Professional Documents
Culture Documents
Understanding
IFRIC 15
Assoc. Prof. Dr. Hassan Ali
I
n Malaysia, properties are usually sold >> IN BRIEF
by estate developers before and during
the construction process. Typically, the There are two standards that are used for rec-
buyer will enter into a sales agreement ognition and measurement purposes for con-
with the property developer for a spe- struction and real estate development - FRS 111,
cific unit during the development process. This Construction Contracts and FRS 118, Revenue.
is commonly referred to as an ‘off plan’ arrange- The primary objective of IFRIC 15 is to address
ment. The arrangement will require the buyer two primary issues:
to pay a deposit that is non-refundable unless • whether the agreement for the construction
of the real estate falls within the scope of FRS
111 or FRS 118; and
IFRIC 15 provides the guidelines to determine the • the timing of the recognition from the con-
struction of the property development.
appropriate approach under varied circumstances.
The judgement with respect to the agreement must Depending on the surrounding facts and cir-
cumstances, agreements for the sale and con-
be based on the assumption that the agreement has struction of property development may come in
been analysed and the definition of a construction different forms. Some organisations are involved
primarily in construction services while others
contract under FRS 111 has been met. are involved in the delivery of units. IFRIC 15
provides the guidelines to determine the appropri-
ate approach under varied circumstances. The
the developer fails to deliver the unit. Such an judgement with respect to the agreement must be
arrangement usually involves a legal obligation based on the assumption that the agreement has
on both parties. Apparently, the revenue recogni- been analysed and the definition of a construction
tion differs between firms with some developers contract under FRS 111 has been met.
preferring to recognise the revenue based on Agreements may be broadly divided into
the construction progress and others when the identifiable components and accounted for sepa-
property is handed over to the buyer. rately. To illustrate an example, assume that a
property developer purchases an acre of land able to specify “the major structural elements of
and acquires an approval to built 30 housing the design of the real estate before construction
units. The developer markets the units and signs begins; and or major structural changes once
the sales agreements with potential buyers. The construction is in progress” - paragraph 11. Thus,
buyers pay a deposit but have no legal right to if the buyer has no control over the structural
rescind from the agreement unless the developer elements of the property, the definition of a con-
fails to deliver the units within the stipulated date. struction contract is not met and the agreement
The developer is responsible for all structural shall be accounted for under FRS 118, Revenue.
Such agreement will result in deferring the rec-
ognition revenue until the entire construction is
complete.
IFRIC 15 stipulates that an agreement for the FRS 111 defines a construction contract as “a
construction of property meets the definition of a contract specifically negotiated for the construc-
tion of an asset or a combination of assets that are
construction contract when the buyer is able to specify closely interrelated or interdependent in terms
“the major structural elements of the design of the of their design, technology and function” - para-
graph 3. In addition, the standard also includes
real estate before construction begins; and or major contracts for ‘the rendering of services which are
structural changes once construction is in progress.” directly related to the construction of the asset’
– paragraph 5. Thus, if the agreement meets the
definition of a construction contract, including
and construction designs and the buyer has no the rendering of services such as the sale of
influence over it. There are two components to units, and its outcome can be reliably measured
this agreement – one is on the sale of the unit and then the recognition should be based on the
the other is the construction development. stage of completion of the transaction using the
The sale of the unit falls within the scope percentage of completion method.
of FRS 118 and should be recognised accord- The term rendering of services needs to
ingly. However, the construction component will be further elaborated. When an entity is NOT
depend on the underlying substance of the agree- required to acquire or supply construction mate-
ment. An important consideration when deter- rials, for example, when a developer is respon-
mining whether it falls under FRS 118 is whether sible only for assembling of materials and is not
the buyer is able to specify the structural design involved in its acquisition (i.e. there is no invento-
of the unit. IFRIC 15 stipulates that an agreement ry risk on the construction materials), the agree-
for the construction of property meets the defini- ment is not a construction contract but is deemed
tion of a construction contract when the buyer is as rendering of services [IFRIC 15, BC22]. The
Audit
Oversight Board:
Implications on Small and Medium-sized
Practitioners – An Issue of Capacity and Quality
Billy Kang, Chairman Audit Practice Subcommittee, MIA
I
n the Budget Speech 2008, then-
Prime Minister Tun Abdullah Briefly, the Amendment to the Act provided for the
Ahmad Badawi announced the following which are relevant to the auditing profession:
need for the establishment of an
audit oversight mechanism to 1 Functions of the Securities Commission (SC) in relation to audit
regulate and oversee the proper financial
oversight:
reporting of the Public Interest Entity
a) To promote and develop an effective and robust audit over-
(PIE). Subsequently, this year saw the
passing of the Securities Commission
sight framework;
(Amendment) Act 2010 by our Parliament b) To promote confidence in the quality and reliability of audit-
which provided for the setting up of the ed financial statements; and
Audit Oversight Board (AOB). c) To regulate auditors of PIE
Under the Act, the AOB has been
given a wide range of supervisory and 2 Functions of AOB in respect to the auditing profession:
disciplinary powers to ensure the qual- a) To implement policies and programmes in ensuring effective
ity functioning of PIE auditors. On the audit oversight;
other hand, MIA is also tasked under the b) To regulate auditors of PIE;
Accountants Act, 1967 to see the orderly c) To register auditors of PIE;
development of the accountancy profes-
d) To direct MIA to establish or adopt auditing and ethical stand-
sion and its members. In this respect,
ards;
both parties have their respective roles
to play in developing the auditing profes-
e) To conduct inspection on and monitor PIE auditors to assess
sion, especially in the domain of the PIE compliance on the adopted standards; and
sector. AOB will certainly compliment f ) To cooperate and liaise with other authorities and oversight
the function of MIA as the regulatory boards from other jurisdictions.
body in Malaysia.
ISQC 1 compliance
Complying with ISQC 1 remains a great iii) Engagement Partner, who is respon- b) Human Resources
challenge to our SMP firms. Certain pro- sible for the audit engagement and Staffing is an ever-challenging issue in
visions of this Standard have direct impact its performance, and for the auditors’ SMP practices. Faced with the rising cost
on firms of PIE auditors. For example: report that is issued on behalf of the of living and the shortage of trained audi-
firm. tors, SMPs just cannot keep up with the
a) Firm’s Structure ever-increasing remuneration packages
Structurally, a firm should have the fol- Although the Standard provides for to retain their staff.
lowing designated partners: the engagement of suitably qualified The matter is further compounded by
i) Audit Compliance Partner (para outsiders (e.g. para 40-670, 50-170) to the ‘competence and capability’ require-
40-110 and 50-100), whose task is to undertake some of the quality assurance ments (para 30-200) of ISQC 1. This para-
set standards and policies for the firm’s functions, the Standard emphasised that graph states that the firm should establish
audit work and supervise compliance persons put in charge of the respective and maintain a level of competency for the
without actually becoming involved functions must have the seniority and various levels of responsibilities within
in detailed compliance work. He is experience necessary to discharge their the firm. This includes, inter alia, techni-
also responsible for monitoring that responsibilities. Anything lesser would cal knowledge; leadership skill; commu-
the firm has complied, and is likely to almost certainly mean a failure to comply nication skill; analytical and judgemental
continue to comply, with the audit leg- with the requirements. skills. In fact, firms are encouraged to
islation, regulations and guidelines. Viewed in light of the above, a firm of benchmark their staff’s competency to
ii) Engagement Quality Control Reviewer say fewer than three partners certainly the internationally accepted International
(para 50-170), whose task is to per- faces great challenges to meet the above Education Standards (IES) 8 issued by
form a ‘quality review’ before the audit requirements. IFAC. In addition, the firm is expected to
report is signed off. This task should be provide continuous professional develop-
undertaken by an independent partner ment for its staff. These aggravate the
in the firm. ‘cost factors’ of SMP practices.
news
summaries of IFAC developments
over the past month.
IAASB Annual Report Highlights service organisations, and XBRL. The board’s IFAC Seeks Views on Its 2010-2012
Implementation and Assurance standard-setting efforts to address the needs Strategy and Work Plan to Serve
Developments of small and medium-sized entities, and Professional Accountants in
The International Auditing and Assurance those who provide services to them, were Business
Standards Board (IAASB) released its 2009 also progressed in 2009 with the initial steps IFAC has released for comment an exposure
annual report recently. The report high- to update and revise the IAASB’s standards draft (ED) setting out its proposed 2010-
lights the completion of the landmark Clarity addressing review and compilation engage- 2012 strategy and work plan prepared by its
Project surrounding the IAASB’s International ments. Incorporating public input is essential Professional Accountants in Business (PAIB)
Standards on Auditing (ISAs), the development to ensuring that the IAASB has insights to the Committee.
of adoption and implementation resources for different perspectives of international regu- The proposed plan outlines the direction and
the ISAs, and the launch of innovative new lators and organisations, national auditing priorities of IFAC’s services relevant to profes-
projects to address emerging issues. standard setters, practitioners, academia, and sional accountants in business. This public
“During a period of great financial instabil- other stakeholders. Its commitment to active consultation is a first-time opportunity for IFAC
ity and uncertainty, auditors and assurance engagement with stakeholders is reflected member bodies and other key stakeholders
practitioners faced significant challenges. By in the various outreach activities described to comment on the proposed vision, strategic
seeking public input, responding to emerging in the report that the IAASB participated in direction, and corresponding work plan for
needs, and supporting the implementation during 2009. this key constituency.
of global standards, the work of the IAASB The annual report includes a report from the The proposed strategic direction focuses on
continued to contribute to the restoration and Chairman of the IAASB Consultative Advisory enhancing the profile, influence, and rele-
maintenance of public confidence in informa- Group on the work of the group in providing vance of professional accountants in business
tion used for decision-making,” said IAASB input to the IAASB. The IAASB also continues and identifies two specific objectives:
Chairman Arnold Schilder. “This has required to receive oversight from the Public Interest 1. Increasing awareness of the important
diligent adherence by the IAASB to its public Oversight Board. roles professional accountants play in cre-
interest mandate, which is now entrenched in The report notes some of the issues the IAASB ating, enabling, preserving, and reporting
how the IAASB operates.” will address in the coming years, including value for organisations and their stakehold-
This first year of the IAASB’s 2009-2011 strat- those arising from today’s global economic ers; and
egy and work programme saw the IAASB crisis. To further inform its work programme, 2. Supporting the professional accountants
produce a range of tools and resources to the IAASB has released an online questionnaire in business within IFAC member bodies by
assist auditors in implementing the now- and invites comment on where the IAASB facilitating the communication and sharing
effective suite of Clarified ISAs. Recognising should focus its efforts during 2012-2014. of good practices and ideas.
the significant demand from auditors and The 2009 IAASB annual report can be down-
preparers for additional guidance in light loaded from www.ifac.org/IAASB/Resources. “Well over half of the total number of pro-
of the financial crisis, this work programme php#AnnualReports. Readers are also encour- fessional accountants is within enterprises,
included a project to develop guidance on aged to visit the new Clarity Center on the and these professional accountants in busi-
auditing complex financial instruments. The IAASB website (web.ifac.org/clarity-center/ ness play a wide range of roles,” said PAIB
year 2009 also marked an important transi- index) for more information on the Clarity Committee Chair Roger Tabor. “The proposed
tion to new projects to address a wide range Project and the full suite of standards that strategic direction provides a basis for IFAC
of information needs, such as greenhouse came into effect for audits of financial state- to determine how best to serve this large,
gas emissions, pro forma financial informa- ments for periods beginning on or after 15 diverse constituency at a global level.” he
tion included in prospectuses, controls at December 2009. n added. n