Chirayuthchai TraisaengsatheanStrategic Finance for Property Development

Abnormal WIP

Classifying WIP, commission and selling expenses, with warning signs and project cost checkpoints

Key takeaways

  • WIP-Development is project cost accumulated until it is transferred to cost of sales. It is not a catch-all for everything you would rather not recognise as an expense.
  • WIP that grows faster than actual construction progress is the first red flag.
  • Selling and marketing expenses must be recognised in the period they are incurred. Holding them in WIP is window-dressing the financial statements and a tax issue.
  • Mixed WIP makes cost of sales per unit wrong on transfer day and directly affects corporate income tax (CIT).

The examples in this article are written to illustrate risk patterns and do not identify or accuse any person or entity. Warning signs are grounds for further review, not a conclusion that wrongdoing has occurred.

Where WIP belongs in the financial statements

AccountSubstanceCorrect classificationCommon mistakes
WIP-Development (land, construction costs, other costs)Project costs accumulated until they are transferred to cost of salesInventory, being real estate project development costs, is a current asset under TAS 2 and the operating cycleClassified as a non-current asset, which distorts liquidity ratios and leads banks to misread the position
Sales commissionIncremental costs of obtaining a contractRecognise as a contract cost asset, separate from construction costs, and amortise on ownership transferPooled with construction WIP, so impairment cannot be tested and cost of sales is miscalculated
Selling and marketing expenses: advertising, eventsSelling expensesExpense immediately in the period incurredAttempts to hold them in WIP to avoid reporting a loss. This is window-dressing the financial statements and a tax issue

Misclassification does not necessarily change profit immediately, but it leads banks and auditors to misread the risk. On transfer day, cost of sales calculated from a mixed pool is immediately wrong, which affects both reported profit and the corporate income tax payable.

Entities applying TFRS for NPAEs may have some criteria that differ from full TFRS, for example in recording the costs of obtaining a contract. Check the accounting policy and consult the auditor before reclassifying.

WIP warning sign register

Account nameHidden riskWarning signsCheckpoint
WIP-Development: construction costsCosts exceed budget, payments run ahead of progress, the contractor is a group companyProgress payments run faster than the actual % of work completed, and no engineer certifies the progress paymentsMatch payment claims, progress reports and site inspection results, and compare the price per sq m with the market
WIP-Development: landLand bought from related parties at a price well above market, and undisclosed encumbrances on the title deedPrice per rai is far higher than the appraised value or transaction prices in the same areaCheck the title deed, easements, mortgages, the Treasury Department appraisal price and the seller's relationships
WIP-Development: commissionSelling expenses parked as an asset to avoid reporting a lossThe balance grows while sales and transfers do not, and there is no schedule linking it to units soldLink commission to units contract by contract, test for impairment, and separate it from construction costs
WIP-Development: otherA catch-all account that pools items nobody wants to explainThe balance is static, with no movement and no supporting detailRequest a sub-ledger by item. Unexplained items older than 6 months must be cleared out

Figures to read alongside WIP

A WIP balance on its own cannot tell you whether a project is normal. It must be read alongside data from the construction team.

QuestionsEvidence usedIf it cannot be answered
What percentage of actual construction progress does cumulative project cost represent?Project budget, progress report certified by an engineerRisk of cost overruns or payments ahead of progress
How much more money is needed to complete construction and transfer all units (cost to complete)?The construction team's estimate and the funding sources to be usedRisk of a stalled project
Which expense items were recorded in project cost this month, and on what basis?WIP movement schedule, accounting policyRisk of window-dressing and CIT issues
Is interest on project loans capitalised into cost in the correct period?Interest capitalisation schedule by project and period (TAS 23)Project costs and period expenses are misstated

If the contractor is a group company

Construction prices that are not at market rates raise both transfer pricing issues and the shifting of profit or loss between companies. Warning signs are a large debit balance in payables, or advance payments made without performance security. Details of the checkpoints are in Related-party transactions and cash leakage

Project owner's corner: what to look for and what to ask

  • Ask to see WIP movements by category every month, not just the total
  • Every quarter, compare cumulative payments to the contractor with the construction progress certified by the engineer
  • Every quarter, review cost to complete and the funding sources to be used

Internal auditor's corner: checkpoints

  • Test a sample of payment claims against site reports
  • Check the relationships of the land seller and the contractor
  • Request the sub-ledger for other WIP and follow up items older than 6 months
  • Test impairment of contract costs and the net realisable value of remaining units

This content is management and internal audit guidance, not a legal or tax opinion for a specific case. Check the current law and consult an auditor, tax adviser or lawyer before making decisions in a real case.