Documente Academic
Documente Profesional
Documente Cultură
I. References:
1. Expert Advisory Committee Opinion on applicability of revised AS-7 to enterprises undertaking
construction activities on their own account CA Journal, Sep 2003
Page 1 of 4
the seller of the goods has transferred to the buyer the property in the goods for a
price or all significant risks or rewards of ownership have been transferred to the
buyer and the seller retains no effective control of the goods transferred to a degree
usually associated with ownership; and
ii.
No significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of goods.
4. The real estate sales take place in a variety of ways and hence the point of time at which all
significant risks and rewards of ownership can be considered as transferred, is required to be
determined on the basis of the terms & conditions of the agreement for sale.
5. In case of real estate sales, the events, such as, transfer of legal title to the buyer or giving
possession of real estate to the buyer under an agreement for sale, usually, provide an
evidence to the effect that all significant risks and rewards of ownership have been
transferred to the buyer. It may however be noted that in case of real estate sales, the seller
usually enters into an agreement for sale with the buyer at initial stages of construction. This
agreement for sale is also considered to have the effect of transferring all significant risks and
rewards of ownership to the buyer provided the agreement is legally enforceable and subject to
the satisfaction of all the following conditions
a. The significant risks related to the real estate have been transferred to the buyer; in case
of real estate sales, price risk is generally considered to be one of the most significant
risks.
b. The buyer has a legal right to sell or transfer his interest in the property, without any
condition or subject to only such conditions which do not materially affect his right to
benefits in the property.
6. Once the seller has transferred all the significant risks and rewards of ownership to the buyer,
any further acts on the real estate performed by the seller are, in substance, performed on
behalf of the buyer in the manner similar to a contractor. Accordingly, in case the seller is
obliged to perform any substantial acts after the transfer of all significant risks and rewards of
ownership, revenue is recognized by applying the percentage of completion method in the
manner explained in AS 7, Construction Contracts.
Page 2 of 4
b. The seller transferring to the buyer control and the significant risks and rewards of
ownership of the work in progress in its current state as construction progress, for example:
i. the construction takes place on land that is owned or leased by the buyer.
ii. The buyer having a right to take over the work in progress during construction. Eg.
engaging a different contractor
iii. In the event of the agreement being terminated before construction is complete, the
buyer retaining the work in progress and the seller having the right to be paid for work
performed.
2. An agreement is for the sale of goods when:
a. the negotiation between buyer and seller primarily concerning the amount and timing of
payments, with the buyer having only limited liability to specify the design of the real
estate
b. the agreement giving the buyer only a right to acquire the completed real estate at a later
date, with the seller retaining control and the significant risks and rewards of ownership of
the underlying work in progress until that date.
3. If a sale agreement is for sale of goods, revenue shall be recognized when conditions of IAS 18
have been satisfied .i.e. significant risks and rewards of ownership and effective control have
been transferred to the buyer. These conditions shall be applied to the underlying real estate in
its current state, not to the buyers right to acquire the fully constructed real estate at a later
date.
Significant risks of ownership such as construction risk and risk of damage or default
Retains the right to use i.e. continue development of the work in progress
Page 3 of 4
6. IFRIC noted that it is necessary to distinguish a right to acquire goods from the underlying goods
themselves conditions in IAS 18 requires the entity to have transferred to the buyer the
significant risks and rewards of ownership of, and effective control over, the goods sold, not the
right to acquire the goods. Hence a binding agreement for the sale of a real estate unit is
usually insufficient to satisfy the conditions for revenue recognition.
7. It also addresses situations where conditions for recognizing revenue from sale of real estate
are met before the entity has performed all of its obligations under the sales contract, for
example, the buyer obtains possession before internal decoration has been completed or
communal amenities have been built.
However it does not prevent:
-
Buyer from obtaining the significant risks and rewards of ownership of his or her individual
unit.
Developers continuing presence on the development site does not constitute continuing
managerial involvement to the degree usually associated with ownership of buyers
individual unit.
8. In these cases remaining obligations could be accounted in any of the following ways:
-
Page 4 of 4