The Financial Reporting Standards Council (FRSC) approved the adoption of IFRIC Interpretation 15, Agreements for the Construction of Real Estate, as Philippine Interpretation IFRIC-15. The Interpretation was issued by the International Financial Reporting Interpretations Committee (IFRIC), the interpretative arm of the International Accounting Standards Board (IASB).

 

The Interpretation is effective for annual periods beginning on or after January 1, 2012 and is to be applied retrospectively. The Council decided to require mandatory application of the Interpretation for Philippine financial reporting purposes in 2012 to allow entities engaged in the real estate business time to prepare for implementation of the Interpretation. An entity that would like to make an explicit and unreserved statement of compliance with IFRSs, however, would have to apply IFRIC Interpretation 15 for annual periods beginning on or after January 1, 2009.

 

The Interpretation applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. It provides guidance on the recognition of revenue among real estate developers for sales of units, such as apartments or houses, ‘off plan’, i.e., before construction is complete. It also provides guidance on how to determine whether an agreement for the construction of real estate is within the scope of IAS 11, Construction Contracts, or IAS 18, Revenue, and when revenue from the construction should be recognized.

 

The main expected change in practice is a shift for some entities from recognizing revenue using the percentage of completion method (i.e., as construction progresses, by reference to the stage of completion of the development) to recognizing revenue at a single time (i.e., at completion upon or after delivery).

 

Agreements that will be affected will be mainly those currently accounted for in accordance with IAS 11 that do not meet the definition of a construction contract 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.

 

The IFRIC released draft Interpretation D21, Real Estate Sales, for public comment in July 2007 and was exposed for comment by FRSC in August 2007. In its redeliberations, the IFRIC responded to the concerns expressed by respondents by improving the articulation between IAS 11 and IAS 18 and by providing additional guidance on how to account for revenue in IAS 18. In addition, in its ratification process, the IASB specifically considered whether the IFRIC’s interpretation was in line with the principles underpinning IAS 18 and agreed with the IFRIC’s consensus.