IFRIC 15 – Clarification of continuous transfer (continuing)
The Committee had previously received an inquiry related to IFRIC 15 and recognition of revenue under continuous transfer. Specifically, the submitter asked for clarification on 1) does continuous transfer of control mean that the buyer receives control over the part-completed work in progress or the seller loses control and the buyer gains protective rights, 2) does control mean that the buyer has legal or physical possession of the work in progress while construction takes place; or is it sufficient that the seller is unable to sell the work in progress to anyone else, and 3) whether the unit of account is each individual unit or the entire block.
Interrelated with this interpretation of IFRIC 15 is the Board's pending project on revenue recognition which is developing guidance on the meaning of transfer and continuous transfer. During a meeting earlier this year, the Committee recommended that the Board should consider the fact pattern received by the Committee in its revenue recognition project. However, before concluding on this issue, the Committee asked for further input on this issue from interested parties.
The staff presented the committee with transactions from two separate jurisdictions with an analysis of whether each transaction met the continuous transfer requirements in IFRIC 15.
In jurisdiction A, property developers are highly regulated and licensed by a local Housing Act. Once the sales contract has been executed, the buyer has no right to rescind the contract unless the developer totally fails to perform in respect of any matters arising out of the agreement or the buyer cannot obtain financing. The buyer is also required to make non-refundable payments throughout the construction process based on certified stages of progress with 80% of the price paid to the developer before completion of the development. Jurisdiction A also requires specific performance by both parties to the contract.
In jurisdiction B, developers are subject to building standards but otherwise not regulated as they are in jurisdiction A. Buyers in this jurisdiction are less tied into a sales contract with typically only a 10% deposit required at contract execution and the remainder due upon completion of the property. The buyer may choose not to perform under the contract but would forfeit the deposit and may be legally liable for any difference between the ultimate sales price and the original sales price. Contract terms also typically allow the developer to terminate the contract without penalty. Specific performance may be required by the courts but is not required by legal statute.
The staff's analysis focused on the risk and rewards that each party was subject to and consideration of the transfer of control. Based on their analysis of numerous factors, the staff believed that the transfer to the buyer is continuous in jurisdiction A while it occurs at a point in time in jurisdiction B.
The staff also presented the Committee with an analysis of the unit of account for consideration of continuous transfer. The analysis focused on whether the unit of account represented the individual unit or the entire block. The staff concluded that the appropriate unit of account for assessment of continuous transfer is the individual unit.
The Committee members had various views but several expressed certain issues with the staff analysis. Ultimately, because of the correlation between the interpretation of IFRIC 15 and the revenue recognition proposals the Committee will seek the Board's advice on how to further address the issue.