The IFRS Interpretations Committee tentatively decided not to add this matter to its standard-setting agenda at its meeting in November 2017. The Committee will reconsider the following tentative agenda decision, including the reasons for not adding the matter to the standard-setting agenda, at a future meeting. The Committee encourages interested parties to submit their responses using the link below.
Tentative Agenda Decision
The Committee received a request about whether to recognise revenue over time or at a point in time in relation to a contract for the sale of a unit in a residential multi-unit complex (real estate unit). Specifically, the request asked whether, in the fact pattern described in the request, the real estate developer (entity) has an enforceable right to payment for performance completed to date as described in paragraph 35(c) of IFRS 15.
For each performance obligation, an entity applies the criteria in paragraph 35 of IFRS 15 to determine whether to recognise revenue over time. If none of the criteria in paragraph 35 are met, the entity recognises revenue at a point in time.
The request specifically asked about the application of paragraph 35(c) of IFRS 15. Applying paragraph 35(c), an entity recognises revenue over time if (i) the asset created by an entity’s performance does not have an alternative use to the entity; and (ii) the entity has an enforceable right to payment for performance completed to date.
Paragraph 37 of IFRS 15 states that, to have an enforceable right to payment, at all times throughout the duration of the contract, the entity must be entitled to an amount that at least compensates the entity for performance completed to date if the contract is terminated for reasons other than the entity’s failure to perform as promised.
Paragraph B9 of IFRS 15 states that an amount that would compensate an entity for performance completed to date would be an amount that approximates the selling price of the goods or services transferred to date, rather than compensation for only the entity’s potential loss of profit if the contract were to be terminated. Accordingly, if an entity is entitled only to compensation for loss of profit, it does not have an enforceable right to payment for performance completed to date and, thus, the criterion in paragraph 35(c) is not met.
Application of paragraph 35(c)—enforceable right to payment—to the fact pattern in the request.
The assessment of whether an entity has an enforceable right to payment for performance completed to date requires an entity to consider the rights and obligations created by the contract, taking into account the legal environment within which the contract is enforceable. Accordingly, the Committee observed that the outcome of an entity’s assessment depends on the particular facts and circumstances of the contract.
In the fact pattern described in the request, the contract for the real estate unit includes the following features:
- the entity and the customer enter into a contract for the sale of a real estate unit in a residential multi-unit complex before the entity constructs the unit. The entity’s obligation under the contract is to deliver the completed real estate unit as specified in the contract. The entity retains legal title to the real estate unit (and any land attributed to it) until construction is complete.
- the customer pays 10% of the purchase price for the real estate unit at contract inception, and pays the remainder of the purchase price to the entity after construction is complete.
- the customer has the right to cancel the contract at any time before construction is complete. If the customer cancels the contract:
- the entity is legally required to make reasonable efforts to resell the real estate unit to a third party. On resale, the entity enters into a new contract with the third party—ie the original contract is not novated to the third party. If the resale price to be obtained from the third party is less than the original purchase price (plus selling costs), the customer is legally obliged to pay the difference to the entity.
- the customer does not have any rights to sell, use or develop the real estate unit.
The Committee observed that the principle in paragraph 31 of IFRS 15 for the recognition of revenue is about the relationship between the entity and the customer. The Committee also observed that, in the fact pattern described in the request, the objective in applying paragraph 35(c) is to assess whether the customer obtains control of the real estate unit as it is being constructed. It is, therefore, the payment the entity is entitled to receive from (or on behalf of) the customer relating to performance under the contract with the customer that is relevant in determining whether the entity has a right to payment for performance completed to date. The consideration received by the entity from the third party in the resale contract is consideration relating to that resale contract—it is not payment for performance under the contract with the customer.
The Committee observed that, based on the fact pattern described in the request, the nature of the payment from the customer to which the entity has a right under the contract is a payment for the difference between the resale price and the original purchase price (plus selling costs). Accordingly, the entity has a right to compensation for loss of profit on termination of the contract—it does not have an enforceable right to payment for performance completed to date as described in paragraph 35(c) of IFRS 15.
The Committee concluded that the principles and requirements in IFRS 15 provide an adequate basis for an entity to determine whether it has an enforceable right to payment for performance completed to date. Consequently, the Committee [decided] not to add this matter to its standard-setting agenda.
The Tentative Agenda Decision is open for comment until 29 January 2018
