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objectives of the Interpretation are to clarify the definition of a construction contract and the articulation between IAS 11 and IAS 18 and to provide guidance on how
to account for revenue when the agreement for the construction of real estate falls within the scope of IAS 18.
IFRIC 15 addresses the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. It
clarifies how these revenues and expenses should be recognized if an agreement between a developer and a buyer is reached before the construction of the real estate
is completed.
It is common practice for real estate developers to market their developments well before the start of any construction, and this activity continues throughout the
construction period. Some real estate developers recognize revenue from these arrangements as construction progresses by reference to the stage of completion of the
development, while others recognize revenue only when the completed unit is handed over to the buyer.
Also, this interpretation provides guidance on how to determine whether an agreement is within the scope of IAS 11 or IAS 18.
There are three different revenue recognition approaches within existing standards that could potentially be applied to real estate marketed prior to the completing of
construction.
It could be accounted for as any of the following three:
1. A construction contract in accordance with IAS 11.
2. The rendering of services in accordance with IAS 18.
3. The sale of goods in accordance with IAS 18.
The IFRIC states that where the agreement allows the buyer to specify major structural elements of design before or during construction, then the agreement should
be considered to be a construction contract.
When construction takes place independently of the agreement and the buyer only has a limited ability to influence designs, the agreement should be considered to
be in accordance with IAS 18.
Agreement for the Rendering of Services or Sale of Goods (IAS 18)
Where the agreement falls within the scope of IAS 18 and the entity is not required to acquire and supply construction materials, the agreement is for the rendering
of services. The entity is responsible only for assembling materials supplied by others (i.e., it has no inventory risk for the construction materials) and therefore the
constructor is rendering a service.
Revenue is recognized by reference to the stage of completion of the transaction using the percentage-of-completion method. As stated in IAS 18 paragraph 21, the
requirements of IAS 11 are generally applicable to the recognition of revenue and the associated expenses for such a transaction.
When an agreement involves the provision of construction materials and labor and it does not fall to be accounted for as a construction contract under IAS 11, it will
be an agreement for the sale of goods under IAS 18. The applicable recognition criteria are those set out in IAS 18, paragraph 14.
Revenue can only be recognized when the entity has transferred control and significant risks and rewards of ownership of the goods to the buyer, and the
interpretation distinguishes between circumstances in which these two criteria are met:
1. At a single point in time, for example at completion or upon delivery. Revenue is recognized when the significant risks and rewards of ownership are
transferred to the buyer and all the criteria are met in accordance with IAS 18, paragraph 14.
2. Continuously as construction progresses. It is noted in the Interpretation that agreements with continuous transfer might not be encountered frequently.
However, one example of a situation, which would constitute a continuous transfer, is if the agreement is terminated before construction is complete. The buyer
retains the work in progress and the entity has the right to be paid for the work to date. When the criteria are met continuously, revenue is recognized by
reference to the stage of completion of the transaction using the percentage-of-completion method. As stated in IAS 18, paragraph 21, the requirements of IAS
11 are generally applicable to the recognition of revenue and the associated expenses for such a transaction.
This interpretation supersedes the current guidance for real estate in the Appendix to IAS 18. It is applicable retrospectively for annual periods beginning on or after
January 1, 2009.
DISCLOSURES
When an entity recognizes revenue using the percentage-of-completion method for agreements that meet all the criteria in IAS 18 paragraph 14, continuously as
construction progresses, the following three disclosures are required:
[IFRIC 15 paragraph 20]
1. How the entity determines which agreements meet all the criteria in IAS 18 continuously as construction progresses
2. The amount of revenue arising from such arrangements in the period
3. The methods used to determine the stage of completion of agreements in progress
For any such agreements that are in progress at the reporting date, the aggregate amount of costs incurred and recognized profits (less recognized losses) to
date, as well as the amount of advances received should be disclosed.
IFRIC 18, TRANSFERS OF ASSETS FROM CUSTOMERS
Sometimes an entity receives one or more noncash assets from its customers in return for goods or services that the entity agrees to provide to its customers using the
asset(s) it receives. For example, a real estate developer (in this example, the customer) might construct an electricity substation and transfer that substation to an
electricity network provider. The customer does that so that the persons to whom it will eventually sell the houses it is building will have a connection to an electricity
network and will therefore be in a position to be supplied with electricity.
In some other cases, an entity will receive cash from its customers and will be required to use that cash to construct or acquire an asset that it will then use to provide
goods or services to its customers. For example, an alternative arrangement to the one described in the real estate developer/electricity network provider example could