Accounting for Sales of Real Estate

This Statement attempts to establish an accounting standard for the recognition of profit or loss on sale of real estate. It deals with the profit recognition principle on Sales of Real Estate and Accounting for Retail Land Sales. This statement explains the various ways for accounting for Sales of Real Estate and Accounting for Retail Land Sales in the accounting environment and how revenue is recognized for real estate.

It is important that the receipts accrued to the seller be collectible and that the seller has little unmet commitments for the construction or development before profits are recognized in full by the use of the accrual method of accounting. Other sales for real estate projects should be reported depending on the completion stage or the amount that has been received or is receivable

Profit should be recognized in full depending on whether a sale contract has been entered into, the relationship between the seller and the buyer, and there exists a continuing agreement for the maintenance or other continuing obligations to the buyer among other things. This problem of profit recognition is compounded by the forms of financing that do exist in the market of funds. Under IAS 17 we have various leases that do affect our asset acquisition and hence the person who leases the asset to the lessee should recognize some part as profit and the other part as rental given for the asset.

The most difficult problems facing us in the area of revenue recognition due to the time value of money associated with these transactions and the implicit benefits to the leaser. Hence problems in the application of this principle abound. The real estate under consideration may be used for very many purposes and hence can be sold to as many different legal persons as possible using differing measures. This will bring in the problem of revenue recognition since the measure for revenue recognition under leases (IAS 17) differs from revenue recognition under real estate accounting.

In most cases we should consider the likelihood of defaults and the enforceability of the contract to redress the problem in the case of the item being repossessed due to non payment of the agreed sums under the contract.. this means that in hire purchase of the real estate a number of units will be sold and then repossessed and sold again. This is further compounded by the fact that many financial institutions may have financed the acquisition and hence we should account for these transactions. This is mortgage financing situations that need to be taken care of even as we recognize gains in our real estate deals.

The financing institutions role played in financing commercial and real estate mortgaging and other contractual real estate construction is not available to be used for purposes of revenue recognition and therefore we may not be able to ascertain the real gains or losses due to each transaction. Borrowing costs should also be capitalized Capitalize borrowing costs directly attributable to the acquisition or construction of a qualifying asset, but only when it is justifiable that these costs will result in future economic benefits to the entity, and the costs can be measured reliably.

All other borrowing costs that do not satisfy the conditions for capitalization are to be expensed in the income statement when incurred (IAS 23) Borrowing Costs There exist ambiguity in the calculation of the values and therefore we need to exercise caution and conservatism when revenue recognition is concerned. In practice we find that the recognition of profit is compounded by these problems. For some they recognize profit pre-maturely while others will recognize it when it occurs. Therefore we find that different treatment will always occur in practice.

We should also ascertain whether a sale has occurred when we recognize the profit and not assume that because a sale has been reported we have a sale. This presumption should be considered before the revenue can be recognized. Materiality of the economic benefits associated with these economic benefits should also be considered in the reporting of the revenue in accordance with IAS 8 and IAS 1. According to the convention of full disclosure all accounting statements should be honestly prepared and to that end full disclosure of all significant information should be made.

This means that all the information which is of material interest to proprietors, creditors and investors should be disclosed in accounting statements. Hence an obligation is placed on the accounting professional to see that the books of accounts prepared on behalf of others are as reliable and informative as circumstances permit. This implies that the various treatments will have a bearing on the convention since we shall have different solutions. Due to the differing treatment of various items we find that Statement No.

66 Accounting for Sales of Real Estate is problematic when we compare across companies in the industry. Great amounts of explanations must be provided in the notes to get the disclosure requirements necessary for the revenue recognized to be accepted as sufficient given the facts of the case. I also believe shareholders should not be bogged down with irrelevant explanations but should such information in the main financial statements I believe that that Statement No.

66 Accounting for Sales of Real Estate was prepared with very good intentions in mind and therefore we should implement some few changes to represent the financial reality now days and make sure that all companies using this particular statement treat the revenue and any other financial transaction in the same way at all times. REFERNCES Schwartz, C. H, Mcnamee Dionne (1992). Journal of Accountancy: Accounting for Real Estate Syndication Income and Foreclosed Assets. Vol. 174 Munter, Paul. (1995, October). CPA Journal, Douglas R. Carmichael, Baruch College