1. Projects commencing on or after April 1, 2012
Guidance Note on Accounting for Real Estate Transactions (Revised 2012)
Projects commencing on or after
April 1, 2012

2. Non-Applicability of AS-7 [Expert Advisory Committee’s opinion published in The Chartered Accountant, September 2003]
The AS-7 (Revised) would not apply to construction activities undertaken by enterprises ON THEIR OWN ACCOUNT on or after
AS-9 would apply for revenue recognition in such cases
AS-2 will apply for inventory valuation for such enterprises w.e.f in such cases.
In a nutshell, AS-7 is only for contractors and not applicable to Real Estate Developers/Builders.

3. Non-Applicability of AS-7 – Income Tax
COMMISSIONER OF INCOME TAX vs. ASHALAND CORPORATION (GUJ HC)
Income—Accrual—Arising on sale of land—Arises in the year in which the title in the property was transferred not in the year in which the assessee received part consideration and earnest money.
Business of assessee is to purchase and sell land.
Transaction of sale of land becomes complete only on passing of title which takes place only when registered sale deed is executed.
Mere receipt of earnest money and advance receipt of money towards transaction would not, by itself, partake of the character of taxable income as the registered sale deed was executed only in the subsequent year

4. Guidance Note on Accounting for Real Estate Transactions (Revised 2012)
Introduction

5. Real estate activities and transactions take diverse forms
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.
The natures of these activities are such that often the date when the activity is commenced and the date when the activity is completed usually fall into different accounting periods.

6. Extracts of Balance sheet
Liabilities
Amount
Assets
Booking Advance
W.I.P.
Dinesh Shah
5,00,000
Land
2,00,000/-
Ramesh Modi
6,00,000
Construction exp capitalised
12,00,000/
Suresh Rao
9,00,000

7. This Guidance Note, thus, provides guidance in application of:
Principles of AS 9 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 recognisied when the revenue recognition process is completed; and

8. This Guidance Note, thus, provides guidance in application of:
….Cont
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.

9. For recognition of revenue in case of real estate sales, it is necessary that all the conditions specified in paragraphs 10 and 11 of Accounting Standard (AS) 9, Revenue Recognition, are satisfied.
The seller has transferred to the buyer all significant risks and rewards of ownership and the seller retains no effective control of the real estate to a degree usually associated with ownership;
The seller has effectively handed over possession of the real estate unit to the buyer forming part of the transaction;
No significant uncertainty exists regarding the amount of consideration that will be derived from the real estate sales; and
It is not unreasonable to expect ultimate collection of revenue from buyers.

10. 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. Once the seller has transferred all the significant risks and rewards to the buyer, 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. Accordingly, revenue in such cases is recognised by applying the percentage of completion method on the basis of the methodology explained in AS 7, Construction Contracts.

11. Application of Percentage Completion Method
The duration of such projects is beyond 12 months and the project commencement date and project completion date fall into different accounting periods.  
Most features of the project are common to construction contracts, viz., land development, structural engineering, architectural design, construction, etc.  
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.
The construction or development activities form a significant proportion of the project activity.

12. This method is applied when the outcome of a real estate project can be estimated reliably and when all the following conditions are satisfied:
total project revenues can be estimated reliably;  
it is probable that the economic benefits associated with the project will flow to the enterprise;
the project costs to complete the project and the stage of project completion at the reporting date can be measured reliably; and  
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.

13. 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:

14. (a) All critical approvals necessary for commencement of the project have been obtained. These include, wherever applicable:
Environmental and other clearances.
Approval of plans, designs, etc.
Title to land or other rights to development/ construction.  
Change in land use  

15. (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  

16. ( c )
Atleast 25% of the saleable project area is secured by contracts or agreements with buyers.  

17. (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.
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.

18. Disclosure An enterprise should disclose:
the amount of project revenue recognised as revenue in the reporting period;
the methods used to determine the project revenue recognised in the reporting period; and
the method used to determine the stage of completion of the project.

19. Disclosure
An enterprise should also disclose each of the following for projects in progress at the end of the reporting period: 
the aggregate amount of costs incurred and profits recognised (less recognised losses) to date;
the amount of advances received;
the amount of work in progress and the value of inventories; and
Excess of revenue recognised over actual bills raised (unbilled revenue).

20. Guidance Note on Accounting for Real Estate Transactions (Revised 2012)
Example

21. Name: Omaxe Buildwell Private Limited. Financial Year: 2012-13
Auditor: Doogar and Associates.
Significant Accountant Policy:
Revenue from real estate activity is recognized in accordance with the “Guidance Note on Accounting for Real Estate Transactions (Revised 2012)” (Guidance Note) issued by the ICAI, all projects commencing on or after the said date or projects which have already commenced, but where the revenue is recognized for the first time on or after the above date. Construction revenue on such project is recognized on percentage of completion method provided the thresholds levels as prescribed in the said Guidance Note have been met. The method of determination of stage of completion of construction work is certified by the registered Architect, subject to such percentage being 25 percent or more, and revenue computed under this method in any case does not exceed the revenue computed with reference to the ‘project cost method’.
Revenue is recognized net of indirect taxes and comprises the aggregate amounts of sale price as per the documents entered into. The total saleable area and estimate of costs are reviewed periodically by the management and any effect of changes therein is recognized in the period in which such changes are determined. However, if and when the total project cost is estimated to exceed the total revenue from the project, the loss is reconized in the same financial year.

22. Name: Wonder City Buildcon Private Limited.
Financial Year:
Auditor: Kalyaniwalla & Mistry
Emphasis on Matter :
We draw attention to Note1(f) to the financial statements, in respect of projects under long term contracts undertaken and/or financed by the company, we have relied upon the management’s estimates of the percentage of completion, cost to completion and on the projections of revenue expected from projects owing to the technical nature of such estimates, on the basis of which profits/losses have been accounted, interest income accrued and realizability of the construction work in progress and project advances determined.

23. Significant Accountant Policy:
Determination of revenues under the percentage of completion method necessarily involves making estimates, some of which are of a technical nature, concerning, where relevant, the percentage of completion, cost of production, the expected revenue from the project or activity and the foreseeable losses to completion. Estimates of project income, as well as project costs, are reviewed periodically. The effects of changes, if any, to estimates is recognized in financial statements for the period in which such changes are determined. Revenue from projects is recognized net of income attributable to the land owners. Losses, if any, are fully provided for immediately.
Interest income is accounted on an accural basis at contracted rates.

24. Name: Omaxe Buildwell Private Limited.
Financial Year:
Auditor: Doogar and Associates.
Significant Accountant Policy:
The estimates of the projected revenues, projected profits, projected costs, cost to completion and the foreseeable loss are reviewed periodically by the management and any effect of changes in estimates is recognized in the period in which such changes are determined.

25. Unbilled revenue disclosed under other assets represents revenue recognized based on percentage of completion method over and above amount due as per payment plan agreed with the customers. Amount received from customers which exceeds the cost and recognized profits to date on projects in progress, is disclosed as advance received from customers under other current liabilities. Any billed amount against which revenue is recognised but amount not collected is disclosed under trade receivable.

26. Inventories: PARTICULARS As At March 31,2013 As At March 31,2012
Building material and consumables
Project in Progress

27. Other Assets: Particulars As At March 31,2013 As At March 31,2012
Non Current
Current
Other bank balances -
Unbilled receivables
Intrest accrued on deposites

28. Guidance Note on Accounting for Real Estate Transactions (Revised 2012)
Illustration

29. 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
Total construction 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
Rs. 200 Lakhs

30. Amount realized till the end of the reporting period
Rs.50 Lakhs
Percentage of completion of work
60% of total project cost including land cost ( 360/600*100) or 20% of total construction cost (60/300*100)
REVENUE RECOGNITION : cannot be made Since at least 25% of total construction/development cost not incurred, though other three criteria are complied with.
If the work completed till end of reporting period is (This includes land cost of Rs 300 Lakhs and construction cost of Rs 90 Lakhs)
Rs. 390 Lakhs
Percentage of completion of work would be
65% of total project cost including land cost ( 390/600*100) or 30% of construction cost ( 90/300*100)

31. The enterprise would be able to recognize revenues at the end of the accounting period. The revenue recognition and profits would be as under:
Revenue recognized
(65 % of Rs 200 Lakhs as per Agreement of Sale)
Rs. 130 Lakhs
Proportionate cost (5000 sq.ft./20,000 sq.ft.) X
390
Rs Lakhs
Income from the project
Rs Lakhs
Work in progress to be carried forward ( Rs 390 lacs less Rs lacs)
Rs Lakhs

32. The views expressed in this presentation are based on the orators personal interpretation and diligence. The views are illustrative and suggestive in nature, not purported to be taken as conclusive.

33. RSA Business and Start-up.
Pre-Investment
Entry Strategies
Assessment of applicable taxes
Project Financing
Business Plans
Costing and Budgeting
Business Set-up and Start-up Services
Company Incorporation
Registrations and Approvals
Software and ERP Consulting
Payroll
Bookkeeping
Annual Compliances
Advance Tax
Withholding Taxes
Indirect Taxes
Transfer Pricing
Corporate Tax Returns
ROC Filings
XBRL Compliances