Chirayuthchai TraisaengsatheanStrategic Finance for Property Development

Calculating cost per unit by net saleable area (NSA) to close the project accounts

Seven steps from collecting WIP to recording transfer day, tax and closing WIP, using the NSA and Specific Identification methods

Key takeaways

  • Cost per unit = unit NSA × total project cost per sq m of NSA
  • If construction is not yet complete, the base must be the estimated total cost at completion, not cumulative WIP at the closing date
  • Closing WIP must equal the remaining saleable area multiplied by the rate, which gives you an immediate check
  • SBT of 3.3% and transfer fees on sale are transfer-day expenses and do not go into WIP

The core of closing the accounts for an outright-sale residential project is "cost per unit", which is used to recognise COGS on ownership transfer, calculate gross profit, plan tax and carry WIP in the statement of financial position. This article explains how to apply Specific Identification together with net saleable area (NSA), from collecting WIP through to recording entries on transfer day and closing the accounts.

Step 1: Collect WIP for the whole project

Can be capitalised into WIP

  • Construction costs per the BOQ, foundation works and on-site utilities
  • Professional fees: architects, project manager, project-related legal fees, EIA report
  • Show unit: only works that remain as part of the units to be sold
  • Interest during construction under TAS 23
  • Land cost, including transfer fees on purchase

Do not include in WIP

  • Office overheads: salaries, travel and administrative costs go straight to P&L
  • SBT and transfer fees on sale are recognised as expenses on transfer day
  • Contingency not yet incurred: only costs actually incurred and supported by evidence can be recorded in WIP in the accounts
  • General advertising and marketing costs

Step 2: Calculate cost per square metre (NSA method)

Cost per sq m = total project cost ÷ total project NSA

  • NSA is the area that can actually be sold, so it ties cost directly to revenue
  • GFA includes common areas, which do not generate revenue directly. Using GFA makes cost per unit lower than it really is.
  • If selling prices per sq m differ widely between units, relative sales value is an alternative consistent with TAS 2 paragraph 14. Choose one method and apply it consistently.

If transfers begin before all the works are complete, total cost must be actual cost plus the estimate at completion (EAC) of the costs still to be incurred for the works relating to the units transferred. If you divide cumulative WIP at that date by NSA, the rate will be understated and COGS will be understated with it. Estimated costs must be supported by evidence from contracts and the QS.

Step 3: Calculate cost per unit (Specific Identification)

Cost per unit = unit NSA (sq m) × cost per sq m

TAS 2 applies Specific Identification to items that can be individually identified, such as each condominium unit, and common project costs are allocated to units by area. A unit with a larger area therefore bears a higher share of cost.

Step 4: Record entries on transfer day (unit by unit)

Revenue is recognised at a point in time under TFRS 15, and the WIP for that unit is transferred to COGS. In the hypothetical example, the unit has NSA of 135 sq m and a selling price of THB 46 million, and the cost rate is THB 156,250 per sq m (total cost of THB 3,500 million ÷ NSA of 22,400 sq m).

EntryDrCrTHB
[1] Recognise revenueCash / ARRevenue from Sale46,000,000
[2] Transfer WIP to COGS (135 × 156,250)COGS – ResidentialWIP – Project21,093,750
[3] SBT of 3.3%, including local taxSBT ExpenseCash1,518,000
[4] Transfer fee, developer's share of 1%Transfer Fee ExpenseCash460,000

The SBT base and the transfer fee must be checked against the actual conditions of each plot. The 1% rate in the example assumes the normal 2% fee is split equally with the buyer. The measure reducing the registration fee for transfers and mortgages to 0.01% applies to individuals of Thai nationality where the sale price and appraised value do not exceed THB 7 million, and is effective until 30 June 2027. It does not cover the unit in the example. Check the latest announcement before applying it.

Profit on sale per unitTHB
Revenue46,000,000
COGS(21,093,750)
SBT(1,518,000)
Transfer Fee(460,000)
Unit Profit (49.8% margin)22,928,250

Step 5: Aggregate entries to close the income statement

A hypothetical example for a project that transfers 68 units in the year, with a total area of 11,648 sq m

ItemTHB million
Revenue (68 units)3,800.0
COGS (11,648 sq m × 156,250)(1,820.0)
SBT 3.3%(125.4)
Transfer Fee 1%(38.0)
Gross Profit1,816.6
SG&A + Commission 8%(304.0)
Overhead(21.0)
EBIT1,491.6

Step 6: Calculate corporate income tax

Multi-year projects often have accumulated losses before transfers begin. As a general rule, these can be carried forward for use within the next five accounting periods. You must track the age of each year's losses, because losses beyond five periods can no longer be used. The example assumes that all losses are still within the permitted period.

ItemTHB million
EBIT1,491.6
Less: loss carry-forward(980.0)
Taxable Income511.6
CIT 20%102.3
Profit after tax1,389.3

Profit after tax does not equal the dividends that can be paid, because accumulated losses in the financial statements must be cleared first, and cash and loan conditions must be checked.

Step 7: Adjust the statement of financial position

WIP decreases only by the amount for the units transferred. Units not yet transferred remain in WIP.

ItemTHB million
WIP at start of year2,700.0
Add: construction costs added in the year800.0
Less: COGS transferred out(1,820.0)
WIP at end of year1,680.0
Current Tax Payable102.3

Check: remaining area 22,400 − 11,648 = 10,752 sq m × THB 156,250 = THB 1,680 million, which agrees with WIP at end of year

Three key principles

1. Set the cost rate per square metre before transfers begin

Calculate the rate at the start of the accounting period and apply it to every unit transferred in that year, so that cost recognition is consistent and profit per unit is comparable. If significant new information arises during the year, review the rate immediately.

2. Review the rate at every year-end

If the BOQ changes, a cost overrun arises or there is a variation order, recalculate at the closing date and apply the new rate to units not yet transferred. A change in estimate is not applied retrospectively to units already transferred, unless it is the correction of an error under TAS 8.

3. Apply the method consistently

Whether you choose the NSA method or the relative sales value method, you must use the same method throughout the life of the project. A change of method needs a justification, and the quantitative effect must be disclosed in the notes under TAS 8.

Conclusion

Specific Identification together with the NSA method reflects the matching of revenue to cost and can be traced back to unit level. The accounting system should be able to pull each unit's NSA, cumulative WIP and the rate per square metre on demand, to support closing the accounts, tax planning and answering auditors' questions.