Income computation and disclosures standards related to recognition of revenue

1. Presented By:
Rishabh Khandal
Article Assistant
S.K. Somani and Company

2. Scope:
This standard is applied in determination of
income for a construction contracts.
This should not be applied in determining the
income of Real Estate Transactions.
There is a separate standard on determining the
income of Real Estate transaction.

3. What is Construction Contract?
Specifically negotiated for
the construction of an
asset
OR
a combination of assets
that are closely
interrelated or
independent in terms of
their design, technology,
and function or their use.
Contract for rendering
of services which are
directly related to the
construction of asset.
Contract for destruction
or restoration of assets
and the restoration of the
environment following
the demolition of assets

4. Combining and Segmenting Contracts
Segmenting when?
Only if:
Separate proposals have been
submitted
Separate negotiation for each
asset
Contractor or contractee able to
accept or reject part of the contract
Costs and revenues separately
Combination when?
Only if:
Group of contracts is negotiated
as a single package,
Contracts are interrelated that
they are in effect, part of single
project with an overall profit
margin, and
Contracts are performed
concurrently or in a continuous
sequence.

5. Additional Assets:
Treat as separate construction contract if:-
Significant change in Design
Change in technology/
Functioning of the asset.
Price negotiated irrespective
of original contract price

6. REVENUE
•Contract Price
including
retentions
• Variation in
contract, claims
and incentive
payments
(measurable &
probable)
COST
•Directly related to
contract
•Attributable to contract
activity in general and
can be allocated
•Specifically chargeable
to the customer under
terms of contract
•Allocated Borrowing
Cost as per ICDS IX

7. Recognition of Contract Revenue and Expense
Contract Revenue and Expense should be recognized by ref. to
the stage of completion of contract activity at reporting date.
Stage of completion of contract referred to as Percentage of
Completion Method
During early stage (max. period 25% of stage of completion)
when outcome cannot be estimated reliably then revenue is
recognized to the extent of cost incurred.

8. Methods of calculation of % of completion
Survey Method
Proportion of cost
incurred to total
cost
Completion of
physical
proportion of
contract work

9. General
Revenue
recognised
Method for
degree of
completion
For contract
work in progress
Cost and profits
recognised
Amount of advance
received
Amount of retentions

10. ICDS III AS 7
1. Cost includes “allocated borrowing
cost” in accordance with ICDS IX
1. In this cost does not include allocated
borrowing cost.
2. It does not permit recognition of
foreseeable loss
2. It permit recognition of foreseeable
loss
3. Revenue includes retention money 3. Revenue does not include retentions
4. Upto 25% of the stage of completion,
if the outcome of construction contract
cannot be reliably measured, revenue is
recognized only to extent of cost
incurred.
4. Here irrespective of stage of
completion, if the outcome of contract is
not reliably measured, then in such case
revenue is recognized only to extent of
cost incurred.

11. Scope:
Applicable for determination of income from all
forms of transactions in real estate, which refers
to land as well as buildings and rights in
relation thereto

12. Real Estate Transaction
It includes:
Sale of plots of land (incl. lease) without any development
Sale of plots of land (incl. lease) with development in the form of
common facilities
Development and sale of residential and commercial units, row
houses, independent houses, with or without an undivided share
in land.
Acquisition, utilization and transfer of development rights
Redevelopment of existing buildings and structures
Joint development agreements for any of the above activities.

13. Definition:
Fair Value
Amount for which an asset could
be exchanged between a
knowledgeable, willing buyer
and a knowledgeable, willing
seller in arm’s length transaction
Project
•Smallest group of units, plots or
saleable spaces,
•which are linked with a common set
of basic facilities
•In such a manner that unless the
facilities are made available and
functional,
the units/plot/space cannot be put to
effective use.

14. Recognition of Revenue and Cost
•Project revenue and cost shall be recognized as revenue and cost by
reference to the stage of completion of project on the last date of previous
year for projects where the economic substance is similar to construction
contract
•Stage of completion of project = percentage of completion of project
•If economic substance is not similar to construction contract then
recognition shall be in accordance with ICDS IV.

15. Indicators of Economic
substance Similarity
•Duration of project > 12 months and its
completion and commencement date are
in different years
•Project involve similar activities related
to constructions
•Units to be delivered to different
buyers; are interrelated/ independent
upon completion of number of common
facilities
•Construction/ Development activities
form a significant proportion of
common facilities
Condition for revenue
under POC
•Cost incurred > or = 25% of
total estimated
• > or = 25% of saleable
project area is secured by
contract with buyers, and
• > or = 10% of total revenue
as agreed are realised and it is
reasonably certain such
parties to agreement will
comply ALL T&C.

16. Transferable Development Rights (TDR)
Way of acquisition of TDR:
Direct purchase
Development and construction of built up area
Giving up of rights over existing structures or land
Cost of acquisition(COA) will be cost of purchase OR amount spent on
development OR Fair value of right so acquired
If utilized in project : include its COA in project cost
Revenue on its sale recognized only if title is transferred to buyer and it is
reasonably expected to collect revenue

17. General
Project Revenue
recognized
Method for
degree of
completion
For contract
work in progress
Cost and profits
recognized
Amount of advances
received
Amount of WIP and Value
of inventories
Unbilled Revenue

18. ICDS on Real Estate Transactions Guidance Note on Real Estate
Transactions issued by ICAI
1. Critical Approval conditions is
not included in recognizing the
revenue
1. To recognize revenue all critical
approval is required to be
obtained in addition to other 3
conditions.
2. TDR acquired by way of giving
up rights over land or existing
structures recorded at fair value.
2. TDR acquired by way of giving
up rights over land or existing
structures recorded at fair market
value or net book value.

19. Scope:
Deals with bases for recognition of revenue arising in the course of the
ordinary course of activity of person from:
Sale of goods
Rendering of services
Use by others of the person’s resources yielding interest, royalties or
dividends
What is Revenue?
Gross inflow of cash, receivables or other consideration
In agency relationship revenue is commission amount not gross inflow of
cash, receivables or other consideration

20. Two Basic Conditions:
Revenue is measurable
Its Collection is probable
Sale of Goods:
Revenue is recognized only
when:
Property in good transferred
All significant risk and rewards
of ownership have been
transferred
Rendering of
Service
Revenue is recognized only by
percentage completion method
i.e. proportionately.

21. Two Basic Conditions:
Revenue is measurable
Its Collection is probable
Interest
Accrue on time basis
Determined by amount
outstanding and interest rate
Royalty
Accrue and
recognize on the basis
of terms of relevant
agreement
Dividend
According to
provision of Income
Tax Act.

22. ICDS IV AS 9
1. Revenue from service
contract recognized only by
POCM method
1. Revenue from service
contract recognized either by
POCM method or completed
service contract method.
2. Dividend is recognized
according to Income Tax Act
2. Dividend is recognized
when right to receive is
established