Key takeaways
- Land held for development and sale, WIP and completed units not yet transferred are all inventory under TAS 2, not PP&E.
- Cost includes only the expenditure necessary to bring inventory to the condition and location ready for sale. Selling expenses, marketing and G&A are excluded.
- Measure at the lower of cost and NRV. When the market cuts prices, test each unit or an appropriate group of units.
- Cash paid for a developer's inventory falls under operating activities, not investing activities.
Why TAS 2 is the core standard for developers
In property development, inventory does not mean raw materials in a warehouse. It covers land awaiting development, WIP, and condominium units or houses that are complete but not yet transferred. These items are usually the largest assets in a developer's statement of financial position.
Thai Accounting Standard 2 (TAS 2) Inventories is consistent with IAS 2. This article explains how to classify assets, accumulate and allocate costs, measure value under the lower of cost or NRV principle, and the issues developers most often get wrong, with worked examples.
1. Basic principles
1.1 Definition of inventory
Inventory is an asset that meets any one of the following conditions: it is held for sale in the ordinary course of business, it is in the process of production for sale, or it consists of raw materials or supplies to be used in production or in providing services.
For developers, classification matters greatly, because land and buildings can fall under different standards depending on the purpose for which they are held. Misclassification affects both the financial statements and tax planning.
1.2 Land and buildings: inventory or fixed assets
| How the asset is held | Classification | Standard |
|---|---|---|
| Held for sale in the ordinary course of business, e.g. condos for sale, housing estates | Inventory | TAS 2 |
| Held for use, e.g. a hotel the company operates itself, the company's own office | PP&E | TAS 16 |
| Held to earn rent or for capital appreciation | Investment Property | TAS 40 |
| Non-current assets that meet the conditions to be classified as held for sale | Non-current asset held for sale | TFRS 5 |
For a developer building condos for sale, everything is inventory, from the land and construction work through to completed units not yet transferred.
2. Components of cost
Inventory cost must include the expenditure necessary to bring the inventory to the condition and location ready for sale. It falls into 3 categories, plus a further group of items that must be excluded.
2.1 Cost of purchase
This includes the land price, transfer fees and taxes that the buyer bears under the contract, commission for sourcing the land, legal fees, title verification costs and survey fees.
The seller's taxes are not automatically the buyer's cost: Specific Business Tax (SBT) of 3.3% and withholding tax (WHT) on income are the seller's burden by law. They become the developer's land cost only if the contract requires the buyer to bear them instead. The standard transfer fee rate is 2%; temporary fee reduction measures carry specific conditions, so check the latest conditions before using them in a budget.
2.2 Cost of conversion
This includes construction costs paid to contractors, architect and engineer design fees, the cost of preparing the EIA report, building permit fees, directly related project management costs, and machinery or equipment used exclusively for the project.
2.3 Other necessary costs
These include borrowing costs or interest during construction (IDC) that can be capitalised under TAS 23, only during periods when the asset is actively being developed, and infrastructure costs such as roads, water supply, electricity, drainage and common utilities.
2.4 Costs that must not be included in inventory
- Selling and marketing expenses
- General and administrative expenses (G&A) not related to bringing the inventory to a condition ready for sale
- Abnormal waste of materials, labour or other production costs
- Interest after the project is ready for sale, or during an unusually long suspension of development
3. Cost allocation
Project costs are incurred in large lumps, so they must be allocated to each unit in order to calculate COGS on ownership transfer. The commonly used methods are as follows:
| Allocation method | Suitable for |
|---|---|
| Area-based | Condominiums, allocated by saleable square metres |
| Sales value | Units or houses with widely differing prices, e.g. by view or floor |
| Per unit | Housing estates with identical unit sizes |
| Hybrid | Mixed-use projects |
Example: allocation by area
A sample project of 100 units with a total area of 5,000 sq m and a total cost of THB 500 million, giving a cost of THB 100,000 per sq m.
| Unit type | Total area (sq m) | Cost/sq m (THB) | Cost/unit (THB) |
|---|---|---|---|
| Studio (40 units × 30 sq m) | 1,200 | 100,000 | 3,000,000 |
| 1BR (40 units × 50 sq m) | 2,000 | 100,000 | 5,000,000 |
| 2BR (20 units × 90 sq m) | 1,800 | 100,000 | 9,000,000 |
| Total project | 5,000 | — | 500,000,000 |
If one Studio is sold for THB 4 million, COGS is THB 3 million, gross profit is THB 1 million, and the gross margin is 25%.
4. Measurement: lower of cost or NRV
Inventory must be stated at the lower of cost and net realisable value (NRV).
NRV = expected selling price − costs to complete − selling expenses
If NRV is lower than cost, the write-down loss must be recognised as an expense in that period.
Example: a project that has to cut prices
Cost per unit is THB 5 million and the original list price was THB 7 million. The market is so weak that the price must be cut to THB 4.5 million. Broker fees and selling expenses are THB 200,000 per unit.
| Item | THB |
|---|---|
| Expected selling price | 4,500,000 |
| Less: costs to complete (units already completed) | 0 |
| Less: selling expenses | (200,000) |
| NRV | 4,300,000 |
| Cost | 5,000,000 |
| Write-down per unit | 700,000 |
If there are 50 units in the same condition, a total loss of THB 35 million must be recognised in that period.
5. A complete example: a 200-unit sample project
All figures are illustrative, to explain the accounting mechanics. Unit: THB million.
5.1 Year 1: buying the land and starting the project
| Item | THB million |
|---|---|
| Land price, 2 rai | 200.0 |
| Transfer fee 2% (assuming the buyer bears it) | 4.0 |
| SBT 3.3% (assuming the contract requires the buyer to bear it) | 6.6 |
| EIA and permit fees | 5.0 |
| Architect and engineer design fees | 15.0 |
| Inventory carried forward to the start of Year 2 | 230.6 |
5.2 Years 2 to 3: during construction
| Item | THB million |
|---|---|
| Inventory brought forward at the start of Year 2 | 230.6 |
| Construction costs | 600.0 |
| IDC capitalised | 50.0 |
| Inventory carried forward to the start of Year 4 | 880.6 |
5.3 Year 4: ownership transfers begin
100 units are transferred at an average price of THB 6 million. Cost per unit is 880.6 ÷ 200 = THB 4.403 million. COGS = 100 × 4.403 = THB 440.3 million.
| Income statement, Year 4 | THB million |
|---|---|
| Revenue from sales | 600.0 |
| Cost of sales | (440.3) |
| Gross profit | 159.7 |
| Gross Margin | 26.6% |
Inventory remaining at the end of Year 4 = 880.6 − 440.3 = THB 440.3 million, which is the cost of the remaining 100 units.
5.4 Year 5: weak market and NRV test
If the selling price falls to THB 5 million per unit and selling expenses are THB 0.15 million per unit, NRV is THB 4.85 million, which is higher than the cost of THB 4.403 million, so no write-down is needed.
If the units must be sold off at THB 4 million each, NRV is THB 3.85 million, which is THB 0.553 million per unit below cost. Multiplied by 100 units, this gives a loss of THB 55.3 million.
6. Special issues for real estate inventory
6.1 Borrowing costs under TAS 23
IDC can be capitalised when expenditure is being incurred, borrowing costs are being incurred and development activity is under way. Capitalisation must stop when the project is ready for sale, or when development is suspended for an unusually long period.
If the sample project's construction is completed in January, interest after that date is an expense, not an inventory cost.
6.2 Expenditure after construction is complete
Maintenance costs while waiting for sale, land and building tax and marketing costs are expenses of the period, unless they are costs necessary to bring the inventory to a condition ready for sale under TAS 2.
6.3 Land held for development (land bank)
Land with a clear plan to develop for sale is classified as inventory. If there is no clear plan or the plan changes, the purpose for which the land is held must be reassessed. TAS 40 classifies land with no determined future use as investment property. A transfer out of inventory requires evidence of a change in use, not merely that the land has been held for a long time. While the land remains inventory, apply the NRV test.
6.4 Show units
A unit that will actually be sold and is temporarily used as a show unit remains inventory. Fit-out and furniture for sales purposes must be analysed by nature: if they can be used for more than one period and meet the definition, they may be PP&E and depreciated; if they are advertising or sales promotion activities, recognise them as an expense.
6.5 Common areas and utilities
Swimming pools, fitness rooms, lobbies and utility systems that will become common property or be transferred to the condominium juristic person must be allocated to the cost of the units sold, not separated out as the developer's assets.
7. Inventory KPIs
| KPI | Formula | Meaning |
|---|---|---|
| Inventory Turnover | COGS ÷ average inventory | Number of inventory turns |
| DIO | Inventory ÷ COGS × 365 | Number of days cash is tied up in inventory |
| GP Margin | (Revenue − COGS) ÷ Revenue | Gross margin |
| NRV Coverage | NRV ÷ Cost | Below 100%: write-down required |
| Inventory ÷ Total Assets | Inventory ÷ total assets | Level of capital tied up in inventory |
The reference ranges below come from the author's experience and are not official statistics: DIO of about 2 to 4 years, inventory turnover of about 0.3 to 0.5 times per year, and gross profit margin of 25 to 35% for condominiums and 15 to 25% for housing estates. Compare them with similar companies and the actual market cycle before use.
8. Disclosures
- The accounting policy and cost measurement method for inventory, such as specific identification or weighted average
- Carrying amount by category, such as land held for development, WIP and completed real estate held for sale
- Inventory pledged as security for loans
- The amount of write-down recognised in the period
- Reversals of write-downs when NRV increases, together with the events that led to the reversal
9. Comparing inventory, PP&E and investment property
| Issue | Inventory (TAS 2) | PP&E (TAS 16) | Investment Property (TAS 40) |
|---|---|---|---|
| Objective | Sale | Use | Earning rent or capital appreciation |
| Example | Condominiums for sale, housing estates | Self-managed hotels, offices | Rental buildings, land held for appreciation |
| Depreciation | Not charged | Charged, except on land | Charged under the cost model; not charged under the fair value model |
| Subsequent measurement | Lower of Cost or NRV | Cost or revaluation | Cost or fair value |
| On sale | Revenue and COGS | Gain or loss on disposal | Gain or loss on disposal |
| Borrowing costs | Capitalise during development | Capitalise during development | Capitalise during development |
A mixed-use building where one part is built for sale and another for rent must be separated in line with the standards: the sale part falls under TAS 2 and the rental part under TAS 40. The separation should begin at the design and cost-collection stage.
10. Common mistakes
- Continuing to capitalise interest after the project is completed, which forces adjustments to COGS and profit
- Not writing down inventory when market prices fall
- Allocating common areas or utilities incorrectly, which makes the COGS of every unit wrong
- Including selling and marketing expenses in inventory cost
- Not reviewing the purpose of a land bank that has been held for a long time
- Overlooking non-refundable input VAT, which forms part of cost when it relates to the acquisition of inventory
- Recording cost overruns too late, which makes the unit cost and the NRV test wrong
- Not separating the unit to be sold from fit-out work done for sale purposes
11. Checklist for CFOs
- Separate inventory by project and unit type
- Apply a consistent cost allocation method and document the reason whenever it has to change
- Keep supporting documents for the start, suspension and end of IDC capitalisation
- Review NRV at least quarterly and formally at every year-end
- Prepare an inventory ageing report separating fast-moving and slow-moving inventory
- Track sales velocity to adjust NRV assumptions
- Coordinate with the tax team, because accounting cost may differ from the tax base
12. Effects on the three financial statements
Statement of financial position
Presented as current assets, and should be broken down into land held for development, WIP and completed real estate held for sale, so that the project pipeline is visible.
Income statement
Revenue is recognised when control is transferred under TFRS 15, which is generally the ownership transfer day. COGS is the cost of the units transferred in the period. A write-down is recognised as an expense in the period, generally within cost of sales, and the amount is disclosed in the notes.
Statement of cash flows
A developer's cash paid for inventory falls within operating activities, because development for sale is the core activity of the business. Classifying it as an investing activity makes operating cash flow look better than it really is.
Conclusion
TAS 2 is not merely a matter of bookkeeping; it reflects the true position of a developer. Correct classification, systematic cost collection and allocation, regular NRV testing and transparent disclosure allow investors and financial institutions to rely on the numbers, and help management spot problems before they escalate.