WIP in housing estate projects: effects on the financial statements and planning principles

In property development businesses, whether single-detached houses, townhouses, condominiums or villas, the most significant and most misunderstood accounting item is Work In Progress (WIP). WIP is not an expense; it is an asset that accumulates costs in the statement of financial position until the ownership transfer day. Understanding this mechanism is therefore central to project management, tax planning and communication with banks, investors and auditors.

What WIP is in the financial statements

WIP is an asset account that collects the costs incurred while developing a project: construction costs under the BOQ, design fees, project consultancy fees, interest during construction (IDC) and land costs. Projects held for sale are classified as inventory under TAS 2 and are generally presented as current assets according to the operating cycle, even though it may take several years to sell out.

During construction, WIP is usually the largest asset item. It reflects the capital tied up in the project, which is normal for a developer.

The most important consequence is that WIP does not affect the income statement during construction. Every baht paid as a project cost sits in WIP and comes out as cost of sales when revenue is recognised under TFRS 15 at the point control is transferred to the customer.

Effects on the financial statements across the 3 stages of a project

Stage 1: During construction

The project does not yet recognise revenue under TFRS 15 because ownership has not been transferred, so revenue and COGS are zero. However, office overhead, such as office staff salaries, travel and general administration, and marketing costs must be expensed immediately. Commission that is an incremental cost of obtaining a contract is recorded as a contract cost asset, separate from WIP. The company therefore shows accumulated losses in this stage.

In the statement of financial position, WIP keeps rising, borrowings peak as construction nears completion, and equity often falls or turns negative because of accumulated losses. This looks worrying to outsiders but is normal, because all of the profit is recognised during the transfer period.

Stage 2: The year of ownership transfer

On the transfer day of each unit, the WIP for that unit moves into COGS as the full amount of revenue is recognised. A year with many transfers therefore shows unusually high revenue and gross profit compared with the previous year.

WIP falls in line with the number of units transferred. Cash increases from customers and from escrow withdrawals, while tax payable rises, both Specific Business Tax (SBT) and corporate income tax (CIT).

Stage 3: After all units have been transferred

WIP is zero and no further revenue arises. The project is considered closed in accounting terms. The owner must decide whether to wind up the company or keep the legal entity for the next project, which has a significant effect on tax and on the cost of starting a new project.

6 principles for planning WIP correctly

Principle 1: Clearly separate WIP from expenses

Principle 2: Calculate WIP per square metre correctly

WIP per square metre is a key indicator for estimating the COGS of each unit sold. It is calculated as total project cost divided by the project's total net saleable area (NSA). This figure should be updated every year, particularly when a cost overrun occurs, when the BOQ is revised, or when phases are added or removed.

Principle 3: Beware of overstated WIP

Overstated WIP results from capitalising items that should be expenses. This inflates COGS on the transfer day, understates profit and makes the tax for the transfer year lower than it should be. Although this may look like a short-term benefit, the Revenue Department may issue a retrospective assessment with penalties and surcharges, and the auditor may raise observations, up to issuing a qualified opinion.

Principle 4: Beware of understated WIP

If WIP is understated, COGS in the transfer year will be low, gross margin will look better than it really is, tax will be higher than it should be, and banks or investors may misjudge the project's position, leading to wrong strategic decisions.

Principle 5: WIP must be consistent with actual progress of the work

Construction-cost WIP in the accounts must be consistent with the BOQ progress report.

Expected construction-cost WIP = BOQ progress (%) × construction budget

Principle 6: A document trail for every entry

Every item recorded in WIP must have a purchase order (PO), the contractor's invoice, a progress report from the project manager or quantity surveyor, and approval documents from an authorised person. These documents let you answer the auditor's questions on every baht, guard against queries from the Revenue Department, and serve as evidence if a retrospective tax assessment is made.

The golden rule of WIP management

WIP is cost awaiting transfer day. Setting WIP too high defers tax that will come back as a burden later. Setting it too low means paying more tax than necessary. Setting it correctly means matching actual costs with actual revenue.

Project executives should review WIP every quarter against BOQ progress and work closely with the accounting team, the project team and the auditor, so that the figures in the financial statements reflect the true position. This is the basis for business decisions and for credibility with all parties.