STAFF PAPER March 2019 Interpretations Committee Meeting .

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Agenda ref3AMarch 2019STAFF PAPERIFRS Interpretations Committee meetingProjectOver time transfer of constructed goods (IAS 23)Paper topicComment lettersCONTACT(S)Nicolette Langenlange@ifrs.org 44 (0) 20 7246 6924This paper has been prepared for discussion at a public meeting of the IFRS Interpretations Committee(Committee) and does not represent the views of the International Accounting Standards Board (Board), theCommittee or any individual member of the Board or the Committee. Comments on the application of IFRSStandards do not purport to set out acceptable or unacceptable application of IFRS Standards. Decisions bythe Board are made in public and reported in IASB Update. Decisions by the Committee are made in publicand reported in IFRIC Update.1.For ease of reference, this paper reproduces comment letters received on the tentativeagenda decision published by the IFRS Interpretations Committee in September 2018on ‘Over time transfer of constructed goods’.The IFRS Interpretations Committee is the interpretative body of the International Accounting Standards Board (Board). The Board is the independentstandard-setting body of the IFRS Foundation, a not-for-profit corporation promoting the adoption of IFRS Standards. For more information, visitwww.ifrs.org.Page 1 of 1

Deloitte Touche Tohmatsu LimitedHill House1 Little New StreetLondonEC4A 3TR6 February 2019Phone: 44 (0)20 7936 3000Fax: 44 (0)20 7583 0112www.deloitte.com/aboutDirect phone: 44 20 7007 0884vepoole@deloitte.co.ukSue LloydChairIFRS Interpretations CommitteeColumbus Building7 Westferry CircusCanary WharfLondonUnited KingdomE14 4HDDear Ms LloydTentative agenda decision – IAS 23 Borrowing Costs: Over time transfer of constructed goodDeloitte Touche Tohmatsu Limited is pleased to respond to the IFRS Interpretations Committee’s publicationin the November IFRIC Update of the tentative decision not to take onto the Committee’s agenda the requestfor clarification on whether construction of a property for sale under terms that will qualify for recognition ofrevenue over time results in the entity having a qualifying asset into which directly attributable borrowingcosts are capitalised.We agree with the IFRS Interpretations Committee’s decision not to add this item onto its agenda for thereasons set out in the tentative agenda decision.If you have any questions concerning our comments, please contact Veronica Poole in London at 44 (0) 207007 0884.Yours sincerelyVeronica PooleGlobal IFRS LeaderDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and theirrelated entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide servicesto clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.Deloitte Touche Tohmatsu Limited is a private company limited by guarantee incorporated in England & Wales under company number 07271800, and its registeredoffice is Hill House, 1 Little New Street, London, EC4a, 3TR, United Kingdom. 2019 . For information, contact Deloitte Touche Tohmatsu Limited.

February 3rd 2019IFRS Interpretation Committee7 Westferry CircusCanary WharfLondonRe: Tentative Agenda Decision – Over time transfer of constructed goodDear Committee members,The Israel Accounting Standards Board welcomes the opportunity to comment on the IFRSInterpretation Committee's Tentative Agenda Decision on over time transfer of constructedgood published in December 2018.The tentative agenda decision states that "any inventory (work-in progress) for unsoldunits under construction that the entity recognises is not a qualifying asset. In the factpattern described in the request, this asset is ready for its intended sale in its currentcondition – i.e. the entity intends to sell the part-constructed units as soon as it findssuitable customers and, on signing a contract with a customer, will transfer control ofany work-in-progress relating to that unit to the customer." We understand that theCommittee's position as drafted in the tentative agenda decision is that inventory is not aqualifying asset when the entity is able to sell the inventory. When reading the tentativeagenda decision it is not clear whether the intent to sell the current inventory is a factor inthe analysis, as the tentative agenda decision does refer to the entity's intention "i.e. theentity intends to sell the part-constructed units as soon as it finds suitable customers . ."We would like to express two key concerns with respect to the tentative agenda decision: In our opinion, an approach under which inventory that the entity is able to sell is not aqualifying asset, regardless of an entity's business model will significantly reduce thepossibility to capitalize borrowing costs on all sorts of inventory, although inventory islisted as an example of a qualifying asset (paragraph 7 of IAS 23). That is because aninventory can usually be sold at any stage of its construction process or manufacturingprocess. We believe that the decision whether inventory (work-in-progress) is ready for114 Gruzenberg st., Tel-Aviv 65811, Tel ,972 3 5109977 . טל ,65811 ת"א ,14 ברג רח' גרוז www.iasb.org.il , E-mail: iasb@iasb.org.il ,Fax. 972 3 5109988 . פקס

its intended sale and therefore can be a qualifying asset (according to IAS 23) should bebased on the business model and intention of the entity, rather than on the ability to sellthat inventory. It seems that the Committee's tentative decision links the definition of a qualifying assetto the revenue recognition model (point in time or over time). This linkage might raisevarious implementation challenges e.g the developer might be required to determinewhether it would recognise revenue at a point in time or over time prior to signing a salecontract of any unit.Various distortions might arise from application of the tentative agenda decision if thebusiness model of an entity is disregarded such as entities that engage only with a singleproject of constructing units for sale would incur losses from expensing borrowing costsduring stages in which revenue is not yet recognised.The Committee's tentative agenda decision might also result in expensing borrowing costsincurred on land purchased for development, construction and sale of residential units.Developers usually buy land and begin an improvement and permits process (during whichthe developer receives a building permit, which includes the building rights). According tothe Committee's tentative agenda decision, because the land can be sold in its currentcondition, the land might not meet the criteria of a qualifying asset.We believe that the definition of a qualifying asset should be analyzed based on the businessmodel and intention of the developer (i.e. the intended timing of beginning to sell units).Such an analysis would allow a developer to capitalise borrowing costs during thedevelopment stage and during construction until the point the developer plans to beginselling the units. If the developer's business model is to sell the units immediately afterreceiving a building permit, then the land would be a qualifying asset until that point, but if,for example, the developer's business model is to sell the units only after completion of 40percent of construction, then the inventory (work-in-progress) would be a qualifying assetuntil that point. We would like to mention that the business model is also used in other IFRSstandards such as IFRS 9 (for classification of financial assets) and IFRS 10 (for classificationas an investment entity).We would appreciate if the IFRS Interpretation Committee would consider our commentswhile concluding its agenda decision.We appreciate the opportunity to provide our comments.Sincerely,Dov Sapir, CPA, ChairmanIsrael Accounting Standards Board214 Gruzenberg st., Tel-Aviv 65811, Tel ,972 3 5109977 . טל ,65811 ת"א ,14 ברג רח' גרוז www.iasb.org.il , E-mail: iasb@iasb.org.il ,Fax. 972 3 5109988 . פקס

1 February 2019Ms. Sue LloydChair of the IFRS Interpretations CommitteeInternational Accounting Standards BoardColumbus Building, 7 Westferry CircusCanary Wharf, London, E14 4HDUnited KingdomComments on the Tentative Agenda Decision Relating toIAS 23 Borrowing Costs - Over Time Transfer of Constructed Good1.The Accounting Standards Board of Japan (the “ASBJ” or “we”) welcome theopportunity to comment on the IFRS Interpretation Committee (the “Committee”)’stentative agenda decision relating to IAS 23 Borrowing Costs — Over Time Transferof Constructed Good, proposed in the November 2018 IFRIC Update.2.This tentative agenda decision illustrates the thought process and interpretations ofhow the principles and requirements in IAS 23 would apply to a specific fact pattern.We believe that, as noted in the tentative agenda decision, the principles andrequirements in IAS 23 provide an adequate basis to determine the appropriateaccounting treatment for the specific fact pattern provided in the tentative agendadecision.However, we believe that the tentative agenda decision needs to considerthe following matters.3.The tentative agenda decision noted, as the basis for concluding that a contract assetis not a qualifying asset, that the intended use of a contract asset is to collect cash oranother financial asset and that it does not necessarily takes a substantial period oftime to get ready for its intended use or sale.However, we question if this reasoningis appropriate because some contracts require a substantial amount of time to getready to collect cash or another financial asset.1We believe that it is necessary to

consider whether a contract asset is a qualifying asset, that is, an asset that necessarilytakes a substantial period of time to get ready for its intended use or sale, by clarifyingthe nature of contract assets.4.We are not uncomfortable with the conclusion that a contract asset is not a qualifyingasset for the fact pattern provided in the tentative agenda decision. Nevertheless, webelieve another way to address this issue may be to amend paragraph 7 of IAS 23 andclarify that, similar to financial assets, a contract asset is not a qualifying asset, exceptfor certain cases (such as when a contract asset is a qualifying asset as a result ofapplying paragraphs 19 and 22 of IFRIC Interpretation 12 Service ConcessionArrangements), on the grounds that the intended use of a contract asset is to collectcash or a financial asset, just like the intended use of a receivable is to collect cash oranother financial asset.5.We also note that the tentative agenda decision states that “any contract asset that theentity recognises is not a qualifying asset”. However, this statement is inaccuratebecause there are cases where a contract asset becomes a qualifying asset as a resultof applying paragraphs 19 and 22 of IFRIC Interpretation 12.Therefore, we believethat it is necessary to clearly describe that the statement applies specifically to thefact pattern described in the request, similar to how the tentative agenda decisiondescribes how it applies to inventory.6.We hope our comments are helpful for the Committee’s and the IASB’sconsideration in the future.If you have any questions, please feel free to contact us.Yours sincerely,Yukio OnoChairmanAccounting Standards Board of Japan2

IKATAN AKUNTAN INDONESIA(INSTITUTE OF INDONESIA CHARTERED ACCOUNTANTS)Nomor : 0246/DSAK/IAI/II/2019Jakarta, 6 February 2019Ms. Sue LloydChair – IFRS Interpretations Committee7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Ms. Lloyd,Re: Tentative Agenda Decision – Over time transfer of constructed good (IAS 23Borrowing Costs)The Indonesian Financial Accounting Standards Board (DSAK), as part of the Institute ofIndonesia Chartered Accountants (IAI), is the national accounting standard-setter in Indonesia.DSAK IAI is pleased to present our comments on the IFRS Interpretations Committee’s (theCommittee) tentative agenda decision regarding ‘Over Time Transfer of Constructed Good(IAS 23 Borrowing Costs)’.Our detailed response is attached in the Appendix to this letter below.We hope that our comments could contribute to the Committee’s future deliberations. Shouldyou have further concerns regarding our comments, please do not hesitate to contact us atdsak@iaiglobal.or.id.Yours sincerely.Djohan PinnarwanChairmanThe Indonesian Financial Accounting Standards BoardInstitute of Indonesia Chartered AccountantsGRHA AKUNTAN, Jalan Sindanglaya No. 1, Menteng, Jakarta 10310 - INDONESIATelp.: (62-21) 3190 4232 Hunting, Fax.: (62-21) 315 2076, E-mail: iai-info@iaiglobal.or.id, Home Page: http://www.iaiglobal.or.id

IKATAN AKUNTAN INDONESIA(INSTITUTE OF INDONESIA CHARTERED ACCOUNTANTS)APPENDIX – Comments on the Tentative Agenda Decision – Over time transfer ofconstructed good (IAS 23 Borrowing Costs)The following summarises DSAK IAI preliminary views regarding the tentative agendadecision issued by IFRS Interpretations Committee (the Committee) regarding Over TimeTransfer of Constructed Good (IAS 23 Borrowing Costs).The Staff Paper Agenda Ref. 4 described the background and different possible views oncapitalization of borrowing costs which are separated into:1. View A: Capitalise borrowing costs on only the unsold units2. View B: Capitalise borrowing costs on neither the unsold nor the sold units;3. View C: Capitalise borrowing costs on both the sold and unsold units.We found the Staff analysis in the Agenda Ref. 4 are well thought of and covering in-pointreferences to applicable IFRS Standards to reach at the conclusion on View B, wherebyborrowing costs are not capitalized on the unsold and sold units. We could not find any reasonsto object to the Committee’s conclusion based on currently effective IFRS Standards.However, we have concerns on the unintended consequences of the Committee’s conclusion.We are troubled by the fact that identical residential units under development being financedwith borrowings would have different cost attributed to them depending on the manner inwhich revenues are recognized. There is clearly a diversity in implementation of revenuerecognition and capitalization of borrowing costs (as explained in the Agenda Ref. 4 par. 12 15), as evidenced by results of the Staff’s outreach. This diversity very possibly occurs becauseof previous IFRS Standards on revenue recognition, which differentiate the accountingtreatments based on whether revenues are from the sale of goods or from rendering services,were in line with IAS 2 Inventories and IAS 23 Borrowing Costs. The underlying principles ofrevenue recognition under IFRS 15 which no longer differentiates revenue recognition fromgoods and services might not be in line with the underlying principles of IAS 2 Inventories andIAS 23 Borrowing Costs, which were largely based on differentiation of goods and services.IAS 2 par. 10 states that ‘The cost of inventories shall comprise all costs of purchase, costs ofconversion and other costs incurred in bringing the inventories to their present location andcondition.’ These costs include borrowing costs, provided that provisions in IAS 23 arefulfilled.IAS 23 par. 8 ‘An entity shall capitalize borrowing costs that are directly attributable to theacquisition, construction or production of a qualifying asset as part of the cost of that asset. .’and IAS 23 par. 9 ‘Borrowing costs that are directly attributable to the acquisition, constructionor production of a qualifying asset are included in the cost of that asset. .’Page 2 of 3GRHA AKUNTAN, J a l an S i ndang l aya No . 1 , Ment eng , J aka r t a 10310 ‐ INDONES IATe lp . : ( 62 ‐21 ) 3 190 4232 Hunt i ng ,F ax . : ( 62 ‐21 ) 315 2076 , E ‐ma i l : i a i ‐ i n fo@ia i g l oba l . o r . i d ,Page : h t tp : / /www. i a i g l oba l . o r . i dHome

IKATAN AKUNTAN INDONESIA(INSTITUTE OF INDONESIA CHARTERED ACCOUNTANTS)Both the provisions above are based on conclusion as described in BC9 of IAS 23:The Board concluded that borrowing costs that are directly attributable to the acquisition, constructionor production of a qualifying asset are part of the cost of that asset. During the period when an asset isunder development, the expenditures for the resources used must be financed. Financing has a cost. Thecost of the asset should include all costs necessarily incurred to get the asset ready for its intended useor sale, including the cost incurred in financing the expenditures as a part of the asset’s acquisition cost.The Board reasoned that recognising immediately as an expense borrowing costs relating to qualifyingassets does not give a faithful representation of the cost of the asset.We think that the tentative agenda decision which concludes not to capitalise borrowing costson the unsold or the sold units, on the ground of no qualifying assets, nullified the fact thatinventory was involved in this case. We are of a view that the above provision does not cateractual practice in some of real estate activities, particularly in the fact pattern submitted to theCommittee.We strongly recommend the Committee to reconsider the conclusion, putting into account theconsequences that might incur should the tentative agenda decision effective, and to conductmore in-depth analysis of the impact, as there might be unintended consequences resulting fromthe decision. As such, it would be more appropriate to refer this topic to the IASB.Conclusion: We have concerns on the unintended consequences of the Committee’s conclusion thatthe entity does not capitalize borrowing costs to sold or unsold inventories. We suggested the Committee to conduct more in-depth analysis on the impact and toensure that any unintended consequences have been addressed appropriately. As suchit would be more appropriate to refer this topic to the IASB.***** END OF APPENDIX *****Page 3 of 3GRHA AKUNTAN, J a l an S i ndang l aya No . 1 , Ment eng , J aka r t a 10310 ‐ INDONES IATe lp . : ( 62 ‐21 ) 3 190 4232 Hunt i ng ,F ax . : ( 62 ‐21 ) 315 2076 , E ‐ma i l : i a i ‐ i n fo@ia i g l oba l . o r . i d ,Page : h t tp : / /www. i a i g l oba l . o r . i dHome

Our Ref.: FRSCSent electronically through the IASB Website (www.ifrs.org)11 February 2019Sue LloydChairIFRS Interpretations CommitteeColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Sue,Tentative agenda decision – Over time transfer of constructed goodThe Hong Kong Institute of Certified Public Accountants ("HKICPA") is grateful for theopportunity to provide you with views from our stakeholders on this Tentative AgendaDecision (TAD).In response to this TAD, we reached out to our technical experts in accounting firms('practitioners') and preparers in Hong Kong. Whilst agreeing with the treatment of thesold units in the TAD, some medium-large practitioners and preparers expressedconcerns about the IFRS Interpretations Committee’s tentative views in the TAD thatborrowing costs are not captialised on work-in-progress relating to unsold units underconstruction. This comment letter summarises the concerns of these stakeholders.Concerns that the TAD is contrary to the economics and the core principle of IAS 23 sofar as unsold units are concernedThe Interpretations Committee considers that the unsold, partly-constructed units areready for their intended sale in their current condition because the entity intends to sellthose units as soon as it finds suitable customers and, on signing a contract with acustomer, will transfer control of any work-in-progress relating to that unit to thecustomer. Consequently, the Interpretations Committee concludes that the units priorto sale do not meet the definition of a qualifying asset because they do not meet thecriteria 'necessarily takes a substantial period of time to get ready for its intended useor sale'.Our stakeholders are

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients.

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