1.3       Query

Real estate accounting.

1.The querist has raised this query in the context of the earlier opinion of the Committee on a query raised by the querist on this subject.3

2.A city and industrial development corporation of a state, is a company incorporated under the Companies Act, 1956. It is a wholly owned public limited company of the State Government within the meaning of Section 617 of that Act.

 3.The querist has informed that sale of plots was recorded in accounts after the letters for allotment were issued and the entire consideration was received. The Agreement of Lease in favour of the Licensee was also simultaneously executed no sooner the entire consideration is received. The lands are demarcated and the possession is handed over to the allottees. The querist has furnished a copy of the form of Agreement of Lease for the perusal of the Committee. The demarcation of the plots is possible no sooner the roads are laid upto W.B.M. (Water Bound Macadam) standard. At this stage, the developments provided are in the nature of reclamation (filling), roads upto W.B.M. standard and Kuchha drains. It would, thus, be seen that the level of development in these cases is not very substantial as some more layers of W.B.M., Asphalting of roads, providing Pucca storm water drainage system, laying of water supply distribution system, providing the sewerage lines, street lighting, arboriculture etc. works are yet to be completed.

4.As per the relevant para of the earlier opinion of the Committee on the subject, the querist feels that there are two following options: -

(a) The first option is to account for the sale of plots as soon as the full consideration is received and the lease agreement is entered into between the corporation and the allottee. Under this option revenue is recognised as soon as the possession of plot is handed over to the allottee and the full consideration is received. Once this is done the corporation has nothing more to do on the plot as the same is handed over to the allottee. However, area surrounding the plot is yet to be developed which is the responsibility of the corporation. This developmental expenditure of the surrounding area spans over two to two and a half years. If no provision is made then the profit and loss account will show a distorted picture, as on the one hand the corporation has recognised the revenue receipt and on the other there are no matching costs which might be incurred in the next accounting period.

(b) The second option is to credit the amount received on sale of plots to an “Advance” account, and to recognise the same as sale in the year in which substantial expenditure has been incurred on the development of the surrounding area of the plot. However, in this option, the corporation will have to show the stock of land whose possession has been handed over to the allottees as stock lying with the third parties in the balance sheet of the corporation, although the corporation has no effective control, legal or otherwise, over the plots so sold under a Lease Agreement.

5.The querist has accordingly sought the opinion of the Committee as to which of the above two options are to be followed. If both the above options are not suitable, being violative of either any accounting principal or any guidelines, which is the best option available?

                                                                          Opinion                                         May 22, 1989

1.The Committee notes from the facts of the query and as per the Form of Lease Agreement submitted by the querist that the land is given on lease to the allottees of plots for 60 years. These facts were not made known to the Committee by the querist in his earlier query, the opinion in respect of which has now been referred to by the querist. The Committee has not gone into the question whether recognition of sale in these circumstances is proper since the querist has not raised this question. The issue raised by the querist is on the timing of the recognition of revenue. The Committee has, therefore, restricted its opinion to the latter issue, presuming that the recognition of sale is proper in the circumstances of the query.

2.The Committee notes that the relevant para of the opinion on the earlier query referred to by the querist, states as below:

“The Committee notes that it is generally accepted that revenue should be recognised when the performance is substantially completed in respect of an item of sale. If performance is not substantially complete, any receipts from customers in respect of such items, should be treated as revenue in advance. In order to determine whether performance has been substantially completed all relevant factors should be taken into consideration; for example, in case of land development work, the factors could be the proportion that costs incurred to date bear to the total estimated costs, surveys which measure work performed and completion of substantial proportion of the contract work. Thus, in case of receipts on account of sale of land/plots where the land/plots have not substantially reached the saleable condition, the recognition of revenue should be postponed in order to obtain proper matching of costs with the revenue, i.e., future developmental costs should not be provided for to achieve this end.”

            (a)The outcome of the development project can be reliably estimated;

(b) Both the costs to complete the work and the stage of completion thereof at the reporting date can be reasonably estimated;

(c) Total contract revenues to be received can be reasonably estimated; and

(d) The cost attributable to the project can be clearly identified so that actual experience can be compared with prior estimates.

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3 Published as query no. 1.2 of this volume of Compendium of Opinions.