PROPERTY DEVELOPMENT ACTIVITIES FRS 201

1. PROPERTY DEVELOPMENT ACTIVITIES FRS 201

2. At the end of this topic, students should be able to • Identify and recognise development activities by phases of property development projects • Measuring the cost to be accumulated to the property development projects • Determine the amount of revenue and profit to be recognised in each reporting period; and • Present the required disclosures in FS relating to the property development activities.

3. DEFINITION : Property Development Activities • Activities involving the necessary steps to plan and construct property and comply with statutory and contractual requirements in the development of land into vacant lots, residential, commercial and/or industrial buildings. (These are the inventories of the property development activities)

4. Nature of the business • Acquiring land for development purposes, such as: • constructing houses and office buildings • Selling completed residential and/or commercial and industrial buildings • The development of vacant lots for construction or for sale **Land under development is a stock - trading asset to the enterprise

5. Difference with Construction Contract Construction Contract • Contractor does not have ownership of the physical assets under construction. • Assets under construction belongs to customer • Contractor only provides a construction service Property Development • Developer retains ownership of the whole or a portion of the development units until the units are sold. (Bec the ‘units’ are their inventories) • Property development work-in-progress is an asset until the units are sold to buyers

6. Land Held for Property Development • Comprise of: • Land with no development activities • Land with advance stage of development activities • Land with no development activities and with development activities are not expected to be completed within the normal operating cycle (i) Classified as non-current assets less accumulated impairment loss (ii) ONLY When the development activities have begun and can be completed within normal accounting cycle, it is classified as inventory.

7. LAND HELD BY PROPERTY DEVELOPER • Land under development is classified as current assets • When lands are reclassified as current assets, they should be transferred at their carrying amount. • When the property are developed and sold, the related revaluation surpluses are realized and transferred to R/E

8. Property development cost • Costing method- specific identification method • Each development project must has its own project account to accumulate costs that are incurred throughout the development phases • When each phases can be identified separately, the development of each phases should be treated as a separate development project and must has its own project account

9. Criteria for separating the project • There must exist separate development plan or proposal • Each phase to have separate sale; an • The cost and revenue for each phase can be separately identified. • Example: (i) Vacant land develop (cleared) to sell it for instance by lot (ii) Vacant land develop such that houses are constructed and sale is made subsequently .

10. COST OF DEVELOPMENT ACTIVITIES [16] • Costs associated with the acquisition of land • Purchase price, stamp duties, conversion costs • Costs related directly to a specific development activities • Professional fees, contractors’ cost, borrowing cost and • Costs attributable to the development activities in general and can be allocated to the project (indirect costs) • Cost to construct community centre/ play ground

11. (1) Costs associated with the acquisition of land • Purchase price of land • Conversion cost • Incidental costs; • Professional fees, stamp duties, commissions • Pre-acquisition costs- charged to P&L unless directly identified to development activity. • Capitalisation of these costs are included as project costs

12. (2) Related Costs • Subsequent cost- can be capitalised only when there are development activities in progress • Development activities in progress-pre-construction cost (planning, design, granting permit and construction) • Eg: site labour, material depreciation costs professional fees, etc.

13. REVENUE AND PROFIT RECOGNITION • Revenue shall comprise: • The selling price agreed in the sale and purchase agreements: and • Any additional revenue due to variation in development work • Revenue shall be recognised in respect of all development units that have been sold

14. Revenue recognition commence : • When the sale of the development unit is affected- upon signing sale and purchase agreements • With the commencement of development and construction activities; and • When the financial outcome of the development activities can be reliably estimated

15. Estimation of outcome of development activity • Total revenue from the development activities can be measured reliably; • probable inflow of economic benefits to the enterprise; • Costs to complete the activities and stage of completion of the development project can be measured reliably; and • The cost attributable to the development activities can be clearly identified and measured reliably

16. When the outcome cannot be reliably estimated • Revenue shall be recognised only to the extent of property development costs incurred that is probable will be recoverable; and • Costs on the development units sold shall be recognised as an expense in the period in which they are incurred

17. How to measure revenue and expense to be recognised for development activities • % of completion for the development phase • calculated based on costs incurred to date over the total cost to complete the project. • Cost incurred and total cost must exclude the cost of land and borrowing costs that were capitalized but include the common cost • Only for property development cost I,e cost of constructing the development unit (not including the land cost)

18. Land development and Allocation of Common Cost • Common costs are those costs that relate to the development activities in general • Such as costs for infrastructure, cost of land reserve for educational and recreational purposes • These costs should be accounted for separately as land development and included in the land held for development account • These costs are then allocated to the project account using relative sales value of the projects that benefited from such costs

19. Journal Entry • Accumulation of cost in the project account should continue until the project is complete • When the development units are sold, the portion of the accumulated cost would be transferred and recognised as an expense • Cost of unit sold must be matched with revenues

20. Entry required • When costs are allocated or incurred: Dt. Property development account xx Cr. Land / Cash / creditors / contractors xx • When customers/buyers are billed: Dt. Account receivable xx Cr. Progress billings account xx • When revenue and costs are recognised: Dt. Progress billings account xx Cr. Project revenue in IS xx Dt. Project costs as an expense in IS xx Cr. Property development account xx

21. DISCLOSURE • Method used to determine the stage of completion of property development activities • Revenue and expenses recognised in IS • Property development costs to be carried as an asset; • Gross amount of property development costs • Property development costs incurred during the period • Costs recognised in IS and amount brought forward as an assets • Disposals or transfers to other catogory of assets

22. Cont… • With respect to progress billings: - Disclose accrued billing as current asset- the excess of revenue recognised in IS over the billing to purchaser; and - Disclose progress billings as current liability- the excess of billings to purchasers over revenue recognised in IS; and • Amount of cash held under Housing Development account