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IFRIC issues clarification on agreements for the construction of real estate

03 July 2008

The International Financial Reporting Interpretations Committee (IFRIC) issued today an
Interpretation, IFRIC 15 Agreements for the Construction of Real Estate

The Interpretation will standardise accounting practice across jurisdictions for the recognition of revenue among real estate developers for sales of units, such as apartments or houses, ‘off plan’, ie before construction is complete.

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The Interpretation provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of IAS 11 Construction Contracts or IAS 18 Revenue and when revenue from the construction should be recognised.

The main expected change in practice is a shift for some entities from recognising revenueusing the percentage of completion method (ie as construction progresses, by reference to thestage of completion of the development) to recognising revenue at a single time (ie at completion upon or after delivery).

Agreements that will be affected will be mainly thosecurrently accounted for in accordance with IAS 11 that do not meet the definition of aconstruction contract as interpreted by the IFRIC and do not transfer to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state asconstruction progresses.

The IFRIC released draft Interpretation D21 Real Estate Sales for public comment in July 2007 and received 51 comment letters in response. In its redeliberations, the IFRIC responded to the concerns expressed by respondents by improving the articulation between IAS 11 and IAS 18 and by providing additional guidance on how to account for revenue in IAS 18. In addition, in its ratification process, the IASB specifically considered whether the IFRIC’s interpretation was in line with the principles underpinning IAS 18 and agreed with the IFRIC’s consensus.

IFRIC 15 applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The interpretation is effective for annual periods beginning on or after 1 January 2009 and is to be applied retrospectively.

Introducing IFRIC 15,  Robert Garnett, IFRIC Chairman and IASB member, said:

The real estate industry is an important sector across countries and, especially in times
of volatile markets, transparency and comparability of the accounting are important.
However, at present there is widespread divergence in practice when accounting for the
recognition of revenue for ‘off plan’ contracts. IFRIC 15 clarifies how the existing
principles in IAS 11 and IAS 18 apply for the revenue recognition in the real estate
sector and by doing so will ensure consistent accounting. In some cases this means that
companies will have to change their accounting.

IFRIC 15 Agreements for the Construction of Real Estate is available for eIFRS subscribers
from today.  Those wishing to subscribe to eIFRSs should visit the  online shop or contact:

IASC Foundation Publications Department
30 Cannon Street
London EC4M 6XH, United Kingdom.

Tel: +44 (0)20 7332 2730
Fax +44 (0)20 7332 2749

Press enquiries

  • Mark Byatt , Director of Corporate Communications, IASB
    Telephone: +44 (0)20 7246 6472
  • Sonja Horn , Communications Adviser, IASB
    Telephone: +44 (0)20 7246 6463

Technical enquiries

  • Robert Garnett , Chairman, IFRIC
    Telephone: +44 (0)20 7246 6410
  • Sébastien Landry, Practice Fellow, IASB
    Telephone:+44 (0)20 7246 6923