Practical guide to accounting for land acquired for project development

Key takeaways

Money paid under a sale and purchase agreement is not yet land until the transfer is registered. After transfer, each plot falls into one of 4 categories according to the purpose for which it is held, not the company that holds it. Land developed for sale is inventory, and the purpose should be locked in by a board resolution before transfer day.

Transaction structure to set up first

In the typical case, one company signs the purchase agreement for several plots and then transfers them in stages to group companies for development. Before the first plot is transferred, you must decide which company receives each plot, whether each plot will be developed for sale, leased, used by the company itself or resold, and whether to assign the rights under the contract or buy into the contracting company and resell.

Before transfer registration

How to record

Deposits and instalments: Dr Prepayments for land (other non-current assets)
Keep a separate register for each plot from day one
A deposit that may be forfeited remains an asset until there is evidence that neither the land nor a refund will be received
Transfer to the land or inventory account on the registration date

Points to watch

Taking possession of the land or starting work on it is not in itself a reason to record the land
Development costs paid before transfer are recorded in the project's WIP, not mixed with prepayments for land
Borrowing costs in this period do not yet qualify for capitalisation, because development has not begun
If the right to buy a plot is abandoned, recognise an expense in the year of abandonment

The 4 categories after transfer

Type	Objective	Presented in	Measurement	Interest
A Inventory	Developed for sale	Current assets	Lower of cost and NRV	Capitalised into costs during development
B Investment property	Leased, held awaiting price appreciation, or use not yet determined	Non-current	Cost	Expenses
C Property, plant and equipment	Used in the company's own business, e.g. hotel, office	Non-current	Cost less impairment	Capitalised into costs of buildings under construction
D Land held for sale	Resold without development	Other non-current assets	Cost less impairment	Expenses

No depreciation is charged on land in any category. This guidance applies to entities reporting under TFRS for NPAEs. If full TFRS is used, also check TAS 2, TAS 16, TAS 40 and TFRS 5.

Land held for development and sale is inventory under TAS 2, not TAS 16. Classify it by purpose at the transfer day.

A Inventory

Use this category when developing for sale, e.g. housing estates, houses, villas and condos. The land is a raw material of the project.
Present as a current asset, even for multi-year projects
Recognise the cost when units are transferred to buyers
Allocate land cost to units by area or sales value, using one method across the whole project
Borrowing costs are capitalised only while development is under way, and stop when development is suspended

B Investment property

Held for rental or price appreciation, not used by the company itself or sold in the ordinary course. Includes plots with no determined use.
NPAEs use the cost model. Confirm with the auditor.
Borrowing costs on plots held awaiting price rises do not qualify for capitalisation
Land and building tax on vacant land starts at 0.3% and rises the longer the land is left idle. Check the latest tax-year rate with the local authority.

C Property, plant and equipment

Own use, e.g. self-operated hotels, restaurants, offices, warehouses
A plot with two uses that can be sold separately should be apportioned
Filling and site preparation with permanent benefit form part of land cost
Accounting impairment is not tax-deductible until the land is actually disposed of

D Land held for sale

Decision to resell without developing. NPAEs have no specific standard. Present as land held for sale in other non-current assets.
If trading in land is the ordinary business, classify it as inventory
Stop capitalising borrowing costs as soon as development stops
A company that sells land is subject to Specific Business Tax (SBT) however long it has held the land, and the gain on sale is included in corporate income tax (CIT) income

Decision chart

Developed for sale in the ordinary course? Yes = A Inventory
Used in the company's own business? Yes = C Property, plant and equipment
Resold without development? Yes = D (if trading in land is the ordinary business, use A)
None of the above: held for rent, price appreciation or undetermined = B

Record the answer for each plot in a board resolution dated before the transfer

What is included in land cost

Included in cost

Contract price, including deposits applied against the price
Transfer fees, duties and application fees
Brokerage, survey, legal and title due diligence costs that can be identified with the plot
Demolition of existing structures and filling with permanent benefit
Borrowing costs during the period of actual development

Excluded (expensed or not a buyer's cost)

The 1% withholding tax (WHT) deducted from a corporate seller is paid on the seller's behalf and is not a buyer's cost
SBT borne by the seller, unless the contract makes the buyer bear it as part of the price
Interest before development starts and while development is suspended
Annual land tax, maintenance and fencing costs
Feasibility study costs incurred before deciding to buy

2 routes into the development company, and tax costs

Route 1: assign the rights under the contract

One transfer registration, from the seller to the development company
Transfer costs and taxes of about 6.3% of the price
The contract must permit assignment of rights and the seller must acknowledge it in writing
Any consideration for the assignment above the amount paid is income of the contracting company

Route 2: buy into the contracting company and resell

Two registrations at about 6.3% each, totalling about 12.6%
The inter-company price must be a market price; there is a risk of assessment under Section 65 bis (4) of the Revenue Code
The gain on resale is income of the contracting company

The 6.3% estimate = transfer fee of 2% of appraised value + SBT of 3.3% + WHT of 1% when the seller is a juristic person (example where the appraised value equals the sale price)

Actual cost depends on the appraised value and who bears each item. The 1% WHT is a tax credit for the seller, so it is a cash burden, not a net cost.

Accounting vs tax differences to track outside the accounting system

Item	Accounting (NPAEs)	Tax	What to track
Impairment of land B, C and D	Recognise a loss when there is an indication of impairment	Not deductible until disposal	Add back in PND 50 and track the cumulative amount by plot
Write-down of inventory A	Reduce to NRV	Valued at the lower of cost or market price under Section 65 bis (8) of the Revenue Code	Keep market price evidence for each plot or unit
Inter-company transfer price	At the agreed price	May be assessed at market price if the price is low without justifiable reason	Keep an independent valuation report as at the transfer day

NPAEs do not need to recognise deferred tax, so differences must be tracked off the financial statements plot by plot and reconciled to PND 50 every year until the land is sold.

Steps before transferring the first plot

Prepare a plot register: title deed number, area, contract price, appraised value and planned use
Set the purpose of each plot and match the receiving company to that purpose
Issue a board resolution confirming the purpose and asset category before transfer day
Choose the transfer route and estimate the tax for both routes
Open sub-accounts by plot and by project, to be used for cost allocation on sale
Set an interest policy: when to start, stop and resume capitalising
Prepare an internal memo and agree it with the auditor before transfer day

Changing the category later affects eligibility to capitalise interest and may be viewed as a sale between group companies, so decide at the outset.