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GUIDANCE NOTE ON ACCOUNTING FOR REAL ESTATE TRANSACTIONS (REVISED 2012)– SIMPLIFIED

1) Applicability:

i) To the enterprises dealing in ‘land, building and / or rights related thereto’ as sellers or developers.

ii) To all projects where revenue is being recognized for the first time on or after 01/04/2012. Earlier adoption of this accounting standard is also permitted.

2) Transactions covered: include

i) Sale of plot of land (including long-term leases),

ii) Sale of plots of land (including long-term leases) with common facilities like laying of roads, drainage lines, water pipelines, electrical lines, sports facilities, club house, etc.

iii) Development and sale of residential and commercial units, row houses, independent houses,

iv) Acquisition, utilization and transfer of development rights.

v) Redevelopment and Joint development agreements for any of the above activities.

3) Definitions:

i) Project:

The smallest group of units/plots/saleable spaces, the use of which is dependent upon availability and functionality of common set of amenities.

ii) Project costs: include

(a) Cost of land and development rights:

Include rehabilitation costs, registration charges, stamp duty, brokerage and incidental expenses.

(b) Borrowing costs:

Incurred in relation to a project or which are apportioned to a project, in accordance with AS – 16.

(c) Construction and development costs:

(i) Costs relating directly to a specific project: include

a. land conversion costs, betterment charges, municipal sanction fees, building permission fees etc,

b. site labour costs,

c. costs of materials used in construction or development,

d. depreciation / hiring charges of plant and equipment used for the project,

e. costs of design and technical assistance related to the project,

f.  estimated costs of rectification and guarantee work, expected warranty costs,

g. claims from third parties, etc.

(ii) Costs attributable to project activity in general and can be allocated to specific projects: include

a. insurance,

b. cost of general design and technical assistance not directly related to a specific project,

c. construction and development overheads, and

d. borrowing costs.

The allocation of above expenses is to be made on some rational basis, for e.g. normal saleable area, and the basis of allocation is to be applied consistently to all costs having similar characteristics.

(iii) Costs not considered as part of construction and development costs:

a. general administration cost,

b. selling costs,

c. research and development costs,

d. depreciation of idle plant and equipment,

e. unconsumed stock at site,

f. advance payments made to sub-contractors for work to be performed.

iii) Project revenues:

include revenue on sale of plots, undivided share in land; sale of finished or semi-finished structures; consideration for construction, amenities and parking spaces; sale of development rights.

4) Method of accounting

i) Completed contract method (as per AS-9 “Revenue recognition”):

Revenue is to be recognized when all of the following conditions are satisfied:

(a) The seller has transferred all significant risks and rewards of ownership and retains no effective control of the real estate (including ownership),

(b) The seller has handed over the possession of the real estate unit to the buyer,

(c) The amount of sale consideration can be reasonably measured,

(d) It is not unreasonable to expect ultimate collection of revenue from buyer,

(e) Where the transfer of legal title is a condition before the buyer taking over significant risks and rewards of ownership, revenue should be recongnised when legal title is transferred.

ii) Percentage of completion method (as per AS-7 “Construction contacts”):

(a) Indicators for applicability of Percentage of completion method:

(i) The agreement for sale is entered into between the buyer and seller, which has the effect of transferring significant risks and rewards of ownership to the buyer, provided the agreement is legally enforceable though the legal title is not transferred or the possession of the real estate is not given to the buyer. And any acts on the real estate, performed by the seller, are in substance, performed on behalf of the buyer in the manner similar to a contractor.

(ii) The duration of such projects is beyond 12 months,

(iii) Most features are common to construction contract, viz., land development, structural engineering, architectural design, construction, etc.

(iv) When individual units in the project are dependent upon or interrelated to completion of common facilities / amenities,

(v) The construction activities form a significant proportion of the project activity.

(b) Conditions to be fulfilled before applying the Percentage of completion method:

(i) the outcome of the real estate project can be measured reliably,

(ii) the total project revenue can be estimated reliably,

(iii) the project costs to complete the project can be measured reliably,

(iv) the project costs incurred till reporting date can be clearly identified and measured reliably,

(v)  it is probably that the economic benefits associated with the project will flow to the seller.

(c) Conditions to be fulfilled before revenue to be recognized under Percentage of completion method:

(i) All critical approvals for commencement of the project have been obtained,

(ii) The expenditure incurred on construction and development costs, till reporting date, is at least 25% of total estimated construction and development cost, as defined earlier,

(iii) At least 25% of saleable area is secured by agreement to sale with buyers,

(iv) At least 10% of total revenue, of the contracts or agreements entered into with the buyers, is realized at the reporting date in respect of each of the contracts. To illustrate – if there are 10 agreements of sale and 10% of gross amount is realized only in case of 8 agreements, revenue can be recognized with respect to these 8 agreements.

(d) Methodology of computation of Percentage of completion:

When all the above conditions are satisfied, the following methods should be adopted to calculate income and expenses to be recognized in the reporting period:

(i) Divide the total project cost incurred till the reporting date by the total estimated project cost, the figure arrived at will be the percentage of completion,

(ii) Calculate the total sale consideration of the agreements to sale executed till the reporting date,

(iii) Multiply (i) with (ii) above, the figure arrived at will be the income to be recognized till the reporting date,

(iv) Income to be recognized in current reporting period = (iii) minus amount recognized as income till the previous reporting period,

(e) When it is probable that total project costs will exceed total eligible project revenues, the expected loss should be recognized as an expense immediately. The amount of such a loss is determined irrespective of:

(i) Commencement of project work, or

(ii) The stage of completion of project activity.

(f) The percentage of completion method is applied on a cumulative basis in each reporting period to the current estimate of project revenues and project cost. Therefore, change in estimate of cost or outcome of the project is accounted as change in estimate.

(g) The event of cancellation of ‘agreement to sale’ or change in the purpose of holding the property to ‘being used for own use or for rental purposes’, will also be accounted as change in estimate. In such cases, revenues recognized earlier should be reversed and cost in relation thereto to be accounted as cost of fixed assets (as per AS-10 “Accounting for Fixed Assets”).

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