1. Accounting for Real Estate
Transactions- GN (Rev 2012)
Dhruv SETH, Lucknow
B. Com, FCA, DISA (ICA)
ds@sethspro.com
2. Types of Accounting Issues
Revenue Recognition
Timing
Extent of measurement
Re-measurement
Profit Recognition
Unbundling revenues and profits
Accounting of Finance Cost
Continuing Involvement
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3. AS-7 CONSTRUCTION CONTRACTS
Originally issued in 1983 as
“Accounting for Construction
Contracts”
AS-7 was revised in 2002 which was
applicable for accounting period
commencing on or after 1.4.2003
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4. AS-7 OLD NEW
Both percentage of
completion method
and the completed
contract method
allowed
Applies to
Contractors &
DeveloperBuilders
Only percentage of
completion method
allowed
Applies to
Contractors only
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5. Guidance Note
Guidance Note GN(A) 23 on
recognition of revenue by Real Estate
Developers issued in 2006 by the
ICAI.
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6. Guidance Note 2006 - Cont.
Recommended recognition of Real
Estate Revenue when ALL of the
following conditions are satisfied
When All significant risk and rewards of
ownership have been transferred and the
seller retains no effective control of real
estate to a degree usually associated
with ownership
Certainty of Consideration exists
Certainty of collection
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7. Guidance Note (Revised 2012)
by ICAI
Revised Guidance Note on Accounting
for Real Estate Transactions in Feb
2012. (GN 2006 was “Recognition of
Revenue”)
“to recommend the accounting
treatment by enterprises dealing in 'Real
Estate’ as sellers or developers”
‘real estate’ refers to land as well as
buildings and rights in relation thereto.
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8. Scope of Revised GN 2012
Covers ALL forms of transactions in Real
Estate. Illustrative List: -
Sale of Plots of Land with OR without
Development
Development and sale of Residential and
commercial units with or without undivided
share in land.
Acquisition, Utilisation and Transfer of
Development Rights.
Redevelopment of existing Building
Joint Development Agreements
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9. Scope- Exception
Transactions which are in substance
similar to delivery of goods – Principal
of Revenue Recognition in AS9 to
apply.
Transactions in Real Estate covered
by AS 10 (Fixed Assets), AS 12
(Government Grants), AS 19 (Leases)
and AS 26 (Intangible Assets)
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10. Applicability From
All Projects which are commenced on
or after 1st April 2012. AND also
Which were commenced before 1st
April 2012 but the revenue is being
recognised for the first time on or
after 1st April 2012
Can be applied from earlier date- IF
applied on all transactions
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11. Definition- “Project”
Project is the smallest group of
units/plots/saleable spaces which are
linked with a common set of
amenities in such a manner that
unless the common amenities are
made available and functional, these
units /plots / saleable spaces cannot
be put to their intended effective use.
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12. Project Costs- Comprises
Cost of Land+ development rights
(including rehabilitation cost etc.)
Borrowing Cost in terms of AS 16
Construction & Development Cost
(Includes- Direct Costs and That may be
attributable in general and can be
allocated to the project and also
estimated cost of rectification,
guarantee and expected warranty cost)
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13. Cost NOT part of Construction
Cost- If material
General administration costs;
selling costs;
research and development costs;
depreciation of idle plant and
equipment;
cost of unconsumed or uninstalled
material delivered at site; and
payments made to sub-contractors in
advance of work performed
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14. Project Revenue- Includes
Sale of plots, undivided share in land,
sale of finished and semi-finished
structures,
consideration for construction,
for amenities and interiors,
for parking spaces and sale of
development rights.
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15. Application of % Completion
Method (PCM)
Where economic substance is similar to
construction contracts
Indicators-
Multiple Accounting periods involved
Features common to construction
contracts
Individual units to be delivered to
different buyers these are
interdependent upon or interrelated to
completion of a number of common
activities
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16. PCM applied when
When outcome can be estimated
reliably AND when ALL of the
following conditions are satisfied
total project revenues can be
estimated reliably;
probable that economic benefits
will flow to the enterprise;
Contd.
16
17. Contd.
the project costs to complete the
project and the stage of project
completion at the reporting date can
be measured reliably; and
the project costs attributable to the
project can be clearly identified and
measured reliably so that actual
project costs incurred can be
compared with prior estimates
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18. Rebuttable presumption
That outcome of a project can be
estimated reliably and revenue should
be recognised under PCM only when
the following (a) to (d) are completed
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19. (a)
All critical approval necessary for
commencement obtained. These
include
1.Environmental clearances
2.Plan approvals
3.Title of land and other rights of
development
4.Change in Land Use
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20. (b)
Completion reaches a reasonable level- is
achieved if expenditure incurred on
construction & development cost is more
than 25% of construction and development
cost in terms of Para 2.2(c) read with 2.3
to 2.5
i.e. Project Cost LESS:
Cost of Land & cost of development
rights etc.
Borrowing Cost
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21. (c)
At least 25% of the Saleable project
area is secured by contracts or
agreements with buyers
Which are legally enforceable
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22. (d)
Min 10 % of the total revenue as per
the agreements of sale are realised in
respect of each contract and it is
reasonable to expect that parties will
comply with payment terms.
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23. If outcome can be estimated
reliably
Revenue & project costs of the
project should be recognised as
revenue and expenses by reference
to the stage of completion of the
project activity at the reporting date.
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24. Computation of Revenue
For computation of revenue the stage
of completion is arrived at with
reference to the entire project costs
incurred including land costs,
borrowing costs and construction and
development costs as defined in
paragraph 2.2.
Contd.
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25. Computation of Revenue- Stage
of Computation
Preferred method- is with reference to
project costs
Does not prohibit other methods, e.g.,
surveys of work done, technical
estimation, etc.
However, revenue with reference to
other methods of determination of stage
of completion should not, exceed the
revenue computed with reference to the
'project costs incurred‘ method.
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26. The Recognition of Revenue Not
to exceed
At any point the estimated total
revenues from 'eligible contracts’ /
other legally enforceable
'Eligible contracts’ means contracts /
agreements where at least 10% of
the contracted amounts have been
realised and there are no outstanding
defaults of the payment terms in such
contracts.
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27. If Probable Cost > Eligible
Revenue
When it is probable that total project
costs will exceed total eligible project
revenues, the expected loss should be
recognised as an expense immediately.
The amount of such a loss is determined
irrespective of:
(a) commencement of project work; or
(b) the stage of completion of project
activity.
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28. PCM applied on
Cumulative basis in each reporting
period
Change in estimate is accounted for as
change in accounting estimates.
include changes arising out of
cancellation of contracts.
Where subsequently earmarked for own
use or for rental purposes. Revenue
recognised to be reversed & cost to be
accounted for as per AS 10
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29. Sale of Plots
Without Developments
To be recognised when conditions of
Para 4.2 met
Sale of Developed Plots
Where the development activity is
significant the percentage completion
method is used to account for such
sales.
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30. Transactions with Multiple
Elements
Development + e.g. property management
services, sale of decorative fittings (excluding
fittings which are an integral part of the
unit), rental in lieu of unoccupied premises,
etc.].
The consideration should be split into
separately identifiable components
The consideration for the contract should be
allocated to each component on the basis of
the fair market value of each component
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31. Disclosure
The amount of project revenue
recognised
The methods used to determine the
project revenue recognised in the
reporting period; and
The method used to determine the
stage of completion of the project.
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32. Disclose also- for projects in
progress
the aggregate amount of costs
incurred and profits recognised (less
recognised losses) to date;
the amount of advances received;
the amount of work in progress and
the value of inventories; and
Excess of revenue recognised over
actual bills raised (unbilled revenue)
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33. Sample Note in Notes to
Accounts
Revenue from Projects is recognized on the
“Percentage of Completion Method’ of
accounting. Revenue is recognized, in relation
to the sold areas only, on the basis of
percentage of actual cost incurred thereon
including land as against the total estimated
cost of the project under execution subject to
such actual costs being 25% or more of the
total estimated cost. The estimates of saleable
area and costs are revised periodically by the
management. The effect of such changes to
estimates is recognized in the period such
changes are determined.
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34. Accounting System
“For that purpose it was the duty of the
Income-tax Officer to find out that profit the
business has made according to the true
accountancy practices “
P.M. Mohd 73 ITR 735 (SC) & 98 ITR 167
Challapalli (SC)
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35. Virtual Soft Systems Ltd 18
Taxman 119 (Del)
Accounting for lease rentals was based on the
Guidance Note “Accounting for Leases” issued by the
ICAI, the AO was not entitled to disregard the same.
The Guidance Note reflects the best practices adopted
by accountants the world over and the fact that it was
not mandatory is irrelevant.
The change by the assessee in the policy of accounting
for leases had the imprimatur of the ICAI and so the
AO was not entitled to disregard the books of accounts
or the method of accounting for leases;
Followed Woodward Governor India P Ltd. 294 ITR 451
(Delhi) and Dai Lchi karkaria Ltd 156 CTR 172 (SC)
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36. TAS and Change in Policy
TAS- The method of valuation of
inventory shall not be changed
without a reasonable cause
Snow-white food products 141 ITR
847- can be changed if intended to be
followed regularly in future
CIT v Mopeds India 173 ITR 347- can
be changed for bonafide purposes
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37. TAS & Anticipated Losses
TAS- Future & anticipated losses shall
not be allowed unless actually incurred
Shiv Shanti Punavasan Prakalp 135 ITD
51 (Mum)- Entire anticipated losses can
not be allowed. Only proportionate to
work completed can be allowed.
Allowed in CIT v Triveni Engg 196
Taxman 94 and Jacobs Engg 14
Taxmann.com 186 (Mum)
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38. Grey Areas
New Complex structuring of
Transactions combined with financing
No clarification where developers
takes land and gives the owner
constructed space in the project.
Volatility in earnings.
Rule based regarding threshold of
applicability of 25%- can be abused
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