IFRS 15 — Pattern of revenue recognition in a real estate contract

Date recorded:


This was a new issue.

The IC received a request to clarify whether revenue from the sale of pre-completion residential units in a multi-unit condominium (‘off-plan sales’) should be recognised over time or at a point in time.

The submitter provided the following specific fact pattern which takes into account the common contractual terms and legislative framework applicable to the submitter’s jurisdiction regarding off-plan sales:

  • a) The entity, being a real estate developer, and the customer enter into a contract for the sale and purchase of a real estate unit before the entity constructs the unit.
  • b) On signing the contract, the entity is obliged to deliver the completed unit as specified in the contract—it cannot change or substitute the unit agreed to in the contract. The entity retains legal title to the unit (and any land attributed to it) until construction is complete.
  • c) The customer generally pays 20%-30% of the purchase price of the unit as it is being constructed, and pays the remainder of the purchase price to the entity after construction is complete.
  • d) The customer may resell or pledge the unit while it is being constructed. However, the customer cannot change the structural design of the unit or cancel the contract, except as noted in (f) below.
  • e) If the entity is in breach of its obligations under the contract, the buyers of the units of the condominium have the right, as a group, to decide to remove the entity and hire another real estate developer to complete the construction of the property.
  • f) Although the contract is irrevocable under local law, the courts have accepted requests to cancel a contract in specific circumstances, mainly when it has been proven that the customer is not financially able to fulfil the terms of the contract. In this situation, the customer can cancel the contract and is entitled to receive most, but not all, of the payments it has already made to the entity. The remainder is retained by the entity as a termination penalty. The entity may also auction off the unit if the customer defaults on payments.

Staff analysis

The Staff believed that revenue from the sale of off-plan units, based on specific fact pattern as described in the submission, should be recognised at a point in time because none of the IFRS 15.35 criteria for recognition of revenue over time is met. The Staff focused their analysis on the application of paragraphs 35(b) and 35(c) of IFRS 15.

Paragraph 35(b) specifies that to recognise revenue over time, the customer must control the asset as it is created or enhanced. Control refers to the ability to direct the use of, and obtain substantially all of the benefits from, the asset. The Staff observed that although the customer can resell or pledge the unit under construction and is exposed to market value changes of the unit, it does not have legal title to the unit, nor does it have any ability to direct the construction or structural design of the unit as the unit is being constructed. Furthermore, the customer’s legal right to replace the entity in the event of the entity’s failure to perform as promised is protective in nature and is not indicative of control.

Paragraph 35(c) specifies that to recognise revenue over time, the asset created by an entity’s performance must not have an alternative use to the entity and the entity must have an enforceable right to payment for performance completed to date. The Staff observed that in this case, even though the entity is contractually restricted from directing the partly constructed unit for another use, the entity does not have an enforceable right to payment for performance completed to date upon termination.

Staff recommendation

The Staff recommended that the IC not add this issue to its agenda on grounds that the requirements in IFRS 15 provide an adequate basis for an entity to determine whether to recognise revenue over time or at a point in time for the fact pattern described in the submission.

Letter from the Brazilian Securities and Futures Commission

The Brazilian SFC sent a letter to the IC commenting on the Staff analysis. The letter observed that the Staff analysis was based on an ‘inadequate understanding of the nature of the contract’ under review, which ‘distorts all the conclusions made’ in the Staff paper.


The IC agreed with the Staff’s technical analysis and agreed not to add the issue onto its agenda. The few IC members who referred to the Brazilian SFC letter observed that it did not contain any additional points that would influence the technical analysis.

The IC members generally agreed on the following three points:

  1. When assessing under IFRS 15.35(b) whether a customer controls an asset as it is being created, it is important to identify clearly what the asset under consideration is. In this case, the asset that the customer has while the apartment block is under construction is the sale and purchase contract, including the right to sell or pledge that contract, as opposed to the physical unit itself.
  2. No single factor is determinative of the control assessment. In this case, the question about whether title of the land passes to the customer is powerful, but it is not in itself conclusive of whether control of the asset has passed to the customer. All relevant facts and circumstances should be considered with appropriate weights given to each.
  3. When assessing under IFRS 15.35(c) whether the entity has a right to payment for performance completed to date, especially in the case of contract termination, one should focus on the existence of the right to terminate and not on the probability or frequency of that right’s being exercised. As long as the right to terminate is determined to be enforceable, if upon termination the entity would not be entitled to an amount that compensates it for work performed to date, then the contract fails the paragraph 35(c) criterion regardless of how infrequently the termination right has historically been, or is expected to be, exercised.

A lot of time was spent discussing how the tentative agenda decision (TAD) should be worded. It was agreed that the TAD should specify that the conclusion reached by the IC is based on a very specific fact pattern and that slight changes in contractual terms, the applicable laws and other facts and circumstances could lead to a different outcome. The TAD would also shift the focus from giving a conclusive response to setting out how the IFRS 15 guidance should be applied to the case at hand.

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