HOUSING SOCIETY REVENUE RECOCGNITION

[mmudassir]

there is a housing society which is profit oriented.
purchased land from goverment and ownership tansfered to society for infinite year.
society has 500 members and among members this land has to be divided.
society transfered the said land for 99 year lease.Society will retain ownership.

SCNEARIO 1

balance sheet scenario

asset side

1 cost of land given by society
2 development expenditure paid by society
3 outer development paid by society

all the above three head are shown in land account.

liability side

1 cost of land recovered from members
2 development expenditure recovered from members
3 outer development recovered from members

all the above three head are shown in liabiliy as advance from members.

is this disclosure is correct or not if society has not given possession yet.

what is The treatment of revenue as per IAS-18

SCNEARIO 2

in next year if society give the possession for 99 years lease than what is the accounting treatment of land and advance from members showing in the accounts.

what is The treatment of revenue as per IAS-18

further el me that which IAS is to be apply here under these conditions.

reply me in hurry
thanks to all replicants

[kamranACA]

Dear,

I think we have already discussed both scenarios. There is no difference in my apprehension so far.

SCENARIO 1

As per IFRSs the cost means the historical cost. Therefore the cost of land will definitely include

1 cost of land given by society
2 development expenditure paid by society
3 outer development paid by society

At the moment I dont have IFRSs with me, but I am sure you can get the detail about possible cost components somewhere from paragraph 7 to paragraph 18 of IAS 16. The above cost components are, in my view, the part of historical cost of the land and should be recognised / recorded / capitalized as cost of land in the books of account. You must know that all the development charges on land are to be capitalized in LAND's account. These cannot be capitalized as Buildings or Civil Works.

Further, the recovery of cost of land from members, while alloting them the plots, is a matter of arrangement. Being a society, most probably, no profit margin would be included in the actual cost of land finally developed for handing over to the members.

From your query it is apparent that the cost being charged to members is the actual cost that has been or is being incurred by the society. Still, it is a matter of arrangement and should have been seen in the context of relevant agreements/covenents.

As per your query, liability side includes the following

1 cost of land recovered from members
2 development expenditure recovered from members
3 outer development recovered from members

It should be analysed by you in the light of relevant agreement. Still, it has nothing to do with the actual cost incurred by society as you said the society is a profit oriented society. What is required to be checked is,

- has the society added any profit/ margin in the actual cost of land (including development expenses) for allotting to members. Does the amount received from member include any such margin;

- Whether the society is legally a profit oriented society; and

- does the amount received from a members, is in accordance with the agreement or covenant or resolution etc.

In my view, this treatment is correct showing land on asset side and advances received on liability side. This is exactly what I have replied earlier.

I dont have IFRSs at the moment, but recognizing the revenue/income has very logical critera as per IAS 18 and framework to IFRSs. It is somewhat like the following (although it is not the exact wording)

1. Gross economic benefits are flowing towards the entity
2. These could be recognized reliably
3. The related costs could be estimated reliably
4. All related rights and obligations are transferred to buyer
5. Right to receive the consideration is established

As per above criterias, income/revenue could be recognised when plots are legally allotted to the members.

As per Sales of Goods Act, 1930 the sale is effectd when underlying title of ownership is transferred and not when the actual possession is transferred. Therefore, until the titles are transferred/allotted to the members the amount received by the society will appear as LIABILITY in the balance sheet. It has nothing to do with transfer of possession.

.........{there was only one law in Pakistan "Central Excise and Salt Act 1944" which stated that sale is effected when possession is transferred whether or not the title is transferred. This law had its own objectives and was totally against the SALES OF GOODS ACT, 1930. This law has also been superceded in 2005 by new Federal Excise Act 2005. This is just for your knowledge}..............

Therefore, revenue will be recognized when plots will be allotted.

I already explained in my reply to ur previous post that how revenue would be recognised against "UNEARNED RENT INCOME" / liability, satnding in the balance sheet.

I also pointed out that depreciation will also be charges on the LEASEHOLD LAND recognised in the balance sheet, irrespective of whether the lots have been alloted or not. However, until it has been totally developed for the purpose for which it was intended, it could be disclosed as "CAPITAL WORK IN PROGRESS - LEASEHOLD LAND" in which case depreciation will be started from the date when this land would be actually available for use by the society for whatever intended purpose. For, this purpose you can see, paragraphs 50 to 57 of IAS 16. I think excatly the revelant para is 53 but you can find it from 50 to 57.

Dont confuse with the concept that FREEHOLD LAND is not depreciated then why this land is to be depreciated. Be confirmed that LEASEHOLD LAND has to be depreciated over lease period.

HOPE THE MATTER RAISED UNDER THIS SCENARIO IS CLARIFIED.


SCENARIO 2

I have alreday clarified above the law to recognise the sale and the criteria of revenue recognition. When plots will be allotted and titles would be transferred, revenue will be required to be recognized. In my view if all amount is received in advance, it should be kept as UNEARNED INCOME and every year a proportion should be taken to profit and loss account as REVENUE. This proportion could be calculated by deviding the total amount with the total years for which land is given.

Land will appear as LEASEHOLD LAND (after all developments. Until then it will appear as CAPITAL WORK IN PROGRESS) in the balance sheet. Depreciation will be charged every year by deviding the total cost (total amount paid to government+all development charges) with the 99 years.

HOPE THE ABOVE WILL HELP YOU TO UNDERSTAND THE ISSUE.

BEST REGARDS,

KAMRAN.