Key takeaways
- WIP-Development is project cost accumulated until it is transferred to cost of sales. It is not a catch-all for everything you would rather not recognise as an expense.
- WIP that grows faster than actual construction progress is the first red flag.
- Selling and marketing expenses must be recognised in the period they are incurred. Holding them in WIP is window-dressing the financial statements and a tax issue.
- Mixed WIP makes cost of sales per unit wrong on transfer day and directly affects corporate income tax (CIT).
The examples in this article are written to illustrate risk patterns and do not identify or accuse any person or entity. Warning signs are grounds for further review, not a conclusion that wrongdoing has occurred.
Where WIP belongs in the financial statements
| Account | Substance | Correct classification | Common mistakes |
|---|---|---|---|
| WIP-Development (land, construction costs, other costs) | Project costs accumulated until they are transferred to cost of sales | Inventory, being real estate project development costs, is a current asset under TAS 2 and the operating cycle | Classified as a non-current asset, which distorts liquidity ratios and leads banks to misread the position |
| Sales commission | Incremental costs of obtaining a contract | Recognise as a contract cost asset, separate from construction costs, and amortise on ownership transfer | Pooled with construction WIP, so impairment cannot be tested and cost of sales is miscalculated |
| Selling and marketing expenses: advertising, events | Selling expenses | Expense immediately in the period incurred | Attempts to hold them in WIP to avoid reporting a loss. This is window-dressing the financial statements and a tax issue |
Misclassification does not necessarily change profit immediately, but it leads banks and auditors to misread the risk. On transfer day, cost of sales calculated from a mixed pool is immediately wrong, which affects both reported profit and the corporate income tax payable.
Entities applying TFRS for NPAEs may have some criteria that differ from full TFRS, for example in recording the costs of obtaining a contract. Check the accounting policy and consult the auditor before reclassifying.
WIP warning sign register
| Account name | Hidden risk | Warning signs | Checkpoint |
|---|---|---|---|
| WIP-Development: construction costs | Costs exceed budget, payments run ahead of progress, the contractor is a group company | Progress payments run faster than the actual % of work completed, and no engineer certifies the progress payments | Match payment claims, progress reports and site inspection results, and compare the price per sq m with the market |
| WIP-Development: land | Land bought from related parties at a price well above market, and undisclosed encumbrances on the title deed | Price per rai is far higher than the appraised value or transaction prices in the same area | Check the title deed, easements, mortgages, the Treasury Department appraisal price and the seller's relationships |
| WIP-Development: commission | Selling expenses parked as an asset to avoid reporting a loss | The balance grows while sales and transfers do not, and there is no schedule linking it to units sold | Link commission to units contract by contract, test for impairment, and separate it from construction costs |
| WIP-Development: other | A catch-all account that pools items nobody wants to explain | The balance is static, with no movement and no supporting detail | Request a sub-ledger by item. Unexplained items older than 6 months must be cleared out |
Figures to read alongside WIP
A WIP balance on its own cannot tell you whether a project is normal. It must be read alongside data from the construction team.
| Questions | Evidence used | If it cannot be answered |
|---|---|---|
| What percentage of actual construction progress does cumulative project cost represent? | Project budget, progress report certified by an engineer | Risk of cost overruns or payments ahead of progress |
| How much more money is needed to complete construction and transfer all units (cost to complete)? | The construction team's estimate and the funding sources to be used | Risk of a stalled project |
| Which expense items were recorded in project cost this month, and on what basis? | WIP movement schedule, accounting policy | Risk of window-dressing and CIT issues |
| Is interest on project loans capitalised into cost in the correct period? | Interest capitalisation schedule by project and period (TAS 23) | Project costs and period expenses are misstated |
If the contractor is a group company
Construction prices that are not at market rates raise both transfer pricing issues and the shifting of profit or loss between companies. Warning signs are a large debit balance in payables, or advance payments made without performance security. Details of the checkpoints are in Related-party transactions and cash leakage
Project owner's corner: what to look for and what to ask
- Ask to see WIP movements by category every month, not just the total
- Every quarter, compare cumulative payments to the contractor with the construction progress certified by the engineer
- Every quarter, review cost to complete and the funding sources to be used
Internal auditor's corner: checkpoints
- Test a sample of payment claims against site reports
- Check the relationships of the land seller and the contractor
- Request the sub-ledger for other WIP and follow up items older than 6 months
- Test impairment of contract costs and the net realisable value of remaining units
This content is management and internal audit guidance, not a legal or tax opinion for a specific case. Check the current law and consult an auditor, tax adviser or lawyer before making decisions in a real case.