PIC Q&A on Sale of Residential Properties under Pre-completion Contracts

In December 2016, the Financial Reporting Standards Council (FRSC) approved the adoption of International Financial Reporting Standard (IFRS) 15, Revenue from Contracts with Customers, in the Philippines as Philippine Financial Reporting Standard (PFRS) 15, Revenue from Contracts with Customers, which will be mandatorily effective for annual reporting periods beginning on or after January 1, 2018. PFRS 15 will replace all existing revenue standards and interpretations.

Relative to the approval and issuance of PFRS 15, the FRSC also approved the issuance of Philippine Interpretations Committee (PIC) Question & Answer (Q&A) No. 2016-04, Application of PFRS 15, "Revenue from Contracts with Customers," on Sale of Residential Properties under Pre-completion Contracts, to provide implementation guidance, in relation to the mandatory adoption of the new revenue accounting standard in 2018, specifically on accounting for revenue from the sale of a residential property unit under pre-completion stage (i.e., construction is on-going or has not yet commenced) by a real estate developer that enters into a Contract to Sell (CTS) with a buyer—whether the sale meet the criteria for revenue recognition over time. The Q&A, however, does not deal with the accounting for other aspects of real estate sales such as variable considerations, financing components, commissions and other contract costs, timing of sales of completed properties, etc.

The PIC concluded that the sales of residential properties under pre-completion stage meet the third criterion under paragraph 35(c) of PFRS 15; and therefore, revenue therefrom shall be recognized over time.

See attached Accounting Alert for the details of the PIC's basis of consensus, including the copy of Q&A No. 2016-04 and its attachments.

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