IFRIC 15 — Agreements for the Construction of Real Estate
Note: IFRIC 15 will be superseded by IFRS 15 Revenue from Contracts with Customers as off 1 January 2017
- IFRIC D21 was issued 5 July 2007. Click for Press Release
- Comment deadline was 5 October 2007
- IFRIC Interpretation 15 Agreements for the Construction of Real Estate was issued 3 July 2008 Click for Press Release (PDF 55k)
- Effective Date of IFRIC 15: Annual periods beginning on or after 1 January 2009. Earlier application permitted.
Summary of IFRIC 15
IFRIC 15 standardises accounting practice across jurisdictions for the recognition of revenue by real estate developers for sales of units, such as apartments or houses, 'off plan' – that is, before construction is complete.
The fundamental issue is whether the developer is selling a product (goods) – the completed apartment or house – or is selling a service – a construction service as a contractor engaged by the buyer. Revenue from selling products is normally recognised at delivery. Revenue from selling services is normally recognised on a percentage-of-completion basis as construction progresses.
IAS 11 or IAS 18?
IFRIC 15 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, accordingly, when revenue from the construction should be recognised:
- An agreement for the construction of real estate is a construction contract within the scope of IAS 11 only when the buyer is able to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress (whether it exercises that ability or not).
- If the buyer has that ability, IAS 11 applies.
- If the buyer does not have that ability, IAS 18 applies.
If IAS 11 applies, what is the accounting?
If IAS 11 applies, revenue is recognised on a percentage-of-completion basis provided that reliable estimates of construction progress and future costs can be made.
If IAS 18 applies, service or goods?
Even if IAS 18 applies, the agreement may be to provide construction services rather than goods. This would likely be the case, for instance, if the entity is not required to acquire and supply construction materials. If the entity is required to provide services together with construction materials in order to perform its contractual obligation to deliver real estate to the buyer, the agreement is accounted for as the sale of goods under IAS 18.
Impact of IFRIC 15
The main expected change in practice is a shift for some entities from recognising revenue as construction progresses to recognising revenue at a single time – at completion upon or after delivery. Agreements that will be affected will be mainly those currently accounted for in accordance with IAS 11 that do not meet the definition of a construction 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 as construction progresses.
IFRIC 15 is effective for annual periods beginning on or after 1 January 2009 and must be applied retrospectively. Earlier application is permitted.
Click for the Press Release (PDF 55k).
IAS Plus Newsletter
Click for the IAS Plus Newsletter on IFRIC 15 (PDF 133k).
Discussion at November 2008 IASB Meeting
Transition and effective date of IFRIC 15 Agreements for the Construction of Real Estate
The Board considered representations made by some participants at the September 2008 World Standards Setters' meeting and two individual letters requesting a change to the transitional requirements and effective date of IFRIC 15. The Board had been asked:
- to consider changing the transitional requirements to require prospective application (rather than retrospective); and
- to consider delaying the effective date to annual periods beginning on or after 1 July 2009 (as opposed to 1 January 2009).
The Board discussed both items. There was very little sympathy for prospective application. Board members noted that it was likely that entities applying IFRIC 15 would be moving from a percentage-of-completion approach for revenue to a completed sale approach, which would not require extensive systems changes. With respect to the effective date, the IFRIC Chairman noted that IFRIC and the Board had already agreed to a delayed effective date: six months after issue rather than the usual three months.
The staff noted the Interpretation had been through full due process and that EFRAG had not been persuaded by the arguments raised by one of its constituents (which were copied to the IASB) when preparing its endorsement advice to the European Commission.
The Board unanimously declined to change IFRIC 15 for either issue.