Key takeaways
- WIP must reflect actual progress, and input VAT on units held for sale cannot be reclaimed, so it is included in cost
- Interest capitalised under TAS 23 needs a start date, any suspension dates and an end date, all supported by evidence
- EAC answers the question of where the project will end up, which matters more than the amount already paid
Chapter 7 Construction cost accumulation
This chapter groups costs into land, hard cost, soft cost, finance costs and reserves, and designs the WIP accounts around a Work Breakdown Structure so that you can see which category is over budget. Direct costs, such as payments to main and subcontractors, materials, owner-supplied items, FF&E and quality testing, are posted to WIP by project, building or unit. Indirect costs, such as the site team, internal roads, common systems and all-risk insurance, are allocated on a reasonable and consistent basis.
The logic for recording a progress payment is to debit WIP and credit contractor payables, retention and WHT. For units for sale that fall outside the VAT system, input VAT that cannot be reclaimed is included in WIP. This differs from businesses within the VAT system, such as hotels, which separate out input VAT. Materials not yet used should first sit in a materials inventory account and be transferred to WIP when issued.
Work that is complete but not yet invoiced must be accrued into WIP at period end, and the accrual reversed when the actual document arrives. Acceptance should pass through the engineer, QS and project manager before posting.
Once the certificate of construction completion is received and the units are ready for transfer, WIP is moved to units ready for transfer, and then to cost of sales when ownership is transferred. Retention is a liability deducted from progress payments and released when the conditions are met. A performance bond in the form of a bank guarantee is generally off balance sheet. If retention is withheld to repair defects, reduce the retention liability against the repair provision already set up.
Chapter 8 Capitalising interest as project cost (TAS 23)
TAS 23 requires directly attributable borrowing costs to be capitalised into assets that take a substantial period to get ready for sale. Three conditions must be met at the same time before capitalisation starts: expenditure on the asset is being incurred, borrowing costs are being incurred, and activities to prepare the asset are under way. Simply holding land, even if it was bought with a loan, is therefore an expense until activities actually begin.
Capitalisation ends when the asset is ready for sale. For condominiums, this is usually taken as the date the certificate is obtained and the condominium is registered. In housing estates, capitalisation stops house by house, and in mixed-use projects it stops for each part as it is completed. If activities are suspended for an extended period, for example while waiting for an EIA amendment, because of a dispute or because funding has run out, capitalisation is suspended and the interest is recognised as an expense. Natural pauses, such as waiting for concrete to cure, are not treated as suspension. What counts as an extended period is a judgement that must be supported by reasons.
For project-specific loans, use the actual interest less any income from temporarily investing unused loan proceeds. For general borrowings, apply the weighted average rate to the average cumulative expenditure on assets not funded by specific loans, and the amount capitalised must not exceed the actual interest for the period.
Weighted average rate = general borrowing interest for the period ÷ average principal of general borrowings for the period
The logic for recording is to debit WIP for the capitalisable portion, debit finance costs for the portion that cannot be capitalised, and credit accrued interest or deposits. The worked example in the handbook shows that capitalised interest becomes part of the cost per unit, so drawing down a loan earlier than needed directly increases cost.
Chapter 9 Recording CAPEX and cost control
Cost control determines how much of the planned profit actually remains. The handbook locks the project budget on the investment approval date and separates the figures into the Approved Budget, the Current Budget (which includes approved VOs) and Actual Cost. Any change to the budget requires written approval.
The S-curve is used to compare cumulative spending with progress: low at the start, high during the structure and systems works, and tapering off at the end. It is also the basis of the loan drawdown plan. A variation order or change order arises from a change in materials, scope, design or site conditions, or from accelerating the work, and a signed document is required before it is recorded. The logic is to debit WIP at the certified value of the work and credit contractor payables, retention and WHT, on the same terms as regular progress payments.
Cost overruns must be analysed for their causes, such as design changes by the project owner, unforeseen ground conditions, material prices, delays, rework and scope expansion, so that measures can be put in place, such as a design freeze, fixed-price contracts and milestone gates.
EAC = cumulative actual cost + cost to complete
Monthly cost to complete and EAC reports show how much more is needed and where the project will end up. The project team must therefore assess the work actually remaining, rather than treating the remaining budget as the answer. EAC is also the starting input for cost per unit, NRV testing and reporting to the bank. A review of reserves should look at the trend in late-stage categories, not just the total.
Chapter 10 Accounting for project loans (project finance)
Project loans are drawn down against progress payments. Banks usually require equity to go in first, along with a progress report, a use of proceeds statement, no event of default and, in some contracts, a Presale threshold. The basic logic is to debit the project loan account and credit long-term borrowings.
Fees that form part of the effective interest rate, such as arrangement fees, valuation fees, legal fees and mortgage registration fees, are amortised using the effective interest method under TFRS 9. The portion amortised during the period that meets the TAS 23 conditions can be capitalised into project cost. The straight-line method may be used when the difference is not significant. Fees paid periodically for ongoing services are recorded according to the nature of the item.
Once the building is ready for sale, interest is no longer capitalised and is expensed. Repayment structures include bullet, sculpted, amortised and pay-as-you-transfer. For projects built for sale, repayment based on transfers is usually the best fit, because the main cash flow arrives after construction. Debt sculpting means designing the principal repayment schedule to keep pace with the cash that will actually come in.
The covenants most often seen are DSCR, LTV, LTC, debt to equity, interest coverage and presale ratio. They should be calculated in advance before submission to the bank, and negotiated immediately when a breach looks likely. When refinancing by closing the existing loan, debit the existing loan, credit cash, and recognise the remaining fees as an expense immediately, unless the change is a modification of terms with the existing lender, which must be assessed under TFRS 9.