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.