This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Sales of real estate: Key differences between U.S. GAAP and IFRSs

Under U.S. GAAP, ASC 360-20 is the primary source of guidance on accounting for real estate sales. Other guidance on real estate sales includes various Codification subtopics.

Under IFRSs, IAS 18, Revenue, and IAS 11, Construction Contracts, are the primary sources of guidance on accounting for real estate sales. IFRIC Interpretation 15, Agreements for the Construction of Real Estate, which only applies to real estate arrangements that include construction activities, addresses whether those agreements are within the scope of IAS 18 or IAS 11.

The guidance on real estate sales is significantly more detailed in U.S. GAAP than in IFRSs. Under U.S. GAAP, an entity must apply specific criteria to determine the appropriate accounting for real estate sales. If these criteria are not met, some or all of the profit on the sale may be deferred or an entity may not be able to derecognize the asset from the seller's balance sheet. In contrast, IFRSs provide more general guidance, including a set of conditions that must be met for revenue to be recognized. This difference in the extent of guidance may or may not result in a different accounting conclusion, which should be based on the specific facts and circumstances of each transaction.

The table below summarizes these differences and is followed by a detailed explanation of each difference.1

SubjectU.S. GAAPIFRSs

Definition of "real estate"

Provide guidance on determining whether an asset should be considered real estate.

Do not provide guidance on determining whether an asset should be considered real estate.

Recognition of real estate sales

Provide criteria for using the full accrual method to recognize profit and provide guidance on applying these criteria.

Provide a set of general conditions that must be met for revenue to be recognized.

Provide guidance on determining whether an agreement to construct real estate should be considered a construction contract, the rendering of services, or the sale of goods.

Definition of "Real Estate"

U.S. GAAP provide guidance on determining whether an asset should be considered real estate. ASC 360-20-15-3 states, in part:

The guidance in this Subtopic applies to . . . [a]ll sales of real estate, including real estate with property improvements or integral equipment. The terms property improvements and integral equipment as they are used in this Subtopic refer to any physical structure or equipment attached to the real estate that cannot be removed and used separately without incurring significant cost.

ASC 360-20-15-4 clarifies the definition of integral equipment as follows:

The determination of whether equipment is integral equipment shall be based on the significance of the cost to remove the equipment from its existing location (which would include the cost of repairing damage done to the existing location as a result of the removal), combined with the decrease in the fair value of the equipment as a result of that removal.

Further, ASC 360-20-15-7 states the following:

When the combined total of both the cost to remove plus the decrease in fair value (for leasing transactions, the information used to estimate those costs and the decrease in fair value shall be as of lease inception) exceeds 10 percent of the fair value of the equipment (installed) (for leasing transactions, at lease inception), the equipment is integral equipment.

IFRSs do not provide guidance on determining whether an asset should be considered real estate.

Recognition of Real Estate Sales

Under U.S. GAAP, ASC 360-20-40-5 indicates that the following criteria must be met for an entity to use the full accrual method to recognize profit:

Profit on real estate sales transactions shall not be recognized by the full accrual method until all of the following criteria are met:

a. A sale is consummated [reference omitted].

b. The buyer's initial and continuing investments are adequate to demonstrate a commitment to pay for the property [reference omitted].

c. The seller's receivable is not subject to future subordination [reference omitted].

d. The seller has transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with the property [reference omitted].

ASC 360-20 provides detailed guidance on how to evaluate whether the criteria are met for the full accrual method as well as alternative profit recognition methods (financing, leasing, profit sharing) to use when the full accrual method is not appropriate. When the full accrual method is not appropriate, application of these alternative methods may result in the deferral of some or all profit on the sale or the inability to derecognize the asset from the seller's balance sheet.

Although IFRSs do not provide guidance on specific real estate transactions, IFRIC 15 provides general principles for how the revenue should be recognized (i.e., as a sale of goods, services, or construction contracts).

Real estate sales, other than those accounted for as construction contracts or service transactions under IFRIC 15, are accounted for as sales of goods under IAS 18. Paragraph 14 of IAS 18 states the following regarding the conditions applicable to sale transactions:

Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied:

a. the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;

b. the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

c. the amount of revenue can be measured reliably;

d. it is probable that the economic benefits associated with the transaction will flow to the entity; and

e. the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Agreements for the Construction of Real Estate

IFRIC 15 provides guidance on determining whether an agreement to construct real estate (directly or through subcontractors) should be treated as a construction contract under IAS 11 or as a rendering of services or sale of goods under IAS 18.

Paragraph 11 of IFRIC 15 states, in part:

An agreement for the construction of real estate meets the definition of a construction contract [and is accounted for under IAS 11] 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.

An entity uses the percentage-of-completion method under IAS 11 to recognize revenue for real estate sales that are considered construction contracts under IFRIC 15, as long as the entity can estimate the outcome of the contract reliably. Under the percentage-of-completion method, contract revenue and expenses are recognized as work progresses rather than when the work is complete. When an entity is unable to estimate the outcome of a contract reliably, it recognizes contract revenue only to the extent of contract costs incurred for which it believes it will be reimbursed.

Paragraph 12 of IFRIC 15 clarifies that when buyers have only limited ability to influence the design of the real estate, the agreement is within the scope of IAS 18. Under this guidance, an entity would determine whether the contract is the rendering of services or the sale of goods.

Agreements for the construction of real estate that consist of services as well as the necessary construction materials for an entity to perform its obligation under the contract are accounted for as a sale of goods. In addition, IFRIC 15 states that if an entity transfers to the buyer control and the significant risks and rewards of ownership of the work in progress as construction progresses, the entity may recognize revenue under the percentage-of-completion method if all criteria in paragraph 14 of IAS 18 are met continually as construction progresses. The requirements of IAS 11 generally apply to the recognition of revenue and associated expenses for such transactions.

Agreements to construct real estate whose terms do not require the entity to acquire and supply construction materials are generally accounted for as a rendering of services under IAS 18. IAS 18 requires that if certain criteria are met, an entity use the percentage-of-completion method to recognize revenue for these transactions. The requirements of IAS 11 also generally apply to the recognition of revenue and associated expenses for such transactions.

____________________

1 Differences are based on comparison of authoritative literature under U.S. GAAP and IFRSs and do not necessarily include interpretations of such literature.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.