As 9

If suppose the business of a Co. is to construct villas. But what they actually do is sell off the lans ans then get into an agreement with the customer for future construction. So will it come under "Real estate" . If yes, then AS 9 will apply ,Then there is a rebuttable presumption that the outcome of a real estate project can be estimated reliably and that revenue should be recognised under the percentage completion methodonly when the events in (a) to (d) below are completed.

(a) All critical approvals necessary for commencement of the project

(i) Environmental and other clearances.

(ii) Approval of plans, designs, etc.

(iii) Title to land or other rights to development/ construction.

(iv) Change in land use.

(b) When the stage of completion of the project reaches a reasonable level of development. A reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25 % of the Total Project cost

(d) Atleast 10 % of the total revenue as per the agreements of sale or any other legally enforceable documents are realised at the reporting date in respect of each of the contracts and it is reasonable to expect that the parties to such contracts will comply with the payment terms as defined in the contracts.

In the present case, The construction and development cost does not exceed 25% of total project cost and hence revenue can nor be recognised. So what has to be done? Whether it becomes WIP? And how to treat the revenue already received?

Dear Namitha,

If the contruction and development costs does not exceed 25% of total estimated project costs you cannot recognise revenue of the project. This is clear here.

So if you have received any payments from the Customer before acheiving this stage should not be treated as Revenue instead these payments should be treated as Adavance Payments received.

After achieving 25% of total estimated project costs these advance payments can be adjusted against the first milestone invoice released to the customer. And then at the time of month end closing calculate the % of completion and find the revenue amount to be recognised, post the entry accordingly. In case if the first milestone invoice is released before acheiving the 25% of total estimated costs you should treat all the Invoice amount as Deferred Revenue.

Second point is total actual costs incurred till the current date will be shown as WIP of project in Balance sheet.

I hope my inputs will help you.

Thanks

Anusha