Key takeaways
- Freehold revenue is recognised at the point control transfers, which is generally the registration date. Money received before then is a contract liability.
- Leasehold must first be classified under TFRS 16. The effects on profit, the balance sheet and tax differ greatly.
- The accounting policy should be supported by documents and discussed with the auditor before sales begin.
Chapter 3 Revenue recognition for freehold
Freehold sales do not normally meet the criteria for recognising revenue over time, because the customer does not control the unit during construction. Revenue is therefore recognised at a single point in time, using the TFRS 15 indicators: right to payment, legal title, possession, risks and rewards, and customer acceptance.
Booking deposits, down payments and instalments are recorded as customer advances, unit by unit, even where they are non-refundable. Land and development costs are held in inventory under TAS 2 and transferred to cost of sales only for units where revenue is recognised.
Unit cost = allocable project cost × (unit selling price ÷ total selling price)
The handbook recommends relative selling price where units differ greatly in location or specification, while allocation by area suits units that are similar. Once a method is chosen, it should be applied consistently and recorded in the policy. Selling and marketing expenses should not be included in development cost unless they meet the conditions of a specific standard.
On transfer day, the main entries are: receiving the final instalment, recording SBT and fees as applicable, recording WHT as prepaid tax, closing customer advances to revenue, and releasing WIP to cost of sales. The profit figure for that day is therefore often much higher than the cash actually received, because most of the instalments have already been spent during construction.
Chapter 4 Revenue recognition for leasehold
This chapter covers the most difficult decision point in the revenue section. The lessor must look at substance: whether substantially all the risks and rewards of the asset are transferred. The factors considered are the lease term compared with useful life, the present value of the rent compared with fair value, any purchase option, and the obligations borne by the lessee.
If it is a finance lease, the developer recognises the sale result under TFRS 16 at the lease commencement date and releases WIP. If it is an operating lease, the lump sum is treated as deferred revenue and recognised over the lease term. For example, an advance of THB 30 million for a 30-year lease gives revenue of THB 1 million a year. This example excludes renewal periods.
Finance lease
Profit arises early, in the year of registration, and no unit asset remains on the balance sheet. Documents supporting the classification are required.
Operating lease
Revenue is steady, and the asset is retained and depreciated. This may affect DSCR and Covenant in the first year.
The handbook warns against choosing a method based on the profit desired. Counting a renewal period requires a reasoned basis that renewal is reasonably certain, and in Thailand renewal rights beyond year 30 are legally restricted, so they should not be the sole reason for concluding that a lease is a finance lease. For income tax, advance rent may have to be recognised on a time-apportioned basis. The relevant Revenue Department rulings should be checked and a tax position prepared before sales begin.
Chapter 5 Supporting documents and evidence (audit trail)
A correct policy must be provable. The handbook therefore calls for an accounting policy memo to be prepared before sales begin, covering the project overview, the standards applied, the revenue policy, performance obligations, lease classification, the cost allocation method, key judgements, the disclosure plan and the approver.
The leasehold classification should have a calculation file whose formulas can be checked, together with the source of comparable price data, the origin of the discount rate and a sensitivity analysis. If a renewal-likelihood assessment is used, the reasons and evidence must be recorded. A score or model is only a tool to support judgement.
The control transfer documentation should match each indicator to actual evidence, such as the registration certificate, key handover and handover documents, and should deal with edge cases such as transfer before full payment, soft handover or a snag list. Where there are serious defects, revenue should not be recognised until they are rectified or their effect can be assessed, and a repair provision should be recognised as appropriate.
The next step is for the board to approve the policy and to consult the auditor in writing in advance, especially on revenue, lease classification, cost allocation, bundled sales and borrowing costs. This consultation reduces the chance of later adjustments to the financial statements, but it is not an assurance of the year-end audit outcome, and the policy should be reviewed when the facts or the standards change.