"IFRIC 15: Agreements for the Construction of Real Estate"
Bilal Ahmad
Fractional CFO for Startups | Financial Modeling to Drive Growth and Profitability | Empowering Founders with Data-Driven Financial Leadership
IFRIC 15, titled "Agreements for the Construction of Real Estate," provides guidance on how to apply the International Financial Reporting Standards (IFRS) in recognizing revenue for transactions in the real estate sector, particularly focusing on the construction of real estate. This interpretation clarifies whether such agreements should be treated as construction contracts (under IAS 11 Construction Contracts) or as sale of goods (under IAS 18 Revenue).
Key aspects of IFRIC 15 include:
1. Distinguishing between Construction Contracts and Sale of Goods: IFRIC 15 assists in determining whether an agreement for the construction of real estate should be accounted for as a construction contract or as a sale of goods. The key factor in this determination is the stage at which the buyer obtains control of the goods.
2. Revenue Recognition: For agreements classified as construction contracts, revenue is recognized over the period of construction based on the stage of completion (percentage-of-completion method). For agreements classified as sales of goods, revenue is recognized at the point of sale, typically when significant risks and rewards of ownership are transferred to the buyer.
3. Continuous Transfer of Control: The interpretation also addresses situations where control of the asset is continuously transferred to the buyer over the construction period. In such cases, revenue recognition should follow the percentage-of-completion method.
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4. Segmenting and Combining Contracts: IFRIC 15 provides guidance on when it is appropriate to segment or combine individual contracts. This is crucial for determining the correct revenue recognition approach for each contract or component.
5. Disclosure Requirements: The interpretation specifies disclosure requirements that enhance the users' understanding of the amount, timing, and uncertainty of revenue and cash flows arising from such agreements.
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