SEC Memorandum Circular 2018-14 – PFRS 15 Implementation Issues Affecting Real Estate Industry
This Accounting Alert is issued to provide guidance relating to the Securities and Exchange Commission's (SEC or the Commission) resolution regarding some implementation issues affecting the real estate industry brought about by the adoption of PFRS 15, Revenue from Contracts with Customers, as discussed in the Memorandum Circular (MC) No. 2018-14 issued by the Commission on October 29, 2018.
PIC Issuance and Concerns from the Real Estate Industry
The Philippine Interpretation Committee (PIC) issued PIC Q&A 2018-12, PFRS 15 Implementing Issues Affecting the Real Estate Industry, which provides guidance on some implementation issues brought about by the adoption of PFRS 15. This PIC Q&A, which is effective concurrent with the effective date of PFRS 15 on January 1, 2018, was approved by the Financial Reporting Standards Council on February 14, 2018, and by the Board of Accountancy of the Professional Regulation Commission on May 18, 2018.
Subsequent to the issuance of the PIC Q&A, the real estate industry, through its various associations, raised the following implementing issues relative to the adoption of PIC Q&A 2018-12:
1. Accounting for the significant financing component in the contract to sell (CTS);
2. Exclusion of land in the determination of the percentage of completion (POC); and,
3. Exclusion of the uninstalled materials in the determination of POC.
On October 25, 2018, the Commission en banc decided to provide relief to the real estate industry by deferring for three years until December 31, 2020 the application of certain provisions of the PIC Q&A No. 2018-12. Relative to this, the real estate companies may opt to defer the adoption of any or all of the provisions below.
1. Accounting for significant financing component – an entity may opt not to account for the significant financing component on the transaction price during the period of deferral.
2. Accounting for land in the determination of the POC – an entity may opt to include the land in the calculation of the POC at its historical acquisition cost only (i.e., not at its fair value).
3. Accounting for uninstall materials in the determination of the POC – an entity may opt to include the cost of uninstall materials in the calculation of the POC based on the proportionate work accomplishment of significant building components procured which are specifically and directly identifiable to the project, as long as covered by contracts, purchase orders and are partially paid for.
The deferral will only be applicable to real estate transactions. Effective January 1, 2021, the real estate companies are required to adopt PIC Q&A 2018-12 and any relevant subsequent amendments thereof retrospectively or as the SEC will later prescribed.
A real estate entity may also opt not to avail of the relief provided under SEC MC 2018-14 and adopt fully the provisions under PIC Q&A 2018-12.
Real estate companies which opted for the deferral shall be required to:
* Disclose in the Notes to the Financial Statements (NFS) the accounting policies applied;
* Discuss in the NFS the deferral of the subject implementation issues in the PIC Q&A and a qualitative discussion of the impact in the financial statements had the concerned application guidance been adopted; and,
* Include the relief provided as part of the Philippine Financial Reporting Standards for the purpose of preparing and filing general-purpose financial statements with the Commission (e.g., in the submission of the PFRS Checklist, as supplement to the audited financial statements).
Should any of the deferral options result in a change in accounting policy, such change will have to be accounted for under PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, i.e., retrospectively, together with the corresponding required quantitative disclosures.