Accounting by Real Estate Developers

The total Cost can be divided under the following Cost Centers:

1. Project Cost Centre (PCC) Specific Costs
2. Head Office Cost Center (HOCC) Common Costs and Administration and Selling Costs

The Costs booked under HOCC can be further related to following functional units:

1. Engineering relates to designing and technical activities prior to the commencement of physical construction.
2. Purchase related to activity (tendering, vendor evaluation, PO execution, bill verification, etc.) for purchase of material.
3. Contract relates to activity (tendering, vendor evaluation, PO execution, bill verification, etc.) for labour charges.
4. Marketing and Business Development relates to activity (marketing, advertising, business development, etc.) for selling product.
5. Accounts relates to accounts and financing activities.
6. Administration relates to general administration activities.
7. Information Technology relates to IT activities.
8. Corporate (including MD expenses) relates to general corporate activities including managerial activity.

Costs booked under HOCC is required to be allocated to project on the basis of a 3-stage allocation method:

• Stage 1 : Costs that relate directly to a specific functional unit are required to be accounted under the specific functional unity.

• Stage 2 : Costs that are attributable to functional activity in general and can be allocated to the functional units are required to be allocated and accounted under the respective functional units (sub-cost centers) in the ratio, which would fairly represent the contribution of such units to the expenses incurred. Example is rent expense being allocated to the functional units in the ratio of area occupied.

• Stage 3 : Costs accumulated under various functional units are to be allocated based on the following:

(i)The functional units, which relate to the project activity in general and the costs can be allocated to the project on a reasonable basis, are to be identified as units incurring Common Costs and hence, all costs of such functional units are to be allocated to the project. The functional units that would be covered under this head are as below:

(a)Engineering

(b) Purchase

(c) Contract

(ii)The functional units, which relate to the general administration and selling and distribution activities of the Company, are to be identified as units incurring Administration and Selling Costs and hence, all costs of such functional units are to be charged off to Profit and Loss Account.

(a) Marketing and Business Development

(b) Accounts

(c) Administration

(d) Information Technology

(e) Corporate (including MD Expenses)

It may also be noted that as per para 13 of AS 2 and para 19 of AS 7, administration and selling costs are specifically required to be excluded from Cost of Inventories / Cost of Construction Contract.

Further, borrowing costs incurred towards purchase of land forming part of construction of a commercial or residential project are eligible for capitalization since it does not represent an asset in itself, but forms part of the project, which requires substantial period of time to get ready for its intended use or sale. However, borrowing costs incurred while land acquired for building purposes is held without any associated development activity do not qualify for capitalization.