Accounting Policy for Revenue Recognition

Case for Establishing Accounting Policy and Revenue Recognition

The client Company is a real estate brokerage Company. The typical business module of the Company is :

1-it provides services to the Real Estate Developers by helping them by booking/ selling their flats under construction and in turn it receives commission from the Real Estate Developers depending upon the volume of sales (no of flats) .

2-The developers release the brokerage to the client Company when at least 30-40% of the sale price of the flat is realized from the buyer and the client Company helps the developer in getting the 30-40% of the sale price so that it can receive its commission at the earliest possible.

3- To attract more customers, it also allows the buyer certain percentage of its commission (pass-back) receivable from the Developer and actual payments to the buyer are made once the commission due from the developer has actually been received.

4-Some times The client Company pays to the buyer in the same proportion in which it receives from the developer.

5-it takes long time (6-12 months) in realizing commission from the Developer because of the delay in execution of the project by developer t due to various reasons and the client company has no option but to wait till it receives commission from the developer.

6- Hence the receivables outstanding are very large and in most of the cases there are no written agreements with the developers, it is always risky to predict the actual likely collection, in some of the cases it is seen that brokerage may not be received and the money may turn to be a bad debt.

7-Real Estate Brokerage in India particularly in Delhi NCR is neither systematic nor standardized & regulated and is generally dominated by Builders/Developers and chances of bad debts may not be ruled out, although practically it is seen that outstanding are realized but it takes very long time and continuous follow up.

8-Since there is no set standard or pattern for Real estate brokerage in India at a Corporate Level, and no accounting standards in place as yet, comments and suggestions are invited from the learned Chartered Accountants Auditors and students on the following-

a-At what stage Revenue should be recognized and in what manner

b- What should be the Accounting system for the Pass back payable by the client Company to the Buyer

c-What should be the provision for Bad and Doubtful Debts

d-Provisions of Service tax and TDS do apply

Rendering of Services

7.1 Revenue from service transactions is usually recognized as the service is performed, either by the proportionate completion method or by the completed service contract method.

(i) Proportionate completion method.--Performance consists of the execution of more than one act. Revenue is recognized proportionately by reference to the performance of each act. The revenue recognized under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. For practical purposes, when services are provided by an indeterminate number of acts over a specific period of lime, revenue is recognized on a straight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance.

(ii) Completed service contract method.--Performance consists of the execution of a single act. Alternatively, services are performed in more than a single act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognized when the sole or final act takes place and the service becomes chargeable.