SALE OF UNCOMPLETED RESIDENTIAL PROPERTIES IN SINGAPORE
In Singapore, it is a common market practice for residential properties to be sold off-plan, that is, before the construction is completed (uncompleted residential properties). From 1 January 2018, Singapore property developers are required to apply the accounting principles in Singapore Financial Reporting Standard (FRS) 115: Revenue from Contracts with Customers1 to the sale of uncompleted residential properties in Singapore. So how will the application of the new FRS 115 change the current accounting treatment for these uncompleted residential properties?
ISCA’s Financial Reporting Committee (FRC), through its Core Sub-committee, has discussed the application of FRS 115 on the sale of uncompleted residential properties under the standard Sale and Purchase Agreement (SPA)2. FRC is issuing this guidance to share their discussions and consensus reached. Generally, FRC does not expect changes with respect to whether revenue is recognised over time or at a point in time for sale of uncompleted residential properties in Singapore using the standard SPA, except for those sold under a deferred payment scheme. Under INT FRS 115, the revenue recognition for uncompleted residential properties sold under a deferred payment scheme is upon the completion of the construction and when the rest of the purchase price is paid. Under FRS 115, revenue from the sale of such residential properties could be accounted for using over time revenue recognition basis. FRC considers that those rights and obligations under the standard SPA would allow the developer to recognise revenue over time under FRS 115.
One pertinent issue that is addressed in this guidance is whether property developers have the enforceable right to payment for uncompleted properties. To recognise revenue over time, FRS 115 requires the property developer to have an enforceable right to payment for performance completed to date, at all times during the contract period. This right to payment, whether by contract or by law, must be present, even in instances where the buyer can terminate the contract for reasons other than the developer’s failure to perform under the contract. The inclusion of a payment schedule in a contract does not, by itself, indicate that the entity has an enforceable right to payment for performance to date.
For the assessment of the existence and enforceability of the right to payment for the work completed to date, a developer is required to consider the contractual terms as well as any legislation or legal precedent that could supplement or override those contractual terms. There is one legal precedent in Singapore whereby the property developer succeeded in recovering the outstanding amounts payable by the buyer under the standard SPA. This could be an indication of the existence and enforceability of the property developer’s right to payment under the standard SPA.
A copy of this guidance is available here.
1 On 1 January 2018, ASC will be issuing a new financial reporting framework that is identical to IFRS (IFRS-identical Financial Reporting Standards). The revenue standard (that is equivalent to IFRS 15) that is issued under the IFRS-identical Financial Reporting Standards framework will be the same as FRS 115.
2 As prescribed in the Singapore Housing Developers (Control and Licensing) Act (Chapter 130), the standard form of Sale and Purchase Agreement is required to be used for the sale of residential properties.