Real Estate Industry
Real estate industry
September 2011
IFRS Academy (Israel)
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Real Estate Industry
Content
Introduction
Revenue recognition recap
Construction contracts
Building for self use
Investment property
Service concession arrangements
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Real Estate Industry
Real estate industry
Investment
Property
Building for
self use
IAS 40
IAS 16
Building for third
parties
(IAS 18, IAS 11; IFRIC
15)
IFRIC 12
Lease arrangements
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The world after IFRIC 15
Building for third
parties
Negotiated
contracts
(IAS 11)
POC
Non Negotiated
*Other standards that are relevant:
IAS 2 - Inventories
IAS 23 – Borrowing costs
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Service
IAS 18
POC
Sale of goods*
(IAS 18, IAS 2)
Continuous
Sale
(IAS 18)
POC
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When can an entity recognise revenue?
Sale of Goods
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Sale of Services
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Real Estate Industry
When can an entity recognise revenue?
Sale of Goods
The entity has transferred to the buyer the significant risks and
rewards of ownership of the goods
The entity retains neither continuing managerial involvement to
the degree usually associated with ownership nor effective
control over the goods sold;
The amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the
transaction will flow to the entity
the costs incurred or to be incurred in respect of the transaction
can be measured reliably.
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Real Estate Industry
When can an entity recognise revenue?
Sale of Services
the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the
transaction will flow to the entity
the stage of completion of the transaction at the balance sheet
date can be measured reliably
the costs incurred for the transaction and the costs to complete the
transaction can be measured reliably.
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How is revenue measured?
Fair value of consideration
received or receivable
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Real Estate Industry
Deferred payments
Fair value of amounts receivable
(deferred payments beyond accepted credit terms
in the market)
Cash or cash
equivalents
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Present value according
to market interest rate
that is the most clearly
determinable
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Real Estate Industry
Consideration from sale
Takes into account
Does Not include
Trade discounts
Sales taxes
Discount for
immediate settlement
Goods and services
taxes
Volume rebates
Value added taxes
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Real Estate Industry
Scope
IAS
18 - Revenue
 Sale
of goods
 Sale
of services (except for those under the
scope of IAS 11)
 Return
from others for the use of entity’s assets
in the form of interest, royalties and dividend
(Examples Appendix is not part of the standard)
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Real Estate Industry
Scope
 IAS
11 – Construction agreements
Prescribes revenue recognition for specific transactions,
that include:

Contracts specifically negotiated for constructed asset
(but also for redeveloping and demolition)

Contracts for rendering services that are directly related
to the construction of an asset as above (Project
management, architecture planning).

IFRIC 15 clarifies when IAS 11, or IAS 18 applies for
Real Estate contracts (effective in 2009)
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Real Estate Industry
Scope
Case study 1 – what are the relevant
standards for recognizing revenue
from each of the activities of the
“Promised Land” company?
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IAS 18 paragraph 13:
“in certain circumstances, it is necessary to
apply the recognition criteria to the separately
identifiable components of a single transaction
to reflect substance…
Conversely – the recognition criteria are
applied to two or more transactions together
when they are linked in such a way that the
commercial effect cannot be understood
without reference to the series of transactions
as a whole.”
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Case study 2 –
Paradise Properties
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Construction contracts
Percentage of completion method
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IFRIC 15 main features
 Separation
of multiple elements and allocation of
revenue based on FV
 Determining
the relevant standard and guidance for
each identified element
 Elements
of construction that are in IAS 11 will
determine also the accounting for elements that are
related services as determined in IAS 11.
 Make
provisions for additional work that is required
under the standard, after the real estate was
“delivered’ to the customer.
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IAS 11 - general
Prescribes the accounting treatment of revenue and
costs associated with construction contracts
Two models used in practice
Fixed price
contracts
Cost to
cost
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Survey /
Physical
work
Cost plus
contracts
Stage of completion
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Real Estate Industry
IAS 11 Revenue recognition options
When the outcome of a
construction contract
can be estimated
reliably
When the outcome of a
construction contract
cannot be estimated
reliably:
When it is probable that
total contract costs will
exceed total contract
revenue
revenue and costs shall
be recognized under the
percentage of
completion method
Recognize revenue for
recoverable costs (zero
profit)
Recognize costs as
expense as incurred
(unless assets under
other standards).
the expected loss shall
be recognized as an
expense immediately
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Real Estate Industry
Contract Revenue
Adjustments
(should be probable to be approved by client and
reliably measured)
For variations, incentives
,index adjustments ;
For claims – if have reached an
advanced stage of negotiations
Not for uncollected amounts
(recognized directly as
expense)
Contract revenue is measured at the fair value of the consideration received or
receivable. The measurement of contract revenue is affected by a variety of
uncertainties that depend on the outcome of future events.
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Real Estate Industry
Contract Costs
Contract costs shall comprise:
costs that relate
directly to the
specific contract
costs that are
attributable to
contract activity in
general and can be
allocated to the
contract
such other costs as
are specifically
chargeable to the
customer under the
terms of the
contract
Commencement – date of securing the contract
(But also expenses for securing the contract)
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Real Estate Industry
Contract Costs
Contract costs shall NOT include:
Advance payments
Assets acquired for
later use in the
project
(inventories,
tangible and
intangibles assets)
Costs that cannot
be attributed or
allocated : G&A,
Selling costs, R&D,
Depreciation of idle
facilities*
Will be included in
costs as utilized
* Unless reimbursable by customer
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Real Estate Industry
Contract Costs
No combining or segmenting of construction
Contracts, unless
Negotiated as
single package
Closely interrelated
– effectively part of
a single project
with an overall
profit margin
Performed
concurrently or in
continuous
sequence
Special rules for separating additions (different nature of
asset, separate negotiations)
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Real Estate Industry
IAS 2 – inventories - costs
 Costs
to bring to present location and condition
 Production
Overheads and normal capacity
 Non-production
 Deferred
 Net
overheads
settlement terms
realizable value limit
 Borrowing
 Cost
costs
formulas
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Real Estate Industry
Combination transactions
Joint Venture
Apartments deal
Considerations deal
Recognition
of the land
Recognition
of Land sale
Recognition of
gain
Recognition of
liability
A Land owner
Constructions services
Recognition of
gain
Accounting
for units received
Accounting – fair value
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Capitalisation
of Borrowing
Costs
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Real Estate Industry
Case study 3 – stage of completion
The Promised Land
Company
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Actual costs
$ in thousands
Total costs under Company’s report
Less – bid costs
8,000
Add – sub contracted work not included on accrual
basis
1,500
Less - Advance to sub contractor for work not yet
commenced
(500)
(1,000)
Total actual project costs
8,000
Total Estimated costs for project
18,500
Less – Bid costs
Total estimated costs 31/12/X1
Percentage of completion (8,000/18,000)
(500)
18,000
4/9 (=44.44%)
Revenue to be recognized in P&L: (4/9* 27,000)
12,000
Expenses to be recognized in P&L:
Bid costs
Construction cost
Total expenses for 20X1
500
8,000
8,500
Profit for 20X1
3,500
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Real Estate Industry
IAS 16 – Property,
Plant and
Equipment
Building for self use
IAS 17 – Leases;
IFRIC 4 – Determining whether an
arrangement contains a lease
IFRIC 12 – Service Concession
Arrangements
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Real Estate Industry
IAS 16
 Cost
or revaluation model
– location and condition necessary to be capable
or operating in the manner management intended;
 Cost
– FV (commercial substance, reliably
measured);
 Exchange
 Borrowing
 Special
costs
issues:

ARO obligations (dismantling , removing or restoring)

Running –in expenses

Pre-opening, pre-operating, start up expenses
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Real Estate Industry
IAS 40
 Land
or building (or part of) / rights in operating
lease
 Earn rentals and/or capital appreciation
 Not for self use (production, service or admin)
 Not for sale in the ordinary course of business
 Insignificant ancillary services to occupants
 Initially measured at cost (special guidance for
capital leases)
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Real Estate Industry
IAS 40
FV model
(+ operating
leases)
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IAS 16
model
Cost /
Revaluation
Depreciation
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Real Estate Industry
IAS 40
Investment
Property (IP)
Backing liabilities that
pay return linked to
the IP
FV model
(+ operating
leases)
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IAS 16 model
Cost /
Revaluation
Depreciation
Other
IP
FV model
(+ operating
leases)
IAS 16 model
Cost /
Revaluation
Depreciation
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Real Estate Industry
IAS 40
Fair value model
FV adjustments through P&L
Cost model
Depreciation and impairment
model apply
No depreciation
Lease income under IAS 17
No going back
Unreliable measure exemption
Transfers (reclassifications) at cost
Lease income under IAS 17
No lease rights
Lease rights - on case by case basis
transfers– special guidance
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Disclosure of FV
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Real Estate Industry
IAS 40
Measuerment – initial recognition
 Cost
is the basis for initial recognition under both
methods.
 Transaction
costs, such as legal fees, transfer taxes
are included in the initial measurement
 Start
up costs, losses in running in period, abnormal
amount s of inputs in construction period are not
carried to cost;
 FV
model requires fair valuing the asset during its
development stage
September
2011

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Real Estate Industry
IAS 40
Measuerment – initial recognition
 Leases
rights are recognised in the same manner as
in IAS 17 – lower of FV or PV of MLP
 Premium
paid is included in MLP but not in the
liability.
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Real Estate Industry
IAS 40
Measuerment – FV
 Reflects
market conditions at the end of the reporting
period
 Not
a value in use concept
 The
interest in recognised leased interest is
remeasured
 Current
prices in an active market for similar property
in the same location and condition, is best
 Secondary
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observable inputs:
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Real Estate Industry
IAS 40
Measuerment – FV
 Secondary
observable inputs:

Current prices in an active market for properties of
different nature, condition or location, adjusted to reflect
those differences;

Recent prices of similar properties on less active
markets, adjusted to reflect changes in economic
conditions

DCF supported by external evidence (exisiting lease
prices and other contracts
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Real Estate Industry
IAS 40
Measuerment – FV
 Most
relaiable estimate within the range of reasonable
FV estimates
 Beware
of double counting:

FV usually includes ancilliary equipement such as lifts,
air conditioning

FV of an office that is leased on a furnished basis will
include the furniture;
 FV
should not include future capex for improvements
and the related future benfits
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Real Estate Industry
IAS 40
Special issues – acquiring investment property:
 Could
be BC or an asset deal
 Sometimes
Investment Property is bought and sold in
legal structures (wrapper) ; wrapper is not necessarily
a business
Asset deal
Business Combination
Single property &
tenant
Property portfolio &
many tenants
Ancillary services
Property Management
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Real Estate Industry
IAS 40
Special issues – acquiring investment property:
deal – no goodwill and no deferred taxes on
initial recognition (if wrapper has minority – it will be
recognised at cost);
 Asset
combination – goodwill and DTL are
recognised. DTL is not written off when FV is done
(treated as a liability);
 Business
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Real Estate Industry
IAS 40
Transfers to or from Investment Property - Only
when there is a change in use, evidenced by:
 Commencement
of self use, or end of self use
 Commencement
of development with view to sale
 Commencement
of operating lease for an item of
inventory
 ED
improvements - Asset held for sale when it meets
IFRS 5 requirements
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Real Estate Industry
IAS 40
Measurement at transfer (when FV model is used): –
 Outgoing
 Ingoing
– FV is deemed cost
–

From fixed assets to IP - FV diff. in revaluation reserve

From inventory to IP – FV diff. to P&L
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Real Estate Industry
IFRIC 12- Service Concession
Arrangements
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Real Estate Industry
The main Interpretation
Scope - this Interpretation applies to public-to-private
service concession arrangements if:
the grantor controls or regulates what services the operator
must provide with the infrastructure, to whom it must provide
them, and at what price; and
the grantor controls—through ownership, beneficial entitlement
or otherwise—any significant residual interest in the
infrastructure at the end of the term of the arrangement.
Effective date and transition – annual reporting periods
beginning on or after 1 January 2008. Earlier application is permitted.
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Real Estate Industry
Main features
 Not
Property, plant & Equipment of the
operator/builder
 The
operator shall recognize revenue under IAS 11
and IAS 18 for the service it performs
 Consideration
is either financial asset or intangible
asset, or both
multiple elements (construction and operation) –
allocation of revenue by reference to relative fair value
 If
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Real Estate Industry
Other relevant standards
 IAS
37 - the operator may have contractual obligations
to maintain the infrastructure to a specified level of
serviceability or to restore the infrastructure to a
specified condition.
 IAS
23 – relevant only for intangible asset
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Real Estate Industry
The Consideration
An intangible asset
a right (a licence) to charge
users of the public service.
Not an unconditional right to
receive cash because the
amounts are contingent on
the extent that the public
uses the service.
September 2011
A financial asset
To the extent that it has an unconditional
contractual right to receive cash or another
financial asset from or at the direction of the
grantor for the construction services.
IASs 32 and 39 and IFRS 7 apply to the financial
asset recognized under a financial asset.
The amount due from the grantor is accounted
for in accordance with IAS 39 as:
(a) a loan or receivable;
(b) an available-for-sale financial asset; or
(c) if so designated upon initial recognition, a
financial asset at fair value through profit or loss,
if the conditions for that classification are met.
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Real Estate Industry
September 2011
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IFRS Academy
Real Estate Industry
(Israel)
Israeli Technical Team:
Steinberger, Partner – Head of Accounting
and Technical Services
(menachem.steinberger@crowehorwath.co.il)
 Menachem
 Vered
 Batel
Mesika
Dadoun
Isreali office +972-3-7538300
September 2011
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IFRS Academy
Real Estate Industry
"IFRS Academy" is a training program, written and
regulated by Crowe Horwath Israel, as part of its QA CPE program
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