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Issue Description:

The goal of this project is to clarify how the requirements of IAS 18 Revenue should be applied to real estate sales in which contracts are agreed before construction is complete.

Discussion at IFRIC Meeting March 2006:

The IFRIC discussed matters to be addressed in the project. With regard to the scope of the interpretation, the point was made that the interpretation should assume the relevant agreements through which the construction work is to be undertaken to have been agreed prior to construction. The IFRIC agreed to revisit the scope after discussing the other matters.

Two possible fact patterns could be developed as the potential issues to be addressed:

• 1. Whether it is permissible to switch from the sale of goods guidance (IAS 18.14) to the rendering of services guidance (IAS 18.20) at some point during construction?
• 2. If legal title to the land transfers to the buyer before construction is completed, can IAS 18 be interpreted in a way that allows, from that point onwards, the contractor's activities to be viewed as delivering items onto the buyer's property.

The second issue was noted as posing further questions about separating identifiable components, possibly the land and building under construction as separate deliverables. IFRIC members noted that it is quite possible to deliver a partially complete building.

The IFRIC agreed that the interpretation should address the circumstances in which a contract for sale should be regarded as a construction contract within the scope of IAS 11.

In addressing when revenue should be recognised (provided it is appropriate to apply IAS 18), the IFRIC agreed to explore how transfers of legal title take place in such construction arrangements (title to land may transfer to the buyer but the construction activity continues under the control of the contractor) and how that differs from the notion of 'equitable title' referred to in paragraph 9 of the Appendix to IAS 18. Some IFRIC members noted that the term 'equitable title' is not defined in IFRSs and is used loosely in various jurisdictions. It was agreed that the Interpretation should be drafted using the 'significant risks and rewards' notion with a reference to equitable title as appropriate.

IFRIC noted the possibility of recommending an amendment or deletion of paragraph 9 of the Appendix to IAS 18 if an Interpretation is finalised. This was re-enforced by some IFRIC members who noted that any Interpretation prepared would interpret the Standard, not the Appendix that accompanies but is not part of IAS 18.

IFRIC noted the IAS 18.14(e) requirements about costs but noted that the interpretation should not deal with the allocation questions that arise (for example, costs attributable to the penthouse situated at the top of an apartment block are likely to differ from the costs of the ordinary apartment on the ground floor) as this is an area of judgement based on facts and circumstances.

Discussion at the March 2007 IFRIC Meeting

The IFRIC considered a revised draft of a Draft Interpretation addressing the decisions and suggestions made by the IFRIC at the November 2006 meeting.

Application of IAS 11 Construction Contracts and IAS 18 under the Draft Interpretation

In November IFRIC members raised concern regarding the wording in paragraph 9 of the draft Interpretation outlining under which circumstances a sale agreement would meet the definition of a construction contract and hence be within the scope of IAS 11. The IFRIC members suggested to describe a construction contract as one in which the seller provided construction services 'to the buyer's specifications' (rather than 'to the buyer's directions') but acknowledged that further guidance may be needed to clarify the meaning of this term. Two options were discussed in this context.

Option 1

Include in the Draft Interpretation examples of indicators of when a contract would be within the scope of IAS 11, including one that stated that the buyer obtains ownership rights over the work in progress as construction progresses (typically because the buyer owns the land to which the work in progress attaches). Any contract that was not within the scope of IAS 11 would be an agreement of purchase and sale and would fall within the scope of IAS 18.

Option 2

Restrict the scope of the draft Interpretation to sales of units within multiple-unit developments. In this case it would not be necessary to give a general interpretation of the term construction contract that is applicable to all real estate sales. Accordingly, the guidance on the applicable standard would be significantly simpler.

The IFRIC decided to proceed with Option 1 and there seemed to be a consensus that the indicators were helpful. Some IFRIC members were concerned about the term 'ownership' outlined in indicator noted above. They thought that this term might be problematic in some jurisdictions, particularly where buyers cannot obtain ownership of land. It appeared that the IFRIC will rephrase this indicator by addressing the question of which entity carries the risk and rewards of the asset under construction ('Whose asset is it?', 'Who has the asset under IAS 16?'). No final decision was made but the Chairman asked the IFRIC members to provide wording suggestions to the staff.

In addition, the IFRIC decided:

• to move parts of the consensus dealing with the application of IAS 11 and IAS 18 to a separate section for application guidance.
• that no specific transitional arrangements are included and that the standard 3-month lead in time is proposed

Revisions to example 9 in the appendix of IAS 18

The IFRIC decided to propose to supersede Example 9 in the appendix of IAS 18. Paragraphs 1 and 2 of Example 9 will be included in the draft Interpretation. The IFRIC proposes to delete paragraph 3 of Example 9 without replacement since it was considered that the paragraph does not follow from the requirements of IAS 18 itself.

Discussion at the May 2007 IFRIC Meeting

The IFRIC considered a revised draft of a Draft Interpretation addressing the decisions and suggestions made by the IFRIC at the March 2007 meeting.

Distinguishing between IAS 11 construction contracts and IAS 18 agreements of purchase and sale

The IFRIC discussed the proposed indicators that would help determine whether a sale if real estate is a construction contract within the scope of IAS 11 Construction Contracts or an agreement of purchase and sale within the scope of IAS 18 Revenue.

After a rather lengthy discussion, the IFRIC agreed that features that, individually or in combination, might indicate that an agreement is for the provision of construction services to the buyer's specifications, rather than the sale of goods (constructed real estate), would include:

• (a) the buyer being able to specify the major elements of the design of the real estate before construction begins and/or alter it while construction is in progress (whether it exercises that ability or not);
• (b) the buyer obtaining the risks and rewards of ownership or control over the work in progress as construction progresses.

There was some discussion of possible sub-indicators of (b), such as whether, in the event of the contractor/developer defaulting on the contract, the buyer had a right to sue for specific performance (suggesting an IAS 11 contract) or a right to monetary damages (indicating an IAS 18 contract). The staff agreed to work with the suggestions made by IFRIC members.

The IFRIC also agreed that the list of indicators should not suggest any form of hierarchy or create any rebuttable presumptions (that is, they are indicative only).

Approval

The IFRIC Chairman asked whether, based on the provisional Draft Interpretation and the discussions today, any IFRIC members would not support the Draft Interpretation. None of the IFRIC members indicated a dissent.

Next Steps

The staff will present a revised Draft Interpretation to the IFRIC as soon as possible, with the intention that it will be passed to the IASB for negative clearance as provided in the IFRIC's Due Process Handbook. Provided that the IASB does not object to its publication, a Draft Interpretation should be published by July 2007.

July 2007: IFRIC draft Interpretation on real estate sales

On 4 July 2007, the IFRIC released for public comment a Draft Interpretation D21 Real Estate Sales.

IFRIC D21 aims to standardise accounting practice among real estate developers for sales of units, such as apartments or houses, 'off plan', that is, before construction is complete. At present, real estate developers interpret IFRSs differently and record revenue for the sale of the units at different times. Some record revenue only when they have handed over the completed unit to the buyer, while others record revenue earlier, as construction progresses, by reference to the stage of completion of the development. IFRIC D21 proposes that revenue should be recorded as construction progresses only if the developer is providing construction services, rather than selling goods (completed real estate units). It proposes features that indicate that the seller is providing construction services. In many countries, these features tend currently not to be present in typical off plan sale agreements.

The comment deadline is 5 October 2007. Click for Press Release (PDF 39k).

Discussion at the January 2008 IFRIC Meeting

The IFRIC discussed comments received on the draft Interpretation D21 Real Estate Sales. Of the 52 comment letters received 35 supported IFRIC's proposal to develop an Interpretation. However, many comment letters expressed concern regarding the current wording of D21.

The discussion focussed on the following aspects (the discussion overlapped):

• The need to clarify paragraphs 8 to 10 of D21 and their interaction
• Other clarifications on applying IAS 11 Construction Contracts or IAS 18 Revenue

The need to clarify paragraphs 8 to 10 of D21 and their interaction

The main issues raised by constituents were:

• Many constituents pointed out that the interaction between the indicators in paragraph 9 and 10 is not sufficiently clear. In particular clarification was requested regarding the hierarchy of the indicators, that is, how to account for contracts that have features of both paragraph 9 and 10.
• Regarding the indicator in paragraph 9(a), some constituents pointed out that 'construction services to the buyer's specification' is not articulated as a concept in IAS 11 and therefore did not support this indicator as an indicator of a construction contract. Accordingly, the concern was raised that applying this indicator will result in introducing a different revenue recognition principle.
• One respondent expressed a different understanding of the term construction contract in IAS 11. This constituent took the view that the term construction contract means that construction only takes place because of a sales agreement in place and that it relates to long-term contracts.
• Regarding the indicator in paragraph 9(b), some respondents felt that the indicator goes beyond the requirements of IAS 11.

The IFRIC had a thorough debate on the structure of the consensus and acknowledged that the consensus does not clearly articulate an underlying principle. IFRIC decided to restructure and clarify the consensus as follows:

• The first question needs to be: 'What has been sold under the real estate sales agreement? That is, a distinction needs to be made between (i) a right to acquire, use and sell the completed real estate at a later date and (ii) a right to control the underlying real estate in its existing partially-constructed state. In the first case IAS 18 is the applicable standard and in the latter case IAS 11 is the applicable standard.
• In a next step indicators should be given to help in assessing 'what has been sold' and in determining whether IAS 11 or IAS 18 is the appropriate standard. There seemed to be a consensus that the indicators currently in paragraphs 9(a) and 9(b) of D21 are not different approaches but follow the same principle. In this context the IFRIC noted that if the legal title does not pass as construction progresses (for instance, legal titles passes only after construction is finalised), this by itself does not exclude the application of IAS 11. On the other hand construction activities taking place may fail to meet the requirements of IAS 11.
• The assessment needs to be made for each component of a multiple-element sale agreement. The IFRIC tentatively decided that in these cases the consideration should be allocated to the components with reference to the relative fair values and that a reference to IFRIC 12 Service Concession Arrangements should be included in the basis for conclusions.
• The consensus should be summarised in a flow chart.

Other clarifications on applying IAS 11 or IAS 18

Add the 'ability to sell or pledge the underlying asset' as a feature in paragraph 9(b)

Some respondents recommended adding the ability to sell or pledge an asset to the list of indicators in paragraph 9(b). Without detailed discussion the IFRIC agreed to the staff's view that this indicator might not be understood properly and could lead to diversity in practice. It was agreed to add 'something' to the basis for conclusion to address this issue.

Applying IAS 18 – Continuing involvement

Some constituents suggested that the guidance in paragraph 13 of D21 should be clarified by an illustrative example.

The IFRIC decided that paragraph 13 of D21 should be amended to focus on the requirement of IAS 18, i.e. that revenue recognition is not permitted if the seller contains continuing involvement, and that any further guidance should be included in an illustrative example.

Way forward

The staff was asked to redraft D21 taking into account the decisions made at this meeting. A revised draft will be discussed at the March 2008 meeting.

Discussion at the March 2008 IFRIC Meeting

The IFRIC discussed a revised draft interpretation reflecting the decisions made at the January 2008 meeting (Agenda Paper 3C available on the IASB website). As requested by the IFRIC the staff presented a flowchart illustrating the consensus of the revised draft interpretation (Section 2 of Agenda Paper 3B available on the IASB website).

The discussion was mainly based on the flowchart rather than the revised draft interpretation and focussed on the following topics:

• Identifying the real estate component of the underlying agreement
• Transfer of control and significant risks and rewards as construction progresses

Identifying the real estate component of the underlying agreement

For agreements with multiple components, the flowchart gives guidance on how to split the identifiable components in order to separate the real estate sale component from the sale of other goods and services. This part of the flowchart corresponds to paragraph 7 of the revised draft Interpretation. In addition, reference is made to IFRIC 12 and IFRIC 13 with regard to the allocation of the consideration to the components identified.

Some IFRIC members expressed the view that detailed guidance on multiple component sales was not within the scope of the project and that any interpretation should focus on the accounting treatment of the real estate sale component only.

There seemed to be a consensus that this part of the flowchart should be condensed by just mentioning that separate components need to be identified and referring to the general principles for multiple component sales in existing IFRSs.

Transfer of control and significant risks and rewards as construction progresses

The flowchart goes on to address the accounting treatment of the real estate sale component. This part of the flowchart corresponds to paragraphs 8 to 13 of the revised draft interpretation.

According to the revised documents presented the definition of a construction contract in accordance with IAS 11 is met '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' (corresponds to the indicator in paragraph 9(a) of D21).

The staff presented two views on the accounting treatment when this criterion is not met but 'the seller transfers to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses' (corresponds to the indicator in paragraph 9(b) of D21).

View 1:

Even though the definition of a construction contract is not met the seller applies IAS 11 to the real estate sale component.

View 2:

The seller applies IAS 18 because the real estate sale is a continuous sale of goods. Revenue and costs are recognised by reference to the stage of completion, that is, paragraphs 22-35 of IAS 11 are applied in analogy.

The staff noted that view 2 was developed in response to comments received by constituents that paragraph 9(b) of D21 goes beyond the requirements of IAS 11.

Some IFRIC members raised the concern that the term continuous sale of goods establishes a new concept that is not covered by current IFRSs. One IFRIC member noted that this is a unit of account issue and that it seems odd that every single piece of the real estate (such as a brick) is a unit of account.

Other IFRIC members responded that view 2 is the better approach because the criteria for a sale in accordance with IAS 18 are indeed met on a continuous basis. In addition, these IFRIC members considered the 'fallback' into IAS 11 under view 1 to be a technically inferior solution. One observing Board member was of the opinion that such an interpretation of IAS 18 would not be inappropriate.

Finally, a majority of IFRIC members supported view 2.

The staff noted that the adoption of view 2 may require additional disclosures because guidance in IAS 11 is applied in analogy for a sale in accordance with IAS 18, a standard that has less restrictive disclosure requirements compared to IAS 11. The IFRIC directed the staff to draft such disclosure requirements for discussion at the next meeting.

Way forward

The IFRIC asked the staff to revise the draft interpretation and the flowchart taking into account the decisions made at this meeting. The revised documents will be discussed at the May 2008 meeting. The IFRIC postponed the decision on whether the flowchart should be an integral part of the final interpretation.

Discussion at the May 2008 IFRIC Meeting

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 or IAS 18.

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.

(d) Disclosure

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.

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.

Effective date

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.

Next steps

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.

IASB Approves Interpretation at June 2008 Meeting

Agreements for the Construction of Real Estate

The IFRIC coordinator then moved on to present the second Interpretation for ratification. Agreements for the Construction of Real Estate would provide guidance on how to apply IAS 11 Construction Contracts and IAS 18 Revenue to real estate agreements.

The IFRIC staff highlighted that there have been changes to the flow chart that is part of the Interpretation and that specific disclosure requirements for 'continuous transfers' were added that are similar to the disclosures required by IAS 11.

Furthermore it was noted that this Interpretation would not lead to convergence with US GAAP. One Board member noted that regarding this issue there had never been convergence between US GAAP and IFRS. Another Board member asked why there is no 'no analogies' paragraph in the Interpretation. The staff explained that IFRIC considered the guidance given in the Interpretation would also be appropriately applicable to other transactions outside the real estate sector, but broadening the scope would have consumed much more time. So it has been decided to implicitly allow analogising by not explicitly prohibiting it, but to make clear in the Basis for Conclusion that there are boundaries for analogising.

A Board member asked why the interpretation would have to be applied retrospectively. The staff answered that IFRIC considered it important that the revenue figures are comparable.

The Chairman then took the vote on the Interpretation. The Board agreed unanimously.

The staff then asked the Board if re-exposure was required. It noted although the near-final version changed compared to the ED, this was done to reflect comments from constituents. However, the staff highlighted that these changes would not change the answers derived from applying the Interpretation and hence, recommended not to re-expose the Interpretation.

The Board agreed.

July 2008: IFRIC 15 Issued

IFRIC 15 Agreements for Construction of Real Estate was issued 3 July 2008. Click for Details.