«IFRS Interpretations Agenda reference Committee Meeting March 2011 Date Staff Paper Tentative agenda decision Project IFRIC 15 Agreements for the ...»
18 The entity may transfer to the buyer control and the significant risks and rewards of ownership of the real estate in its entirety at a single time (eg at completion, upon or after delivery). In this case, the entity shall recognise revenue only when all the criteria in paragraph 14 of IAS 18 are satisfied.
BC23 and BC26 BC23 The IFRIC also noted that construction activities often require an entity that undertakes the construction of real estate, directly or through subcontractors, to provide services together with construction materials. However, the entity delivers to the buyer a real estate asset, either completed or in its current stage of completion. Therefore, the IFRIC concluded that the criteria in paragraph 14 of IAS 18 for recognition of revenue from the sale of goods should apply to such agreements.
BC26 The IFRIC noted that agreements with 'continuous transfer' might not be encountered frequently. However, the IFRIC decided that the Interpretation should address the accounting for such agreements because some respondents to D21 identified agreements with these characteristics.
IE 6-IE8 Example 2 IE6 An entity is developing residential real estate and starts marketing individual units (apartments) while construction is still in progress. Buyers enter into a binding sale agreement that gives them the right to acquire a specified unit when it is ready for occupation. They pay a deposit that is refundable only if the entity fails to deliver the completed unit in accordance with the contracted terms. Buyers are also required to make progress payments between the time of the initial agreement and contractual completion. The balance of the purchase price is paid only on contractual completion, when buyers obtain possession of their unit. Buyers are able to specify only minor variations to the basic design but they cannot specify or alter major structural elements of the design of their unit. In the jurisdiction, no rights to the underlying real estate asset transfer
to the buyer other than through the agreement. Consequently, the construction takes place regardless of whether sale agreements exist.
IE7 In this illustrative example, the terms of the agreement and all the surrounding facts and circumstances indicate that the agreement is not a construction contract. The agreement is a forward contract that gives the buyer an asset in the form of a right to acquire, use and sell the completed real estate at a later date and an obligation to pay the purchase price in accordance with its terms. Although the buyer might be able to transfer its interest in the forward contract to another party, the entity retains control and the significant risks and rewards of ownership of the work in progress in its current state until the completed real estate is transferred. Therefore, revenue should be recognised only when all the criteria in paragraph 14 of IAS 18 are met (at completion in this example).
IE8 Alternatively, assume that, in the jurisdiction, the law requires the entity to transfer immediately to the buyer ownership of the real estate in its current state of completion and that any additional construction becomes the property of the buyer as construction progresses. The entity would need to consider all the terms of the agreement to determine whether this change in the timing of the transfer of ownership means that the entity transfers to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses. For example, the fact that 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 performed, might indicate that control is transferred along with ownership. If it does, and if all the criteria in paragraph 14 of IAS 18 are met continuously as construction progresses, the entity recognises revenue by reference to the stage of completion using the percentage of completion method taking into account the stage of completion of the whole building and the agreements signed with individual buyers.
Accompanying Note on Application of INT FRS 115 in Singapore This accompanying note is an integral part of INT FRS 115.
Introduction 1 This note takes into account the legal framework in Singapore that is directly relevant to the application of INT FRS 115 in Singapore and summarises the Council’s considerations in reaching its consensus on the accounting treatment for the sale of uncompleted residential properties “off-plan”.
2 The scope deals with the accounting treatment for revenue and associated expenses by housing developers who develop more than 4 units of private residential properties in Singapore for sale prior to completion 1 of the properties. These developers are regulated under the Singapore Housing Developers (Control and Licensing) Act (Chapter 130) (the “Act”) and use the standard form of the sale and purchase agreement 2 (the “SPA”) prescribed in Form D for landed properties and Form E for strata-titled properties of the schedule to the Housing Developers Rules, with This refers to the issue of Certificate of Statutory Completion and individual legal titles for the housing units.
Any amendment, deletion or alteration to the standard SPA can only be effected with the approval of the Controller of Housing.
each unit sold intended to comprise a lot in a land title plan for landed properties and strata title plan for strata-titled properties. Such a unit sold is referred to as “uncompleted property unit”.
Such sales are referred to as “standard residential property sales”.
3 The issue is whether standard residential property sales result in the transfer to the purchasers the control and the significant risks and rewards of ownership of the uncompleted property units in their current state as construction progresses, so that the developer should recognise revenue for such sales by reference to the stage of completion using the percentage of completion method.
Consensus 4 The five criteria set out in FRS 18.14, in the context of standard residential property sales, are analysed in turn below.
Whether the developer has transferred to the purchaser the significant risks and rewards of ownership of the uncompleted property units - FRS18.14(a) 5 The Council noted that no housing development 3 (“development”) shall be carried out or undertaken in Singapore except by a housing developer who or which is in possession of a licence in writing from the Controller of Housing authorising it to do so. This point together with the various powers vested with the Controller of Housing and the Minister under the Act, underscore the legislative intent to protect the rights of the purchaser of an uncompleted property unit. The provisions in the Act are necessary to protect the rights of the purchaser and justify the basis that the risks of an uncompleted property unit accrue to the purchaser.
6 Standard residential property sales can result in the transfer of the significant risks and rewards of ownership from the time that the SPA is executed, as the purchaser acquires beneficial ownership of the uncompleted property unit. Such beneficial ownership entitles the purchaser to the rewards of ownership such as the ability to sell the purchaser’s beneficial ownership of the uncompleted property unit to another party, with the gain or loss from such a sale being retained by the purchaser. The purchaser is unable to rescind the standard SPA if the developer does not satisfy its obligations and the Council noted that in this regard, the developer passes the risk of ownership to the purchaser upon the execution of the SPA.
7 The developer similarly passes to the purchaser the risks of ownership such as a progressive instalment payment schedule that is designed to progressively match and pay for the contracted purchase price of the uncompleted property unit as the construction progresses. The payment schedule as specified in the standard SPA is also systematically aligned to the stage of completion certified by a qualified person as defined under section 2(1) of the Building Control Act (Chapter 29) (i.e. 30% of the purchase price would be paid to date which is aligned to the completion of the foundation work of the uncompleted property unit etc.).
8 Downward price changes in the market value of the uncompleted property unit sold to the purchaser will not be borne by the developer. The progressive payments by the purchaser As defined under section 2 of the Act.
represent a payment for an appropriate proportion of the contracted purchase price based on the stage of completion at the date of each of the pre-specified payment intervals.
9 The purchase of an uncompleted property unit exposes the purchaser to losses from the risk of a failure by the developer to complete the property, with the loss of the amounts he has paid to date.
The Council noted that the risk of default is mitigated by a requirement in the Act for the developer to operate a separate project account for the development with a bank or finance company.
10 The types of monies to be deposited into and withdrawn from the project account are set out in the Housing Developers (Project Account) Rules. These rules are designed to ensure that monies paid by purchasers in each development are segregated, and utilised only for designated types of payments that relate to the development. The monies shall not be released unless supported by a certificate from the qualified person in charge of the development or documentary proof that payment is due to be made for that designated purpose. This provides a framework that significantly limits the risks to the purchaser of non-completion of the construction of the property.
11 Based on the above observations, the Council noted that standard residential property sales can result in the transfer of the significant risks and rewards of ownership of the uncompleted property units to the purchaser.
Whether the developer retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the uncompleted property units sold FRS18.14(b) 12 As the sale involves an uncompleted property that the developer has obligations to complete, the developer would continue to have involvement in the uncompleted property sold to the purchaser. During the construction period, such managerial involvement on the part of the developer arises from the contractual obligation of the developer to complete construction in accordance with agreed contractual terms.
13 The Council noted that the SPA together with the relevant building approvals set out the specifications of the property that cannot be changed unilaterally by the developer. Similarly, the developer does not have the right of an owner to deal freely with the uncompleted property unit once sold, that unit cannot be sold by the developer to another party or be substituted by the developer for another unit. The Council noted that there are no major decisions that a developer can make to derive ownership benefits, e.g. such as making changes to the specifications and approved plans unless the changes have been approved or are required by the Commissioner of Building Control or any other relevant authority of the uncompleted property.
14 The Council noted that the Act provides, in the event of a developer not meeting its obligations, for the relevant authority to direct the appointment of another developer to carry on the business of the defaulting developer. Such power vested in the Minister underscores the rights of purchasers as owners, since such action is not designed to protect any developer’s rights to the property.
15 Based on the above observations, the Council considered that the involvement of the developer is in a managerial capacity acting on behalf of the owners, rather than as an owner and that the developer does not have effective control similar to what an owner would be expected to have.
16 The Council noted that INT FRS 115.17 states that “The entity may transfer to the purchaser control…of the work in progress in its current state as construction progresses.” On this point on whether the purchaser obtains control progressively of the uncompleted property unit as construction progresses, the Council has rationalised the concept of control from the dimension of a multi property unit development rather than a single unit property development.
17 The Council noted that absolute control of the uncompleted property unit vests in no one single entity during construction for a multi-unit property development. The standard SPA does not specify that a purchaser is able to take over the uncompleted development during construction (e.g. to engage a different entity to complete the construction). Approaching control from the dimension of a multi-unit property development, the purchaser of a single unit cannot unilaterally change the developer during construction. However, the issue of whether collectively all the purchasers are able to change the developer during construction has not been considered because there has been no such precedence in Singapore to date and hence, inappropriate to speculate with regard to the application of INT FRS 115.
18 The Council noted that a purchaser will not be able to alter the major structural elements of the design of the property unit even after completion of construction and hence, the issue of whether the purchaser has this ability during construction is irrelevant to the application of INT FRS 115.
However, the Council noted that there have been instances where the purchaser of two adjoining property units had entered into a supplementary SPA with the developer to combine the 2 property units during construction. The Council noted that the purchaser had evidenced the ability to alter the specifications of the purchaser’s own uncompleted property unit within the unit’s parameters during construction.
19 The Council noted that the control the Controller of Housing has over the uncompleted property unit during its construction is primarily on the control of the project account and not on the uncompleted property unit. His role is predominantly to safeguard the interests of the purchaser by ensuring the SPA is a fair agreement between both parties.