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AASB 111 - Construction Contracts

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Summary 
Developments, Key Differences & History 
Compared to IFRS 
Interpretations 
Rejection Notices 
Questions & Answers 
Articles 
AASB website 

 
IFRIC Rejections and Guidance 
  1. November 2006 - Allocation of profit in a single contract 
  2. November 2004 - IAS 11 Construction Contracts and IAS 18 Revenue: Pre-completion contracts for the sale of residential properties 
  3. September 2004 - Project accounting - contractee's accounting 
  4. August 2002 - Pre-contract costs
 
1. September 2006 - Allocation of profit in a single contract 
 
Issue:  
 
Whether it is appropriate in a single contract to determine different profit margins for the different components of the contract. 
 
IFRIC Decision:  
 
Whilst IAS 11 Construction Contracts has specific criteria for contract segmentation, the guidance on segmenting in IAS 18 Revenue is expressed only at a general level. The IFRIC noted that in IAS 18:
  • Paragraph 4 states that services directly related to construction contracts are not dealt with in IAS 18 but are dealt with in IAS 11 
     
  • Paragraph 13 states that in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction.
The IFRIC noted that, whilst IAS 18 paragraph 21 refers to IAS 11, it does so only for the percentage of completion method for recognition of revenue and the associated expenses and does not refer to the combining, segmenting and disclosure requirements of IAS 11. 
 
The IFRIC noted that, as part of its project on D20 Customer Loyalty Programmes, it has deliberated whether, in a single contract within the scope of IAS 18, it is appropriate to determine different profit margins for the different components of the contract. In D20, the IFRIC tentatively concluded that the requirements of IAS 18 paragraph 13 to account for separately identifiable components of a contract would require segmentation of contracts that have separately identifiable components potentially with different profit margins. D20 also proposes guidance on how to allocate the total contract revenue to the different components. 
 
The IFRIC noted that, for a single contract for construction and other services not directly related to construction activities, IAS 18 paragraphs 4 and 13 require the contract to be separated into two components, a construction component within the scope of IAS 11 and a service component within the scope of IAS 18, in order to reflect the substance of the transaction. The IFRIC noted that the segmenting criteria of IAS 11 apply only to the progressive recognition of margin relating to the construction component and that the requirements of paragraph 13 of IAS 18 apply to the service component. The consequence is that different profit margins might be recognised on the different components of such a single contract. 
 
The IFRIC decided that, in view of the existing guidance in IAS 18 and IAS 11 and because these issues are expected to be addressed in an Interpretation following from D20, it would not take this item onto its agenda. 
 
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2. November 2004 - IAS 11 Construction Contracts and IAS 18 Revenue: Pre-completion contracts for the sale of residential properties 
 
Issue: 
 
IAS 11 Construction Contracts and IAS 18 Revenue: Pre-completion contracts for the sale of residential properties. The IFRIC considered a question on the application of IAS 11 Construction Contracts and IAS 18 Revenue that had been referred to it by the Urgent Issues Group of the Australian Accounting Standards Board. The UIG was concerned that its Abstract 53 Pre completion Contracts for the Sale of Residential Development Properties might not comply with IFRSs. 
 
IFRIC Decision: 
 
The IFRIC agreed that pre-completion contracts might not meet the definition of construction contracts set out in IAS 11 because the contracts in question are not specifically negotiated for the construction of residential units. Rather, they are agreements for the purchase and sale of such units. In addition, when pre-completion contracts did not meet the definition, the guidance in IAS 18 would prohibit revenue recognition before legal title is transferred, if the risks and rewards of ownership did not pass to the buyer before then. 
 
The IFRIC agreed that the issue should not be added to the agenda. The IFRIC noted that the definition of a construction contract in IAS 11 was sufficiently clear on this matter; it did not include typical pre-completion contracts and further guidance was not required. The IFRIC also has a project on its agenda seeking to clarify the criteria for combining and segmenting contracts. The features of pre-completion contracts that might have a relevance to the criteria for combining contracts could be considered as part of that project. The Board is also undertaking a project on revenue recognition, which will address revenue recognition on real estate transactions. The IFRIC agreed that, in the meantime, the guidance in the Appendix to IAS 18 is sufficient to prevent premature recognition of revenue on pre-completion contracts.  
 
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3. September 2004 - Project accounting - contractee's accounting 
 
Issue: 
 
The IFRIC was asked to consider providing guidance on the proper accounting by the contractee as a construction project develops from contract signature to completion. 
 
IFRIC Decision: 
 
The IFRIC agreed not to add this topic to the agenda, as the issue was one of application rather than principle. Also, there was no convincing evidence of widespread problems in practice. 
 
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4. August 2002 - Pre-contract costs 
 
Issue:  
 
When is it appropriate to recognise an asset (versus an expense) for pre-contract costs? 
 
IFRIC Decision:  
 
Paragraph 21 of IAS 11 Construction Contracts provides guidance regarding accounting for pre-contract costs relating to construction contracts, and that this guidance can be used for analogous circumstances. 
 
Although the IFRIC agreed not to publish an Interpretation on this issue, it noted that a great deal of care should be taken when determining whether pre-contract costs should be capitalised. 
 
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