Академический Документы
Профессиональный Документы
Культура Документы
Accounting Challenges
They may manage the project themselves and provide labour and
materials on site. However, many developers subcontract all or part
of the construction work.
Execute:
Appoint architects,
Acquire Obtaining
project managers, other
property funding
consultants and
constructor
Finalise:
Market for
Secure approvals, sale/ lease Finalise
i.e. local council (pre-sale Construction sale
and internal targets for
residential)
7
Parties to a development
Local council Financing
Loan
agreement Mezzanine
Development and Joint venture
agreement First mortgage debt
construction
approval (DA & BA) Equity
JV parties
Construction
company
8
Development business risk often
speculative in nature
What are the two main categories of risks?
Revenue Cost
Realisation of value Risk of cost blow-
Market risk
out
Funding risk
Settlement risk
Approval risk
Completion risk
9
Development business risk
risk of cost blow out
Key risks
Construction risk
Design risk
Schedule risk
Finance and holding costs
Developers risk management
Committing costs early
Use of fixed price/lump sum contracts
Updating and reviewing forecast costs and progress against
project feasibilities regularly
Adequate project contingencies
10
Development business risk
market risk
Most fundamental risk matching timing and nature of developments with market
demand
Fluctuations in property cycles
Commercial
Retail
Industrial
Residential
Factors impacting property cycle
Market sentiment
Interest rates
Competing supply (other developers)
Legislation, e.g. Incentive under tax law
Demographics
Economics
Developers risk management:
11 Development lead time, i.e. Hold short/[med] term
Pre-commitments, i.e. sales, leasing
Development business risk
funding risk
Risk of not being able to fund the development or fund at a commercially viable rate
Increase in risk
12
Development business risk
funding risk (cont.)
Lender requirements for debt
Project viability (robust feasibility)
Minimum level of developer equity
Security
Pre-commitments
Interest rate
Advances and covenants
Developers risk management
Pre-sale commitments
13
Project feasibilities
Development business risk
Approval risk
Risk that approvals to commence the
development or a stage within the
development are not received
Development approval (DA)
Building design
Property zoning
Environment clearance
Construction approval (CA)
14
Development business risk
completion risk
Risk that development not ready for intended use by forecast completion
date
Implications
Potential fall over of pre-commitments
Sunset dates in sales contracts
Lease agreements, e.g. rental guarantees
Blow out of holding and financing costs
Developers risk management
Pass on to builder
Early completion incentive
Liquidated damages
Program float (buffer between contracted completion and
sunset dates)
15
Development business risk
settlement risk
The risk that sales
(exchanges) will not
complete (i.e. not
settled in cash)
Developers risk
management
Exit strategy
Enforceable sales
contracts
Assessment of credit
risk
Deposits (e.g. 10% cash
16
or deposits bonds)
Accounting challenges
Which accounting standard valuation?
Cost accumulation and allocation
Borrowing costs
Which accounting standard - revenue?
Revenue recognition
17
Accounting considerations
Which accounting standard valuation?
Valuation
AS 2 Inventories development for sale
Inventory measured at lower of cost and NRV
AS 13(IAS40) Investment Property development to hold for long
term capital appreciation or rental income
Asset measured at fair value OR depreciated historic cost
Revision to IAS 40 eliminated potential different treatment
between new development and redevelopment of existing
investment property
AS 10/IAS 16 Property, Plant and Equipment development by owner
occupiers
Asset measured at fair value OR depreciated historic cost
18
Accounting considerations
Key questions Accounting impact/considerations
1. What is the nature of the entitys
investment in the development?
Asset Inventory
Subsidiary Consolidation The answer to
Joint venture Equity accounting/proportionate
each of these
Joint agreement consolidation questions
drives the
Proportional consolidation
accounting
2. How is the project funded? Debt (on or off balance sheet) treatment
Equity
AS2/IAS 2 Inventory
Costs must relate to that development
Capitalised costs must be directly attributable (be
careful with marketing costs)
Inventory property held for resale
Cost of acquisition
Development costs capitalised
Other costs: rates, taxes and interest
Current versus non-current
20
Accounting considerations
Cost allocation
21
Accounting considerations
Borrowing costs
22
Accounting considerations
Which accounting standard - revenue?
24
Accounting/Audit
Key considerations revenue recognition matter of judgement
Assess who is exposed to majority
Recognise revenue of risks and benefits of ownership
Cash collected of asset
Title transferred
No terms/
Defer revenue
conditions attached
recognition
to sale
Cash deferred and
No continuing
amount is contingent
involvement
Title does not transfer
No bonding
What if (is retained)
Conditions attached to
Seller of land is also
contracted to develop the sale, e.g. yield
land for the purchaser? guarantee
Involved in assets
ongoing management
(continuing
involvement)
25
Accounting considerations
Revenue recognition example
Type of
product Revenue recognised when:
Land /plot sale Substantially complete (meaning sewer,
water and roads are complete)
Title obtained from authorities
Enforceable agreement entered in to for
sale and Settled (in cash by purchaser)
Built form Sold apartments on percentage completion
residential, achieved (100% complete)
Commercial Completion certificate from authorities.
space
27 2
7
Accounting considerations
Disclosures
28
Auditing a real estate developer
Inventory
Recoverability of inventory is the most
fundamental audit consideration
Requirements of AS 2 Measure inventory at lower of
cost and NRV
Also consider cost accumulation, cost allocation,
capitalization of borrowing cost
How do we assess this?
Project reviews
29
Specific Issues
Accounting for infrastructure cost in respect of
megha township project and working out its
impact on final product.
Sale of land and construction under two
separate agreements
Perpetual ownership of infrastructure with
developer having continuous revenue stream
Deferred payment facilities.
Auditing a real estate developer
Inventory
Total population
Apply specific item sampling to select projects for Perform procedures to identify misstatements >
detailed assessment by project review based upon performance materiality in residual population,
quantitative and qualitative factors: such as:
linked to inherent risk (higher risk projects) consider level of reliance that can be placed
on tests of the operating effectiveness of
total project value greater than x managements key controls over the whole
forecast profit/ loss greater than x population, such as internal project reviews
movement in forecast profit/ loss greater than x analytical procedures: compare project
management suggestions revenue and margin against expectation
(based on prior periods)
unique or unusual arrangements
inspect internal management project reports
complexity, specifications, regulatory
environment high level discussions with management as
to project status
Auditing a real estate developer
Project reviews
32
Auditing a real estate developer
Revenue recognition
33
Any questions?
???
3
4