Recent agenda decisions by the IFRS Interpretations Committee
IFRS Interpretations Committee (“Committee”) agenda decisions are those issues that the Committee decided not to take onto its agenda. Although not authoritative guidance, in practice they are regarded as being highly persuasive, and all entities reporting under IFRS should be aware of these decisions because they could impact the way particular transactions and balances are accounted for.
At its January and March 2018 meetings, the Committee issued agenda decisions on the following issues:
IFRS 15 revenue recognition issues – real estate contracts
The Committee issued agenda decisions on three revenue recognition issues relating to real estate contracts, specifically whether, in three separate fact patterns, revenue should be recognised at a point in time, or over time as construction progresses.
Transfer of land
In the first scenario, for a real estate construction contract that includes the transfer of land, the Committee concluded for this specific fact pattern, that transferring the land and performing the construction services were considered two separate performance obligations, and that revenue would be recognised for the:
- Land – at a point in time, and
- Construction services – over time because the entity is building on the customer’s land (i.e. work performed creates or enhances an asset, for example WIP, that the customer controls as the asset is created or enhanced - IFRS 15, paragraph 35(b)).
Paragraph 35(c) criteria for recognising revenue over time
The second and third IFRS 15 fact patterns considered by the Committee related to IFRS 15, paragraph 35(c). Revenue is recognised over time if:
- The entity has no alternate use for the asset being constructed, and
- The entity has an enforceable right to payment for services completed to date.
An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:
- The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs (see paragraphs B3–B4)
- The entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced (see paragraph B5), or
- The entity’s performance does not create an asset with an alternative use to the entity (see paragraph 36) and the entity has an enforceable right to payment for performance completed to date (see paragraph 37).
IFRS 15, paragraph 35
The three agenda decisions go into some detail regarding these criteria in paragraph 35(c).
Presentation of interest revenue calculated using the effective interest method
IAS 1, paragraph 82(a), was amended with the introduction of IFRS 9. In addition to disclosing revenue on the face of the Statement of Profit or Loss, it also requires separate disclosure of ‘interest revenue calculated using the effective interest method’.
A question was raised whether this requirement specifically prohibits an entity presenting certain cash flows on derivatives that are not part of a designated hedging relationship (for example, the accrued realised cash flows on an interest rate swap) from being disclosed as interest revenue, rather than as part of movements in fair value of derivatives.
The Committee noted that amortised cost accounting only applies to financial assets that are subsequently measured at either amortised cost or fair value through other comprehensive income. It is not applied to financial assets that are subsequently measured at fair value through profit or loss (“FVTPL”). Therefore, the requirement in IAS 1, paragraph 82(a), does not apply to derivatives or other financial assets that are subsequently measured at FVTPL.
Contributing property, plant and equipment (“PPE”)) to an associate
Three questions were raised about how an investor accounts for a contribution of PPE to a newly-formed associate:
- Question A: Whether there is a general exception or exemption from applying the requirements of particular accounting standards to common control transactions
- Question B: Whether an investor recognises a gain/loss on contributing PPE to an associate to the extent of the other investors’ interests in the associate, and
- Question C: How an investor determined the gain/loss on contributing PPE to an associate and whether the cost of the resulting interest should be based on the fair value of the PPE contributed, or the fair value of the acquired interest.
Please refer to our International Financial Reporting Bulletin IFRB 2018/01 for more detail about the Committee’s rationale on the agenda decisions for the above scenarios.
For more on the above, please contact your local BDO representative.