Inventory under construction

All topics related to IFRS Standards.
Post Reply
Andreas Kyriacou
Posts: 46
Joined: 13 Dec 2019, 13:31

Inventory under construction

Post by Andreas Kyriacou »

Hello everyone!

I am really confused about this, I would appreciate your thoughts.

Company A signed contracts with developer to purchase a whole complex of total 6 apartments. Project has just started and the construction will complete in 18 months.
Company's A operations are the trading of properties and therefore these flats would be classified as inventory in Company's A records.

Six Separate Contracts were signed one for each flat. Total contract prices varies in accordance with the flats specifications and Sqm.
Flat 1 - €550,000 + VAT
Flat 2 - €650,000 + VAT
Flat 3 - €350,000 + VAT
Flat 4 - €800,000 + VAT
Flat 5 - €850,000 + VAT
Flat 6 - €950,000 + VAT

Total Contractual cost is €4,150,000. A big payment will be made upon inception of €700,000 and then invoices will be issued upon construction.
The question is about the cost that will be recognized initially as inventory under construction. Would the cost be the total contractual price agreed to pay of €4,150,000 and at the same time recognize a financial liability for the same amount? (I believe IFRS 9 states that a financial liability must be recognized when the entity becomes a party to the contractual provisions of the instrument, like in this case I suppose).

Or the cost will be recognized as the payments are made which will be subject to the works performed up to that date???
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: Inventory under construction

Post by Marek Muc »

this is an executory contract, so you don't recognise amounts payable for unperformed work

https://ifrscommunity.com/knowledge-bas ... -contracts

I would carefully consider the presentation of the milestone payments, whether they are prepayments shown separately from inventory or subsumed into inventory. I guess it depends on when the control passes. I would use the criteria for performance obligations satisfied at a point in time to make that judgement:
https://ifrscommunity.com/knowledge-bas ... nt-in-time
Andreas Kyriacou
Posts: 46
Joined: 13 Dec 2019, 13:31

Re: Inventory under construction

Post by Andreas Kyriacou »

Hi Marek thanks for the reply.

Yes but for executory contracts paragraph B3.1.2 (b) states that if the commitment is to buy non-financial asset (as in this case), the fair value of the liability is recognized on the commitment date.

Am I missing something?
Andreas Kyriacou
Posts: 46
Joined: 13 Dec 2019, 13:31

Re: Inventory under construction

Post by Andreas Kyriacou »

Regarding your 2nd point for the presentation of milestone payments, you mean that all payments in relation to works completed (as per the agreement) must be Debited to inventory whereas any other payments that are not directly related to any milestone should be shown as prepayments and transferred to inventory when control is established?
Andreas Kyriacou
Posts: 46
Joined: 13 Dec 2019, 13:31

Re: Inventory under construction

Post by Andreas Kyriacou »

I am also confused from IFRS 15 ''Costs to fulfil a contract'' guidelines.

In accordance with IFRS 15 any costs to fulfil a contract are recognised as an asset under IFRS 15 only if they:

- Relate directly to a contract, or to an anticipated contract that can be specifically identified
- Generate or enhance resources to be used to satisfy performance obligations in future, and
- Are expected to be recovered.

These are all met in this example. This provisions are not applicable??
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: Inventory under construction

Post by Marek Muc »

Andreas Kyriacou wrote: 02 Nov 2021, 13:55 Regarding your 2nd point for the presentation of milestone payments, you mean that all payments in relation to works completed (as per the agreement) must be Debited to inventory whereas any other payments that are not directly related to any milestone should be shown as prepayments and transferred to inventory when control is established?
no, I meant that you should consider where to present *all* payments

costs to fulfil a contract under IFRS 15 are not applicable to you in this scenario
Andreas Kyriacou
Posts: 46
Joined: 13 Dec 2019, 13:31

Re: Inventory under construction

Post by Andreas Kyriacou »

Thanks !!
Post Reply