IFRIC 15 and IFRIC 16
The International Financial Reporting Interpretations Committee (IFRIC) has issued two new interpretations, IFRIC 15 Agreements for the construction of real estate and IFRIC 16 Hedges of a net investment in a foreign operation.
IFRIC 15 relates to the construction of real estate. This interpretation addresses how revenue from the construction of real estate will be recognised.
IFRIC 16 applies to entities that hedge the foreign currency risk arising from its net investments in foreign operations.
IFRIC 16 clarifies that:
- the presentation currency does not create an exposure, which an entity may apply to hedge accounting
- a parent entity may designate a hedged risk, with the foreign exchange differences arising from a difference between its own functional currency and that of its foreign operation
- the hedging instrument may be held by any entity within the group
- IAS 39 Financial instruments: recognition and measurement must be applied to determine the amount that needs to be reclassified to profit and loss from the reserve in respect of the hedging instrument
- IAS 21 The effects of changes in foreign exchange rates must be applied for the hedged item
The Australian Accounting Standards Board (AASB) is expected to adopt these interpretations shortly.
CPA Australia submitted its comments on the exposure drafts relating to IFRIC 15 and IFRIC 16.
Effective dates
IFRIC 15 applies for annual periods beginning on or after 1 January 2009, with early application permitted. When IFRIC 15 is applied, the change in accounting policy will be accounted for retrospectively in accordance with IAS 8 Accounting policies, changes in accounting estimates and errors.
IFRIC 16 applies for annual periods beginning on or after Wednesday 1 October, with early application permitted.
Entities are not required to apply IAS 8 for the initial application of IFRIC 16.
The transitional provision of IFRIC 16 requires prospective application of the guidance in recognition of the difficulties in preparing adequate documentation from the inception of the hedge relationship.
IAS 11 and IAS 18
IFRIC recognises that there is divergence of accounting that is, revenue may be recognised on a progressive basis in accordance with the construction as stipulated in IAS 11 Construction contracts or on delivery or transfer of goods and services in accordance with IAS 18 Revenue.
IAS 11 does not require continuous transfer of control, and the risks and rewards of ownership to apply the percentage of completion method to recognise revenue, only that the contract be a construction contract.
IAS 18 recognises revenue when there is a transfer to the buyer of control and the risks and rewards of ownership. It applies when the construction amounts to a sale of goods.
The accounting treatment depends on whether the agreement is within the scope of IAS 11 or IAS 18. Determining the nature and type of agreement depends on various facts and requires some judgement.
Where the buyer is able to specify major structural elements to the design and construction, it is a construction contract in accordance with IAS 11. Where the buyer has limited ability to influence the design of the real estate, it is an agreement for a sale of goods.
Further information
