Percentage completion method- contractors/ builders
This query is : Resolved
06 December 2012
Sir,
An assessee being a builder is engaged in construction and development of property/ Residential building & Commercial Complex with or without undivided right in land depending up on each project. The sale is made to general public. The builder enters into the sale agreement during the process of construction of building with individual owners. The builder some of the residential apartments/ commercial shops with him as there was no offer to purchase the same from any customer and it is not sold. He is following percentage of completion method for declaring his contract revenue under the Income Tax. Now my question is while computing the contract Revenue/ Gross receipt under the percentage completion method only the agreement value of the sold flats & shops have to be considered or the total salable value of percentage of work completed including the notional revenue for unsold flats has to be considered?.
I am of the opinion that revenue should be declared on the basis of percentage completion method only for those flats for which sale agreements are executed and so much percentage of sale agreement value for which work is completed has to be considered as contract revenue in that respective year. Is it the best way to handle this case?
Regards,
Prasanna Shenoy
An assessee being a builder is engaged in construction and development of property/ Residential building & Commercial Complex with or without undivided right in land depending up on each project. The sale is made to general public. The builder enters into the sale agreement during the process of construction of building with individual owners. The builder some of the residential apartments/ commercial shops with him as there was no offer to purchase the same from any customer and it is not sold. He is following percentage of completion method for declaring his contract revenue under the Income Tax. Now my question is while computing the contract Revenue/ Gross receipt under the percentage completion method only the agreement value of the sold flats & shops have to be considered or the total salable value of percentage of work completed including the notional revenue for unsold flats has to be considered?.
I am of the opinion that revenue should be declared on the basis of percentage completion method only for those flats for which sale agreements are executed and so much percentage of sale agreement value for which work is completed has to be considered as contract revenue in that respective year. Is it the best way to handle this case?
Regards,
Prasanna Shenoy
06 December 2012
Notional revenue not to be booked. Flat sold will go to revenue recognition. % completion of the same shall have the effect in valuation of closing stock.
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06 December 2012
Total Area in Sq Ft 1000
Area Sold in Sq Ft 300
Cost of Construction per sq ft 1,400/-
Cost incurred till date Rs 560/- per sq ft
sale Rate as per the sale agreement per sq ft Rs 2,000/-
Percentage of work completed 40%
Revenue to be declared 300 X 2,000 x 40% = 2,40,000/-
Closing stock 700 sq ft X 560 = 3,92,000/-
Whether this calculation is right?
Area Sold in Sq Ft 300
Cost of Construction per sq ft 1,400/-
Cost incurred till date Rs 560/- per sq ft
sale Rate as per the sale agreement per sq ft Rs 2,000/-
Percentage of work completed 40%
Revenue to be declared 300 X 2,000 x 40% = 2,40,000/-
Closing stock 700 sq ft X 560 = 3,92,000/-
Whether this calculation is right?
06 December 2012
% completion is applicable for valuation of closing stock. There is no problem in applying the same to revenue, but the matching principle may get disturbed... the question of cost incurred to be accounted for 40% may peep in. In practice, revenue is recognised on due basis or at actuals.
06 December 2012
The elimination of completed contract method is to avoid WIP concept. Therefore, the calculation given by you is not correct. In other words the revenue recognation should be as follows.
1000 Sq ft X 40 % X Rs.2,000 = Rs. 8,00,000.00
1000 Sq ft X 40 % X Rs.2,000 = Rs. 8,00,000.00
06 December 2012
In the above illustration-
Opening Stock NIL
Cost of Construction till Date 5,60,000/-
Total 5,60,000/-
Contract Revenue 2,40,000/-
Stock 3,92,000/-
Total 6,32,000/-
Gross Profit 72,000/-
There is no disturbance in matching principle as profit for work completed has been declared in the year itself.
Please correct me if I am wrong.
Opening Stock NIL
Cost of Construction till Date 5,60,000/-
Total 5,60,000/-
Contract Revenue 2,40,000/-
Stock 3,92,000/-
Total 6,32,000/-
Gross Profit 72,000/-
There is no disturbance in matching principle as profit for work completed has been declared in the year itself.
Please correct me if I am wrong.
06 December 2012
Dear Chakrapani Sir,
If we declare the notional income based on your calculation and if we do not sell the flat as we do not fetch a good rate and use it for our purpose what will be the treatment in books of accounts.
If we declare a notional income based on your calculation how will we pass entry in our books of account as there is no contractee at all?
If we declare the notional income based on your calculation and if we do not sell the flat as we do not fetch a good rate and use it for our purpose what will be the treatment in books of accounts.
If we declare a notional income based on your calculation how will we pass entry in our books of account as there is no contractee at all?
06 December 2012
My observation was for an entity whose business is 'works contract' more specifically for construction contractor's wherein revenue has to be recognised as per percentage of completion method. If there is no contractee ( awarder), the concept of 'works contract' fails meaning thereby the nature of business of the entity turns out to that of a 'builder' for which revenue can be recognised based on AS 9, and not AS 7, on a method which the entity is following regularly.
Courtesy:- The Chartered Accountant (vol 52 no 3) page 232.
Courtesy:- The Chartered Accountant (vol 52 no 3) page 232.
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07 December 2012
Thank you Chakrapani Sir. Can following be taken as basis for declaring revenue for builders-
Guidance note on Real Estate Transactions issued by ICAI in the month of February 2012.
They have clearly mentioned with an illustration to declare the revenue only for sale agreements executed based on percentage completion method.
Kindly correct me If I am wrong.
Further CBDT along with ICAI have come up with Tax Accounting Standards recently. Is there any impact of such standards on the revenue to be recognized in case of builders?
Guidance note on Real Estate Transactions issued by ICAI in the month of February 2012.
They have clearly mentioned with an illustration to declare the revenue only for sale agreements executed based on percentage completion method.
Kindly correct me If I am wrong.
Further CBDT along with ICAI have come up with Tax Accounting Standards recently. Is there any impact of such standards on the revenue to be recognized in case of builders?
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