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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
• A construction contract in accordance with IAS 11.
• The rendering of services in accordance with IAS 18.
• The sale of goods in accordance with IAS 18.
IFRIC 15 states 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 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 that 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
An entity shall disclose the following six items:
1. The amount of contract revenue recognized as revenue in the period
2. The methods used to determine the contract revenue recognized in the period
3. The methods used to determine the stage of completion of contracts in progress at the balance sheet date
4. For contracts in progress at the balance sheet date
a. The aggregate amount of costs incurred, and recognized profits less recognized losses, to date
b. Advances received
c. Retentions
5. The gross amount due from customers for contract work as an asset
6. The gross amount due to customers for contract work as a liability
The gross amount due from customers for contract work is the net amount of costs incurred plus recognized profits, less the sum of recognized losses and progress
billings for contracts in progress for which costs incurred plus recognized profits, less recognized losses exceeds progress billings.
The gross amount due to customers for contract work is the net amount of costs incurred plus recognized profits, less the sum of recognized losses and progress
billings for contracts in progress for which progress billings exceed incurred plus recognized profits, less recognized losses.
Notes to the Consolidated Financial Statement
EXTRACTS FROM PUBLISHED FINANCIAL STATEMENTS
HOLCIM, Annual Report, 2009