IAS 23 — Over time transfer of constructed goods

Date recorded:

Over time transfer of constructed goods (Agenda Paper 3)


In November 2018 the Committee discussed a submission about the eligibility of capitalisation of borrowing costs in relation to the construction of a residential multi-unit real estate development for entities which recognise revenue over time for the sale of individual units in the development. In that specific fact pattern, before construction begins, the entity signs contracts with customers for the sale of some of the units in the building (sold units) and the entity markets the remaining units in the building (unsold units) for sale.

The Committee agreed to adopt the agenda decision which set out the analysis that the assets the entity might recognise are receivables, contract assets and inventory and none of these are qualifying assets applying IAS 23, i.e. "...an asset that necessarily takes a substantial period of time to get ready for its intended use or sale". Furthermore, the staff analysed that the unsold units are ready for their intended sale in their current condition and would not necessarily take a substantial period of time to get ready for such sale. They would therefore not meet the definition of a qualifying asset and accordingly, borrowing costs in relation to the construction of the building cannot be capitalised and shall be recognised as an expense.

Comment letters were received and some respondents disagree, with details of the disagreement and staff analysis set out below.

Staff analysis

Some respondents said that recognising such borrowing costs as an expense when incurred would fail to provide a faithful representation of the costs of the units. However, the staff are of the view that the borrowing costs incurred do not relate to the construction of the unsold units. Instead they finance the entity's holding of part-constructed units while the entity finds customers. This is because the unsold unit is ready for its intended sale in its current condition. In respect of sold units, some respondents said that the performance obligation of the part-constructed unit has not been fulfilled until the physical construction is completed. The staff disagree with this thought and consider that there is no "asset" for those sold units and hence no borrowing cost can be capitalised.

Several respondents said the tentative agenda decision draws an inappropriate distinction between the cost of units transferred to customers over time versus at a point in time. The staff are of the view that the difference in accounting treatment is reflecting the different rights and obligations for the entity and the nature of assets recognised by the entity is different. On that basis, it is reasonable to be of the view that the pattern of revenue recognition would affect the capitalisation of borrowing costs.

On the other hand, certain respondents commented on the impact of the subject matter in terms of the time it would take to implement the agenda decision.

Staff recommendation

The staff recommend (i) finalising the agenda decision subject to some editoral changes; and (ii) including in IFRIC Update a note that the entity is entitled to sufficient time in determining a potential change in accounting policy as a result of the agenda decision. This is to address the respondents' concern on the time it would take to implement the agenda decision.


Additional statement in IFRIC Update

Before going into the discussion on the wording of the Agenda Decision, the staff highlighted the feedback received on the Accounting Policies Exposure Draft and stakeholders' needs for allowing reasonable time for implementation that results from the issuance of an Agenda Decision. Agenda Decisions are not an amendment to an IFRS Standard, but they provide new insights or new information to stakeholders that might result in a change in accounting policy. One Committee member expressed his disagreement with this approach. Given IAS 8 does not mention what the appropriate time of implementing a change in accounting policy would be in such a situation.

A few Committee members discussed the enforcement perspective of Agenda Decisions. They were concerned about the meaning of "sufficient time" in the proposed wording of IFRIC Update as they do not expect people to take a long period of time for the implementation once the Agenda Decision is finalised. There should be rules or guidance on what time period might be expected. The Committee members were concerned about the comparability of financial information since some entities may not have sufficient resources to adopt the changes in a timely manner and so one Committee member suggested "sufficient time" should be independent of the preparedness of a specific entity. Some Committee members raised the issue of disclosure if there is material change in accounting policy.

One IASB Board member who observed the meeting has mentioned that the Board noted that the term "sufficient time" is an undefined concept and vague. However, it is difficult for the Board to determine which time period entities should be given to apply the change in accounting policy because there is no effective date of an Agenda Decision, unlike amendments to IFRS Standards. Further, the Board considered there should be disclosure on an accounting policy change if it is material to the financial statements, which is quite clear in IAS 8.

The Chair concluded that the review of the Due Process Handbook can provide clarity around the status of an Agenda Decision. The Committee observed that the Board acknowledged and decided that people should be allowed sufficient time on the implementation of policies arisen from Agenda Decision and would communicate the message through several mechanism including the IFRIC Update. The Chair also suggested the staff think about what the expectations are in relation to "sufficient time" and what might be appropriate in terms of disclosure.

Agenda Decision

In general, there was no disagreement with the technical analysis produced in the staff paper among the Committee members and there was no significant discussion on its content in the meeting.

There were some discussion about whether a narrow-scope amendment to IFRS Standards is needed. One member said it may be helpful to draw attention to the fact that this agenda decision is based on the specific fact pattern (over time revenue recognition). Another Committee member was concerned about the alignment of new standard IFRS 15 and old standard IAS 23, which was developed a long time ago.

The staff suggested drawing contrast between point in time and over time accounting in the agenda decision and providing supporting education materials in respect of the interaction of IFRS 15 and IAS 23. The Committee decided, by a majority of votes, to adopt the wording in the Agenda Decision subject some tweaks.

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