IFRIC D21 — Final redeliberations and consideration of draft Interpretation
The session was devoted to final re-deliberations and approval of a final Interpretation.
Consideration of outstanding issues
(a) Clarification of scope
As part of the clarification of the scope of the Interpretation, the IFRIC agreed that the title of the Interpretation should be changed to something like 'Agreements for the Construction of Real Estate'. This reflects the change in emphasis away from real estate sales and the determination of whether an agreement involving real estate construction activities is within the scope of IAS 11 Construction Contracts or IAS 18 Revenue.
The IFRIC concurred with staff suggestions that the Interpretation be clarified to identify only two parties: 'the entity' and 'the buyer'. It is the entity that contracts with the buyer. The entity may also be the person performing the construction services but may only perform services directly related to a construction contract. The IFRIC agreed that the Interpretation should address the following agreements involving the construction of real estate:
- Construction contracts (IAS 11 contracts)
- Contracts for the rendering of services directly related to construction contracts (IAS 18)
- Contracts for the sale of goods (that is, contracts failing the definition of construction contracts in IAS 11 but still involving the construction of real estate (IAS 18)).
The IFRIC asked for clarification whether IAS 18 IE 9 would be deleted as was intended originally. The Chairman suggested that this be referred to the Board for resolution when it considers the Interpretation prior to issue. It seemed that the IFRIC favoured the deletion of the IE 9, but this was not stated explicitly.
(b) Application of IAS 18
The IFRIC discussed the notion of a 'continuous transfer' by the seller to the buyer of 'control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses'.
The IFRIC discussed various aspects of this principle, but eventually agreed that it was an appropriate interpretation of IAS 18.14. However, the Interpretation, Basis for Conclusions and Illustrative Examples needed to be explicit that all the conditions in that paragraph must be satisfied before the seller would be able to recognise revenue. In particular, IFRIC members noted that the condition in IAS 18.14(b), 'the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold', would rarely be met in a typical real estate construction agreement.
The IFRIC noted that there was a tension between the percentage of completion method in IAS 11 and the method required in IAS 18. In particular, the two methods produce different revenue recognition patterns. The IFRIC agreed that it was trying to say that contracts involving the construction of real estate may not be IAS 11 contracts, but facts and circumstances might result in the conditions in IAS 18.14 being met at several points during the life of the contract, which would result in a revenue recognition pattern similar to IAS 11. Thus, in a single agreement for the delivery of multiple goods (for instance, residential units in a development), it would be likely that the entity would recognise revenue on each unit as the conditions in IAS 18.14 were met with respect to that unit.
IFRIC members expressed concern that some of the material accompanying the Interpretation (especially the Illustrative Examples) muddied the principle in the Interpretation. In particular, meeting the conditions in IAS 18.14 required proper consideration of the substance of the agreement as well as legal or jurisdictional factors. The staff undertook to review the material in the Basis for Conclusions and the Illustrative Examples related to this principle and circulate it to IFRIC members out of session.
The IFRIC agreed that, since the Interpretation (and in particular the notion of 'continuous transfer') was based explicitly on principles in IAS 18, there was no reason to restrict application of the Interpretation by analogy. IFRIC members suggested that, given the rigorous conditions in IAS 18.14, it was unlikely that 'continuous transfer' could occur outside real estate contracts.
(c) Identification of a component for the sale of land
The IFRIC agreed that the identification of a separate component for the sale of land must be undertaken when analysing any potential separate components. In some cases, a sale of land would be identified clearly at an early stage of analysing a transaction. In other cases, it would be clear that no separate component for the sale of land can be identified, in other words, the right to the constructed elements and the underlying land are not separate assets.
The IFRIC agreed that the disclosures required by IAS 11.39-45 contained the information most likely to be of use to users of the financial statements. However, they were reluctant to require such disclosure explicitly in the Interpretation.
However, the IFRIC agreed to draw attention to the requirements in IAS 1.117, .122, and .125 regarding the application of accounting policies; the significant judgements involved in applying those policies; and any sources of estimation uncertainty involved. In addition, the Interpretation will observe that the disclosures in IAS 11 provide users the most appropriate information in the circumstances addressed in the Interpretation.
Flowchart and Illustrative Examples
The IFRIC agreed that a flowchart developed by the staff analysing a single agreement including the construction of real estate should be included in the material accompanying the Interpretation. In addition, subject to amendments to address IFRIC members' comments, the Illustrative Examples should also be issued as non-authoritative guidance accompanying the Interpretation.
Scope: should the scope be extended explicitly beyond contracts involving real estate?
The IFRIC agreed that the scope should not be extended explicitly beyond contracts involving the construction of real estate. The IFRIC had already agreed that the Interpretation could be applied by analogy. Any explicit extension of scope would trigger re-exposure.
The IFRIC reviewed the triggers in the Due Process Handbook for the IFRIC that would require re-exposure and agreed that the changes made to the Interpretation since exposure did not trigger re-exposure.
The IFRIC agreed to recommend to the IASB that the Interpretation be effective for annual financial statements for periods beginning on or after 1 January 2009. Transition would be in accordance with IAS 8.
Approval of the Interpretation
The Chairman asked whether any IFRIC member would dissent from issuing the Interpretation. No members indicated that they would dissent. The Interpretation was approved unanimously.
The IFRIC will complete its review of the final text in time for the Interpretation to be sent to the Board for approval by written ballot at the June IASB meeting. If approved, the Interpretation would be issued before the end of June 2008.