RERA- Certification and issues in Alteration

Prepared by Maitri Thakkar
Certification and Issues in Alteration
Sandesh Mundra & Associates – Sandesh.mundra@smaca.in

01
Introduction
02
Role of Chartered Accountant in the Act
03
Certification of Form 3
04
Annual Certification in Form 5
05
Issues arising in Alterations

01.
 Increasing population  Rapid urbanization
 Rise in demand  Inelastic supply of Land  Rise to a lot of unethical practices.
 Advance Payment of consideration  buyer at the mercy of the developer/builder
 Delay in completion of a real estate project  results into diversion of funds across
multiple projects
 Requirement of regulatory mechanism to regulate the sector  The Real Estate
(Regulation and Development) Act, 2016.(hereafter referred to as “Act”.)

 Compulsory Registration in planning area
 Ban on marketing prior registration
 Deposition of 70% of the amounts realized from the allottees into a
separate bank account;
 Certification from experts (Architect, Engineer & Chartered Accountant)
for withdrawal of amounts deposited as part of mechanism for
monitoring the use of funds .
 Registered real estate agents will be authorized to act.
•

•
1. Requirements at the time of Registration :
 Review of means of financing along with the cost already incurred and
paid, prior to registration, by the promoter out of the estimated cost.
 Certification of the time period within which the promoter undertakes to
complete the pending project.
 Certification of the balance amount receivable from the
apartments/flats/premises sold or allotted as well as unsold of an ongoing
project.
 Certification in respect of the cost already incurred and paid for the
purpose of calculating the proportionate cost of completion of the project.

•
2. Certificate for deposition and withdrawal of funds :
 Ensuring deposition of 70% of amounts realized from allottee in
a separate Bank Account.
 Certification for withdrawal of the amount deposited.
 Certification within six months at the end of a financial year for
production of the yearly statement of accounts The Chartered
Accountant has to comment on the following :
a. Amount collected for this project have been utilized for the
same project
b. Withdrawal has been in compliance with the proportion to
percentage completion of project

Project X Amount (in Rs
Crores)
A Estimated cost of the project 500
B Cost incurred up to 31 December 2017 300
C Aggregate of amounts collected from
time to time up to 31 December 2017
600
D Aggregate of amounts deposited into
the designated bank account up to 31
December 2017 (70% of 600 cr)
420
E Aggregate of amounts withdrawn up to
31 December 2017
Nil
F % of completion (B/A) 60%
Should the chartered accountant certify as amount withdrawable 60% of-
•Rs.500 being the estimated cost of real estate project; or
•Rs.600 being the total amount collected; or
•Rs.420 being the total amount deposited till 31.12.2017?

•
3. Role as Authorised Representative:
 Competent to represent the applicant or appellant before the
Appellate Tribunal or the Regulatory Authority or the
adjudicating officer.
4. Quarterly Return :
 Certification at time of each Quarter of percentage completion of
the project in Form 3.

Key points in Certification :
1. Sequence of Certification :
 Act is silent about the sequence to be followed by the three
professionals for withdrawal of funds from the separate account.
 Would this mean “after it is certified by an engineer, an architect
and a chartered accountant in practice” used in second Proviso to
s4(2)(l)(D) can be interpreted as laying down the sequence to be
followed by the three professionals ?
•

2. Relevance of SA 620-Using the Work of an Auditor’s Expert :
 Can the chartered accountant rely on the certificates issued by the
engineer and architect
 Can the Chartered Accountant take shelter under SA 620-Using the Work
of an Auditor’s Expert?
3. Percentage of Completion:
Depending on the nature of the contract, the methods may include:
 the proportion that contract costs incurred for work performed up to the
reporting date bear to the estimated total contract costs; or
 surveys of work performed; or
 Completion of a physical proportion of the contract work.
•

 Key points in Certification :
4. Project Costs :
 The Act does not define  ‘Costs of the Project’ or “Project Costs”.
 Section 4(2)(l)(D) read with its first Proviso, indicates 
 ‘Project Cost’ = “Cost of Construction” + “Land Cost”.
 However, these two expressions are not defined further.
 Therefore, one will have to decide as to what constitutes the ‘Cost
of Construction’ and the ‘Land Cost’.
•

Definitions in the Guidance Note on Accounting for Real Estate
Transactions(hereafter referred to as “GN”)
a. Project costs comprise of the following :
i. Cost of land and cost of development rights – All costs related to
 acquisition of land,
 development rights in land or property including cost of land, cost
of development rights,
 rehabilitation costs,
 registration charges,
 stamp duty,
 brokerage costs and incidental expenses.
•

Definitions in the Guidance Note on Accounting for Real Estate
Transactions(hereafter referred to as “GN”)
ii. Borrowing Costs – In accordance with Accounting Standard (AS)
16, Borrowing Costs which are incurred directly in relation to a
project or which are apportioned to a project.
iii. Construction and development costs – These would include costs
that relate directly to the specific project and costs that may be
attributable to project activity in general and can be allocated to
the project.
•

5. Pass through payments:
 ‘Pass-Through’ payments  To be deposited
 preferably in designated bank account opened just for depositing such Pass-
Through Charge, or
 any other bank account of promoter
 Should not be deposited in the separate bank account.
 However, promoter shall be accountable.
6. Deployment of Funds :
 Balance in separate bank account, if not required, make FD with same bank
maintaining the separate bank account.
 Chartered Accountant  to ensure  no lien on or loan against security of FD
•

7. Cancellation:
 Cancellation Amount, to the extent of 70% can be withdrawn from the Separate Bank
Account, subject to availability of funds
 No mention about treatment of interest/compensation, can be presumed as cost incurred
for project.
8. Cost of Construction of Rehab buildings:
 Promoter  under obligation  to build houses under slum rehabilitation scheme 
will get the actual cost of construction  such cost is to form part of the land cost.
•

 Issues :
i. Cost of land and cost of development rights :
 Cost of land to be taken as ?
 Historical cost,
 Fair market vale,
 Indexed Cost,
 approved valuer
 value assessable for the purpose of stamp duty on conveyance of
land
 Date as of which the land cost will be determined 
Commencement certificate for Land
 Common Infra & Land for multiple projects / phases
 Land acquired before 1st day of April, 2001  Circle rates as at
that date
•

Particulars Estimates of project cost
based on historical cost
Estimates of project cost
based on fair market value
Land cost 100 10,000
Cost of construction 5,000 5,000
Total 5,100 15,000
Cost Incurred
Land cost 100 10,000
Cost of construction 2,500 2,500
Total 2,600 12,500
% of completion 50.98% 83.33%
Amounts collected from allottees 15,000 15,000
Amount deposited in separate bank account 10,500 10,500
Amounts withdrawable (rounded off) based
on cost
to cost approach
2,600 12,500

 Issues :
ii. Borrowing Cost :
 Not mentioned as a separate element of project cost, should it still be regarded
as part of the ‘Project Cost’ ?
 Can be treated as Cost of Construction ?
iii. Cost of Construction :
 Specific exclusions as per GN to be excluded in RERA also ? (Eg. General
administration costs; selling costs; etc.)
 Cost of Construction – Rule 5 – Restricted to on-site expenses for physical
development of project – very subjective
 30% funds are free for use - for profits + Office overheads
•

 Issues :
iv. Joint Development Agreement & Redevelopment
 Land Owner or developer liable for registration ?
 Responsibilities of promoter to be borne by land Owner or developer
?
 Cost of land in books of developer ?
 Area Sharing
 Revenue Sharing
 Collection towards land received by Developer
 Collection towards land received by Land owner
 One or more separate bank accounts ?
 Redevelopment a part of REDA ?
•

v. Other Issues :
 No distinction between builder & developer
 More than 70% can also be deposited
 Entire Collection received at time of booking 
Compulsory requirement of Agreement to Sale on receipt
above ten percent of Agreement Value applicable ?
What happens to ongoing contracts calculations ?
Creation of back to back subcontracting group co.
•

 In the case of an ongoing project, the full amount recovered from allottees before
the registration of the project will be deemed to be the amount withdrawn till the
date of first certificate.

 Quarterly Certification :
 Quarterly updation of details on website.
 Certification date & Certificate signing date should be same ?
 Quarter dates similar for all projects ?
 Certification period ?
 From inception or Immediate date after first certification ?
 Till last date of Quarter or any date nearer to Quarter end ?
 Certification by same Chartered Accountant who certified at the
time of Registration ?
•

 Quarterly Certification :
 Points to be taken into consideration :
a. Selection of date prior & nearer to Quarter end
b. Scrutiny of data as certified in prior certificate/(s)
c. Scrutiny of transactions of separate bank account
d. Checking the Annexures of sold & unsold apartments and collection
received/pending thereon.
e. Scrutiny of paid & unpaid creditors and stock
•

Incurred & Paid :
 Emphasis on “incurred & paid”.
 Not optional but mandatory for any cost to be incurred and paid.
 New strategies and policies required :
 Phase wise registration - separate books of accounts/cost centres
 Common expenses - Proportionate on the basis of direct costs incurred
 Creditors - Paid creditors relating to purchase of on-site material to included
in Cost of construction.
 Closing stock - Cost of paid stock would be “Cost of unconsumed or
uninstalled material delivered at site” should be excluded from Cost of
Construction as per GN & Instructions of Form 3.
•

 Forms :
i. Form 3
ii. Changes in CA Certificate
•

 a letter of engagement stating the nature of certificate required and the purpose for which
it will be used;
 the relevant data particulars, duly certified by the promoter to be true, received from him
regarding the land cost and the cost of construction incurred during the period covered by
the certificate as also the particulars to show cumulative land cost and the cost of
construction incurred up to the date of the certificate;
 working showing the manner of attribution of expenditure on interest relatable to the
project, assigned and allocated that it is in accordance with the applicable AS, if any;
 the certificates issued by the engineer and the architect;
 a note on assumptions, if any made in certification with reasons why the assumptions are
made;
 a note giving reasons why any evidence is accepted or rejected, or any assumption is made
or why any term or expression is given a particular meaning, etc.

 Whether Form 5- Certificate or Report ?
 The points that should be taken care of at the time of audit are as
under :
 Audited balance sheet should match with the books of accounts
(BOA).
 Scrutiny of unaudited BOA
 Management Representation/Certifications
 Matters requiring clarification from the management should be
clarified and scrutinized.
 Form 5 :
•

•
 Profile Changes :
 List of permissible alterations as per Order 7 :
 Registration process E-mail ID
 Details of Registration granted by Authority
 Promoter Details (Individual/company)
 Tye of promoter
 Authorised Signatory Details
 Project Details
 Project Bank Detail
 Project PAN Card
 Performa of Allotment Letter
 Fees Details
 Other profile changes to be affected on fees payment
 Processing Fees of Rs. 5000/application

•
 Structural Alterations :
 Sec 14(1)(i)
 “Minor additions or alterations" - "minor additions or alterations" excludes structural
change including an addition to the area or change in height, or the removal of part of a building, or any
change to the structure, such as the construction or removal or cutting into of any wall or a part of a
wall, partition, column, beam, joist, floor including a mezzanine floor or other support, or a change to or
closing of any required means of access ingress or egress or a change to the fixtures or equipment, etc
 Changes other than “ Minor additions or alterations” – written consent
of 2/3rd allotees, other than the promoter.
 Change in project plans :
 Fees for revision of plan  Equal to the amount paid as Registration
Fees

•
 Extension of Project :
 Applicable Section 6 and Rule 7.
 Application made by promoter due to force majeure
 Extension based on facts and reasons in writing
 In aggregate, cannot exceed a period of one year
 No rejection of application, without giving applicant an opportunity of being
heard.
 Fees for an amount equivalent to half the registration fees as per Rule 7.
Note :For the purpose of this section, the expression "force majeure" shall
mean a case of war, flood, drought, fire, cyclone, earthquake or any other
calamity caused by nature affecting the regular development of the real
estate project.

•
 Change in Estimated Cost of the project :
• No applicable section
• Authority may be of view to avoid repetitive
alterations

Prepared by Maitri ThakkarSandesh Mundra & Associates – Sandesh.mundra@smaca.in

RERA- Certification and issues in Alteration

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