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Accounting for real estate acquisition

Accounting for real estate acquisition

  1. IFRS applicable to real estate

    In this current global economic world, International Financial Reporting Standards (IFRS) has been an important topic that has been talked upon by the whole world. Looking at the worldwide level, implementing IFRS seems to be a logical move. Many of the institutions and nations have welcomed this move; still, some professionals find it skeptical to accept it completely. Recently this topic is being discussed on a large scale all over the world. In a more significant sector like real estate, the implementation of IFRS is going to impact the regular working of the industry. It will be interesting to look at how the IFRS will impact the real estate.

    Implementing IFRS in real estate is undoubtedly a challenge before the developing country like India. Also, the developed economic countries like US, UK, China, and Germany. I would find it difficult in the transition process. Well-developed accounting professionals need to make this possible in a very convenient way. Real Estate sector will experience a substantial change while implementing the IFRS. Generally, the buyers are given the sales agreement immediately after the project is launch, which is also complete before handing over the possession and completing the construction. According to the IFRS, while considering the “construction of real estate agreement” the developer has to determine regarding the exact nature of the contract, whether it is service contract, construction contract, sales contract or revenue recognition contract.

    If the design of the construction is in control of the buyer until it is complete, then the agreement can be termed as a construction contract. In the case, if the buyer provides the material, then the transaction can be called the deal of service, however, usually, this case never happens. GAAP in India has allowed the proportionate completion method in the case of a contract of sale case. In IFRS, sales of goods or sales of residential flats will enable the sales of residential apartments. Implementing several elements is easily possible in the IFRS. It allows having different arrangements for the construction service and sale of land.

    In IFRS, transactions done on the barter basis is accounted for Accounting, and real estate professionals need to learn a new system without affecting their current business. New reporting standards have to implement at this moment, revamping the earlier order. IFRS must apply as early as possible to make the accounting operation as a one-world operation.

  2.  Accounting for property intended for sale 

    In accounting, each of the entries must be made in the right place. The real estate sector has always been a susceptible subject for all accounting professionals. It is essential to understand the actual nature of the transactions while doing accounting in the real estate sector. When there is selling of property, the accounting professionals have to decide whether the record should be complete for sale and after-sale which method to use while recording profit on the sale. Generally, the property is selling for generating the fund or the asset being retired. So, here the seller may either get an advantage or may have a loss.

    So, here whenever a property is sold, three transactions do occur which are (i) cash is received, (ii) property is sold, (iii) when the property is sold, what would be the profit achieved. Journal entry here will be on Cash account, sale of property account, profit in sales account. A systematic approach needs to be followed while accounting for the property, which is intended for the purchase. There is no accumulated depreciation in the sale of the property, so accounting for a feature differs from the sale of fixed assets.

    Whenever an individual or company sells a property which it was holding initially, then it will
    (i) Property being sold is updated in the general ledger for the amount being sold
    (ii) Cash is debited for the received amount
    (iii) After selling the loss or gain is recorded

    The depreciation expense is never recorded in this case, as the property does not get depreciated. Also, there is no removal of accumulated depreciation from the company’s book. In property sale, there is no depreciation as the theory related to it clearly states that the property is never consumed.

    Real estate people have to look thoroughly at the property tax environment scenario, as it is made entry specifically in the accounting book. Proper liquidity needs to be maintained along with an appropriate record of the property taxes. This helps the real estate people to have an adequate projection regarding cash flow and have very relevant profit calculations.

    There has been a very urging need for maintaining proper accounting for selling the property to anyone. Selling a property is an excellent source of generating revenue for any of the businesses, so an appropriate entry of accounting needs to maintain here. For companies that are selling their property know that money is the revenue of their business. When it comes to property, it can be any of the land, machinery, equipment, and vehicle, which may have specific depreciation costs.

    Many of the accounting professionals agree that they need to have a clear policy on the entry that needs to be made in the accounting books. Due to several international standards which are implemented all over for the accounting has challenged the traditional way to maintain the accounting book. It wholly depends on professional to professional and company to company to follow a specific accounting format as per their convenience.

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