Development agreement

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

05 June 2015 My client sold development rights to a builder, in consideration of 7% of revenue accrued to builder by selling the flats developed by him. The land in my books is showing as stock in trade. I want to know what will be the accounting treatment with respect to closing stock i.e. how much closing stock of land is to be shown.

Amol S Joglekar

Amol S Joglekar (Expert)
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05 June 2015 "cost or market whichever is lower" principle be used for valuation of closing stock.

As and when the revenue of sale of development right is recognised, the proportionate stock of land will be getting extinguished and shown under sales.

Querist : Anonymous

Querist : Anonymous (Querist)

05 June 2015 How can we estimate the future revenue of the builder.

Querist : Anonymous

Querist : Anonymous (Querist)

05 June 2015 How can we estimate the future revenue when half of the flats are still unsold.

Amol S Joglekar

Amol S Joglekar (Expert)
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05 June 2015 as per accounting standard on revenue recognition: The revenue is to be recognised as and when the same becomes due.

In your case, although the % is certain, the amount for which the builder may agree to sell the flat is dependent on the said builder and hence the revenue can be recognised as and when the builder submits you the details of his revenue.

In most of the cases, as and when the builder starts receiving the consideration from the prospective flat owners, 7% and 93% of the payment is shared. You need to check your method as per the agreement entered into by and between assessee and the builder.

Querist : Anonymous

Querist : Anonymous (Querist)

05 June 2015 Those are the facts of my cases but i want to know how much amount of closing stock will be shown

Amol S Joglekar

Amol S Joglekar (Expert)
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05 June 2015 that is what i told you in the first place....
cost or market whichever is lower.

prima facie it looks as if your revenue should be recognised after the builder pays you. So? Till that time land will be shown at cost. Once you get the 7% share, the same shall be shown as sale.

better if you could share some more details

Querist : Anonymous

Querist : Anonymous (Querist)

05 June 2015 The revenue is recognized on the basis of POC method adopted by Builder, by multiplying 7/93 to the amount of revenue recognized by builder.

Amol S Joglekar

Amol S Joglekar (Expert)
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05 June 2015 why 7/93?
7% amounts to 7/100

Anyway, the same method as adopted by the builder may be adopted by you to recognise the revenue.

What is the long form of POC...(just to confirm if you are talking the same as i aim.)

Querist : Anonymous

Querist : Anonymous (Querist)

05 June 2015 Percentage of Completion

Amol S Joglekar

Amol S Joglekar (Expert)
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05 June 2015 yes, as i said, you can follow the same method for your revenue recognition as well.

Querist : Anonymous

Querist : Anonymous (Querist)

05 June 2015 I have recognized the revenue on the same basis. But the problem is there any standard treatment defined or suggested like guidance notes etc. for valuation of closing stock (land) regarding this type of agreement and in what proportion the closing stock should be written off. The problem is we can not properly estimate the future revenue. And if we can then also is it justified to proportion the value of land in that proportion.

Amol S Joglekar

Amol S Joglekar (Expert)
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08 June 2015 See, my contention is......say for example 100,000 sq ft of land, the builder is going to obtain 210,000 sq ft of saleable area of flats.
Now 7 % of 210,000 is going to come to land owner. i.e. 14,700 sq ft.
It is but obvious that the value of land is much LOWER than value of 14,700 sq ft of saleable flats, right?

So? Till the time land is sold/conveyed, it will continue to be shown as closing stock as COST. The revenue is being recognised as per POC.

A stage will come when the land is conveyed and at that point of time, closing stock will be NIL

Your view please.....

Querist : Anonymous

Querist : Anonymous (Querist)

08 June 2015 If we take closing stock as NIL in the year when land is conveyed, that year's P&L will show loss.
In my opinion closing stock of land should be removed from Closing stock but in what proportion.

Querist : Anonymous

Querist : Anonymous (Querist)

08 June 2015 I also want to know that whether interest paid on unsecured loan taken will be capitalized or not in cost of land.

Amol S Joglekar

Amol S Joglekar (Expert)
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08 June 2015 01. Let it show loss, it is not a restrictive indicator that P & L should not show loss.

02. If you want to go by proportion, then you need to reckon proportion of payment received.

Say first year, only 25% sq ft is booked and out of that only 40% payment is received. Now you can see, this is 25% multiplied by 40% i.e.10%......That is to say, now you can show 90% land as stock, but 10 % is assumed to be being converted into revenue.

Querist : Anonymous

Querist : Anonymous (Querist)

08 June 2015 And interest cost will be capitalized because i am in doubt, that whether land would be a qualifying asset or not?

Amol S Joglekar

Amol S Joglekar (Expert)
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08 June 2015 which interest cost you are referring?

Querist : Anonymous

Querist : Anonymous (Querist)

08 June 2015 Interest on Unsecured loans taken would be capitalized as per AS-16 or not on this land?

Amol S Joglekar

Amol S Joglekar (Expert)
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08 June 2015 Noy to be capitalised. you are showing it as closing stock.

Querist : Anonymous

Querist : Anonymous (Querist)

09 June 2015 There is no where written in AS-16 that interest can not be capitalized on closing stock. According to AS -16, "Qualifying Asset" means an asset that necessarily takes a substantial
period of time to get ready for its intended use or SALE .

Amol S Joglekar

Amol S Joglekar (Expert)
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10 June 2015 Oh great! Choice is yours. All the best.

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