Indian Accounting Standards provide companies in India with a consistent, transparent framework for accounting practices and financial reporting. Called Ind AS, it guides the accounting treatment of costs, revenues, etc. Ind AS 115 applies to Revenue from Contracts with Customers and is particularly applicable to real estate companies in the context of the construction and sale of commercial and residential property. Let’s look at the impact of Ind AS 115 on real estate companies in India.

Ind AS 115 - Revenue Recognition

Real estate companies in India are required to apply Ind AS 115 to revenue recognition from all contracts. This includes insurance contracts, leases, and other contractual obligations. Following are the steps for revenue recognition under Ind AS 115:

Identify the contract with the customer - which is the enforceable obligations and rights between the company and the customer.
Identify the contractual performance obligations - or the promise made by real estate companies to perform the obligation to deliver the unit.
Calculate the transaction price - or sale price of the unit transferred to the customer minus GST and other taxes.
Transaction price is allocated to the performance obligations - such as brokerage which is an example of incremental costs incurred to obtain the contract.
Recognise revenue when performance obligations are satisfied - or when the unit is handed over to the customer.

Applicability of Ind AS 115 - Practical Examples

Selling Under-construction Property: The performance obligation of a real estate company is completed when it hands over the completed property to the customer. Completing a slab, however, doesn’t fulfill the contractual obligation.

Agreement for Joint Development: Landowner A contracts Company B to construct apartments on A’s land. Here A may only be considered a customer if a certain number of apartments are handed over in exchange for development rights. Thus, under AS 115 B will consider revenue when the apartments are given to A. However, if A only receives a fixed portion of the sales value of the apartments, then A is no longer a customer, and AS 115 won’t apply to the transaction.

Ind AS 115 Applicability Vs Guidance Note

Ind AS 115 prescribes that real estate companies recognise revenue on completion of contractual obligations. However, the Guidance Note on Real Estate Transactions advocates reporting revenue as a percentage of the completed contract. Thus, in order to avoid income tax disagreements with tax authorities real estate companies need to maintain two sets of accounts. One will be as per Ind AS 115 and the other as per guidance note on accounting for real estate transactions for income tax purposes.

AS 115 prescribes clear accounting standards for the treatment of revenue received for property sales.

Frequently Asked Questions

1. From when should real estate companies follow Ind AS 115?

Answer: Ind AS 115 is applicable from 1st April 2018 to real estate companies selling commercial or residential units.

2. What is POCM?

Answer: Percentage of Completion Method considers revenue as a percentage of a completed contract.

Implication of Indian Accounting Standards in Real Estate Taxation

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