Implication of Indian Accounting Standards in Real Estate Taxation

Indian Accounting Standards provide companies in India with a consistent, transparent framework for accounting practices and financial reporting. Called Ind AS, it guides the accounting treatment of costs, revenues, and disclosures. Ind AS 115 real estate provisions apply to Revenue from Contracts with Customers and are particularly relevant to real estate companies involved in the construction and sale of commercial and residential property. Let’s look at the impact of Ind AS 115 revenue recognition on real estate companies in India.

Ind AS 115 - Revenue Recognition

Real estate companies in India are required to apply revenue recognition in real estate under Ind AS 115 for all customer contracts. This includes insurance contracts, leases, and other contractual obligations. Following are the steps for revenue recognition under Ind AS 115:

1. Identify the contract with the customer - which is the enforceable obligations and rights between the company and the customer.
2. Identify the contractual performance obligations - or the promise made by real estate companies to perform the obligation to deliver the unit.
3. Calculate the transaction price - or sale price of the unit transferred to the customer minus GST and other taxes.
4. Transaction price is allocated to the performance obligations - such as brokerage which is an example of incremental costs incurred to obtain the contract.
5. Recognise revenue when performance obligations are satisfied - or when the unit is handed over to the customer.

Applicability of Ind AS 115 - Practical Examples

Selling Under-construction Property: The performance obligation of the developer is fulfilled only when the completed property is handed over to the buyer. Partial construction milestones, such as slab completion, do not satisfy the contractual obligation under Ind as 115 revenue recognition principles.

Agreement for Joint Development: Landowner A engages Company B to develop apartments on owned land, A is treated as a customer only if apartments are transferred in exchange for development rights. In such cases, revenue is recognised when apartments are handed over. However, if A receives only a fixed share of sales proceeds, A is not considered a customer, and Ind as 1154 does not apply to the arrangement.

Ind AS 115 Applicability Vs Guidance Note

Ind AS 115 mandates revenue recognition upon completion of contractual obligations, whereas the Guidance Note on Accounting for Real Estate Transactions recommends the percentage completion method. To avoid disputes related to real estate taxation in India, developers often maintain dual accounting records—one aligned with Indian accounting standards under Ind AS 115 and another following the Guidance Note for income tax computation.

Overall, Ind as 115 real estate provisions establish clear and consistent accounting standards for recognising revenue from property sales, improving transparency and compliance across the real estate sector.