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«IFRS Interpretations Agenda reference Committee Meeting March 2011 Date Staff Paper Tentative agenda decision Project IFRIC 15 Agreements for the ...»

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20 Historically, when a developer defaulted during the construction of an uncompleted development, the mortgagee financial institution which financed the development via a loan to the developer secured by the land and the development as mortgage had stepped in to take over the development.

21 The Council noted that the courses of action taken by a mortgagee financial institution included the appointment of a receiver which subsequently completed the development as per the original SPA or sold the underlying land without completing the development. Typically, the courses of actions depended on the stage of completion and the percentage of units sold to date.

22 The Council noted that there was a case where a mortgagee financial institution sold the underlying land to another developer when it took over the development during the foundation stage of completion when none of the units were sold. In another case, the mortgagee financial institution took over the development with 25 out of the 52 units already sold. The underlying

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land was sold to a new developer with the sale subject to the new developer taking over the obligations of the failed developer under its existing SPAs with the purchasers.

23 The courses of action taken by a mortgagee financial institution or a receiver appointed on an uncompleted development in respect of a developer which had defaulted are ultimately driven by commercial justifications. The historical rate of defaults by developers in Singapore is minimal.

24 Notwithstanding the above courses of action that could be taken by a mortgagee financial institution, the Council noted that the Minister may intervene under the Act to ensure that the rights of the purchasers under the SPA are safeguarded. In addition, the Council noted that a purchaser is able to mortgage the uncompleted property unit to obtain a housing loan to settle the progressive payments.

25 The Council considered the two alternative scenarios posed in paragraphs IE6 to IE8 of illustrative example 2 accompanying INT FRS 115, the Council noted that legal title of the property unit would only pass to the purchaser upon the completion. The developer would execute a proper conveyance to the purchaser of the property unit and also hand over to the purchaser the title to the property unit, namely the subsidiary strata certificate of title (for a stratatitled property) or the certificate of title (for a landed property). This certificate is an official document issued by the Registrar of Titles stating that the person named in the certificate is the legal owner of the property described in the certificate.

26 To protect the purchaser’s interest, the purchaser (i.e. “caveator”) may lodge a caveat 4 against the specific uncompleted property unit under section 115(1) of the Land Titles Act (Chapter 157).

The caveat is a precautionary step taken by the caveator pending completion of the uncompleted property unit. The caveat also serves as a notice to others that the caveator has an interest in the uncompleted property unit (i.e. an encumbrance).

27 The Council noted that a caveat lodged on an uncompleted property unit can prevent the developer from dealing with the underlying land independently of the caveator. So long as a caveat remains effective, the Registrar of Titles shall not register any dealing which is prohibited by the caveat. Upon lodgment of a transaction which is prohibited by a caveat, the Registrar of Titles shall serve on the caveator a notice of his intention, at the expiration of 30 days from the date of the service of the notice, to register the transaction. The ability of a caveator to be notified and object to another party’s registration of a transaction of the underlying land in which a caveat had been lodged earlier, evidences control associated with ownership of the uncompleted property unit.

28 The Council noted that a missing control factor prior to the completion of construction is that the purchaser does not possess physical control of the completed unit. Prior to the transfer of the A caveat is a legal document lodged at the Singapore Land Authority by someone (known as a “caveator”) against a property in which the caveator claims an interest. The Land Titles Act (Chapter 157) allows any person who claims an interest in the property to lodge a caveat. When a caveat is lodged, the Registrar of Titles will notify it against the property. A caveat may be lodged by any party who has an interest in the property and that party is usually a: purchaser who has paid a deposit to buy a particular property; or  financial institution which has granted a loan to the owner or the purchaser; or  Central Provident Fund (CPF) Board when CPF funds are released from the owner’s or the purchaser’s CPF account(s).

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legal title, the Council noted that there is a progressive alignment of the monies deposited into the project account and the progressive build up and value accretion of the physical property unit that evidences that the purchaser progressively accumulates control over the uncompleted property unit as progressive payments are made to the project account.

29 Accordingly, the legal framework and the caveat system in Singapore taken as a whole provide an equitable right of the purchaser over the uncompleted property unit. This together with the project account and the progress payments made by the purchaser, evidences that the purchaser obtains control over the uncompleted property unit as construction progresses.

Collectively, the various mechanisms in the legal framework, over and above contractual rights, establish a purchaser’s control over the uncompleted property unit. This is reflected in the historically minimal rate of defaults on developments in Singapore.

Whether the amount of revenue can be measured reliably - FRS18.14(c) 30 The Council noted that the considerations relating to the reliability of measurement of revenue should be based on standard accounting principles and require no further consideration for purposes of this note.

Whether it is probable that the economic benefits associated with the transaction will flow to the developer - FRS18.14 (d) 31 The Council considered the issue of whether the regulatory restrictions in the Act on the use of the monies received from purchasers and deposited in the project account poses a significant uncertainty on the ultimate receipt of the sale proceeds. One related argument is that these monies are the property of the purchasers and held in trust on their behalf. The Council noted that the monies are considered as belonging to the developer, notwithstanding the regulatory restrictions, and that the monies are applied towards the payment of construction costs that the developer would otherwise have to finance. The Council also noted that the developer is allowed to withdraw the balances in the project account ahead of the completion of construction if the developer furnishes a banker’s guarantee of equivalent amount to the Controller of Housing and has obtained the Controller of Housing’s approval.

32 The Council also considered a scenario where sales of uncompleted property units have been made, but there is considerable uncertainty as to the ability of the developer to sell sufficient units and its ability to continue as a going concern. In such a situation, the Council felt that there would be significant doubt as to the eventual completion of the project and realisation of the attributable profit relating to the sales made to date, since the project could result in a loss overall.

Whether the costs incurred or to be incurred in respect of the transaction can be measured reliably - FRS18.14(e) 33 The Council noted that the considerations relating to the reliability of measurement of costs are no different from standard accounting principles and require no further consideration for purposes of this note.

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Conclusion 34 The Council noted that standard residential property sales in Singapore meet the criteria set out in FRS 18.14 that would require such sales to be accounted for on a percentage of completion method. However, in some situations specific to the circumstances of a development project as described in paragraph 32, there might be uncertainties that would require the completion of construction method to be applied, consistently with the principles set out in FRS 18 for the treatment of revenue when such uncertainties exist.

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