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Guidance Note On Real Estate Transactions PDF
Guidance Note On Real Estate Transactions PDF
Completion
of revenue
Application of recognition –
completion of when
contracts effective
method possession is
Agreement for handed over,
sale no effective
control with
seller
To be applied where
◦ Economic substance similar to construction contracts
◦ Construction contract defined as “contract specifically negotiated for the
construction of an asset or a combination of assets that are closely
interrelated or interdependent in terms of their design, technology and
function or their ultimate purpose or use.”
Differences between contracts of sale vs construction contracts
In a contract of sale, the seller sells a ready-built asset; in a construction
contract, the asset is built based on order
Indicators:
◦ 12 months or longer duration so that project commencement date and project
completion date fall into different accounting periods.
◦ project includes land development, structural engineering, architectural design,
construction, etc.
◦ While individual units of the project are contracted to be delivered to different
buyers these are interdependent upon or interrelated to completion of a
number of common activities and/or provision of common amenities.
◦ The construction or development activities form a significant proportion of the
project activity.
When the outcome of the project can be
measured reliably AND all the following
total project revenues can be estimated reliably;
it is probable that the economic benefits
associated with the project will flow to the
enterprise;
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.
All necessary approvals for commencement of
project obtained, including:
Environmental clearances
Plan and design approvals
Title of land and other development right / construction
Change of land use
Stage of completion reaches a reasonable level
◦ Construction and development costs must have reached
25%
At least 25% of sellable area must have been
secured by contracts or agreements with buyers
At least 10% of the total revenue with respect to
each agreement has been received
Various options for stage of completion
Preferred method
◦ Project cost incurred
Including land cost, borrowing cost, development and construction costs
Other methods
◦ Survey of work done, technical estimation, etc
These methods are not ruled out. However, revenue computed
should not exceed revenue as per project cost incurred method
The project revenue as per % completion method should not
exceed estimated total revenue from “eligible contracts”
◦ That is, contracts where at least 10% of revenues have been realised, and
there are no defaults in payments
Estimated loss on completion should be booked outright
Percentage completion method is applied on cumulative basis :
◦ If estimates change over time, it is change of estimate, effect of which is
applied prospectively
◦ Change of estimate includes cancellation of contracts, or earmarking
property for self use
Revenue from sale of plot/land may be
booked when risk/rewards transferred
◦ That is, transfer of legal title, conveyance or
possession are not pre-requisite
In case agreement for sale of developed land,
percentage completion method to be applied
Cost of acquiring TDRs should be added to
the cost of construction
In case of transfer fo TDRs, revenue should
be booked
◦ When title is transferred
◦ It is not unreasonable to expect realisation
If there is a contract for supply of goods or
services in addition to construction contract
◦ Those parts will be segregated
◦ Composite consideration shall be segregated in
proportion to fair market value
Revenue related disclosures:
◦ the amount of project revenue recognised as revenue in the
reporting period;
◦ 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.
An enterprise should also disclose each of the following
for projects in progress at the end of the reporting period:
(a) the aggregate amount of costs incurred and profits
recognised (less recognised losses) to date;
(b) the amount of advances received;
(c) the amount of work in progress and the value of
inventories; and
(d) Excess of revenue recognised over actual bills raised
(unbilled revenue).
Accounting
Taxation
◦ MAT
◦ Regular income tax
IAS 11 Construction contracts
Snapshot
◦ Key objective:
Construction contracts normally span more than one accounting
period – hence, the costs/revenues are scattered; the standard
provides for allocation of revenue/costs to the period
Scope exception