Page 44 - CODIC 2016/2017 - Annual report

Although all facts and circumstances are analysed case by case, the nature of the asset concerned (land) is such
that the main risks and rewards reside in fluctuations in the value of the land, which depend on a large number
of external factors. Other than this, the risks and rewards specific to land relate to legal ownership of the asset,
for example exposure to fluctuations in property taxes and insurance premiums. As for control of the land, the
Group considers that it is transferred to the buyer from the moment it takes possession of the asset and can
therefore sell it or lease it out for example.
The transfer of both the risks and rewards and of control of the asset coincides with the sale of the shares of
the project company or the execution of the deed of sale of the land, and the revenue associated with the land
portion is established at that date.

As for the construction component of the sales contract, IFRIC 15 contains provisions for determining whether a
construction agreement is involved, as dealt with by IAS 11, or a sale of goods as covered by IAS 18. In the former
case, the revenue is recognised in principle according to the percentage of completion of the construction project,
whereas for the sale of goods it is recognised upon completion, unless the transfer of control and of the significant
risks and rewards is continuous, in which case recognition of revenue using the percentage of completion
method is also appropriate.

Given the Company’s activity as a property developer, the construction component of the sales contract does
not usually constitute a construction contract in the meaning of IAS 11 and the associated revenue is recognised
upon completion of the project in accordance with IAS 18. In this case, the construction project is recognised
in inventories (see item 8 below*).

Identifying the risks and rewards associated with the construction component and assessing the moment at
which they are substantially transferred to the buyer, calls for judgment, and depends on all the facts and
circumstances relevant to the transaction.
Nonetheless, the Group typically retains the following risks and rewards until completion of the project in view
of its obligations in the context of the off-plan sales contract whereby the monitoring of the work and the timely
delivery of the building in accordance with the terms of reference and legal requirements are guaranteed to
the buyer:

• Construction risk, i.e. the risk that the characteristics of the property do not conform to legal requirements
or to the specifications as set out in the terms of reference.
• Budget variance risk, i.e. the risks (and rewards) associated with an increase (decrease) in real costs
relative to the initial budget on which the sale price was mainly based.
• Timing risk, i.e. the risk (reward) associated with the project’s being delivered after (before) the contractually
established date, given that penalties (incentives) are generally provided for contractually in case of
late (early) delivery.

Apart from this, the risk of changes in the value of the property can be considered to be transferred to the
buyer on the date of the sales contract. The selling price determined in the contract is fixed, and the contract
does not usually include an indexation clause linked to the volatility of the property market or the economic
situation. This risk relates mainly to the land, as discussed above.
Based on all these factors, it is generally concluded that the transfer of the significant risks and rewards associated
with the construction component does not take place until completion of the project.

In the particular case of sales of residential units in Belgium that are subject to the Breyne law (the Group has
developed some residential projects complementarily to office projects, although this is not its main activity),
it has been concluded that the risks and rewards associated with ownership were gradually transferred to the
buyer as construction progressed, given that the transfer of ownership is effected “as and when materials are
delivered and incorporated into the ground or the property under construction”.
Consequently, the revenue relating to constructions has been recognised in line with percentage of completion
of construction provided the residential units have been sold (by notary deed).

If the definition of a construction contract according to IAS 11 is met, the percentage of completion of the
contract is estimated based on the cost method (relationship between the costs already incurred on the work
performed and the estimated total costs of the contract), excluding costs that do not reflect any real progress.
Revenue on the contract comprises the amounts agreed in the initial contract and in any addenda thereto, and
the amounts of indemnifications and other bonuses and incentives to the extent that it is probable that they will
be acquired and if they can be reliably valued. The costs of the contract comprise costs directly relating to the

42 Codic Annual Report 2016/2017