IAS 11 — Allocation of profit in a single contract
The IFRIC considered an issue identified in its deliberations of service concession arrangements, namely whether it is appropriate in a single contract to determine different profit margins for the different components of the contract.
Decision not to add
Whilst IAS 11 Construction Contracts has specific criteria for contract segmentation, the guidance on segmenting in IAS 18 Revenue is expressed only at a general level. The IFRIC noted that in IAS 18:
- paragraph 4 states that services directly related to construction contracts are not dealt with in IAS 18 but are dealt with in IAS 11
- paragraph 13 states that in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction.
The IFRIC noted that, whilst IAS 18 paragraph 21 refers to IAS 11, it does so only for the percentage of completion method for recognition of revenue and the associated expenses and does not refer to the combining, segmenting and disclosure requirements of IAS 11.
The IFRIC noted that, as part of its project on D20 Customer Loyalty Programmes, it had deliberated whether, in a single contract within the scope of IAS 18, it is appropriate to determine different profit margins for the different components of the contract. In D20, the IFRIC tentatively concluded that the requirements of IAS 18 paragraph 13 to account for separately identifiable components of a contract would require segmentation of contracts that have separately identifiable components potentially with different profit margins. D20 also proposes guidance on how to allocate the total contract revenue to the different components.
The IFRIC noted that, for a single contract for construction and other services not directly related to construction activities, IAS 18 paragraphs 4 and 13 require the contract to be separated into two components, a construction component within the scope of IAS 11 and a service component within the scope of IAS 18, in order to reflect the substance of the transaction. The IFRIC noted that the segmenting criteria of IAS 11 apply only to the progressive recognition of margin relating to the construction component and that the requirements of paragraph 13 of IAS 18 apply to the service component. The consequence is that different profit margins might be recognised on the different components of such a single contract.
The IFRIC decided that, in view of the existing guidance in IAS 18 and IAS 11 and because these issues are expected to be addressed in an Interpretation following from D20, it would not take this item onto its agenda.
IFRIC reference: IAS 11-1