Key takeaways
- Presale costs have three possible destinations: contract cost asset, project-owned assets or PPE, and expenses.
- Incremental commission is a contract cost asset under TFRS 15 paragraph 91, not construction WIP.
- Brochures, billboards, scale models and 3D renders are expenses, even when produced for a specific project.
- Strict separation prevents inflated WIP and reduces risk when auditors and the Revenue Department review the accounts.
Presale is the stage in which condo developers invest heavily in marketing, show units, agent commission and sales promotion activities before any revenue is recognised. The question accountants and CFOs must answer is which items are assets and which must be recognised immediately as expenses in the income statement.
Paying money in order to sell does not make the expenditure a project cost. TAS 2 paragraph 16 excludes selling costs from the cost of inventory. TAS 38 paragraph 69 requires advertising and promotional expenditure to be expensed as incurred. TFRS 15 paragraph 91 applies only to the incremental costs of obtaining a contract.
Basic principle: capitalise or expense
Ask which standard the expenditure qualifies under. For TFRS 15 paragraph 91, the cost must be incremental, meaning it would not have been incurred had the contract not been obtained, and it must be expected to be recovered. If the expenditure meets none of the criteria, it must be expensed immediately.
1. Items recorded as assets
1.1 Commission paid to external sales agents
Commission payable only when a sale closes is an incremental cost. Record it as a contract cost asset, separate from construction WIP, and amortise it when the condominium unit is transferred.
1.2 Sales staff commission: incremental portion only
Commission payable only when a sale closes is treated in the same way as commission to external agents. Base salary must be recorded as an expense.
1.3 Show units and sales gallery
Consider what the work will become when it ends. Work that remains in a unit to be sold, or forms part of the property delivered, can go into WIP. A temporary sales gallery used for more than one period is considered PPE under TAS 16 and is depreciated over the sales period. If it does not meet the conditions, expense it. Agree the approach with the auditor before construction starts.
2. Items that must be expensed
2.1 Advertising and marketing
This includes printed materials such as brochures and billboards, even when they name a specific project, because they are sales promotion activities and do not create a component of the condominium unit delivered.
2.2 Scale models and 3D renders
These are used for presentation and sales promotion, so they are advertising and promotional expenditure. Being specific to a project does not change the nature of the expenditure.
2.3 Donations and sponsorships
These are not incremental costs of a sale contract for an individual condominium unit, so they are expenses.
2.4 Travel expenses for sales
Travel for road shows or general sales activities is an expense. Travel by the construction or project management team that relates directly to the project can go into WIP when supported by evidence.
2.5 Social media and brand awareness
Brand awareness activities are expensed immediately.
2.6 Costs that would be incurred whether or not the contract is obtained
Under TFRS 15 paragraph 93, costs that would be incurred whether or not the contract is obtained are expenses, unless they are clearly chargeable to the customer whether or not the contract is obtained, such as the cost of a standing sales team or of preparing proposals. Expenditure already recognised as an expense cannot, as a general rule, be reinstated as an asset later.
3. Decision tree for classifying Presale costs
- Is it an incremental cost of obtaining a contract? For example, commission paid when a sale closes. If yes, record it as a contract cost asset under TFRS 15 paragraph 91.
- Is the work part of the property delivered? If yes, include it in WIP under TAS 2.
- Is it an asset used for more than one period that meets the TAS 16 criteria? If yes, record it as PPE.
- Is it advertising, sales promotion or branding? If yes, it is always an expense.
- Any other item that does not meet the criteria above should be expensed.
Conclusion
Classifying Presale costs correctly reflects the true performance and financial position. Capitalising items that do not qualify overstates profit before revenue is recognised, and fills WIP with items that have no value on transfer or in the NRV test. Expensing incremental costs that do qualify overstates the loss in the Presale stage.
Developers should prepare a clear cost classification policy, set up the chart of accounts to match the classification, and have the auditor review it annually.