«IFRS Interpretations Agenda reference Committee Meeting March 2011 Date Staff Paper Tentative agenda decision Project IFRIC 15 Agreements for the ...»
Tentative agenda decision
IFRIC 15 Agreements for the Construction of Real Estate –
Meaning of continuous transfer
1. The IFRS Interpretations Committee (the Interpretations Committee) received a
request asking for clarification on the meaning of the term ‘continuous transfer’ in
paragraph 17 of IFRIC 15 Agreements for the Construction of Real Estate.
2. For ease of reference, the text of the submission is reproduced in Appendix A to this paper.
Purpose of the paper
3. This paper:
(a) provides background information on the issue;
(b) provides an analysis of the issue;
(c) makes a recommendation that the Interpretations Committee should add the issue to its agenda;
(d) asks whether the Interpretations Committee agrees with the staff’s recommendation.
This paper has been prepared by the technical staff of the IFRS Foundation for discussion at a public meeting of the IFRS Interpretations Committee.
The views expressed in this paper are those of the staff preparing the paper. They do not purport to represent the views of any individual members of the IFRS Interpretations Committee or the IASB. Comments made in relation to the application of an IFRS do not purport to be acceptable or unacceptable application of that IFRS—only the IFRS Interpretations Committee or the IASB can make such a determination.
Decisions made by the IFRS Interpretations Committee are reported in IFRIC Update.
Interpretations are published only after the IFRS Interpretations Committee and the Board have each completed their full due process, including appropriate public consultation and formal voting procedures. The approval of an Interpretation by the Board is reported in IASB Update.
Page 1 of 23 Agenda paper 9 IASB Staff paper Background information Summary analysis presented in the submission
4. IFRIC 15 prescribes the accounting for revenue from the construction of real
estate in situations where the agreement is:
(a) a construction contract;
(b) an agreement for the rendering of services; or (c) an agreement for the sale of goods.
5. In the submission received, it is made clear that the request is limited to situations (c). However, the staff is aware that the Revenue Recognition project is currently developing a revenue model under which no distinction is made between the supply of goods and the supply of services; rather the project concentrates on the pattern of transfer as shown in the contract. Later in the analysis (see paragraph 22 of this paper) and in order to consider current discussions, the staff refers to the boards’ recent tentative decisions on services that transfer continuously.
6. The constituent points out that, with respect to accounting for revenue in an agreement for the sale of goods, IFRIC 15 refers to paragraph 14 of IAS 18 Revenue. This paragraph sets out conditions that have to be satisfied for an entity
to recognise revenue for the sale of goods. Two of the conditions are that:
(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; and (b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.
The relevant literature is reproduced in full in Appendix A to this paper for ease of reference.
7. Paragraphs 17 and 18 of IFRIC 15 provide for an accounting treatment for the recognition of revenue where the seller transfers to the buyer control and significant risks and rewards of ownership (and where all other criteria in
paragraph 14 of IAS 18 are met):
(a) if the seller transfers to the buyer control and significant risks and rewards of ownership continuously as construction progresses: revenue should be recognised by reference to the stage of completion;
(b) if the seller transfers to the buyer control and significant risks and rewards of ownership in their entirety at a single point in time: revenue should be recognised upon or after delivery of the goods sold.
8. The constituent is aware that whether transfer is continuous or at a single point in time is a matter of judgement requiring appropriate analysis of facts and circumstances. However, the constituent notes that significant divergence exists in practice in interpreting the meaning of continuous transfer. In addition, such divergences are not limited to some jurisdictions; they occur in several regions, including Asia and South America.
Views presented in the submission
9. The request lists differing views as to how the meaning of continuous transfer is
10. In the light of the existing differing views, the submission therefore asks the
Interpretations Committee to clarify (quote from the submission):
11. The staff note that the meaning of control is a major issue that is currently being addressed by the Board. The meaning of continuous transfer is, under current IFRSs, an issue that is specific to off-plan sales within IFRIC 15 and the staff are of the opinion that it is appropriate for the Interpretations Committee to address this.
12. Consequently, at this stage, the staff limit the scope of this project to describe continuous transfer more clearly and to define the unit of account to which continuous transfer applies.
13. The staff note that control is only referred to in IAS 18 in paragraph 14(b) with no further guidance as to how to assess that notion of control.
14. The notion of continuous transfer does not exist as such in IAS 18 and is only mentioned in IFRIC 15.
15. In addition, the staff note that, in currently effective IFRSs, continuous transfer is not defined in such a way as to be helpful in determining whether transfer of control occurs at one point in time only or is instead on a continuing basis. This is the core issue in the submission.
Current project on revenue recognition
16. The staff note that paragraphs 25 to 31 of the exposure draft (ED) Revenue from Contracts with Customers propose the following guidance as to the meaning of
17. Paragraph 30 of the ED proposes specific indicators to help determine that a
customer has obtained control of a good:
(a) the customer has an unconditional obligation to pay;
(c) the customer has physical possession; and (d) the design or function of the good is customer-specific.
18. While paragraphs 32 and 33 of the ED refer to continuous transfer of goods, they set out methods of recognising revenue, rather than providing indicators that would help to assess whether transfer of the good is continuous or occurs only upon delivery of the good.
19. In addition, the staff note that the ED does not refer to transfer of risks and rewards when providing guidance for revenue recognition.
20. Recent tentative decisions reached by the boards on the topic of determining the transfer of goods are set out in the IASB Update for January 2011 and are
reproduced below for ease of reference:
For determining the transfer of a good, the boards decided that an entity should recognise revenue when the customer obtains control of
the good. The boards also decided that the revenue standard should:
21. In the light of current literature and of recent discussions, the staff note that transferring risks and rewards of ownership is to be considered an indicator of transfer of control rather than as a condition for recognising revenue (as is currently the case in paragraph 14(a) of IAS 18).
22. The latest tentative decisions by the boards on the Revenue Recognition project were made at the joint FASB / IASB meeting in February 2011. Below is reproduced, for ease of reference, the relevant excerpt from the IASB Update for
23. The staff note that under the Revenue Recognition project’s current thinking, if a property development contract has the characteristics of a service that transfers
continuously (using the indicators listed in paragraph 22 of this paper) then revenue would be recognised as the property is created.
Factors that are commonly analysed to determine the revenue recognition pattern
24. The staff gathered inputs from standard setters in several jurisdictions on different indicators that an entity analyses when determining whether the transfer of control and risks and rewards for off-plan sales is on a continuous basis or occurs only at one point in time.
25. The intention of the staff in discussing those indicators is not to assess the correctness (with respect to IFRSs) of analyses of specific facts and circumstances performed in some jurisdictions against those indicators. Rather, the staff note that there is a lack of guidance under IFRSs to help determine continuous transfer of control versus transfer of control at one point in time and that there exists diversity in practice.
26. The following indicators are commonly used in practice:
(e) whether the property under construction is buyer-specific; and (f) who bears the risk that the construction may not be completed.
27. The staff believe that those indicators are characteristic of off-plan sale agreements where the only two parties involved are the developer and the buyer.
In addition, these indicators illustrate broadly those proposed by the boards in the
Revenue Recognition project, as reproduced in paragraphs 16, 20 and 22 of this paper.
28. The staff note that these indicators are commonly used across jurisdictions, but they seem to be insufficient in some jurisdictions to provide for reaching a conclusion on whether the transfer of control is on a continuous basis or at one point in time.
Specific fact pattern common to those jurisdictions where the analysis of transfer of control is controversial
29. The staff identified that in those jurisdictions where characterising the transfer of control is controversial, relevant public authorities are involved, in addition to the direct parties to the sale purchase agreement (ie the developer and the buyer).
Their role is to protect the buyer if the developer defaults, because they have the power to assign a new developer to complete the construction. Because of the involvement of those relevant authorities, constituents in those jurisdictions find it difficult to conclude whether control lies with the developer or with the buyer.
30. In those instances, clarification would help to achieve common ground for the analysis of transfer of control, hence leading to better consistency when determining the accounting method for recognising revenue.
31. The staff note that two views are presented in the submission as to the meaning of continuous transfer in the specific situation described in paragraph 29 of this
32. The staff understand that in those circumstances in which an additional entity is involved whose role is to ensure that the buyer benefits from protective rights,
control is yet to be received by the buyer, but no longer rests with the seller. The staff believe that this may create a gap where neither the developer nor the buyer has control of the construction while it is in progress.
33. The staff note that view 1 reflects one reading of the words ‘The entity may transfer to the buyer control and the significant risks and rewards of ownership […]’ in paragraphs 17 and 18 of IFRIC 15.
34. This view is consistent with analysing the transfer of control and significant risks and rewards irrespective of protective rights a public authority may provide to the buyer. The staff understand that this is a common reading of IFRIC 15 where no third party is involved in addition to the buyer and the seller.
35. Those who share view 1 believe that receiving protective rights from a third party is insufficient to characterise the transfer of control and significant risks and rewards from the seller to the buyer. In their opinion, in those cases where neither the developer nor the buyer has control as construction progresses, control is transferred only at one point in time, upon completion of the construction. The consequence of this view is that revenue should not be recognised until completion of the construction.
36. The staff understand view 2 as being an attempt to capture situations where a public authority provides protective rights to the buyer.
37. The staff note that neither IAS 18 or IFRIC 15 contemplated that specific fact pattern.
38. Those who share view 2 are of the opinion that the protective rights provided by the public authorities reflect a partial transfer of control and significant risks and rewards from the seller to the buyer. In their opinion, such a partial transfer would lead to using the percentage of completion method for recognising revenue.
39. The staff think that the effect of an additional party should be analysed together with other indicators such as those listed in paragraph 26 of this paper to reach a conclusion as to whether transfer of control is continuous or occurs only upon completion of the construction.
Agenda criteria assessment