Seminar 07092013 GopalJi

NORTHERN INDIA REGIONAL COUNCIL
OF
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
SATURDAY, SEPTEMBER 7, 2013
ACCOUNTING FOR
REAL ESTATE TRANSACTIONS

GOPAL JI AGRAWAL
B.COM LLB DISA IFRS (ICAI)
For any query, discussion or suggestion, please mail at
gjafca@gmail.com +91 9811264160

MATTERS FOR DISCUSSION

BY- CA GOPAL JI
AGRAWAL
GUIDANCE NOTE ON ACCOUNTIG FOR
REAL ESTATE TRANSACTIONS
1. Applicability of OTHER TECHNICAL STANDARDS
2. Need for the revision of 2006 Note
3. Comparative study of OLD Vs. New Guidance Note
4. Comparative study of Guidance Note Vs. AS-7 & AS 9
5. Brain mapping with the New Guidance Note
Guidance Note on Accounting for
Real Estate Transactions
BY- CA GOPAL JI
AGRAWAL
Whether any AS or GN was applicable for real
estate transactions before the issuance of this
Guidance Note?

Whether AS 7 or AS 9 or this GN governs the
accounting of real estate transactions?

Whether any other AS/GN is also considered for
such RET?

What is the impact of this GN on the industry?
TECHNICAL STANDARDS
BY- CA GOPAL JI
AGRAWAL
MANDATORY

1. Framework for the preparation and
presentation of FSs
2. Disclosure of Accounting Policies[AS-1/IAS1]
3. Changes in Accounting Policies [AS-5/IAS 8]
4. Construction Contracts [AS -7/IAS11]
5. Revenue Recognition [AS-9/IAS18]
6. Borrowing Costs [AS -1AS 23 ]
7. Provisions, CL & CA [AS-29/IAS37]
8. Inventories (though NA) [AS-2/IAS 2]

TECHNICAL STANDARDS
BY- CA GOPAL JI
AGRAWAL
Recommendatory

1. Guidance note on Accounting for
Real Estate Transactions [IFRIC 15]
2. Guidance note on turnover in case of
contractors
TECHNICAL STANDARDS
BY- CA GOPAL JI
AGRAWAL
PRIME ISSUES

1. Is the agreement within the
scope of AS 7 or AS 9?
&
2. When should revenue from
the construction of real
estate be recognized?
TECHNICAL STANDARDS
BY- CA GOPAL JI
AGRAWAL
WHY PRIME ISSUES ARISE?

Date of start of contract activity and completion
usually fall in different (two or more)
accounting periods?

TECHNICAL STANDARDS
BY- CA GOPAL JI
AGRAWAL
Contractor Vs. Contractee
Or
Seller Vs. Buyer

AS 7 Vs. AS 9

TECHNICAL STANDARDS
BY- CA GOPAL JI
AGRAWAL
GN states that economic substance of the
transaction will determine whether it
would fall in AS 7 or AS 9.
GN further states that since in real estate
transactions, the major terms and
conditions are similar to principles in
AS 7, hence usually, AS 7 should be
applied.
TECHNICAL STANDARDS
BY- CA GOPAL JI
AGRAWAL
Arguments in favor of AS 7

Ownership risks and rewards are
transferred to buyers as they have
identified property and have all legal
rights of buyer i.e. transfer etc.
Price is determined usually with cost
escalation clauses.
Certainty in collection
TECHNICAL STANDARDS
BY- CA GOPAL JI
AGRAWAL
Arguments against AS 7
The buyer has no physical right even of
inspection to the property
The identified property not in existence
The buyer has no right of alteration
Contractor remain the same while buyers can
come and go
The buyer has no tangible property
Physical damages during construction (seller)
The seller has right to cancel the contract if
default is made in payment
Take precaution in buy back and guaranteed %
TECHNICAL STANDARDS
BY- CA GOPAL JI
AGRAWAL
Per IFRIC 15
For a construction contract
When the buyer is able to specify
the major structural elements of
the design of the real estate before
construction and/or specify major
structural changes once
construction is in progress.IAS11
TECHNICAL STANDARDS
BY- CA GOPAL JI
AGRAWAL
Per IFRIC 15
For an agreement of sale
When the buyer has only limited
ability to influence the design or
to select a design from a range of
options specified by entity or to
specify minor variations to the
basic design. IAS 18
TECHNICAL STANDARDS
BY- CA GOPAL JI
AGRAWAL
AS 7 Construction contracts [2002]
1. Applicable for construction contracts of any
assets
2. Real estate transactions not dealt with
separately
3. Only PCM is recognized. (CCM permitted
earlier)
4. Applicable for contractors only (earlier version
covered construction in own a/c)

Before 2006, EAC had opined that AS-9 should be
followed in real estate transaction.
NEED FOR REVISION OF
GUIDANCE NOTE [2006]
BY- CA GOPAL JI
AGRAWAL
What was the need for revision of the
earlier Guidance Note [2006]

What aspects have been brought in by
the new GN?

When this GN would be applicable?

NEED FOR REVISION OF
BY- CA GOPAL JI
AGRAWAL
No guidance in respect of:

Whether land costs should be included in
computing in stage of completion in PCM
Whether borrowing costs should be
included in computing stage of
completion in PCM
No threshold limit for stage of completion
Not dealt with the TDRs

BROADER GUIDELINES IN
BY- CA GOPAL JI
AGRAWAL
1. Scope specified in detail land, building,
TDRs
2. Definitions of project and project costs
3. AS-9 permitted if economic substance is
similar to sale of goods while old GN states if
conditions of AS 9 satisfy, apply AS 7.
4. Additional conditions for threshold limits,
minimum sale and collection specified. -Rules
5. Items to be considered for threshold costs
6. Additional detailed disclosures required.

Guidance note on Accounting for
Real Estate Transactions [2012]

BY- CA GOPAL JI
AGRAWAL
Real Estate Transactions Applicability

Land, buildings and rights in relation thereto.

Real estate developers, builders, contractors,
sellers i.e. only contractors

Not Applicable for transactions covered in AS-7

Any asset like plant & machinery, ships, roads,
dams, bridge, tunnel, software etc.


BY- CA GOPAL JI
AGRAWAL
Not Applicable for real estate transactions
covered in

AS 10 Accounting for fixed assets
AS 12 Accounting for government grants
AS 19 Leases
AS 26 Intangible assets


BY- CA GOPAL JI
AGRAWAL
Applicable for
1. All projects in real estate
commenced on or after April 1, 2012
&
2. All projects commenced before
April 1, 2012 where revenue is not
recognized till 31
st
March 2012.

EARLIER APPLICATION PERMITTED


BY- CA GOPAL JI
AGRAWAL
Project (Determination is significant)

Project is smallest group of
units/plots/saleable space linked
with common set of amenities
available and functional to make it
ready for intended effective use.
A SINGLE TOWER/TOWNSHIP CAN BE
PROJECT


BY- CA GOPAL JI
AGRAWAL
Project Costs Direct/attributable/allocable
1. Cost of land and development rights
2. Borrowing costs (AS-16)
3. Construction and development costs
Land conversion, sanction & approvals
Material & labour
Depreciation/hire charges, freight of P&M
Design and technical assistance
Costs of rectification, guarantee, warranty
Claims from third parties
Insurance


BY- CA GOPAL JI
AGRAWAL
Project Costs NOT INCLUDIBLE

1. General administration costs
2. Selling costs
3. Research and development costs
4. Depreciation of idle plant & machinery
5. Cost of unconsumed material delivered at site
6. Payment made to sub-contractor in advance


BY- CA GOPAL JI
AGRAWAL
RECOGNITION OF REVENUE
AS 9- Paragraphs 10, 11 and 12 must be satisfied:

1. The seller has transferred to the buyer all
significant risks and rewards of ownership
and seller retains no effective control to a
degree usually associated with ownership.
2. No significant uncertainty exists regarding
the amount of consideration from real estate
3. It is not unreasonable to expect ultimate
collection


BY- CA GOPAL JI
AGRAWAL
Application of PCM- economic substance is
similar to AS-7 Construction contracts
associated with following conditions:
Project > 12 months, falling in 2 periods
Most construction contract features exist like
land development, structural engineering,
design
Despite several buyers but delivery is
interdependent and interrelated having
common amenities
Construction and development activity form
significant proportion of project activity


BY- CA GOPAL JI
AGRAWAL
Application of PCM- when the outcome of Project
can be estimated reliably with ALL below:
1. Total project revenue can be estimated
reliably
2. Probable that economic benefits will in flow
3. Estimated total project costs and stage of
project completion at reporting date can be
measured reliably.
4. Projects costs attributable to project can be
clearly identified and measured reliably so
that actual costs incurred can be compared
with prior estimates.


BY- CA GOPAL JI
AGRAWAL
FURTHER CONDITIONS:
1. All necessary critical approvals obtained
Environment and other clearance
Approval of plans and designs
Title to land and other rights to development
Change in land use
2. Reasonable level of development
Expenditure on construction and
development (excluding cost of land and BC)
is not less than 25% of the total estimated
construction and development costs.


BY- CA GOPAL JI
AGRAWAL
FURTHER CONDITIONS:
3. At least 25% of the saleable project
area is secured by contracts or
agreements with the buyers.
4. At least 10% of the total revenue as
per agreements of sale are realized
at the reporting date in respect of
each of the contract


BY- CA GOPAL JI
AGRAWAL
Determination of stage of completion:

Project costs incurred but other methods are not
prohibited like survey of work done,
technical estimation

BUT
Revenue can not exceed as computed by project
costs incurred method

It reflects the economic activity/performance
during the period


BY- CA GOPAL JI
AGRAWAL
ESTIMATED LOSS OF THE PROJECT

When it is probable that total project costs will
exceed total project revenue, the expected loss is
charged as an expense irrespective of
Commencement of project work
Stage of completion of the project activity

Change in estimate of project costs is change in
estimate only.
Other significant items ACs , furniture should be
componentized and a/for separately.


BY- CA GOPAL JI
AGRAWAL
Disclosures:
1. Project revenue recognized
2. Method used to determine project revenue
3. Method used to determine state of completion

Disclosures for project in progress:
1. Total costs incurred and profit/loss recognized
2. Amount of advance received
3. Amount of WIP and value of inventories
4. Excess of revenue over actual bills raised
(unbilled)


BY- CA GOPAL JI
AGRAWAL
Whether the Revised Guidance Note necessitates
the change in Accounting Policy?

What additional disclosures are required?

Whether the Industries in the real estate segments
are following AS 7 or AS 9?

Whether the GN would increase or decrease
accounting income?
REVENUE RECOGNITION
HDIL [2012 & 2013]
BY- CA GOPAL JI
AGRAWAL
The Company follows
completed project method of
accounting (Project
Completion Method of
Accounting). Allocable
expenses incurred during the
year are debited to work-in-
progress account.
REVENUE RECOGNITION
L & T Ltd. [2012]
BY- CA GOPAL JI
AGRAWAL
A. Cost plus contract: Cost + proportionate margin

B. Fixed price contracts: 1. To the extent of cost
incurred till outcome of the contract cannot be
ascertained reliably.
2. Others- PCM based on costs incurred.

Remarks:
No percentage specified.
Silent about the land/BC costs.
REVENUE RECOGNITION
L & T Ltd. [2013]
BY- CA GOPAL JI
AGRAWAL
Contracts classified

A. Property Development activity and further classified in

AS -9
AS -7

Excluded land/BC costs in PCM

B. Revenue from construction activities
Cost plus and fixed price (as per last year) w/o %

PBT is higher by 2.39 crore due to change in policy.
REVENUE RECOGNITION
OMAXE [2012]
BY- CA GOPAL JI
AGRAWAL
Activities dividend into

A. Real Estate: PCM with 30%
including cost of land

B. Contract : PCM but no disclosure
as to % as certified by client not with
regard to costs incurred.
REVENUE RECOGNITION
OMAXE [2013]
BY- CA GOPAL JI
AGRAWAL

A. Real Estate: PCM with 30%
including cost of land & further as
per GN 2012

B. Contract : PCM but no disclosure
as to % as certified by client not with
regard to costs incurred.
REVENUE RECOGNITION
PDL [2012]
BY- CA GOPAL JI
AGRAWAL

A.Real Estate: PCM with 30%
including cost of land

B. Contract : PCM but no
disclosure as to %
An humble appeal
I will acknowledge your critical comments
and suggestions for making our
Coming Deliberations
more effective and copious

Gopal Ji Agrawal
B.COM LLB DISA IFRS (ICAI)
For any query, discussion or suggestion, please mail at
gjafca@gmail.com

Seminar 07092013 GopalJi

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