A1 DEVELOPERS LTD

Mrinalini Singh (1511337)

Punit P Parekh (1511345)

Pramod Rangarajan (1511341)

Shiva Rohit(1511356)

FINANCIAL ACCOUNTING

CASE STUDY

GROUP 8

A1 DEVELOPERS LTD

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CONTENTS

Sr. No. Description Page No.

1 Summary of Information 2

2 Activity 1 : Purchased Land for Rs. 10 Crore on Apri1, 2013. 2

3 Activity 2 : Firm Bookings were made for 200 units of value Rs. 200 Crores and Rs. 36 Crores were received by 31st March, 2014. There was stage wise payments for the balance.

2

4 Activity 3 : The total estimated cost of the project construction was Rs, 390 Crores including interest of Rs. 4.00 Crores. The estimated cost included Rs 10 Crores on creation of common facilities like swimming pools, parks and recreation centres.

3

5 Activity 4 : As on 31st March, 2014 the company had incurred Rs. 160 Crores on this project including interest of Rs. 1.60 Crores.

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6 Activity 5 : The company had completed construction of ten residential units to be used as model flats for exhibition. These flats were duly furnished and equipped to represent a modern residential unit with all facilities. Due to popular demand the company had auctioned 5 of these flats for a consideration of Rs. 7.5 crore lakhs on March 31, 2014.

4

7 Disclosures 5

8 References 5

A1 DEVELOPERS LTD

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Summary of Given Information

Name of the company: A1 Developer Ltd Domain: Industrial Property Developers, Real Estate Head office: Bombay Accounting Period: April 2013 to March 2014 Estimated number of total units to be constructed: 500 units Estimated total revenue from 500 units: Rs. 500 Cr Location of construction work: Calcutta

Activity 1: Purchased Land for Rs. 10 Crore on Apri1, 2013.

Land purchased can be classified as a fixed asset or as an inventory. In the case of real estate, from the general accounting policies of companies like Brigade Group, DLF etc., it was observed that companies classify land and constructed housing units as asset if these are being leased or given on rent. In case of land and housing units which are to be sold for real estate, the land and units are considered as inventories. The inventories are valued as under:

a) Building Material, Stores, Spares parts etc. are valued at cost using FIFO method. b) Completed Units (Unsold) are valued at lower of cost or net realisable value. c) Project/Contracts work in progress are valued at cost d) Land is valued at lower of cost or net realisable value.

The company may finance this via cash, credit or a mixture of options. Here it is assumed that the company paid Rs. 10 Crore in cash and added Land in inventory worth Rs. 10 Crore.

Activity 2: Firm Bookings were made for 200 units of value Rs. 200 Crores and Rs. 36 Crores were received by 31st March, 2014.

No of units booked 200 units Cash received from customer Rs 36 Crores

The money received from bookings can be classified as revenue or as a liability. As per Ind AS-11, AS-11, revenue can be recognized using percentage of completion method at end of accounting period. Also, revenue should be recognized when majority of risks and ownership has been transferred to owner. As customers have made a preliminary booking it is assumed that currently Rs. 36 Crore is classified as Advance from Customers under Other Liabilities, as per naming conventions in the Annual reports of Brigade Group, Ansal Housing. This will be further re-evaluated using percentage of completion method once stage of completion is identified in further sections of the report.

A1 DEVELOPERS LTD

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Activity 3: The total estimated cost of the project construction was Rs, 390 Crores including interest of Rs. 4.00 Crores. The estimated cost included Rs 10 Crores on creation of common facilities like swimming pools, parks and recreation centres.

Cost of creation of common facilities Rs 10 Crore

Interest Rs 4 Crore

Other Project Expenses Rs 376 Crore

Total Estimated Project Construction Cost Rs 390 Crore

Cost of Land to be used for Project Rs 10 Crore

Total Estimated Project Cost Rs 400 Crore

Activity 4: As on 31st March, 2014 the company had incurred Rs. 160 Crores on this project including interest of Rs. 1.60 Crores.

Cost incurred in project Rs 158.40 Crore

Interest Rs 1.60 Crore

Total Incurred Project Cost Rs 150 Crore

Cost of Land in use for Project Rs 10 Crore

Total Incurred Project Cost Rs 160 Crore

Here it is not clear if 160 crore is total project cost or total project construction cost incurred. For the purpose of this analysis it is assumed that Rs 160 crore is the total project cost incurred. As Land is being used in the Project currently we remove from inventory and add it as an expense to project construction as per GN(A) 23. From AS7 and Investopedia, it is observed that “Construction interest that is incurred on the construction of a structure intended for rental or business use is not deductible at the time that it is paid. This type of interest is added to the cost basis of the building instead” Hence we are considering all the construction interest as part of construction cost rather than dealing with it individually.

A1 DEVELOPERS LTD

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Activity 5: The company had completed construction of ten residential units to be used as model flats for exhibition. These flats were duly furnished and equipped to represent a modern residential unit with all facilities. Due to popular demand the company had auctioned 5 of these flats for a consideration of Rs. 7.5 crore lakhs on March 31, 2014.

As per IndAs-11, when the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract shall be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period. In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied:

a) Total contract revenue can be measured reliably; b) It is probable that the economic benefits associated with the contract will flow to the entity; c) Both the contract costs to complete the contract and the stage of contract completion at the end

of the reporting period can be measured reliably; and d) The contract costs attributable to the contract can be clearly identified and measured reliably so

that actual contract costs incurred can be compared with prior estimates. The stage of completion of a contract may be determined in a variety of ways. The entity uses the method that measures reliably the work performed. Depending on the nature of the contract, the methods may include:

a) The proportion that contract costs incurred for work performed to date bear to the estimated total contract costs;

b) Surveys of work performed; or c) Completion of a physical proportion of the contract work.

Considering method (c) it can be estimated that 10 out of 500 units were completed. For method (b), no survey information is available in case. Finally, method (a) is chosen and we estimated the percentage of completion to be:

Stage of Completion = (Total Incurred Project Cost / Total Estimated Project Cost) * 100

= (160/400) *100 = 40%

Considering that 10% of agreement amount has been realized and 25% of construction cost has been realized we now use this 40% stage of completion in our revenue recognition. In the inventory we add 5 units as Completed Units (Unsold) at lower of cost or net realisable value and also add the remaining cost that has not been incurred as Project work in progress at cost.

A1 DEVELOPERS LTD

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Disclosures

Summary of financial data (All figures in Crores)

Initial amount of revenue agreed 500 Variation 2.5 Total contract revenue (500+2.5) 502.5 Contract costs incurred upto reporting date 160 Contract cost to complete (400-160) 240 Total estimated contract costs 400 Estimated profit = (502.5-400) 102.5 Stage of completion 40%

P&L

(Alternative 1) (Alternative 2) Revenue- (0.4*502.5) 201 Revenue- (0.4*495)+7.5 205.5 Expenses 160 Expenses 160 Profit 41 Profit 45.5

Contract disclosures

Contract revenue recognized 201 Contract revenue recognized 205.5 Contract expenses recognized 160 Contract expenses recognized 160 Expected losses 0 Expected losses 0 Recognized profits less losses 41 Recognized profits less losses 45.5 Contract costs incurred 160 Proportionate cost ((10/500)*160) 3.2 WIP to be carried forward (160-3.2) 156.8 Contract Revenue 201 Contract Revenue 205.5 Progress Billings 87.5 87.5 Unbilled contract revenue 121 118 Advances 205.5

References

1. AS-7 2. AS-11 3. Ind AS-11 4. GN(A) 23 5. Brigade Group Annual Report 2013-14 6. DLF Group Annual Report 2014-15 7. Ansal Housing Annual Report 2013-14 8. http://www.investopedia.com/