Analysing The Draft Income Disclosure Standards For Real EstateBloombergQuintOpinion
The government has issued draft Income Computation and Disclosure Standards (ICDS) on real estate transactions for public comments.
This ICDS is applicable for the determination of income from all forms of transactions in real estate, which refers to land as well as buildings and rights in relation thereto.
As per the draft ICDS, for projects where the economic substance is similar to construction contracts, project revenue and project cost shall be recognised as revenue and cost respectively based on percentage of completion method i.e. with reference to stage of completion of the project on the reporting date. Stage of completion of a contract is determined based on project cost incurred or surveys of work performed or completion of physical proportion of work.
The proposed ICDS further provides that revenue shall be recognised in respect of only such units where 10 percent or more of the total revenue as per the agreements of sale are realised and it is reasonably certain that the parties to such contracts will comply with the payment terms.
For projects where the economic substance is not similar to construction contract, revenue shall be recognised in accordance with ICDS IV relating to revenue recognition and provisions of paragraph 3, 4 & 5 of the said standard shall apply as-is i.e. provisions pertaining to recognition of revenue for sale of goods, reasonable certainty of ultimate collection and revenue recognition in respect of claim for escalation of price of goods.
For transferable development rights (TDRs), revenue shall be recognised when the following conditions are fulfilled:
- Title to the development rights is transferred to the buyer; and
- It is reasonable to expect that the revenue will be ultimately collected.
The provisions of ICDS on real estate transactions is based on Guidance Note on Accounting for Real Estate Transactions issued by the Institute of Chartered Accountants of India (ICAI) with certain key modifications. Changes in draft ICDS vis-a vis ICAI Guidance Note includes the following:
- Definition of project: as per the Guidance Note, the set of units which are connected by a common set of amenities will constitute a single project. ICDS recommends use of the term ‘basic facilities’ in place of common amenities.
- Definition of project cost: the Guidance Note contains an illustrative list of items to be included, allocated or excluded in the project cost. Consistent with the framework of ICDS, the illustrations have been excluded in the ICDS.
- The proposed ICDS does not provide for capping the recognition of revenue based on the stage of completion determined with reference to project cost incurred.
- The Guidance Note contains four conditions to be satisfied for recognition of revenue including the condition of obtaining all critical approvals. Draft ICDS proposes doing away with the condition of obtaining all 'critical approvals' for revenue recognition in view of the newly enacted ‘The Real Estate (Regulation and Development) Act, 2016’ (RERA). All other conditions have been retained in the proposed ICDS.
- In the case of acquisition of TDRs, the Guidance Note provides the development rights shall be recorded at the fair market value or net book value. To bring certainty and consistency with other ICDS, the committee recommends recognition of TDRs at the fair value of the development rights so acquired.
The specific ICDS on real estate transactions shall be a welcome move as it shall instill clarity in the application of provisions of ICDS and certainty in the computation of taxable income to the sector.
With the government releasing draft ICDS for real estate sector, industry is hoping that another sector i.e. leases, for which there is no ICDS, will get some clarity too.
Vikas Gupta is Partner – Assurance at Nangia & Co LLP.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.