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Can anybody point me in the right direction??

Good Monday Morning Everyone,

Could anyone point me in the right direction to find out more about accounting for a speculative property developer?

I just can't find any literature and the FRSSE doesn't help me much thus far either.

For example, the motive is to make a profit from the sale of the eventual properties. Therefore one would assume that the direct costs are not capitalised into an asset. But then the development will incur large losses at the start to be carried forward for when the property is, hopefully, sold. But is this right? I am thinking the capitalised version would be correct. And then, what if a buyer is found and monies are transferred before the property is finished? Would this be deferred income in accordance with accruals? If so, when would it be released?

As you can see, I have a million questions and I am very keen to learn more on this topic so I would sincerely appreciate any guidance or pointers in the right direction. Please no "ask your accountant" responses.

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28th Nov 2011 09:43

Not capital

but stock and long term WIP

 

Back to basics - matching.

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28th Nov 2011 09:52

Thanks Mouse - I am definately over analysing this!! Back to basics indeed. It's just that my experience has been lacking when it comes to WIP and stock if I am completely honest.

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28th Nov 2011 10:55

I knew this!

Following on, I found a thread on another forum I created 2 months a go where I said that all direct costs should go into WIP!! I am a silly boy.

 

Quick question then : Would the WIP be realised when the properties are sold? I.e:

Dr Finished Goods

Cr WIP

and then

Dr Cash / debtors

Cr Finished Goods

The difference being a profit or loss to be tranferred to the... well, profit and loss.

 

Correct?

 

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28th Nov 2011 11:12

Nearly correct but not quite

Well I would

Dr Cash / bank / debtors

Cr Sales

for the sale

and then

Dr Cost of Sales

Cr WIP

with the cost of the property sold

 

By Dr and Cr Finished Goods you only show the gross profit - accounts need to show turnover and cost of sales as separate lines. Further more we usually used "Finished goods" as a stock description, not a cost description.

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28th Nov 2011 11:21

its a trade like any other and the same principles arise

effectively  all property related costs go into stock and are released on sale - however that does not mean that you cannot hold property as an investment as well but thats another story

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28th Nov 2011 11:31

Spot on guys. Thank you - sincerely, it's nice to get decent input.

 

If you if have the time and the inclination carnmores I would be very interested to read about what would happen in the scenario a PD were to hold the constructed property as an investment.

 

Without doing any research I am thinking that the WIP would be capitalised into investment property and potentially an adjustment be made for the fair value of the property - this is reminding me of the relevant international accounting standards. Nonesense that is off the top of my head and probably incorrect.

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28th Nov 2011 15:32

dont forget,if you have a contract which states when payment is due e.g. Ground works complete etc

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29th Nov 2011 09:56

thinking of stage pmt contracts=profit taking

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29th Nov 2011 11:40

Prefinish sale

This is what we are looking at in order to raise funds - to have buyers sign up before the build is complete and release the funds in stages.

But of course, during this period the WIP will still be accumulating until the build is finished.

Therefore should the funds be accounted for in the following manner:

Dr Bank

Cr Deferred Income (Bal Sheet)

And then, once the build is complete and all contracts have been finalised

Dr Deferred Income

Cr Sales

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29th Nov 2011 11:55

no,you can take profit as the contract proceeds and as certified by a qa

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30th Nov 2011 17:25

Re: taking stage profits

Suggest you need to know absolutely everything about the "sale" of the property before you can make a decision on how to account for any of the associated revenue in advance of completion.   This does not just include the sale contract but also any related contracts, side letters, you even have to ask if there have been any verbal agreements.  You also need to ascertain if the buyer is credit worthy for the total sums involved.

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By blok
30th Nov 2011 17:58

.

as far as the sale goes, you need to understand the fundamental difference between a promise to purchase and an unconditional legal offer made to purchase.  You only recognise revenue when you have an unconditional sales contract. 

If you have the buyers "signed up" then you are in the realms of long term contracts....which is a whole different question.  

I would then refer to the real accountants to offer advice on how you account for stock that becomes a LTC.

 

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