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IAS 11 Construction Contracts: The Criteria for Combining and Segmenting Contracts

Go To List of IFRIC Issues Issue Description: IAS 11.7-10 require that, in some cases, IAS 11 should be applied separately to the separately identifiable components of a single contract and that, in other cases, IAS 11 should be applied to a group of contracts taken together. IFRIC has been asked to consider providing guidance for combining and segmenting contracts, including the impact that contract options and additions may have on combining and/or segmenting. Discussion at IFRIC Meeting July 2003: IFRIC asked the staff to draft an Interpretation that provides guidance on the criteria in IAS 11 for segmenting and combining contracts. Discussion at IFRIC Meeting September 2003: The IFRIC discussed a proposed draft interpretation that provides additional guidance on applying the requirements of IAS 11 to combining and segmenting contracts with the intention to converge IAS 11 with US GAAP. IFRIC noted that IAS 18 has a requirement to look to IAS 11 for multi-element contracts. Therefore, any changes to IAS 11 in segmenting or combining contracts would have an effect on the recognition of revenue for multi-element contracts (an issue addressed in EITF 00-21 in the US). The staff will prepare a paper detailing how the proposed changes in this draft interpretation relate to revenue recognition of multi-element contracts. Because this project will require significant changes to IAS 11 but will not likely be finalised until after the first quarter of 2004, IFRIC members suggested a delayed implementation date to ensure a stable platform for adoption of IFRS in Europe. This issue will be discussed at a future meeting. Discussion at IFRIC Meeting March 2004 The IFRIC continued its discussion of the appropriate criteria for combining and segmenting construction contracts. It was noted that IAS 18 Revenue refers preparers to IAS 11 for guidance in determining the appropriate method of accounting for service contract revenue. Accordingly the IFRIC agreed that once the text of an interpretation relating to combining and segmenting construction contracts has been decided, the text should be tested against other service contracts to ensure that the results are considered appropriate. The IFRIC considered a draft interpretation and agreed to discuss the principles therein, but with a view to refraining from issuing a draft Interpretation until the service concessions project is further progressed, to ensure consistency between the projects. The IFRIC agreed that the wording from SOP 81-1 (as had been included in the draft interpretation under consideration) should be amended so as to present the principles for separation of contracts, followed by indicators that suggest separation is appropriate. The broad principle agreed was that the contract in question should be separated when the negotiations for the parts of the contract were separate and it is common market practice for the negotiations for parts of such contracts to be considered separately. The IFRIC considered a number of examples as to when multiple contracts should be combined and agreed that multiple contracts should be combined where they are sufficiently interdependent, such that the contractor has the obligation to complete all phases of the contracts, and the counter-party the right to demand completion of all contracts. The IFRIC agreed a broad principle that where a single contract for a project exists, the contract should be presumed to be a single unit of accounting but should be tested to determine whether separation is appropriate. Conversely, where multiple contracts for a project exist, those contracts should each be presumed to be single units of accounting but should be tested to determine whether combination is appropriate. The IFRIC considered when options to extend contracts should be separated from or combined with the original contract for accounting purposes. The IFRIC requested additional guidance from staff on the method of amending the original contract where separation/combination are not considered necessary. The IFRIC will discuss the issues further at a later meeting. Discussion at IFRIC Meeting February 2005 The IFRIC, after some discussion, decided to proceed with this project, noting that the interaction between IAS 18 and IAS 11 would be challenging given the on-going IASB project on Revenue Recognition. The IFRIC agreed to incorporate some of the US GAAP guidance in SOP 81-1. It was pointed out that, as a convergence project, the issues to be dealt with were broader than just the interaction between SOP 81-1 and IAS 11 but would also include EITF 00-21. The IFRIC agreed to report to the IASB on these issues at its March meeting before going ahead with the substantive work on this project. Discussion at IFRIC Meeting November 2006 Project removed from IFRIC agenda.