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LEMBAGA PIAWAIAN PERAKAUNAN MALAYSIA
MALAYSIAN ACCOUNTING STANDARDS BOARD Presentation of Financial Statements Property Development Activities The standards, which have been set in bold type, should be read in the context of the background material and implementation guidance in this Standard, and in the context of the Foreword to Financial Reporting Standards. Financial Reporting Standards are not intended to apply to immaterial items. Objective The primary issue in accounting for property development activities is the allocation of property development revenue and costs to the accounting periods in which the property development activities are performed. The objective of this Standard is to prescribe the accounting treatment for revenue and costs associated with property development activities. A secondary issue is the classification of land held for future development by property development entities. This Standard uses the recognition criteria established in the MASB's A Proposed Framework for the Preparation and Presentation of Financial Statements to determine when revenue and related expenses, and hence, profit from property development activities shall be recognised in the income statements. The Standard provides guidance on the application of these criteria. Scope This Standard shall be applied in accounting for property development activities in the financial statements of an entity undertaking property development activities. This Standard supersedes MASB Approved Accounting Standard MAS 7, Accounting for Property Development. This Standard applies to entities engaged in property development activities including those governed by provisions of the Housing Development (Control and Licensing) Act 1966, whether or not such operations are their main activities.
Property Development Activities Property development as applied in this Standard refer to the business of acquiring land for purposes of: construction thereon and selling completed residential, and/or commercial and industrial buildings whether as a whole or by parcels therein; and development and sale of vacant lots for the construction of such buildings thereon including homesteads, hobby farms, orchards or for other similar purposes.
Definitions The following terms are used in this Standard with the meanings specified:
A project is a cluster of development units erected within a designated geographical area forming a cost accumulating centre. Property development activities are defined as activities involving the necessary steps to plan and construct, and comply with statutory and contractual requirements in the development of land into vacant lots, residential, commercial and/or industrial buildings. Development unit is a unit of residential, commercial, or industrial building, and vacant lot developed for sale. Relative sales value is the ratio of the estimated current selling price of each individual development unit at the time the evaluation is being carried out, in the final state that it is intended to be sold to that of others to be developed in the development project.
Nature of Property Development Activities The MASB is of the view that the nature of property development activities is that of a specialised industry and a separate Standard will enhance the quality and comparability of financial statements of entities undertaking such activities. A property development entity may be one that carries out all aspects, or the majority, of property development activities in-house, for example, planning, design and construction. In contrast, other property development entities may outsource many of these functions, in particular construction activities. Property development entities may be involved in the development of either, or all, industrial, commercial or residential developments. Those involved in residential development are subject to the Housing Development (Control and Licensing) Act 1966. A major feature of property development is that development activities are carried out over more than one accounting period. This is generally due to the procedures involved in obtaining approvals from relevant authorities as well as the construction work itself. The activities that have to be undertaken before physical construction of development units can commence may include conversion of land use, sub-division of land, technical planning and drawing, environmental impact assessment, soil test and approval by relevant authorities of master and building plans. The nature of the development activities is such that revenue may be received at varying points in time and quantity. Sale of development units can occur at the point of launching the project, or at any stage of the construction work. Other sales may be made at some time after the completion of the project. Sale of development units can also come with various forms of incentives, for example, rental guarantee, interest rebate, and other promotional packages such as free air-conditioners, and kitchen cabinets. The nature of the sales process has consequences for the recognition and measurement of revenue and expenses, and assets arising from property development activities. Property development costs are also peculiar to this industry and require specific cost allocations system for common infrastructure and costs associated with it over a life cycle which is invariably longer than the costing system that one would adopt for costs associated with a building phase. A further issue is the circumstance where property development entities have large land banks that are developed in stages. As a consequence, it is necessary to consider how such land shall be classified and measured. In addition, even though a large area of land is to be developed in stages, common infrastructure such as connecting roads, bridges and flyovers may need to be constructed for the whole area instead of only for the portion currently under development.
Land Held for Property Development It is not unusual for a property development entity to hold large areas of land which are at varying stages of development, ranging from land on which there is no development to those which are in an advanced stage of development. Land held for property development shall be classified as non-current asset where no development activities have been carried out or where development activities are not expected to be completed within the normal operating cycle. Land held for property development shall be carried at cost less any accumulated impairment losses. An entity shall apply FRS 1362004, Impairment of Assets, to determine whether the land has become impaired. The change in the classification of land held for property development to current asset shall be at the point when development activities have commenced and where it can be demonstrated that the development activities can be completed within the normal operating cycle. Current assets as explained in FRS 1012004, Presentation of Financial Statements, are those assets which are expected to be realised or held for sale or consumption in the normal operating cycle.
Property Development Costs Property development costs shall comprise all costs that are directly attributable to development activities or that can be allocated on a reasonable basis to such activities. Costs relating to property development activities can be divided into: costs associated with the acquisition of land; costs related directly to a specific property development activity; and costs attributable to the development activities in general and can be allocated to the project.
Costs associated with the acquisition of land include the purchase price of the land, professional fees, stamp duties, commissions, conversion fees and other relevant levies. Pre-acquisition costs are charged to the income statement as incurred unless such costs are directly identifiable to the consequent property development activity. Capitalised pre-acquisition costs are included as property development costs. Consistent with the underlying principles of FRS 1232004, Borrowing Costs, all related costs incurred subsequent to the acquisition of land can be capitalised only during periods in which activities necessary to prepare the property for its intended use are in progress. These activities would include those of an administrative and technical nature undertaken during the pre-construction stage such as the preparation of plans and the process of obtaining approvals and permits from government authorities. Costs that relate directly to a specific development activity may include professional fees and infrastructure works that are related to the project and contractors' costs for the building works. Some of the property development costs can be specifically attributed to development units sold, others to project units not sold whilst other costs are general and cannot be allocated but are nonetheless central to the project. Common costs that may be allocated to property development activities include: costs that would be allocated to existing and future property development projects within the same geographical location (related) such as common infrastructure costs, mandatory land reserve for educational and recreational purposes on a piece of land which the entity intends to develop in several phases/ projects; and costs that would be allocated to all projects currently in progress in various locations (unrelated), for example, certain corporate expenditure that relates to existing property development projects undertaken by the entity.
These costs may be allocated using relative sales value of the projects that benefited or are going to benefit from such costs, or other generally accepted methods. The method selected must be applied consistently.
Costs attributable to development activities include contingency costs such as those relating to defect liability. Contingency costs are accounted for in accordance with FRS 1372004, Provisions, Contingent Liabilities and Contingent Assets. Costs associated with borrowings on property development projects are accounted for in accordance with the provisions of FRS 1232004, Borrowing Costs. Allocation of costs to individual development units shall be made in accordance with the following criteria: specific identification (e.g. direct building costs); relative sales values where specific identification is not possible; or other appropriate methods consistently applied where allocation based on relative sales value is impracticable
Property Development Revenue and Expenses Property development revenue shall comprise: the selling price agreed in the sale and purchase agreements; and any additional revenue due to variation in development work.
A variation is an instruction by the customer for a change in the scope of the work to be performed under the development project contract (sale and purchase agreement). A variation may lead to an increase or a decrease in property development revenue. Examples of variations are changes in the specifications or design of the asset and changes in the duration of the development project contract. A variation is included in property development revenue when: (a) it is probable that the customer will approve the variation and the amount of revenue arising from the variation; and (b) the amount of revenue can be reliably measured. Property development revenue shall be recognised in respect of all development units that have been sold. Revenue recognition commences when all the following criteria are met: when the sale of the development unit is effected, e.g. upon the signing of the individual sale and purchase agreements; upon the commencement of development and construction activities; and when the financial outcome of the development activities can be reliably estimated.
The financial outcome of a development activity can be reliably estimated when all of the following conditions are satisfied: total revenue from the development activities can be measured reliably; specific identification (e.g. direct building costs); relative sales values where specific identification is not possible; or other appropriate methods consistently applied where allocation based on relative sales value is impracticable. the costs attributable to the development activities can be clearly identified and measured reliably so that actual development costs incurred can be compared with prior estimates.
Where the outcome of a development activity cannot be reliably estimated: the property development revenue shall be recognised only to the extent of property development costs incurred that is probable will be recoverable; and the property development costs on the development units sold shall be recognised as an expense in the period in which they are incurred.
Any expected loss on a development project shall be recognised as an expense immediately (including costs to be incurred over the defects liability period).
During the early stages of a property development project, there are circumstances that may preclude the outcome of the project to be estimated reliably. Under such circumstances the provisions of paragraph 30 may be more appropriate. In the event that the outcome of the project cannot be estimated reliably, no profit shall be recognised. It may also be probable that property development costs will exceed total property development revenue. In such cases, any expected excess of total property development costs over total property development revenue is recognised as a loss immediately in accordance with paragraph 30. When property development units are sold, the attributable portion of property development costs shall be recognised as an expense in the period in which the related revenue is recognised. The process of recognising as an expense the attributable portion of property development costs results in the matching of expenses and revenues. In determining the allocation amount or portion, an entity shall adopt a method that most appropriately reflects its circumstances. This method shall be applied consistently. Property development revenues and expenses shall be recognised in the income statement when the outcome of a development activity can be estimated reliably (see paragraph 29). The amount of such revenues and expenses shall be determined by reference to the stage of completion of development activity at the balance sheet date. The recognition of revenue and expenses by reference to the stage of completion of the development activity is often referred to as the percentage of completion method. Under this method, property development revenue is matched with property development expenses incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit attributed to the proportion of work completed. This method provides useful information on the extent of the development activity and performance during a period. The stage of completion of a development activity may be determined in a variety of ways. The entity shall use the method that measures reliably the work performed. Depending on the nature of the development activity the methods may include: the proportion that property development costs incurred for work performed to date bear to the estimated total property development costs; surveys of work performed; or completion of a physical proportion of the property development work.
Progress billings to purchasers and payments received often do not reflect the work performed.
When the stage of completion is determined by reference to the property development costs incurred to date, only those property development costs that reflect work performed are included in costs incurred to date. Examples of costs that do not relate to work performed are cost of land, financing costs capitalised to the project, and payments made to contractors in advance of work performed under the project. When the uncertainties that prevented the outcome of the project being estimated reliably no longer exist, revenue and expenses associated with the development activity shall be recognised in accordance with paragraph 34. Property development costs not recognised as an expense shall be recognised as an asset and shall be measured at the lower of cost and net realisable value.
Estimates, Revocation of Sales and Incentives Estimates and cost allocations shall be reviewed at the end of each financial reporting period until the project is substantially completed. Costs shall be revised and reallocated where necessary for any changes on the basis of current estimates. The effects of a change in an accounting estimate shall be included in the determination of net profit or loss in accordance with FRS 1082004, Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies. As a result of uncertainties inherent in property development activities, cost and revenue estimates cannot be measured with precision. The use of reasonable estimates is essential in the preparation of financial statements and does not undermine their reliability. Revisions to cost or revenue estimates attributable to the property development activities in general shall be assigned to both on-going and future projects as applicable. Project development revenue and expenses recognised shall be immediately written back as soon as a rescission or revocation of sale occurs. Liquidated damages receivable from contractors (on late completion) and liquidated damages payable to purchasers (for late delivery) shall be disclosed as gross amounts in the income statement. When sales incentives or other guarantees are offered to induce sales, the estimated obligation under such incentives or guarantees are accounted for in accordance with FRS 1372004, Provisions, Contingent Liabilities and Contingent Assets. It is common practice for property development entities to offer incentives to entice buyers. The incentives may be in the form of a developer's guaranteed occupancy of the development units or guaranteed return on the purchasers' investments for a specified period. Uncertainties exist as to: the extent that purchasers would allow the entity to manage on their behalf; demand for rented properties; and amount of rental chargeable. Under such situations, it may be difficult to estimate reliably the obligations to be undertaken by the entities. Other incentives or promotional costs incurred by the property development entity that are associated with the sale of its development units shall not be capitalised but are to be recognised in the income statement. Similarly, administrative and maintenance fees, forfeited deposits and interest receivable are to be taken to the income statement.
Inventories - Unsold Completed Development Units Inventories of unsold completed development units shall be stated at the lower of cost and net realisable value. Those unsold completed development units that are retained by an entity are accounted for in accordance with FRS 1162004, Property, Plant and Equipment or MASB ED 31, Investment Property.
Disclosure An entity shall disclose: the method used to determine the stage of completion for property development activities; the revenue and related expenses recognised in the income statement; in respect of property development costs carried as an asset, a reconciliation of the carrying amount at the beginning and end of the period showing: the gross amounts of property development costs, segregating the portion related to land; property development costs incurred during the period; amount of property development costs recognised as an expense in the income statement, showing brought forward and current period amounts; and disposals or transfers to other category of assets or any other changes in the carrying amount during the period.
in respect of progress billings: accrued billings as current asset, representing the excess of revenue recognised in the income statement over the billings to purchasers; and progress billings as current liability, representing the excess of billings to purchasers over revenue recognised in the income statement; and
the amount of cash held under Housing Development Account [opened and maintained under section 7A of the Housing Development (Control and Licensing) Act 1966 and any other restrictions on cash.
For land held for property development, the financial statements shall disclose: the gross carrying amount of the cost and accumulated impairment loss (if any) at the beginning and end of the period; and a reconciliation of the carrying amount at the beginning and end of the period showing: additions; disposals; transfers to current assets as property development costs; impairment losses recognised / reversed in the income statement during the period, if any; and other movement.
The financial statements shall also disclose: the existence and amounts of restrictions on titles of land; and land held for property development and property development projects pledged as security for liabilities.
Transitional Provisions Where the adoption of the provisions of this Standard by an entity results in a change in accounting policy, an entity shall apply the Standard retrospectively in accordance with the benchmark treatment in FRS 1082004, Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies. Where an entity has carried its land held for property development at revalued amount as allowed under MASB Approved Accounting Standard MAS 7, Accounting for Properly Development, the entity shall continue to retain the revalued amount of the land (and subsequently, its carrying costs) as its surrogate cost.
Effective Date This Financial Reporting Standard becomes operative for annual financial statement covering periods beginning on or after 1 January 2004.
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