1.5  Query:           

Applicability of Accounting Standard (AS) 7 to an unsold site.

“Profit is recognised on percentage of completion method which is further reduced to 80% for keeping an appropriate allowance for future unforeseeable factors in cost and sale prices till the project is fully completed.”

2.  The querist has stated that the above accounting policy has been framed keeping in view Accounting Standard (AS) 7 on ‘Accounting for Construction Contracts’ which, inter alia, according to the querist, permits booking of profit on percentage of completion method. The above method of booking profit was chosen, since the project is spread over many financial years and booking of profit in one year would have given very erratic movement of the profit in that year. The calculation of percentage of completion is made by dividing work in progress by estimated cost of the project as on 31.3.1995.

3. One of the projects which the company undertook had two different sites. While one site was sold and part payment received, the other site was yet to be allotted/sold to any party. However, for the purpose of booking estimated profit, it was felt that the profit on unsold site should also be booked. Accordingly, the sale price for unsold site was also worked out on the basis of the price at which another site was sold and the total profit was calculated with reference to the total sale price of both the sites and the total estimated expenditure of all the sites which was further limited by applying percentage of completion worked out as stated above and the profit so calculated was further reduced to 80 percent as per the accounting policy and the result was included in the profit and loss account as notional profit.

4.  Auditors are of the view that in the absence of agreement for sale, application of percentage of completion method in the case in against the accepted accounting principles and the Accounting Standard (AS) 7 is not relevant where an agreement for sale does not exist. However, the management is of the view that Accounting Standard 7 is applicable irrespective of the fact that one site is yet to be sold since outcome of the project/sale price has been reasonably estimated and is considered to be on low side keeping in view that an offer letter from a builder has been received who has offered higher prices than what was considered above for working out notional profit and the higher reserve prices fixed by company for unsold property.

5. The opinion of the Expert Advisory Committee is sought on whether notional profit can be booked using percentage completion method under Accounting Standard (AS) 7 on unsold site.

                                                                               Opinion                                   April 19, 1996

1. The Committee notes para 1 of Accounting Standard (AS) 7 on ‘Accounting for Construction Contacts’, issued by the Institute of Chartered Accountants of India, which states as below:

“The statement deals with accounting for construction contracts in the financial statements of enterprises undertaking such contracts (hereafter referred to as ‘contractors’). This statement also applies to enterprises undertaking construction activities of the type dealt within this statement not as contractors but on their own account as a venture of a commercial nature where the enterprise has entered into agreement for sale.” (emphasis added)

2. Based on the above, the Committee is of the opinion in respect of the issue raised at para 5 of the query that no profit can be booked using percentage of completion method in view of the fact that there is no agreement of sale. In any case, in accounting, no profit can be booked on a notional basis.

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