Guidance Note on Accounting for
Real Estate Transactions
(for entities to whom Ind AS is applicable)
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
Guidance Note on Accounting for
Real Estate Transactions
(for entities to whom Ind AS is applicable)
(The following is the text of the Guidance Note on Accounting for Real Estate
Transactions, issued by the Council of the Institute of Chartered Accountants
of India for entities to whom Ind AS is applicable.)
1. Objective and Scope
Objective
1.1 The objective of this Guidance Note is to recommend the accounting
treatment by entities dealing in `Real Estate' as sellers or developers. The
term `real estate' refers to land as well as buildings and rights in relation
thereto. Entities who undertake such activity are generally referred to by
different terms such as `real estate developers', `builders' or `property
developers'.
Scope
1.2 This Guidance Note covers all forms of transactions in real estate. An
illustrative list of transactions which are covered by this Guidance Note is as
under:
(a) Sale of plots of land (including lease of land on finance lease
under Ind AS 17, Leases) without any development.
(b) Sale of plots of land (including lease of land on finance lease
under Ind AS 17, Leases) with development including
development in the form of common facilities like laying of
roads, drainage lines and water pipelines, electrical lines,
sewage tanks, water storage tanks, sports facilities, gymnasium,
club house, landscaping etc.
(c) Development and sale of residential and commercial units, row
houses, independent houses, with or without an undivided share
in land.
(d) Acquisition, utilisation and transfer of development rights.
(e) Redevelopment of existing buildings and structures.
(f) Joint development agreements for any of the above activities.
1.3 The Guidance Note primarily provides guidance on application of
percentage of completion method where it is appropriate to apply this method
as explained in subsequent paragraphs as such transactions and activities of
real estate have the same economic substance as construction contracts.
For this purpose, the Guidance Note draws upon the principles enunciated in
Ind AS 11, Construction Contracts. In respect of transactions of real estate
which are in substance similar to delivery of goods principles enunciated in
Ind AS 18, Revenue, are applied.
1.4 Real estate transactions of the nature covered by Ind AS 16, Property,
Plant and Equipment, Ind AS 20, Accounting for Government Grants and
Disclosure of Government Assistance, Ind AS 38, Intangible Assets and Ind
AS 40, Investment Property are outside the scope of this Guidance Note.
1.5 This Guidance Note should be applied to all projects in real estate by
entities to whom Ind AS are applicable.
2. Definitions
2.1 Project Project is the smallest group of units/plots/saleable spaces
which are linked with a common set of amenities in such a manner that
unless the common amenities are made available and functional, these units/
plots/ saleable spaces cannot be put to their intended effective use.
A larger venture can be split into smaller projects if the basic conditions as
set out above are fulfilled. For example, a project may comprise a cluster of
towers or each tower can also be designated as a project. Similarly, a
complete township can be a project or it can be broken down into smaller
projects.
2.2 Project Costs Project costs in relation to a project ordinarily
comprise:
(a) Cost of land and cost of development rights - All costs related to
the acquisition of land, development rights in the land or
property including cost of land, cost of development rights,
rehabilitation costs, registration charges, stamp duty, brokerage
costs and incidental expenses.
(b) Borrowing Costs In accordance with Ind AS 23, Borrowing
Costs, which are incurred directly in relation to a project or
which are apportioned to a project.
(c) Construction and development costs These would include
costs that relate directly to the specific project and costs that
may be attributable to project activity in general and can be
allocated to the project.
2.3 Construction costs and development costs that relate directly to a
specific project include:
(a) land conversion costs, betterment charges, municipal sanction
fee and other charges for obtaining building permissions;
(b) site labour costs, including site supervision;
(c) costs of materials used in construction or development of
property;
(d) depreciation of plant and equipment used for the project;
(e) costs of moving plant, equipment and materials to and from the
project site;
(f) costs of hiring plant and equipment;
(g) costs of design and technical assistance that is directly related
to the project;
(h) estimated costs of rectification and guarantee work, including
expected warranty costs; and
(i) claims from third parties.
2.4 The following costs should not be considered part of construction
costs and development costs if they are material:
(a) General administration costs;
(b) selling costs;
(c) research and development costs;
(d) depreciation of idle plant and equipment;
(e) cost of unconsumed or uninstalled material delivered at site;
and
(f) payments made to sub-contractors in advance of work
performed.
2.5 Costs that may be attributable to project activity in general and can be
allocated to specific projects include:
(a) insurance;
(b) costs of design and technical assistance that is not directly
related to a specific project;
(c) construction or development overheads; and
(d) borrowing costs.
Such costs are allocated using methods that are systematic and rational and
are applied consistently to all costs having similar characteristics. The
allocation is based on the normal level of project activity. Construction
overheads include costs such as the preparation and processing of
construction personnel payroll.
2.6 Project revenues Project revenues include revenue on sale of plots,
undivided share in land, sale of finished and semi-finished structures,
consideration for construction, consideration for amenities and interiors,
consideration for parking spaces and sale of development rights.
Under Ind AS 18, Revenue and Ind AS 11, Construction Contracts, project
revenues are measured at fair value of the consideration received or
receivable. The measurement of project revenues is affected by a variety of
uncertainties that depend on the outcome of future events. The estimates
often need revision as events occur and uncertainties are resolved.
Therefore, the amount of project revenue may increase or decrease from one
reporting period to the next.
3. Accounting for Real Estate Transactions
3.1 Real estate activities and transactions take diverse forms. While some
are for sale of land (developed or undeveloped), others are for construction,
development or sale of units that are not complete at the time of entering into
agreements for construction, development or sale.
3.2 The typical features of most construction/development of commercial
and residential units have all features of a construction contract land
development, structural engineering, architectural design and construction
are all present. The nature of these activities is such that often the date when
the activity is commenced and the date when the activity is completed
usually fall into different accounting periods. It is not unusual for such
activities to spread over two or more accounting periods.
3.3 For recognition of revenue in case of real estate sales, it is necessary
that all the conditions specified in Ind AS 18, Revenue, are satisfied. As
stated above, real estate sales take place in a variety of ways and may be
subject to different terms and conditions as specified in the agreement for
sale. The point of time at which all significant risks and rewards of ownership
can be considered as transferred, is required to be determined on the basis
of the terms and conditions of the agreement for sale. In case of real estate
sales, the seller usually enters into an agreement for sale with the buyer at
initial stages of construction. This agreement for sale is also considered to
have the effect of transferring all significant risks and rewards of ownership
to the buyer provided the agreement is legally enforceable and subject to the
satisfaction of conditions which signify transferring of significant risks and
rewards even though the legal title is not transferred or the possession of the
real estate is not given to the buyer. Accordingly, any acts on the real estate
performed by the seller are, in substance, performed on behalf of the buyer
in the manner similar to a contractor. Revenue in such cases is recognised
by applying the percentage of completion method on the basis of the
methodology explained in Ind AS 11, Construction Contracts. Further, where
individual contracts are part of a single project, although risks and rewards
may have been transferred on signing of a legally enforceable individual
contract but significant performance in respect of remaining components of
the project is pending, revenue in respect of such an individual contract
should not be recognised until the performance on the remaining
components is considered to be completed on the basis of the aforesaid
principles. This Guidance Note, thus, provides guidance in the application of:
Principles of Ind AS 18 in respect of sale of goods for
recognising revenue, costs and profits from transactions of real
estate which are in substance similar to delivery of goods where
the revenues, costs and profits are recognised when the
revenue recognition process is completed; and
Percentage completion method for recognising revenue, costs
and profits from transactions and activities of real estate which
have the same economic substance as construction contracts.
3.4 The application of the methods described in paragraph 3.3 above
requires a careful analysis of the elements of the transaction, agreement,
understanding and conduct of the parties to the transaction to determine the
economic substance of the transaction. The economic substance of the
transaction is not influenced or affected by the structure and/or legal form of
the transaction or agreement.
4. Application of Principles of Ind AS 18 in
Respect of Sale of Goods to a Real Estate
Project
4.1 The application of principles of Ind AS 18 in respect of sale of goods
requires recognition of revenues on completion of the transaction/activity
when the revenue recognition process in respect of a real estate project is
completed as explained in paragraph 4.2 below.
4.2 The completion of the revenue recognition process is usually identified
when the following conditions are satisfied:
(a) the entity has transferred to the buyer the significant risks and
rewards of ownership of the real estate;
(b) the entity retains neither continuing managerial involvement to
the degree usually associated with ownership nor effective
control over the real estate sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the
transaction will flow to the entity; and
(e) the costs incurred or to be incurred in respect of the transaction
can be measured reliably.
4.3 Where transfer of legal title is a condition precedent to the buyer
taking on the significant risks and rewards of ownership and accepting
significant completion of the seller's obligation, revenue should not be
recognised till such time legal title is validly transferred to the buyer.
5. Application of Percentage Completion Method
5.1 The percentage completion method should be applied in the
accounting of all real estate transactions/activities in the situations described
in paragraph 3.3 above, i.e., where the economic substance is similar to
construction contracts. Some further indicators of such transactions/activities
are:
(a) The duration of such projects is beyond 12 months and the
project commencement date and project completion date fall
into different accounting periods.
(b) Most features of the project are common to construction
contracts, viz., land development, structural engineering,
architectural design, construction, etc.
(c) While individual units of the project are contracted to be
delivered to different buyers these are interdependent upon or
interrelated to completion of a number of common activities
and/or provision of common amenities.
(d) The construction or development activities form a significant
proportion of the project activity.
5.2 This method is applied when the outcome of a real estate project can
be estimated reliably and when all the following conditions are satisfied:
(a) total project revenues can be estimated reliably;
(b) it is probable that the economic benefits associated with the
project will flow to the entity;
(c) the project costs to complete the project and the stage of project
completion at the reporting date can be measured reliably; and
(d) the project costs attributable to the project can be clearly
identified and measured reliably so that actual project costs
incurred can be compared with prior estimates.
When the outcome of a project can be estimated reliably, project revenues
and project costs associated with the project should be recognised as
revenue and expenses respectively applying the percentage of completion
method in the manner detailed in paragraphs 5.3 to 5.8 below.
5.3 Further to the conditions in paragraph 5.2 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 method only when the events in (a) to (d) below are completed.
(a) All critical approvals necessary for commencement of the
project have been obtained. These include, wherever
applicable:
(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
construction and development costs as defined in paragraph 2.2
(c) read with paragraphs 2.3 to 2.5.
(c) Atleast 25% of the saleable project area is secured by contracts
or agreements with buyers.
(d) Atleast 10 % of the contract consideration 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. To illustrate - If there are 10 Agreements of sale and
10 % of gross amount is realised in case of 8 agreements,
revenue can be recognised with respect to these 8 agreements
only.
5.4 When the outcome of a real estate project can be estimated reliably
and the conditions stipulated in paragraphs 5.2 and 5.3 are satisfied, project
revenue and project costs associated with the real estate project should be
recognised as revenue and expenses by reference to the stage of completion
of the project activity at the reporting date. For computation of revenue the
stage of completion is arrived at with reference to the entire project costs
incurred including land costs, borrowing costs and construction and
development costs as defined in paragraph 2.2. Whilst the method of
determination of stage of completion with reference to project costs incurred
is the preferred method, this Guidance Note does not prohibit other methods
of determination of stage of completion, e.g., surveys of work done, technical
estimation, etc. However, computation of revenue with reference to other
methods of determination of stage of completion should not, in any case,
exceed the revenue computed with reference to the `project costs incurred'
method. Illustration appended to this Guidance Note clarifies the method of
computation of revenue.
5.5 The project costs which are recognised in the statement of profit and
loss by reference to the stage of completion of the project activity are
matched with the revenues recognised resulting in the reporting of revenue,
expenses and profit which can be attributed to the proportion of work
completed. Costs incurred that relate to future activity on the project and
payments made to sub-contractors in advance of work performed under the
sub-contract are excluded and matched with revenues when the activity or
work is performed. This method provides useful information to the extent of
contract activity and performance during a period.
5.6 The recognition of project revenue by reference to the stage of
completion of the project activity should not at any point exceed the
estimated total revenues from `eligible contracts'/other legally enforceable
agreements for sale. `Eligible contracts' means contracts/ agreements
specified in paragraph 5.3 where at least 10% of the contract consideration
has been realised and there are no outstanding defaults of the payment
terms in such contracts.
5.7 When it is probable that total project costs will exceed total eligible
project revenues, the expected loss should be recognised as an expense
immediately. The amount of such a loss is determined irrespective of:
(a) commencement of project work; or
(b) the stage of completion of project activity.
5.8 The percentage of completion method is applied on a cumulative basis
in each reporting period to the current estimates of project revenues and
project costs. Therefore, the effect of a change in the estimate of project
costs, or the effect of a change in the estimate of the outcome of a project, is
accounted for as a change in accounting estimate. The changed estimates
are used in determination of the amount of revenue and expenses
recognised in the statement of profit and loss in the period in which the
change is made and in subsequent periods.
5.9 The changes to estimates referred to in paragraph 5.8 above also
include changes arising out of cancellation of contracts and cases where the
property or part thereof is subsequently earmarked for own use or for rental
purposes. In such cases any revenues attributable to such contracts
previously recognised should be reversed and the costs in relation thereto
shall be carried forward and accounted in accordance with Ind AS 16,
Property, Plant and Equipment, or Ind AS 40, Investment Property, as the
case may be.
6. Accounting for Sale of Land or Plots
A. Sale of plots of land without any development
Revenue from sale of land or plots should be recognised when all the
conditions in paragraph 4.2 above are met.
B. Sale of developed plots
Where the development activity is significant and if the projects meet the
criteria specified in paragraphs 3.3 and 5.1 above, the percentage
completion method is used to account for such sales.
7. Transferable Development Rights
7.1 Transferable Development Rights (TDRs) are generally acquired in
different ways as mentioned hereunder:
(a) Direct purchase.
(b) Development and construction of built-up area.
(c) Giving up of rights over existing structures or open land.
7.2 When development rights are acquired by way of direct purchase or on
development or construction of built- up area, cost of acquisition would be
the cost of purchases or amount spent on development or construction of
built-up area, respectively. Where development rights are acquired by way of
giving up of rights over existing structures or open land, the development
rights should be measured in accordance with the principles of exchange of
assets enunciated in paragraphs 45 to 47 of Ind AS 38, Intangible Assets.
7.3 When development rights are utilised in a real estate project by an
entity, the cost thereof as arrived at in accordance with the principles stated
in paragraph 7.2 above should be added to the project costs.
7.4 When development rights are sold or transferred, revenue should be
recognised when the following conditions are fulfilled:
(a) the entity has transferred to the buyer the significant risks and
rewards of ownership of development rights;
(b) the entity retains neither continuing managerial involvement to
the degree usually associated with ownership nor effective
control over the development rights sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the
transaction will flow to the entity; and
(e) the costs incurred or to be incurred in respect of the transaction
can be measured reliably.
8. Transactions with Multiple Elements
8.1 An entity may contract with a buyer to deliver goods or services in
addition to the construction/development of real estate [e.g. property
management services, sale of decorative fittings (excluding fittings which are
an integral part of the unit to be delivered), rental in lieu of unoccupied
premises, etc.]. In such cases, the contract consideration should be split into
separately identifiable components including one for the construction and
delivery of real estate units.
8.2 The consideration received or receivable for the contract should be
allocated to each component on the basis of the fair value of each
component.
8.3 The accounting of each of the components should be in accordance
with paragraph 3.3 above.
9. Disclosure
9.1 An entity should disclose:
(a) the amount of project revenue recognised as revenue in the
reporting period;
(b) the methods used to determine the project revenue recognised
in the reporting period; and
(c) the method used to determine the stage of completion of the
project.
9.2 An entity should also disclose each of the following for projects in
progress at the end of the reporting period:
(a) the aggregate amount of costs incurred and profits recognised
(less recognised losses) to date;
(b) the amount of advances received;
(c) the amount of work in progress and the value of inventories; and
(d) Excess of revenue recognised over actual bills raised (unbilled
revenue).
Illustration on application of percentage completion method
Total saleable area 20,000 Sq. ft.
Estimated Project Costs
(This comprises land cost of Rs. 300 Lakhs
and construction costs of Rs. 300 Lakhs) Rs. 600 lakhs
Cost incurred till end of reporting period
(This includes land cost of Rs. 300 lakhs and
construction cost of Rs. 60 Lakhs) Rs. 360 Lakhs
Total Area Sold till the date of reporting period 5,000 Sq. ft.
Total Sale Consideration as per Agreements
of Sale executed (Assumed to be fair value
of consideration receivable) Rs. 200 Lakhs
Amount realised till the end of the reporting Rs.50 Lakhs
period
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 entity 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.
Continuing the illustration
If the work completed till end of reporting
period is Rs. 390 Lakhs
(This includes land cost of Rs. 300 Lakhs and
construction cost of Rs. 90 lakhs)
Percentage of completion of work would be 65% of total project cost
including land cost or 30%
of construction cost
The entity would be able to recognise revenues at the end of the accounting
period. The revenue recognition and profits would be as under:
Revenue recognised Rs. 130 Lakhs
(65 % of Rs. 200 lakhs being the
fair value of consideration receivable)
Proportionate cost (5000 sft./20,000 sft.) X 390 Rs. 97.50 Lakhs
Income from the project Rs. 32.50 Lakhs
Work in progress to be carried forward Rs. 292.50 Lakhs
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