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In my earlier article Joint Development Agreement - A Business Model I had made an attempt to discuss the joint development agreement model and a broad view of tax implication under the Income Tax Act, 1961. After receiving the various comments and queries I am trying now to explain accounting aspect with an illustration.

Since there is no existence of any specific standard or guidance note for JDA accounting we have to take shelter under AS 7, 9 and Revised Guidance Note on Accounting for Real Estate Transaction (Revised 2012) issued by The Institute of Chartered Accountants of India to account JDA transaction.

In JDA accounting there will be presence of three parties viz. Land owner, Developer and Purchaser. As we know that purchaser will capitalise the value of the asset as and when he pay and start depreciating it from the date of its put to use as specified in AS 6 and AS 10.

The major accounting complication exists only in books of Landlord and Developer. Let’s discuss one by one.

In the Books of Landlord:

The asset lying in the balance sheet could be an investment in land or stock in trade irrespective of its form, on entering into an “effective” general power of attorney for giving right to the developer to develop or to nominate the prospective buyer the landlord can avoid early tax liability.

As we discussed earlier if giving right to the developer is amounts to transfer as per section 45 of the Income Tax Act, 1961 then the landlord shall account the transfer in the same year in which tax treatment is given i.e. recognition of sale based on fair value of land or alternatively can wait to account above transaction till execution of sale deed of land including receipt of his share of units received in lieu of land given up.

In case of asset converted from investment to stock in trade the following entry required to be passed:

Stock in Trade A/c Dr……………………XXX

To Investment in Land A/c…………….XXX

To Revaluation Reserve A/c……………XXX

(Being Land has been converted in to stock in trade at fair value)

On receipt of Developed units:

Stock in trade/Investment in flat   A/c Dr……………..XXX

To Investment in Land/stock in trade A/c……………XXX

To Profit on transfer of Land or Stock A/c…………..XXX

(Being units received and profit earned under JDA accounted)

Since Landlord has transferred property with significant risks and rewards of ownership to the developer/buyer he will recognise revenue under AS –9 Revenue Recognition (note that the transfer of land does not amount to Construction Contract which is ruled by AS – 7).

An Illustration of Computation of Capital Gains is given below:

Particulars

Amount in

Capital Gains (Month of Transfer Dec 2014)

i) Long Term Capital Gains on JDA   (say share 50:50)

 Consideration being construction cost of units  of Landlord share (30 Lakhs X 10 Units)

300,00,000

 Less: Indexed cost of acquisition of Land (50%)

150,00,000

150,00,000

Less: Exemption u/s 54F (one

residential house situated in India from AY 2015-16)

60,00,000

Less: Exemption u/s 54EC

1. Investment in REC bonds – 50 lakhs in Jan 2015

2. Investment in NHAI bonds - 50 lakhs in April 2015 within filing of ROI.

(Investment in long-term specified bonds, out of capital gains arising from transfer of one or more original assets in a financial year, to be restricted to 50 lakhs, whether such investment is made in the same financial year or in the next financial year or partly in the same financial year and partly in the next financial year.)

50,00,000

Long Term Capital Gains

40,00,000

 

The above Illustration is based on the amendments made in Union Budget 2014-15. U/s 54F reinvestment in number of residential units is restricted to one unit which has to be situated in India by this amendment the most debated case of  Sri Anand Basappa (2009) 309 ITR 329 & Smt. K.G Rukminiamma (2011) 331 ITR 211 judgements by Hon’ble  Karnataka High Court has no future application. In the above cases it was held that all units situated in the same residential building will constitute “a residential house for the purpose of section 54.

In the Books of Developer:

Developer being an enterprise which includes Individuals, Firms, LLP’s & Companies who is required to comply with Accounting Standards and Guidance Note. When we talk about AS – 7 Construction Contracts it applies to Contractor who engages in construction work it does not apply to developer who gives sub-contract of construction works therefore AS 9 and Guidance note comes into picture in such situation.

AS 9 apply where developer transfers the completed units to buyer and Guidance Note apply when revenue recognised on percentage completed method (POCM). Even the draft Tax Accounting Standard (TAS) specifies that the revenue shall be accounted on the basis of POCM.

Point in time when revenue and profits is recognized as per POCM on construction contracts

a. Critical approvals necessary for commencement have been obtained

b. Stage of completion of the project reaches a reasonable level of development

c. If stage of completion is less than 25% of the total construction and development cost, reasonable level of development not reached

d. Construction and development costs do not include land cost and borrowing cost incurred towards land to check recognition criteria 

e. At least 25% of saleable project area is secured by contracts

f. At least 10% of total revenue as per legally enforceable contracts are realized at reporting dates

Illustration on application of percentage completion method

Total Saleable area

20,000 Sq.ft.

Estimated Project costs (This comprises land cost of 300 Lakhs and construction costs of 300 Lakhs)

600 Lakhs

Cost incurred till end of reporting period

(This includes land cost of ₹ 300 Lakhs and construction cost of  60 Lakhs)

₹ 360 Lakhs

Total Area Sold till the date of reporting period

5,000 Sq. ft.

Total Sale Consideration as per Agreements of Sale executed

200 Lakhs

Amount realised till the end of the reporting period

50 Lakhs

Percentage of completion of work (60% of total project cost including land cost or 20% of total construction cost)

 

At the end of the reporting period the enterprise will not be able to recognise any revenue as reasonable level of construction, which is 25% of the total construction cost, has not been achieved, though 10% of the agreement amount has been realised.

If the work completed till end of reporting

period is(This includes land cost of ₹ 300 Lakhs and construction cost of 90 Lakhs)

₹ 390 Lakhs

Percentage of completion of work would be 65% of total project cost including land cost or 30% of construction cost

The enterprise would be able to recognise revenues at the end of the accounting period. The revenue  recognition and profits would be as under:

Revenue recognised

(65 % of ₹ 200 Lakhs as per Agreement of Sale)

130 Lakhs

Proportionate cost

(5000 sq.ft./20,000 sq.ft.) X 390

97.50 Lakhs

Income from the project

₹ 32.50 Lakhs

Work in progress to be carried forward

₹ 292.50 Lakhs

Normally in JDA accounting undivided portion of land cost will not be considered in computation of percentage of completion since the developer has not incurred the land cost whereas it’s a general practise if the developer has paid a deposit being non refundable, it shall be considered as cost towards land and same shall be included in the computation of revenue recognition.

In the above illustration total built-up area is 20,000 Sq.ft. which comprises 20 units of 1000 Sq.ft each. In the above capital gain computation we saw that the share of JDA being 50:50 the 10 units belongs to the landlord in such case there is an option to developer to account the above transaction inclusive of land cost as follows:

To Account the land received

Work-in-progress A/c (Land cost) Dr………………300 Lakhs

To Landlord A/c………………………………………….300Lakhs

(Being land cost recognised on entering into JDA)

On allocation of constructed units

Landlord A/c Dr……………………………………….300 Lakhs

To Completed Units A/c…………………………………300Lakhs

(Being allocation of share of land owner portion of completed units accounted)

Alternatively the developer may not account the undivided land cost unless there involves non refundable deposit. He may choose to account total cost of construction units as follows:

Cost per Unit = Total construction costs (exclusive of Land cost)

Share of Developer Units

As per the above illustration

    30 Lakhs per Unit   =        Total construction cost – 300 Lakhs

                                                   10 Units (Developer share)

In above computation the developer absorbs the whole cost of construction including landlord share by his share of units not accounting land cost.

To conclude with the accounting of JDA is more of a subjective matter which differs case to case based on the nature & type of Joint Development Agreement.

I look forward for your valuable feedback/suggestions/comments mail to bhanu.prakash.m@icai.org


 

Published by

Bhanu Prakash Rao
(Think Beyond Stay Ahead...!)
Category Accounts   Report

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