Accounting for Real Estate Acquisition
In this current global economic world, International Financial Reporting Standards (IFRS) has been an important topic. Looking at the worldwide level, implementing IFRS seems to be a logical move. Many of the institutions and nations have welcomed this implementation; Still, some professionals find it sceptical to accept it completely.
Recently, this topic is being discussed on a large scale all over the world. In more significant sectors like real estate, implementing IFRS will impact the regular working of the industry. Let us see how implementation will affect the real estate business.
1. IFRS applicable to real estate
Implementing IFRS in real estate is undoubtedly a challenge before developing countries like India. Also, for the developed economic countries like US, UK, China, and Germany. They would find it difficult in the transition process. Accounting professionals need to adapt to this change in a very convenient way.
Real Estate sector will experience a substantial change while implementing the IFRS. Generally, they provide the sales agreement to the buyers immediately after they launch the project. They also provide this agreement 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 the exact nature of the contract, and whether it is a service contract, construction contract, the sales contract or revenue recognition contract.
We can also term the agreement a construction contract if the design of the construction is in control of the buyer until we say that we complete the construction. Here, if the buyer provides the material, then we know the transaction as the deal of service. However, usually, this case is unlikely to happen.
2. GAAP in India has allowed the proportionate completion method with 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 the sale of land.
In IFRS, it accounts for transactions done on the barter basis for accounting. 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 a one-world operation.
3. Accounting for property intended for sale
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 also, after-sales, 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 business sells a property, three transactions occur which are
- it receives cash
- they sell a property,
- When the business sells a property, how much will they earn the profit?
Journal entry here will be on Cash account, sale of property account, profit in sales account. Systematic approach while accounting for the property, which is for the purchase. There is no accumulated depreciation in the property’s sale, so accounting for a feature differs from the sale of fixed assets.
Whenever an individual or company sells a property that it was holding initially, then it will
(i) Record the property being sold in the general ledger for the amount being sold.
(ii) Debit the cash for the received amount
(iii) Recording of profit or loss of after-sales
- We do not record the depreciation expense in this case, as the property does not depreciate. Also, there is no removal of accumulated depreciation from the company’s book. In property sales, we are not consuming any property, so there is no chance of recording the depreciation.
- Real estate people have to look thoroughly at the property tax environment scenario, as it makes the entry, specifically in the accounting book. Proper liquidity needs maintenance 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, we need to maintain an appropriate accounting entry here. For companies who are selling their property, know that money is the revenue of their business. In 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 made in the accounting books. Accounting implements several international standards. This has challenged the traditional way to maintain the accounting book. It all depends on professionals and companies to a company to follow a specific accounting format as per their convenience.
For more information about accounting for real estate acquisition, contact us anytime. One of our sales representatives will assist you with further requirements.