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IFRIC D21 — Analysis of comment letters and first redeliberations

Date recorded:

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 Service Concession Arrangements and IFRIC 13 Customer Loyalty Programmes 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 Construction Contracts 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 Revenue 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.

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