Institute of Cost Accountants of India has recently released a draft guidance note on the maintenance of cost records in respect of Real Estate Industry. Besides giving a clarification on the nature of activities covered under cost in respect of Real Estate, the Draft Guidance Note has thrown some light on the basic aspects for preparation for cost records in the construction Industry. It has also mentioned about the Cost Accounting Standards to be followed and to what extent. The basic formats of the cost sheets have also been given in the draft.
Summary of the Draft Guidance note can be as under:
a. Company can formulate its own costing methodology rather than going by any specific methodology. But it should be compliant of various Cost Accounting Standards and GACAP
b. Project has been defined to be cost object. If the company does not want to work out the cost of the various units like 2BHK, 3BHK, Plots etc.. it can restrict itself upto working out the costing at the project level based on CAS and GACAP. Cost Statements would be prepared in respect of Projects.
c. Creation of common service cost centres and apportionment of the same following suitable method is required
d. Creation of common Plant and Machinery as a separate cost centre and apportionment of the same following suitable method is required
e. The revenue recognition in cost records will follow the same principles/AS as are followed in financial accountsi.e.AS-7
f. Interest Charges not identifiable with specific projects need to be apportioned on the projects
g. The variations in complying with CAS need to be specifically mentioned in Cost Sheets and Cost Compliance report
Construction Industry is unlike any manufacturing industry wherein products are manufactured in a particular and sold accordingly whereas in construction industry , the construction of cost object may take years but the revenue and expenses are booked based annually on certain factors.
The first and the foremost explanation in the guidance note is with regard to the application clause which states that in case of companies covered under Rule 3 and construction activities are required to prepare cost records and file cost compliance report with MCA.
Rule 3 of CARR 2011 covers the companies:
1. wherein, the aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees; or
2. wherein the aggregate value of the urnover made by the company from sale or supply of all products or activities during the immediately preceding financial year exceeds twenty crores of rupees; or
3. wherein the company’s equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India
Coverage of Companies
Construction (incl. development or real estate) industry who meets with the threshold limits laid down in Rule 3 (please refer above) of the Companies (Cost Accounting Records) Rules, 2011 shall be required to maintain cost accounting records and file compliance report with the Central Government in accordance with the provisions of these Rules. This includes companies undertaking:
1. construction jobs with the use of own materials (whether self manufactured / produced or procured from outside) and / or
2. development of residential, commercial or industrial estates i.e. development of township, residential units, commercial complex, office blocks, industrial parks (including SEZ), etc. or
3. construction of highways rails, roads, bridges, industrial & non-industrial structures, or other infrastructure facilities etc or
4. construction activities undertaken under BOT/BOOT mode, or the projects undertaken as EPC contractor or the projects undertaken abroad by a company incorporated in India.
Please note that above clarification has used the word “ includes” so apart from the above there might be other companies having other type of real estate/construction activities.
Exemption of preparation of cost Records
As per MCA's General Circular No. 67/2011 dated 30th November 2011 (annexed as annexure III) companies engaged in construction business as contractors or sub- contractors wherein they are paid only the conversion charges are exempted from the applicability of companies (Cost Accounting Records) Rules, 2011.
Non applicability of Cost records
Companies (Cost Accounting Records) Rules, 2011 do not apply to such Joint Ventures that are non-corporate entities [i.e not companies registered under the companies Act] or to unlisted companies that are below the specified threshold limits or to a body corporate governed by any special Act.
Highlights of the Draft Guidance Note is given as under
The Cost Accounting Record Rules do not prescribe any specific format of cost statement and the company is free to adopt a system suitable to provide cost information.
The type of cost records would depend on the particular situation, structure of the company and the activities that the company is engaged in. What is intended is to ensure maintenance of such records and details in a structured manner on a regular basis so that the accumulation is possible on a periodical basis to arrive at the cost of a particular cost object.
The cost records should be capable of providing and maintenance cost in a manner so that costs could be accumulated for a particular cost object. Cost Object has not been defined in terms of Real Estate. However, the project can be taken as a cost object for working out the costs.
In a construction activity, each project or operation can be different and distinct and there is a need to define the “cost object” in relation to which the costs are required to be accumulated and reported.
The Project in the context of construction activity is to be considered as the cost object.
Revenue Recognition : Construction industry maintains its accounts and recognises revenue on the basis of Accounting standard - 7. The revenue recognition for cost accounting records would follow the same principle. The elements of costs and revenue would be based on the same principles as adopted for its financial accounting
The reporting to the MCA has to be made product groupwise and the product group in real estate has been defined as:
a) Construction of residential buildings
b) Construction of non-residential buildings
c) Construction of highways, road, bridges etc.
d) Construction of industrial and non industrial plants, structures and facilities
e) Laying of pipelines, communication and power lines
f) Other construction activities not elsewhere specified
g) Real estate development activities
h) Architectural and engineering services
i) Construction and Real Estate Related Services
At the time of planning for costing, the projects or sub-projects need to be bifurcated in the above product group categories.
The construction project models have been categorized into various categories and Applicability of CARR for various construction projects modals from the specific period is given below:
PPP model:
The primary business model is Build, Operate and Transfer. CARR will be applicable from the time the Company starts building or constructing the project (either by themselves or through contractor).
EPC Contracting Model
The business model is primarily Engineering, Procurement and Construction. CARR will be applicable from the initial stage of Engineering or construction, as applicable.
Real Estate Development Model
The business model is primarily development and sale of real estate. CARR will be applicable from the start of development /construction activity.
The detailed Guidance note can be accessed at:
http://members.icwai.org/members/CAR/ED-GN-Construction-Industry.asp
The above discussion is purely based on the draft which yet to be finalized.
In case of any clarification, please feel free to contact us at:
Email: navneetic@yahoo.com, navneet.jain@costaudit.org
Navneet Kumar Jain, Practising Cost Accountant, Delhi
FCMA, MBA, LL.B., M.COM., PGDTL, LIII., AIIISLA
CAclubindia
