Key takeaways
- Closing a project in the accounts is not the same as completing construction, because liabilities, taxes and common-area accounts must all be closed out.
- A warranty provision is set up when revenue is recognised and creates a temporary tax difference.
- Good reporting separates volume problems from price problems, and documented accounting rationale speeds up audits.
Chapter 26 Project close-out
A project is closed in the accounts when nearly all units have been transferred, the juristic person has been established and the common property handed over, the loans have been repaid and the mortgages released, construction costs and retention have been paid, adequate warranty provisions have been set up, and no customer advances remain outstanding. The handbook therefore uses checklists covering sales, costs, inventory, common areas, financing and tax.
Common property is transferred to the condominium juristic person at no charge and should not create new profit or loss, because common-area costs should be allocated to the units already transferred. The logic is to clear the remaining common-area WIP through an adjustment to cost of sales, or to adjust the remaining units where appropriate, without posting anything to share capital. Sinking funds and common-area fees collected on behalf of the juristic person must be transferred to it and the related liabilities cleared.
A defect warranty is a provision under TAS 37, set up when revenue is recognised: debit expense, credit provision. When actual repairs are made, the provision is reduced. Any balance remaining once the warranty period expires is reversed through profit or loss. The rate should be based on the company's actual statistics. For tax purposes the cost is deductible only when actually paid, which gives rise to a deferred tax asset (DTA).
Before closing, review actual costs against the cost per unit used. Immaterial differences are adjusted in the current period; if material, consider whether the difference is a change in estimate or an error. Dissolving an SPV requires a special resolution, a liquidator, settlement of debts, an audit of the accounts, closure of tax affairs and registration. Any return of capital in excess of paid-in capital has dividend tax and WHT consequences depending on the status of the recipient.
Chapter 27 Financial reporting for management and investors
This chapter moves the accountant from record-keeper to provider of decision-making information. Project-level statements show profit or loss, financial position and cash flow separately from the company's statements, revealing each project's margin, funding needs and the cash it can return.
The monthly management report has five sections: Executive Summary, Sales & Presale, Construction Progress, Financial Performance, and Issues & Actions. It must state what management needs to decide, not merely report figures. The investor report focuses on the market, progress, sales, projected returns and risks. The bank covenant report must be calculated according to the definitions in the loan agreement, such as DSCR, LTV, LTC and the Presale ratio.
KPIs fall into three groups. Sales: take-up rate, sell-through, ASP, cancellation rate and sales velocity. Financial: gross margin, operating margin, net margin, Project IRR and Equity IRR. Cost control: cost variance, EAC against budget, and cost per square metre. The numerical thresholds in the handbook are guidelines and should be compared with the market and the nature of the project.
Budget vs actual analysis should identify causes. For example, if revenue is low but gross margin is unchanged, the problem is likely transfer volume rather than price. The reporting logic is that every figure must reconcile back to the accounts: revenue must agree with transfers, the contract liability must agree with the per-customer balances, and costs must agree with WIP and the latest EAC.
Chapter 28 Internal audit and external auditors
The final chapter sets out a control system based on the five components of the COSO framework and applies it to business-specific processes such as land acquisition, construction contracts, progress billing, receipts from customers, transfer day, loan drawdowns and adjusting entries. Under the principle of segregation of duties, the person who requests, the person who approves, the person who pays and the person who records should be different people.
Documents that should be ready include land purchase contracts and title deeds, progress payment documents, transfer documents, the contract liability report by customer, NRV analysis, the capitalised interest schedule, allocation schedules, tax returns, transfer pricing documentation and the covenant report. A good format is the original document, the calculation schedule and a note recording the accounting rationale.
Auditors tend to focus on the timing of revenue recognition, reconciliation of contract liabilities, cost allocation methods, capitalised interest, allowances for impairment, related-party transactions, warranty provisions, covenant compliance, going concern and events after the reporting date. The audit logic is to trace from the accounting entries to the documents and assumptions, so unusual movements must be explainable.
IPO preparation takes several years. It starts with a readiness assessment, then a move to TFRS for PAEs, preparation of comparative financial statements, and work on deferred tax, leases and fair value where relevant. It also involves setting up governance, an audit committee, internal audit, a policy on connected transactions and a consolidation system. Property businesses must also prepare their backlog, pipeline, land bank and tax privileges for review. Listing requirements should be checked against current rules.