Real estate development and borrowing costs (IAS 23)
The IFRS IC has published an agenda decision on the capitalisation of borrowing costs relating to the construction of a residential multi-unit real estate development, sold as individual units.
Keywords: Mazars, Thailand, IFRS, IFRS IC, IAS 23, IFRS 15, Real Estate, Borrowing Costs
23 May 2019
The question put to the IFRS IC was whether a real estate developer who borrowed funds specifically to construct such a complex could capitalise the borrowing costs as part of the cost of constructing the complex. The fact pattern presupposes that the housing complex is sold to end customers as individual units, under contracts that specify that control is transferred over time, i.e. as construction work progresses.
Thus, the question was whether a qualifying asset exists in the specific case of real estate development when control is transferred over time. In its March 2019 agenda decision, the Committee concluded that:
- the receivable that the entity recognises in relation to its end customers, in accordance with IFRS 15, is a financial asset and therefore cannot be a qualifying asset (IAS 23.7);
- the contract asset (as defined in Appendix A of IFRS 15), which corresponds to revenue recognised over time for which the right to consideration has not yet been established, is not a qualifying asset because the intended use of the asset is to collect cash (or another financial asset) and this is not a use for which it necessarily takes a substantial period of time to get ready;
- unsold inventory under construction (i.e. units that are still on the market) is not a qualifying asset as it is ready for sale in its current condition. The developer intends to sell the part-constructed units as soon as it has the opportunity, i.e. as soon as it finds a buyer. In other words, work-in-progress will be transferred to the customer on signature of the contract.
This IFRS IC agenda decision is significant for real estate developers, as current practice is usually to capitalise specific borrowing costs. Thus, this will require a change in accounting policy for many entities. This must be carried out in a timely fashion, although entities are entitled to ‘sufficient’ time to implement the change, particularly if they need to obtain new information or adapt their systems.