Part 1: Business overview and accounting standards framework

Chapter 1 Overview of the property development business

This chapter explains why property development accounting differs from buy-and-resell businesses. The business is capital-intensive, has a cycle of 3–10 years, must pass through multiple layers of permits, and uses a Presale system that collects money from customers before construction is complete. A project therefore moves through five phases: Pre-Development, Construction, Presale & Sales, Transfer and Close-out, with Construction and Presale overlapping.

Project type is the starting point for accounting policy. Housing estates and standard condominiums recognise revenue on the transfer day. Build-to-order villas may recognise revenue over time when the criteria are met. Condotels have both sales revenue and rental pool revenue, while mixed-use projects must separate performance obligations and cost pools by building.

There are three sources of funds: equity and shareholder loans, project loans drawn by progress payment, and booking deposits and down payments, which are contract liabilities, not revenue. The accounting result is that during construction the statement of financial position shows WIP and contract liabilities growing together while revenue remains zero. The recording logic in this period is to debit inventory when qualifying costs are incurred, and to credit contract liabilities when money is received from customers.

For this reason, losses in the early years do not mean the project has failed. The indicators to use before transfer are the take-up rate, cumulative Presale value and cost to complete. For a business developing for sale, cash paid for inventory is classified within operating cash flow, so negative CFO during construction must be read with this in mind.

Chapter 2 Relevant accounting standards framework

This chapter sets out the standards framework used throughout the handbook. At its core is TFRS 15, which applies five steps and recognises revenue when control transfers to the customer. For standard condominiums and housing estates, this is the ownership transfer day. Land and projects held for sale are inventory under TAS 2, split into land awaiting development, WIP and units ready for transfer, measured at the lower of cost and NRV, and not depreciated.

TAS 16 applies to assets the entity uses itself, such as offices and vehicles, and may include a temporary sales gallery used for more than one period, which is depreciated over the sales period and not included in WIP. A show unit goes into WIP only for the work that remains in the unit to be sold. TAS 40 applies to property held for rental or capital appreciation. Classification depends on the purpose for which the property is held.

TAS 23 requires directly attributable borrowing costs to be included in qualifying assets from when expenditure is incurred, borrowing costs are incurred and activities to prepare the asset are under way, until the asset is ready for sale. Under TFRS 16, a lessee recognises a right-of-use asset and a lease liability. TAS 12 recognises deferred tax on temporary differences.

Most companies that are not yet listed use TFRS for NPAEs, which is simpler for leases, deferred tax and the choices available for borrowing costs. A company planning an IPO should begin to comply with TFRS for PAEs in advance, because restating the financial statements retrospectively involves a great deal of work. Details of the standards can change, so check the current version before setting policy.

Chapter 3 Chart of accounts structure for property projects

The chart of accounts is the foundation for closing the books and analysing cost per unit. The handbook recommends five standard categories and adds business-specific accounts, such as escrow deposits, project loan accounts, land awaiting development, WIP, units ready for transfer, allowance for impairment, contract liabilities split into booking deposits, contract deposits and down payments, retention and warranty provisions, as well as revenue and costs split by type of sale.

One point to align with the standards is commission incurred to obtain a contract. There should be a separate contract cost asset account, expensed when the unit is transferred, whereas advertising and general selling expenses are expensed as incurred.

Accounts can be separated by project in three ways: a separate entity using an SPV, which gives clear cost separation but high administration costs; segment accounting within a single company, suited to small projects; and a hybrid with a holding company and SPVs on a central ERP system. The selection criteria are cost clarity, ease of borrowing, ease of selling the project, and the conditions of tax privileges.

The responsibility structure should separate profit centres by building or business, such as the rental pool, from cost centres, such as construction, sales, design and head office, so that the owner of each figure can be identified. Codes should have four levels, Project-Phase-Building-Unit, and be held as a dimension separate from the account code. The recording logic is that every entry to WIP, revenue and contract liabilities must carry a unit code, so that cost per unit reports can be drawn for the whole life of the project without creating duplicate accounts.