IFRS 15 Revenue from Contracts with Customers (Agenda Paper 2A)

In the last six months the Committee has published three tentative agenda decisions in relation to IFRS 15. In September 2017 the Committee published a tentative agenda decision titled ‘Revenue recognition in a real estate contract’. In November 2017 the Committee published tentative agenda decisions titled ‘Revenue recognition in a real estate contract that includes the transfer of land’ and ‘Right to payment for performance completed to date’.

All three tentative decisions are being discussed at this meeting. 

After considering the comments received, the staff continue to support the technical analysis and conclusions the Committee reached in September and November 2017. The staff are therefore recommending that the Committee finalise its tentative agenda decisions. However, the staff have also recommended several amendments to the tentative agenda decisions to clarify some aspects.

General feedback that applies to all three tentative decisions is summarised in Agenda Paper 2B. The proposed tentative agenda decisions are included in Agenda Papers 2C, 2D and 2E.

IFRS 15 Revenue from Contracts with Customers - general feedback (Agenda Paper 2B)

The responses received by the Committee included comments on some broader issues. 

Concluding on specific fact patterns

Some respondents raised concerns about the Committee providing technical responses to highly-specific fact patterns submitted to it. One Board member highlighted similar concerns at the October 2017 Board meeting. At the November 2017 meeting, the Committee itself discussed the importance of carefully considering the appropriateness of reaching such conclusions, and said it would relook at this in considering the feedback on the questions relating to IFRS 15.

In response, the staff notes that the Committee has made efforts to improve the clarity of explanatory material included in agenda decisions when, having applied the agenda criteria in the Due Process Handbook, it decides not to add a matter to its standard-setting agenda. The Committee often includes material in agenda decisions that explains how the applicable principles and requirements apply to the question submitted.

The staff think that an agenda decision with explanatory material can shed additional light on a question by providing context for the question and linking the relevant pieces of the Board’s literature together.

The Committee often receives questions about highly-specific transactions. The questions on the application of IFRS 9 Financial Instruments to dual currency bonds and load following swaps, which are also being discussed at this meeting, are examples. How those questions are addressed needs careful consideration. The Committee has acknowledged that there are risks to providing answers to highly-specific fact patterns. The main risk highlighted is that stakeholders might inappropriately analogise to the conclusion when the facts are similar but not the same. The Committee generally does not provide answers to highly-specific fact patterns.

However, not answering such questions does not prevent the Committee from being responsive or helpful. The staff think the Committee would be responsive with respect to the IFRS 15 questions simply by pointing to the applicable requirements and providing some context (e.g. setting out the Board’s objective in developing particular requirements and the factors an entity needs to consider in applying those requirements to real estate contracts more generally).

However the staff also think it is sometimes necessary to go further. In the case of the IFRS 15 questions the staff have recommended concluding on the application of paragraph 35 of IFRS 15 to the fact patterns in the submissions. The staff say that these questions are causing disruption in the implementation and application of IFRS 15 and the Committee can help in resolving the disruption using an agenda decision.

The staff agree with respondents who state that it is important to clearly articulate the fact pattern and the factors that are relevant for consideration in reaching the particular conclusion, to reduce the risk of inappropriate application of the Committee’s conclusions.

Information obtained from recognising revenue over time

Some respondents expressed a concern that financial statements will provide less useful information if, in the fact patterns in the submissions discussed in Agenda Papers 2C and 2E, entities are required to recognise revenue at a point in time rather than over time.

In response, the staff have emphasised that the Committee’s role is to respond by explaining how to apply the requirements in the context of the particular facts submitted and not to reconsider the usefulness of the information provided by the requirements. That is the responsibility of the IASB.

Outreach

One respondent disagreed with the decision not to perform outreach on the submissions discussed at the November 2017 meeting.

In response, the staff state that the purpose of outreach is usually to help assess whether the matter has widespread effect and has, or is expected to have, a material effect on those affected. The staff did not perform outreach because they were already aware that it is common in many jurisdictions for entities to enter into real estate contracts before construction is complete and that contracts and legislation in different jurisdictions vary. This was conveyed in the staff papers.

Due process steps

One respondent suggested that the process of publishing agenda decisions warrants discussion with the Due Process Oversight Committee to potentially amend the Due Process Handbook. They think the Committee should be required to consider the agenda decision in the context of the qualitative characteristics of financial information in the Conceptual Framework and the general objectives of the applicable Standard(s); the potential pervasiveness of the agenda decision beyond the fact pattern in the submission; whether and in what form to publish an agenda decision close to the effective date of a Standard; and the effect of publishing an agenda decision on a Standard that is converged with US GAAP. The respondent also makes suggestions regarding the Board’s due process in finalising a Standard, and whether and how the Committee addresses submissions that have a jurisdictional dimension.

In response the staff says the Committee is unable to address these comments, but that the comments have been provided to the IFRS Foundation staff assisting the Trustees with their review of the Due Process Handbook.

Discussion

The session began with a discussion of the general feedback to the three IFRS 15 tentative agenda decisions. Committee members seemed to think that it is helpful for agenda decisions to identify the relevant guidance and practical application. But they also understand that they do not want to be ruled-based. There is a fine balance between being helpful and creating fact-specific guidance.

A couple of members said that these agenda decisions have put a spotlight on the Committee’s processes, highlighted by the unusually large number of comment letters received. One member said that they need to be consistent in their approach and indicated that the approach to the IFRS 15 issues seemed to be inconsistent with the approach to the IFRS 9 issues (discussed later in the agenda).

In terms of the responsibility of the Committee, one member noted that if the Committee identifies something that the Board might not have anticipated or that gives a counter-intuitive answer they have ways to communicate that to the Board.

Revenue recognition in a real estate contract (Agenda Paper 2C)

Background

In September 2017 the Committee discussed 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 a specific fact pattern which takes into account the common contractual terms and legislative framework applicable to the submitter’s jurisdiction regarding off-plan sales. From the fact patter, the staff concluded that 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 Committee agreed, but spent a lot of time discussing how the wording of the tentative agenda decision. It was agreed that the tentative decision should specify that the conclusion reached by the Committee 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.

A tentative decision not to add the issue onto its agenda was published. The Committee received 40 responses to this tentative agenda decision which the staff have analysed for this meeting.

Staff analysis

Fact pattern

The Brazilian real estate industry and the Brazilian SEC expressed concerns about the accuracy of the facts the Committee considered in reaching its tentative conclusion. In Brazil the entity and the customer enter into a contract for the sale of an undivided interest in the land (on which a multi-unit residential complex will be built), and the entity agrees to build and deliver a real estate unit within the complex linked to that undivided interest within a given time, at a specified price, and according to specified conditions. The entity’s obligation under the contract is to construct and deliver the real estate unit as specified in the contract—it cannot alter or replace the specified unit. The entity retains legal title to the specified unit until the customer has paid the full purchase price. The Brazilian SEC says that the general market practice is that legal title to the specified real estate unit passes to the customer when construction is complete and the full purchase price is paid—the retention of legal title acts as a credit risk protection mechanism.

The contract gives the customer an ‘in rem’ right over an undivided interest in the land and accessions. At contract inception, the customer therefore obtains a right to an undivided interest in the land and the multi-unit complex being constructed on the land. The undivided interest represents a notional fraction of the land and complex under construction that corresponds to the real estate unit specified in the contract. The Brazilian real estate industry and the Brazilian SEC say the ‘in rem’ right gives the customer a right that is equivalent to ownership. The customer can resell or pledge its right to the undivided interest in the land and part-constructed complex during the period that the complex is being constructed, subject to the entity performing a credit risk analysis of the new buyer of the right (no credit check is required if the customer has paid the entire purchase price for the unit). The customer cannot change the structural design of the complex or the real estate unit. The customer, and the other customers who have agreed to buy real estate units in the multi-unit complex, have the right to together decide to change the structural design, negotiate such change with the entity, bear the related costs, etc. If the entity is in breach of its obligations under the contract, the group of customers also has the right to together decide to replace the entity or stop the construction, or each customer may seek to cancel its contract.

The Brazilian real estate industry and the Brazilian SEC also say, without breach of contract, the applicable law prevents both the entity and the customer from unilaterally cancelling the contract.

As the staff understand it, in the submitter’s jurisdiction, termination rates are reasonably high and not limited to situations of financial difficulty. As such, it was not merely the existence of legal precedent, but the high rate of termination coupled with refund of consideration that affected enforceability.

In general, the staff think the facts outlined by the Committee in the tentative agenda decision are not significantly different from the facts described by the respondents. However, the staff think there are some refinements to the wording the Committee could make. In particular, (a) the ‘in rem’ right gives the customer the right to an undivided interest in the land and the part-constructed complex as the complex is being constructed. When the full purchase price is paid and construction is complete, the customer then obtains legal title to the real estate unit specified in the contract; (b) the customer, and the other customers who have agreed to buy real estate units in the multi-unit complex, have the right to together decide to change the structural design, negotiate such change with the entity, bear the related costs, etc. If the entity is in breach of its obligations under the contract, the group of customers also has the right to together decide to replace the entity or stop the construction, or each customer may seek to cancel its contract; and (c) the customer does not have the legal right to cancel the contract as it was described in the Committee’s analysis in the tentative agenda decision. The description in the fact pattern in the tentative agenda decision more accurately described this as the courts accepting requests for cancellation.

A number of respondents raised concerns about the Committee’s technical conclusions in the tentative agenda decision. These relate to: (a) whether the customer controls the asset as it being created or enhanced; (b) whether the entity has an enforceable right to payment for performance completed to date; and (c) the application of paragraph 9 and paragraphs 22-30 of IFRS 15.

Control

Several respondents state that in the fact pattern in the submission, the customer controls the real estate unit as it is being constructed. In their view, therefore, the criterion in paragraph 35(b) is met. The customer can prevent others from directing the use of, and obtaining the benefits from, the part-constructed real estate unit because the contract between the customer and the entity entitles the customer to that specified unit. The entity is unable to sell the unit to any other customer.

In response the staff note that ‘control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset’. In the fact pattern in the submission, the asset in question is the real estate unit specified in the contract. Accordingly, the assessment of paragraph 35(b) focusses on whether the customer controls that real estate unit as the unit is being constructed.

The staff agree with the respondents who stated that, in the fact pattern in the submission, the contract would appear to give the customer the ability to obtain substantially all of the remaining benefits from the asset and to prevent others from obtaining those benefits. Consequently, respondents’ concerns relate to the Committee’s conclusion regarding the customer’s ability to direct the use of the real estate unit as it is being constructed.

In the fact pattern, the contract gives the customer the right to an undivided interest in the land and part-constructed complex as the complex is being constructed. On completion of construction, the legal title to the land and the complex as a whole held by the entity is split into individual legal titles to each real estate unit. When the customer has paid the purchase price for the unit, the customer then obtains legal title to the real estate unit specified in the contract.

The respondents that disagree with the Committee’s technical conclusion view the ‘in rem’ right as equivalent to ownership of the specified real estate unit (and land attributed to it). This is because the customer’s right to the undivided interest represents a notional fraction of the land and complex under construction that corresponds to the real estate unit specified in the contract. They also say the entity’s retention of legal title to the specified real estate unit acts only as a credit protection mechanism. The staff think the customer’s ability to resell and pledge its right to the undivided interest gives it the ability to direct the use of that right to the undivided interest and that the undivided interest in the land and part-constructed complex is different from the specified real estate unit and, thus, the customer’s ability to resell and pledge its right to the undivided interest is different from having the ability to sell and pledge the specified real estate unit itself. Regardless of the reason for the entity’s retention of legal title to the unit, the staff think that an important factor in the assessment is that the customer does not hold legal title to the real estate unit until construction is complete. The customer is therefore legally unable to sell or pledge the specified real estate unit itself as the unit is being constructed.

The staff conclusion is that respondents have not identified evidence that indicates the customer has the ability to direct the use of the part-constructed real estate unit as it is being constructed. Accordingly, in the fact pattern in the submission we think the criterion in paragraph 35(b) is not met.

Enforceable right to payment for performance completed to date

Several respondents expressed concerns about how the agenda decision addresses right to payment. The wording in the tentative agenda decision implies the existence of legal precedent is enough to undermine the enforceability of the entity’s right to payment. While some respondents agree that, in the fact pattern in the submission, the entity does not have an enforceable right to payment for performance completed to date it is not merely the existence of legal precedent, but the high rate of cancellation coupled with the refund of consideration, that affects enforceability.

In September 2017, the Committee discussed whether an entity considers likelihood in its assessment of the criterion in paragraph 35(c)—that likelihood could relate to the entity exercising its right to payment or it could relate to the cancellation of the contract. The Committee concluded that the likelihood that an entity would exercise its right or that a customer would cancel the contract is not relevant to the assessment—the assessment is focussed on the existence of the right and its enforceability.

The staff continue to agree with the Committee’s conclusion that likelihood of cancellation is not part of the assessment of paragraph 35(c) and that the criterion in paragraph 35(c) is not met in the fact pattern in the submission.

Paragraph 9 and paragraphs 22-30 of IFRS 15

Some respondents note that the tentative agenda decision does not mention how the requirements in paragraph 9(e) regarding collectability interact with the criterion in paragraph 35(c)—an entity’s enforceable right to payment for performance completed to date and suggest that this be addressed.

In response, the staff recommend adding a paragraph to the agenda decision to state that an entity first applies paragraph 9; it then applies the requirements in IFRS 15 discussed in the agenda decision only if the paragraph 9 are met.

One respondent notes that the conclusion in the tentative agenda decision that there is one performance obligation has been made by including a statement that ‘any land attributed to the real estate unit is not distinct.’ It says this conclusion is unsubstantiated and suggests developing a rationale for the Committee’s conclusion. The staff conclude that no change is necessary.

Staff recommendation

The staff recommended that the Committee finalise the agenda decision, but with changes to the wording.

Discussion

The Chair began by suggesting some amendments to the agenda decision.  The agenda decision was designed to be general, but most of the comments came from one jurisdiction and reflect how some particular court decisions affect enforceability. To make the decision less specific to that jurisdiction it might be better to state that the contract must be enforceable and that this will be based on evidence. In the facts presented the evidence is that the contracts are not enforceable. This should be stated as a presumption (or statement of fact) so as to make it clear that the Committee is not assessing or giving an opinion on the actions of the courts in that jurisdiction.  Comments from members indicated that they welcomed that change.

All Committee members who spoke agreed in principle with the agenda decision. Most of the discussion was about specific wording, reflecting the earlier discussions about wanting to be helpful without being too fact-specific.

Committee members emphasised that it is clearly important to be clear about what is an enforceable right to payment. Consider court cases and the law are part of the terms of the agreement. They noted that assessment of legal enforceability depends on the jurisdiction and that it is not the likelihood of cancellation, it is the legal enforceability. Even with the same contract, the enforceability can change depending on the jurisdiction. It is important to explain this in the agenda decision.

They discussed the fact that although the courts have overruled the enforceability of the contracts, but not tested in a higher court. They said that you have to consider the facts and circumstances in front of you. In this case precedent has been established and you do not make it so open that something that has never happened, such as a higher court overturning the ruling, might have precedence over something that has happened. It could be helpful to expand upon the types of things you consider when legal precedent overrides enforceability.

One member said that it was helpful to state that a right to buy is not the same as ownership. This is also an extreme example where land is not a separate performance obligation, and it might be helpful to mention that because it helps contrast with the other two IFRS 15 issues.

Before a vote was called the staff clarified the modifications and suggestions that would be included in a final agenda decision. They would add references to IFRS 15.B12, refer to evidence that is “available” and “sufficient”. In this fact pattern the court’s acceptance of request for cancellation is evidence of precedent and the agenda decision will make it clear that it is assumed in this case that an assessment has been made that this precedent is relevant and sufficient. The proposed agenda decision would include a conclusion that the criteria in IFRS.35 are not met.

The Committee decided (12:2) to finalise the decision not to add the issue to its agenda.

Revenue recognition in a real estate contract that includes the transfer of land (Agenda Paper 2D)

Background

At its meeting in November 2017 the Committee discussed a request about the application of IFRS 15 to a construction of real estate contract that involves the transfer of land. Specifically, the submitter asked whether the transfer of land on which the building will be constructed is a separate performance obligation from the construction of the building and whether revenue should be recognised over time or at a point in time for the performance obligation(s) identified.

The Staff recommended that the Committee not add this issue to its agenda on grounds that the requirements in IFRS 15 provide an adequate basis for an entity to identify the performance obligations in the contract and to determine whether revenue should be recognised over time or at a point in time for the fact pattern described in the submission.

The Committee agreed with the Staff’s technical analysis and agreed not to add the issue onto its agenda. No significant concerns were raised on the technical aspect of the paper. However, the Committee debated what the most appropriate approach would be to address this type of very fact-specific submission. The Chair explained that they have taken a different approach to addressing IFRS 15 submissions because of the imminent effective date of the Standard, while also acknowledging that the Committee needs to strike a balance between being helpful and answering every jurisdictional specific question. Several Committee members thought it risky for the Committee to conclude on specific fact patterns and warned of its potential abusive effect on the Committee’s role.

The Committee published its tentative agenda decision, receiving 8 responses.

Staff analysis

Four of the eight respondents say they agree, or do not disagree, with the Committee’s technical conclusion and analysis. Two respondents raised concerns about the technical conclusion. Respondents suggested changes to the wording of the tentative agenda decision.

One respondent raises technical concerns about the identification of performance obligations. They assert that the tentative agenda decision relies on the notion of a ‘transformative relationship’ (mentioned in the Basis for Conclusions on IFRS 15) to conclude that there are two performance obligations in the contract. They suggest that the Committee consider how the requirements in IFRS 15 apply to the fact pattern before discussing concepts mentioned only in the Basis. They are also concerned that the tentative agenda decision implies that the identification of the number of performance obligations depends on the number of parties with which an entity contracts. They also state that the foundations of a building could be considered to transform the land. It says a functional relationship could be considered to be when work performed to date by the contractor could easily be removed or modified and would have no added value.

One respondent says the focus on the entity’s performance being different if the customer were to acquire the land or building from a different entity focuses on the application of paragraph 27(a), rather than paragraph 27(b). In addition, it says the construction of the building transforms the land because, after construction, the land becomes ‘built land’.

In response, the staff note that for a good or service promised in a contract to be distinct, paragraph 27(b) requires that ‘the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (ie the promise to transfer the good or service is distinct within the context of the contract)’.

The staff think that the Basis for Conclusions is helpful in explaining what the Board had in mind when it developed the criterion in paragraph 27(b) and the factors in paragraph 29.

In the fact pattern in the submission, the staff think the promise to transfer the land is separately identifiable from the promise to construct the building. As noted in the tentative agenda decision, there is a functional relationship between the land and the building. However the staff think that IFRS 15.27(b) makes it more important to focus on the integration and interdependence among the promises in the contract.

In assessing whether a promise to transfer land is separately identifiable from a promise to construct a building on that land, the staff think the costs, or ease of removal, of work needed to prepare the land for construction is not a relevant consideration. If the contract included only the promise to construct the building on land already owned by the customer, then presumably the entity would need to dig into the land in preparing the land for construction--such work is an embedded part of the promise to construct the building.

In considering the integration of the land and building, the staff consider that land and a building are fundamentally different assets. IAS 16.58 requires an entity holding land and a building on the land to treat those as separate assets, even if they were acquired at the same time.

Although the staff continue to agree with the Committee’s technical conclusion and analysis, they think improvements could be made to the wording of the agenda decision. In particular, they agree with the respondents who stated that the identification of performance obligations does not depend on the number of entities supplying services to a customer. The staff propose that the agenda decision refer to whether the work performed by the entity in constructing the building would be any different if it did not also transfer the land and vice versa. They have also suggested several other drafting changes to improve the clarity of the wording.

Staff recommendation

The staff recommended that the Committee finalise the tentative agenda decision, but with changes in the wording.

Discussion

Most members who spoke were in favour of finalising the agenda decision.

The focus of the discussions was on the clarity of the wording.

Some of the language that the staff had deleted from the tentative agenda decision about the specific facts and circumstances such as can you benefit from the land should be reinstated. There are other scenarios such as with a strata title where you do not want to assume that they are always separate performance obligations. It needs to be clearer that just because there is land involved there are not always two performance obligations. Even building a fence involves some transformation of the land (digging post holes or foundations) but that does not mean there are not two performance obligations.

Several members thought it would be helpful to analyse IFRS 15.29(b) as part of the decision. The staff clarified that IFRS 15.29 sets out factors to consider (they are indicators) rather than criteria that are determinative. Entities are not required to go through this list every time. In the analysis the staff refer to IFRS 15.29(a) and (c) but not (b). Members thought it would be helpful to explain in the agenda decision that these are indicators and not criteria and that is why IFRS 15.29(b) was not considered to be relevant.  

Several members thought that the Committee should conclude and answer the question as to whether there is one performance obligation or two and that not answering the question is a shortcoming.

The Committee decided (12:2) to finalise the decision not to add the issue to its agenda, and that the decision should not answer the question about whether there is one performance obligation or two.

Right to payment for performance completed to date (Agenda Paper 2E)

Background

At its meeting in November 2017 the Committee discussed a request about the application of IFRS 15.35(c) to the following fact pattern:

• a) An entity and its customer enter into a contract for the sale of a real estate unit in a residential multi-unit complex, before the entity constructs the unit. The entity’s obligation is to deliver the completed real estate unit to the customer.
• b) The customer pays 10% of the purchase price at contract inception, and the remainder after construction is complete.

The customer has the right to cancel the contract at any time before construction is complete. When this happens, the entity is legally required to make reasonable efforts to resell the real estate unit to a third party. On resale, the entity enters into a new contract with the third party—the original contract is not novated. If the resale price is less than the original purchase price (plus selling costs), the customer is legally obliged to pay the difference to the entity.

The Committee decided to issue a tentative decision not to add the matter to its agenda. In its decision the Committee stated that the principle in IFRS 15.31 is about the relationship between the entity and the customer. The objective in applying IFRS 15.35(c) is to assess whether the customer obtains control of the real estate unit as it is being constructed. It is therefore the payment the entity is entitled to receive from (or on behalf of) the customer relating to performance under the contract with the customer that is relevant in determining whether the entity has a right to payment for performance completed to date.

The tentative decision observed that the nature of the payment from the customer to which the entity has a right under the contract is a payment for the difference between the resale price and the original purchase price (plus selling costs). Accordingly, the entity has a right to compensation for loss of profit on termination of the contract—it does not have an enforceable right to payment for performance completed to date as described in paragraph 35(c).

The Committee received 9 responses to the tentative decision.

Staff analysis

Five of the nine respondents agree with technical conclusions, or do not disagree. Most respondents were concerned about the particular wording of the decision. Some respondents disagree with the Committee’s technical conclusion.

One respondent disagreed with how the fact pattern was characterised. The staff think this respondent is highlighting that the entity has an enforceable right to ultimately receive at least the original sales price in the contract, albeit that part or all of the amounts ultimately received may come from a party other than the original customer. The staff have suggested some modifications to the wording to clarify the rights.

Two respondents disagree with the technical analysis.  They say that IFRS 15.35(c) should be applied by considering the entity’s right to be compensated for its performance in constructing the unit, without regard for how the entity will be compensated or who will pay the compensation.

The staff also set out an alternative view that says the Committee focused on who the entity receives payment from, not on the rights to payment originated by the contract signed with the first customer. This focus is absent from the requirements identified as relevant to the fact pattern, ie paragraphs 35(c), 37 and paragraphs B9–B11. IFRS 15.31 does not refer ‘to the relationship between the entity and the customer’. Instead, it requires an entity to recognise revenue when it transfers a promised good or service to a customer. By considering the contracts as separate contracts the Committee has focused on the legal form, rather than the substance, of the transaction. The second contract (with the third party) is a separate contract by its legal form, and the first contract (with the customer) is also terminated from a legal form standpoint. In substance, however, the effects of the first contract continue from the perspective of the entity—the same unit is sold with no alternative use, and the entity’s right to payment is for no less than the original price.

In response the staff note that if the customer were to cancel the contract, the entity must make reasonable efforts to resell the contract to a third party under a new contract. The entity is entitled to compensation related to the contract with the customer calculated as the original sales price for the real estate unit less the resale price (plus selling costs). At any time, the amount of compensation the entity is entitled to under the contract varies depending on the resale price of the real estate unit. This could be less (or more) than compensation for performance completed to date (ie it could be less (or more) than an amount that approximates the selling price of the part-constructed unit at the time of cancellation). The staff consider that the entity is not entitled to an amount that at least compensates it for performance completed to date at all times throughout the duration of the contract if the contract were to be cancelled. Accordingly, in the fact pattern in the submission we think the criterion in paragraph 35(c) is not met.

The staff also think it is inappropriate to consider the two separate contracts (the original contract and the resale contract) together when assessing whether the entity has an enforceable right to payment for performance completed to date. IFRS 15.17 includes requirements for when an entity combines separate contracts and accounts for them as a single contract. Those requirements apply to contracts that are entered into at or near the same time, with the same customer (or related parties of the customer), provided that one or more of three specified criteria are met. In the fact pattern in the submission, the contracts are entered into at different times and with different counterparties. The staff see no basis on which to consider these contracts as one contract for the purpose of applying IFRS 15.

Although the staff agree with respondents that IFRS 15 does not require that the customer must directly make the payment to which the entity is entitled on cancellation what is important is that the payment to which the entity is entitled on cancellation relates to performance under the contract with the customer, and not to performance under a different contract.

Staff recommendation

The staff recommended that the Committee finalise the tentative agenda decision, but with changes in the wording.

Discussion

The discussion indicated that the Committee was generally supportive of not taking this matter onto its agenda.

One member said that the vendor is in the same position whether the contract is cancelled or not. Before you get to IFRS 15.35(c) you have to work through IFRS 15.31, where the focus is on whether the customer has obtained control. Other members agreed and asked the staff to emphasise that the focus of paragraph 31 is on the customer and when the customer obtains control.

It is also important to clarify in the last paragraph that the difference “if any” on return of the unit is not satisfaction of the consideration. Additionally, IFRS 15.BC142 is explicit that it is the customer’s obligation to pay.  

One member emphasised that it was important to be consistent in how these decisions are drafted. For example, the conclusion should be at the end of each decision and, in this case state that “the criteria in paragraph 35(c) are not met.”

The Committee decided (12:2) to finalise the decision not to add the issue to its agenda.