The International Financial Reporting Interpretations Committee (IFRIC) issued the interpretation, IFRIC 15 Agreements for the Construction of Real Estate to standardize accounting practice for the recognition of revenue among real estate developers for sales of units, such as apartments or houses, before construction is complete.
Specifically guidance is provided on how to determine whether an agreement for the construction of real estate is within the scope of one of the below IAS standards.
o IAS 11, “Construction Contracts” or
o IAS 18 “Revenue” and when revenue from the construction should be recogniszd.
The main expected change is a shift for some entities from recognizing revenue using the percentage of completion method to recognizing revenue at a single time. The main items effected are those items that do not meet the definition of a construction contract as interpreted by the IFRIC and do not transfer to the buyer control and the significant risks and rewards of ownership of the work in progress in its current state as construction progresses. IFRIC 15 applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors.
The real estate industry is an important sector across countries and, especially in times of volatile markets, transparency and comparability of the accounting are important. Because of that, this interpretation was created to remove the widespread divergence in practice when accounting for the recognition of revenue for ‘off plan’ contracts.
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