DOCSLIB.ORG

Classification of Land by Real Estate Developer

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Classification of Land by Real Estate Developer PHILIPPINE INTERPRETATIONS COMMITTEE (PIC) QUESTIONS AND ANSWERS (Q&A) Q&A No. 2018-11 Issue What is the correct classification of the land owned by real estate developer? Classification of land by real estate developer Background A real estate developer develops residential and commercial units which are sold or leased out to customers. These projects can be horizontal or vertical projects which are either: (a) units in a high-rise building which can be for office or residential use; (b) serviced lot; or (c) serviced lot and house. Projects can be in a single phase or in multiple phases and usually take more than one year to complete (e.g. 3-5 years). In the normal course of its business, the real estate developer purchases the following raw land: Land A - The entity has plans to construct and develop the parcel of land as a residential subdivision for sale as approved by the entity’s Board of Directors. The preparation of the master plan, detailing the plans as residential property, has commenced but the entity intends to start the physical construction activities (e.g. excavation) two years from the government approval of the master plan. Land B –The entity has plans to construct and develop the parcel of land as a residential subdivision for sale as approved by the entity’s Board of Directors. The preparation of the master plan, detailing the plans, has not commenced. Land C - The entity intends to develop the land into a commercial center for lease but preparation of master plan has not commenced and the entity does not intend to commence the physical construction activities within the year. Land D -The entity purchased the parcel of land to establish presence in the location but does not have any concrete plans on how to develop the property. Conclusion a. Land A – Classified as inventory presented as current assets b. Land B – Classified as inventory presented as current assets c. Land C – Classified as investment property presented as non-current asset d. Land D – Classified as investment property presented as non-current asset Discussion In accordance with paragraph 6 of PAS 2: Inventories are assets: a. held for sale in the ordinary course of business; b. in the process of production for such sale; or c. in the form of materials or supplies to be consumed in the production process or in the rendering of services. In accordance with paragraph 5 of PAS 40: Investment property is property (land or a building—or part of a building—or both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both, rather than for: (a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business. Paragraph 8 of PAS 40 further provides the following examples of investment property: (a) land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business. (b) land held for a currently undetermined future use. (If an entity has not determined that it will use the land as owner-occupied property or for short-term sale in the ordinary course of business, the land is regarded as held for capital appreciation.) (c) a building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases. (d) a building that is vacant but is held to be leased out under one or more operating leases. (e) property that is being constructed or developed for future use as investment property. In accordance with paragraph 66 of PAS 1, an entity shall classify an asset as current when: a. it expects to realize the asset, or intends to sell or consume it, in its normal operating cycle; b. it holds the asset primarily for the purpose of trading; c. it expects to realize the asset within twelve months after the reporting period; or d. the asset is cash or a cash equivalent (as defined in PAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. An entity shall classify all other assets as non-current. In addition, paragraph 68 of PAS 1 defines the operating cycle of an entity as the time between the acquisition of assets for processing and their realization in cash or cash equivalents. When the entity's normal operating cycle is not clearly identifiable, it is assumed to be twelve months. Current assets include assets (such as inventories and trade receivables) that are sold, consumed or realized as part of the normal operating cycle even when they are not expected to be realized within twelve months after the reporting period. Current assets also include assets held primarily for the purpose of trading (examples include some financial assets that meet the definition of held for trading in PFRS 9) and the current portion of non-current financial assets. Analysis of the classification of the parcel of lots purchased by the entity are as follows: a. Land A meets the requirements for an asset to be classified as inventory and current asset. See analysis below: Current or Non-current Inventory or Investment Property (a) it expects to realize Met. Land A was purchased Inventory, since it meets the criteria the asset, or intends by the entity for the purpose of PAS 2, paragraph 6 (a), which is to sell or consume it, of converting it into a land held for sale in the ordinary in its normal operating residential subdivision for course of business as evidenced by cycle; sale. As defined above, the BOD approval and preparation of operating cycle of an entity master plan. is the time between the acquisition of assets for processing and their realization to cash or cash equivalents. Given the nature of business of real estate development, wherein projects usually take more than one year to construct/develop and requires certain period for selling and conversion to cash, the normal operating cycle is more than one year form the time of purchase. Given this, the raw land will be classified as current asset. (b) it holds the asset Met. Real estate inventories primarily for the are held by the entity for purpose of trading; sale to customers. (c) it expects to realize Not applicable. See the asset within discussion in (a) twelve months after the reporting period; or (d) the asset is cash or a Not applicable. The asset is cash equivalent (as not cash or cash equivalent. defined in PAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. b. Land B meets the requirements for an asset to be classified as inventory and current asset. Even though the preparation of the masterplan has not commenced, the intention of the entity to hold the land for development for sale in the ordinary course of business is evident, given that the plan was approved by its Board of Directors. It is classified as current because it meets the criteria of PAS 1, Paragraph 66 (a) and (b) given the same rationale for Lot A. c. Land C meets the requirements for an asset to be classified as investment property and non- current asset. See analysis below: Current or Non-current Inventory or Investment Property i. it expects to realize Not Met. The parcel of lot is Investment property, since it meets the asset, or intends not expected to be realized, the criteria of PAS 40 where the lot is to sell or consume it, sold or consumed within the held to earn rentals and is not used in its normal operating entity’s normal operating in the production or supply of goods cycle; cycle. or services or for administrative purposes; or for sale in the ordinary ii. it holds the asset Not Met. Investment course of business. primarily for the properties are not held for purpose of trading; sale to third party. iii. it expects to realize Not Met. See discussion in the asset within (i) twelve months after the reporting period; or iv. the asset is cash or a Not applicable. The asset is cash equivalent (as not cash or cash equivalent. defined in PAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. d. Land D meets the requirements for an asset to be classified as investment property and classified as non-current asset. The same analysis as Land C above for the classification as current or non-current. Land D is an investment property, since it meets the criteria of PAS 40 where it is held for capital appreciation and is not used in the production or supply of goods or services or for administrative purposes; or for sale in the ordinary course of business. In addition, PAS 40.8(b) cites that land held for a currently undetermined future use is an example of an investment property. Transition and Effective Date The consensus in this Q&A is effective from the date of approval of the FRSC. Date approved by PIC: January 31, 2018 (Original signed) PIC Members Wilson P. Tan, Chairman Emmanuel Y. Artiza Ma. Gracia F. Casals-Diaz Chase M. Sarmiento Zaldy D. Aguirre Wilfredo A. Baltazar Ferdinand George A. Florendo Gloria T. Baysa Jose Emmanuel U. Hilado Rosario S. Bernaldo Lyn I. Javier Ma.
Load more

Recommended publications
  • Glossary of Financial Terms
    GLOSSARY OF FINANCIAL TERMS Balance sheet The balance sheet sets out the assets and liabilities of a business and its net worth. Bottom line The closing cash balance, which then becomes the next month’s opening balance and provides the basis for comparison with the firm’s monthly cash-book total. Current assets Assets used or turned over within 12 months: cash in hand or at the bank, debtors and work in progress. Current liabilities Liabilities that need to be met regularly or within the current reporting year. They may include trade creditors, disbursements, bank overdrafts, lease or hire purchase payments and accrued expenses such as annual leave and insurance. Disbursements Client disbursements can be both an income and an expenditure component. Over a period these will be the same, apart from a small net outflow due to growth of the practice and increasing charges. Investing activities This category refers primarily to the cash flow of sales and purchases of assets relating to the business. An example of an inflow of revenue from an investing activity is the sale of an office, property or equipment. An outflow would be the purchase of such assets. Fees or income Cost basis when fees paid for legal services. Accruals when invoice raised for legal service. Financing activities This category relates to such things as the borrowing and repaying of loans, and returning investments to investors. Financial performance statement Also known as a profit and loss statement; shows all income and expense accounts over time while indicating profitability over the same period. The main items shown on a financial performance statement for a legal practice are: fees or income operating expenses net profit before tax provision for income tax net profit after tax.
    [Show full text]
  • An Introduction to Basic Farm Financial Statements: Balance Sheet
    W 884 An Introduction to Basic Farm Financial Statements: Balance Sheet Victoria Campbell, Extension Intern S. Aaron Smith, Associate Professor Christopher N. Boyer, Associate Professor Andrew P. Griffith, Associate Professor Department of Agricultural and Resource Economics The image part with relationship ID rId2 was not found in the file. Introduction Basic Accounting Overview To begin constructing a balance sheet, we Tennessee agriculture includes a diverse list need to first start with the standard of livestock, poultry, fruits and vegetables, accounting equation: row crop, nursery, forestry, ornamental, agri- Total Assets = Total Liabilities + Owner’s tourism, value added and other Equity nontraditional enterprises. These farms vary in size from less than a quarter of an acre to The balance sheet is designed with assets on thousands of acres, and the specific goal for the left-hand side and liabilities plus owner’s each farm can vary. For example, producers’ equity on the right-hand side. This format goals might include maximizing profits, allows both sides of the balance sheet to maintaining a way of life, enjoyment, equal each other. After all, a balance sheet transitioning the operation to the next must balance. generation, etc. Regardless of the farm size, enterprises and objectives, it is important to keep proper farm financial records to improve the long- term viability of the farm. Accurate recordkeeping and organized financial statements allow producers to measure key financial components of their business such A change in liquidity, solvency and equity can as profitability, liquidity and solvency. These be found by comparing balance sheets from measurements are vital to making two different time periods.
    [Show full text]
  • Statement of Cash Flows
    Title: Statement of Cash Flow Speaker: Christina Chi online.wsu.edu Cash vs. Accrual Accounting Cash basis accounting Recognizes revenue when cash is received and expenses when cash is paid Beginning cash + cash revenue – cash payments = ending cash Accrual basis accounting Recognizes revenue when earned and expenses when incurred Overview of Financial Statements Balance sheet provides a point-in-time statement of overall financial position of a hotel - “snapshot” of financial health of a hotel Income statement Assess hotel’s operating performance over a period of time Reports the profitability of a hotel’s operating activities Prepared on accrual basis accounting and include noncash revenues & expenses Neither can answer questions regarding cash inflows and outflows during an operating period Purpose of Statement of Cash Flows Report and identify the effects of cash receipts and cash disbursements on hotel’s business activities during a period of time Allows an evaluation of hotel’s liquidity & solvency Provides basis for the evaluation of managers’ performance on cash management Provides basis for cash budgeting Provides a foundation to predict hotel’s future cash flows Cash Flow Activity Levels Operating activities Relate to hotel’s primary revenue generating activities; such activities are usually included in determining income. Investing activities Include buying and selling fixed assets, buying and selling securities/investments not classified as cash equivalents, etc. Financing activities Include borrowing
    [Show full text]
  • Balance Sheet 101 by Mark Snyder | Focuscfo
    Balance Sheet 101 By Mark Snyder | FocusCFO Accounting is the language of business, but unfortunately, it’s confusing almost to the point of mystifying to the layperson. A company’s balance sheet is one of the most important financial statements, yet many people don’t understand the “how” and “why” behind its purpose and structure. The purpose of the balance sheet is simple, it is merely a summary, at a point in time, of what a company owns [assets], owes [liabilities] and net worth [equity]. Why is it organized in such a weird way where the total Assets equals the total of Liabilities plus Equity? Wouldn’t it make more sense to have your Assets less your Liabilities equal your Equity? Accounting is based on the key concept of double entry bookkeeping in which debits have to equal credits. This key principle of balancing debits and credits hews well to the concept of a balance sheet and makes perfect sense to an accounting professional. Assets and Liability The asset and liability portions of the balance sheet are organized between current and non- current sections. Anything in the current section is something that will impact cash in 12 months or less. For example, accounts receivable is considered a current asset as it should be collected as cash within 12 months. Conversely accounts payable is considered a current liability as the amount will be paid to the vendor out of the company’s cash balance within the next 12 months. Working Capital The essence of the balance sheet is highlighting the working capital of a company.
    [Show full text]
  • Simplifying Classification of Deferred Taxes
    Simplifying Classification of Deferred Taxes On November 20, the Financial Accounting Standards Board (FASB) updated U.S. generally accepted accounting principles (GAAP) to simplify presentation of deferred taxes. Accounting Standards Update (ASU) 2015-17, Balance Sheet Classification of Deferred Taxes, amends Accounting Standards Codification Topic 740 (formerly FAS 109), Income Taxes, by requiring the classification of all deferred tax liabilities and assets as noncurrent in a classified statement of financial position. The amendments in this ASU have no effect on entities not presenting a classified statement of financial position. The standard is effective for annual and interim periods beginning after Dec. 15, 2016, for public business entities. For all other entities—including not-for-profit organizations and employee benefit plans with activities subject to income taxes—the amendments are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. An entity may apply the amendments either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. All entities would disclose the nature of and reason for the change in accounting principle in both the interim and annual period first adopted. For prospective application, an entity would note that prior periods were not retrospectively adjusted; for retrospective application, an entity would disclose quantitative information about the effects of the accounting change on prior periods. FASB’s position is that presenting deferred tax assets and liabilities in one place, as a noncurrent asset or liability, won’t negatively affect the quality of information given to investors because the current and noncurrent classification generally does not reflect when a temporary difference will reverse and become a taxable or deductible item.
    [Show full text]
  • Debit and Credit During Invoice
    Debit And Credit During Invoice andhisParticipatory palatinate meretricious. Ralph laminates retrains, reminds his bikini immitigably. collets polingsRustie resumetranscriptionally. her four-pounder Million and jejunely, slant Halvard unmoveable burking If any particular dollar amount will be done is a regular invoice debit expenses allow customers might be due for this post This is the date the transaction will be posted. That means the vendor is giving money to the company. Learn more transactions are recorded as well as such as journal. This topic explains how you can view invoice and payment settlement information in a convenient and simple format. In order for a journal entry in the account ledger to be valid, etymologists, Account receivable figures will show a negative figure as this will directly obligate the entity to provide the committed obligations in a fixed portion of time and under specified terms and conditions. Balance is debit and credit during invoice? Fixed amount to. All financing and using a debit memos to debit and invoice entry, the concept in the same solution finder tool for acceptance of invoices. This wording is next business, rent receipts reflect adjustments tab displays any sanctions for. Some of any web address or invoice debit memosis identical to entering the current asset account ledger is any personal or reviewed and expense account while a credit? The bundle is recent to be assigned in data order billing document of category M with a negative leading sign. Great Examples of Accounting Transactions Debit and Credit. How do happen from anywhere: explaining your business and a debit and debit and credit during invoice, you were not store customer.
    [Show full text]
  • What Cash Should Appear in the Current Asset Section of the Balance Sheet?
    Woman C.P.A. Volume 5 Issue 11 Article 7 6-1943 What Cash Should Appear In the Current Asset Section of the Balance Sheet? LaVerne Nettle Follow this and additional works at: https://egrove.olemiss.edu/wcpa Part of the Accounting Commons, and the Women's Studies Commons Recommended Citation Nettle, LaVerne (1943) "What Cash Should Appear In the Current Asset Section of the Balance Sheet?," Woman C.P.A.: Vol. 5 : Iss. 11 , Article 7. Available at: https://egrove.olemiss.edu/wcpa/vol5/iss11/7 This Article is brought to you for free and open access by the Archival Digital Accounting Collection at eGrove. It has been accepted for inclusion in Woman C.P.A. by an authorized editor of eGrove. For more information, please contact [email protected]. PAGE 114 The Woman C. P. A. JUNE, 1943 What Cash Should Appear In the Current Asset Section of the Balance Sheet? By LAVERNE NETTLE It would seem that a solution to this able for the payment of current liabilities question must conform with several well would vitiate the value of this classifica­ established accounting concepts. These tion. are: The application of these concepts to cur­ rent asset cash may be clarified by a few (1) The balance sheet presents “going illustrations. Except in the case of an at­ concern” values—meaning that so tachment, the cash in general checking ac­ far as is known the assets will con­ counts or in the cash receipts drawer is tinue to be used as their classifica­ undoubtedly unrestricted and available for tions indicate.
    [Show full text]
  • Accounting for Statement of Cash Flows
    Revised Summer 2016 Chapter Review ACCOUNTING FOR STATEMENT OF CASH FLOWS Key Terms and Concepts to Know Statement of Cash Flows • Reports the sources of cash inflows and cash outflow during an accounting period. • Inflows and outflows are divided into three sections or categories based on the underlying cause or nature of the cash flows: o Operating Activities o Investing Activities o Financing Activities • Cash forms a fourth section at the bottom of the statement in which the beginning cash balance is added to the total of the three sections to determine the ending balance for cash. • Cash is separated because the statement explains the changes in the cash balance during the period. Transactions Not Affecting Cash • At times, companies enter into investing and financing transactions that do not involve cash, such as issuing common stock to purchase land. • These transactions are not reported on the statement of cash flows because they do not provide or use cash. • Instead, they are reported in a separate section or note that is presented after the ending cash balance. Free Cash Flow • Cash flows from operating activities is available to the company is use, but not without some reservations. • The company must invest in new fixed assets to maintain the current level of operations (think of this as nothing lasts forever and therefore someday must be replaced) • The company must also satisfy current stockholders (owners) by maintaining the current dividend payout. • Therefore Free Cash Flow = Cash from Operating Activities – “maintenance” capital expenditures – cash dividends Page 1 of 24 Revised Summer 2016 Chapter Review Key Topics to Know Overview The Statement of Cash Flows explains the changes in the balance sheet during an accounting period from the perspective of how these changes affect cash.
    [Show full text]
  • Off Balance Sheet Finance
    CHAPTER 11 Off balance sheet finance 11.1 Introduction The main purpose of this chapter is to introduce the concept of ‘off-balance sheet finance’ which arises when accounting treatments allow companies not to recognise assets and liabilities that they control or on which they suffer the risks and enjoy the rewards. Various accounting standards have been issued to try to ensure that the statement of financial position properly reflects assets and liabilities such as IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IAS 10 Events after the Reporting Period. Also the conceptual framework of accounting is important in how it requires the substance of transactions to be reflected when giving reliable information in financial statements. Objectives By the end of this chapter, you should be able to: ● understand and explain why it is important that companies reflect as accurately as possible their assets and liabilities, and the implications if assets and liabilities are not reflected on the statement of financial position; ● understand and explain the concept of substance over form and why it is important in accounting; ● account for provisions, contingent liabilities and contingent assets under IAS 37 and explain the potential changes the IASB is considering in relation to provisions. 11.2 Traditional statements – conceptual changes Accountants have traditionally followed an objective, transaction-based, book-keeping system for recording financial data and a conservative, accrual-based system for classifying into income and capital and reporting to users and financial analysts. Capital gearing was able to be calculated from the balance sheet on the assumption that it reported all of the liabilities used in the debt/equity ratio; and income gearing was able to be calculated from the income statement on the assumption that it reported all interest expense.
    [Show full text]
  • Preparing Agricultural Financial Statements
    Preparing Agricultural Financial Statements Thoroughly understanding your business’ financial performance is critical for success in today’s increasingly competitive agricultural environment. Accurate records and financial statements are the foundation material required to analyze the financial condition and trends of your operation. All agricultural businesses, from small part-time farms to large commercial operations, require financial statements completed on a regular basis to track financial progress including equity, liquidity, income, and cash flow. How do financial statements prove useful? As a tool for management Successful managers use financial statements in combination with production records to identify strengths and weaknesses in their operation. In addition to tracking trends in assets and liabilities, financial statements can reveal where revenues are originating and where expenses are occurring. Financial statements can be used to time cash expenditures and plan for credit needs. Finally, these statements provide the critical data for ratio analysis and benchmarking. As a tool for use with lenders and how financial statements are prepared. other professionals Although accountants are professionals and are knowledgeable in their field, no one Lenders request, and in most cases require, understands your business like you do. an accurate set of financial statements to accompany a credit request. A carefully Financial statements include the balance prepared set of financial statements shows sheet, income statement, statement of you have a detailed understanding of your owner equity, statement of cash flows, and business and its repayment capacity. Others, cash flow projection. Our discussion will such as attorneys and financial planners, focus on the three most commonly used also need financial statements for services financial statements: the balance sheet, such as estate and retirement planning, income statement and cash flow projection.
    [Show full text]
  • Basic Understanding of a Company's Financial Statements
    Basic understanding of a company’s financial statements September 2020 Table of contents What are financial statements? 3 Balance sheet 5 Income statement 16 Cashflow statement 24 PwC | Basic Understanding of a Company's Financials 2 What are financial statements? PwC | Basic Understanding of a Company's Financials 3 The financial statements Financial statements are written records that illustrates the business activities and the financial performance of a company. In most cases they are audited to ensure accuracy for tax, financing, or investing purposes. A methodically work through of the three financial statements in order to assess the Financial health of a company. Balance Sheet is a snapshot at a point in time. On the top half you Balance Sheet have the company’s assets and on the bottom half its liabilities and Shareholders’ Equity (or Net Worth). The assets and liabilities are • Statement of financial position typically listed in order of liquidity and separated between current and non-current. Income Statement The income statement covers a period of time, such as a quarter or year. It illustrates the profitability of the company from an accounting • Statement of operation/profit and loss (accrual and matching) perspective. It starts with the revenue line and after deducting expenses derives net income. Statement of Cash Flows The cash flow statement look at the cash position of the company . It answers it answers the questions ; How much of the organisation’s cash goes to its creditors and shareholders? Does it keep enough for its own investment and growth? has 3 components cash from operations, cash used in investing, and cash from financing.
    [Show full text]
  • The Balance Sheet a Practical Example & Explanation Financial Services Division
    The Balance Sheet A practical example & explanation Financial Services Division Published by the Communications Division for [insert Division Name] Division Department of Education and Early Childhood Development Melbourne February 2011 © State of Victoria (Department of Education and Early Childhood Development) 2011 The copyright in this document is owned by the State of Victoria (Department of Education and Early Childhood Development), or in the case of some materials, by third parties (third party materials). No part may be reproduced by any process except in accordance with the provisions of the Copyright Act 1968 the National Education Access Licence for Schools (NEALS) (see below) or with permission. NEALS is an educational institution situated in Australia which is not conducted for profit, or a body responsible for administering such an institution may copy and communicate the materials, other than third party materials, for the educational purposes of the institution. Authorised by the Department of Education and Early Childhood Development, 2 Treasury Place, East Melbourne, Victoria, 3002. This document is also available on the internet at http://www.education.vic.gov.au/management/financial/ Contents Balance Sheet Example ................................................................................................. 3 1. Introduction ............................................................................................................... 4 2. Accumulated Funds .................................................................................................
    [Show full text]