18 March 2013
Dear Neelesh Real estate development is a construction business. The revenue and cost recognition is dealt by IAS 11 – construction contracts. The standard requires that the revenue shall be recognized on percentage completion method when the outcome of the contract can be measured reliably. Under this method you should compare the cost incurred in the accounting period with the total budgeted/ estimated cost and the same percentage of total contract price shall be accounted for as revenue (this amount should be equal to invoices made + progress billing). E.g you contract price is Rs 100 and estimated cost is Rs 85. In first year you spend SR. 25 on the contract it is 29% of cost so you should book the revenue @ 29% of the contract value i.e. 100 so it is RS. 29. (GP will be calculated by revenue 29 – cost 25 = 4). In the next year your total cost is 46 so it is 54% of total cost now the revenue should be 54% as aggregate i.e. RS. 54. To arrive at on actual revenue for the period minus the revenue you have already recognized i.e RS. 29 so your revenue shall be 25 for this period and calculate the cost of the contract in the same way. For further details please refer to IAS 11, Para 22 to 36
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