HK (IFRIC) Interpretation on Agreements for the Construction of Real Estate  

¡@

In July 2008, the International Financial Reporting Interpretations Committee (IFRIC) published IFRIC 15 "Agreements for the Construction of Real Estate". The HKICPA followed its policy to converge HKFRSs with IFRSs and adopted the same interpretation as HK (IFRIC) Interpretation 15 and withdrew HK Interpretation 3 "Revenue - Pre-completion contracts for the Sale of Development Properties" (HK Interpretation 3).

The development of this Interpretation was prompted by the IFRIC's desire to standardise accounting practice among real estate developers for "off plan" sales of apartments or houses (sales before the construction of the apartments or houses is complete). Up to now, the IFRIC has observed that there have been significant differences in the way real estate developers have accounted for such sales, with some recording revenue only when the completed unit is handed over to the buyer, and others recognising revenue as construction progresses in accordance with IAS 11 Construction Contracts.

The IFRIC Interpretation emphasises that a feature of construction contracts is the buyer's ability to specify major structural components of the design both before and during construction activity. In March 2005, the HKICPA published its home-grown interpretation, HK Interpretation 3 with similar consensus. This home-grown interpretation concludes that pre-completion contracts for the sale of development properties are not construction contracts as defined in HKAS 11 (the HKFRS equivalence of IAS 11) if the contracts in question are not specifically negotiated for the construction of the properties. In this regard, HK (IFRIC) Interpretation 15 (the new Interpretation) is not expected to bring about significant accounting impacts on HKFRS property developers.

When the agreement (or a component of an agreement) is within the scope of IAS 18, the new Interpretation identifies three types of agreements which have distinguishable substance and are accounted for differently. The three types of agreements are:

	agreements for the rendering of services only; ¡@
	agreements for the sale of goods in which 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 progress; and ¡@
	agreements for the sale of goods in which the entity transfers to the buyers control and the significant risks and rewards of ownership of the real estate in its entirety at a single time (e.g. at completion, upon or after delivery).

HK (IFRIC) 15 is effective for annual periods beginning on or after 1 January 2009, with earlier application permitted. Any change in accounting policy on first application of HK (Interpretation) 15 is accounted for retrospectively in accordance with HKAS 8 "Accounting Policies, Changes in Accounting Estimates and Errors".

¡@