Part 4: Accounting for revenue and sales

Chapter 11 Sales and receipt of deposits (Presale stage)

The sales process runs through booking, contract signing, down payment instalments and transfer. All money received before transfer is a contract liability under TFRS 15, because control has not yet been handed over. The entry logic is to debit cash and credit contract liability; at contract signing, the booking deposit is moved to join the contract deposit. Keeping sub-ledgers by type of payment helps track customer status and forecast cash flow.

Receivable data by unit should show whether the customer is paying on time, in arrears or has cancelled, because the contract liability directly affects revenue on transfer day. In the financial statements for this stage, revenue is still zero. The indicators to watch are the take-up rate and the value of sales achieved.

When a customer cancels, look at the contract terms. If the money is forfeited, clear the contract liability and recognise other income. If part is refunded, credit cash for the amount refunded and credit other income only for the forfeited portion. If the company is the party in breach, it must refund the money and recognise a penalty according to the obligation arising.

Discounts and promotions must reflect the transaction price, not the list price. A cash discount is deducted from the price immediately, while a discount that depends on future conditions is variable consideration that must be estimated and reviewed every period. An interest-free down payment or a long instalment plan requires consideration of a financing component. As for freebies, permanent installations are usually combined with the unit, whereas loose furniture that the customer can use separately may be a separate obligation, with the price allocated by reference to the stand-alone selling price.

Chapter 12 Revenue recognition under TFRS 15

This chapter walks through the five steps: identifying the contract, with the sale and purchase agreement (SPA) as the main reference point; identifying performance obligations; determining the transaction price; allocating the price; and recognising revenue when control transfers. A booking form alone may not yet meet the contract criteria, because there is not yet a full commitment.

Recognition over time requires one of the following criteria to be met: the customer receives benefits as the entity performs; the customer controls the asset as it is built; or the asset has no alternative use and the entity has an enforceable right to payment for work completed. Condominiums and housing estates are therefore generally recognised on transfer day, by debiting cash received and the contract liability, crediting revenue, and recording cost of sales at the same time.

Build-to-order work on the customer's land may be recognised over time, with progress measured using an input method such as cost-to-cost, or an output method. If the right to payment is still conditional, use a contract asset; if the right to payment is unconditional, it is a receivable.

Mixed-use projects or branded residences that include multi-year service rights require separate obligations. For example, the unit itself is recognised on transfer day, and the service rights are recognised over the service period, with the portion of service not yet provided held as a contract liability. The allocation uses the stand-alone selling price (SSP) in the order of observable price, adjusted market assessment, expected cost plus margin, and residual, the last being used only in limited cases. SSP is the price at which the item is sold separately, not the price after discount.

Chapter 13 Cost of sales and cost allocation per unit

Cost per unit determines the gross margin of each transfer, and is an area that auditors and the Revenue Department scrutinise closely. The handbook explains the saleable area method, the relative sales value method and specific identification. The area method is simple and suits units whose price per sq m is similar; the value method suits cases where prices differ widely, for example because of view or floor; and the specific method suits villas where the cost of each house is clearly identifiable.

Unit cost = allocable total cost × (unit area or sales value ÷ total area or total sales value) + direct cost of the unit

The area method gives units with a high price per sq m a higher profit, whereas the value method gives roughly the same margin on every unit. What matters is to choose the method that reflects the nature of the project, apply it consistently and disclose the policy.

Total cost can change throughout construction. The commonly used approach is the budget method, which uses the latest EAC, reviewed quarterly, and adjusts the cost per unit for subsequent transfers when the EAC changes significantly. The threshold the handbook recommends is around 3–5%. Common-area costs, such as the lobby, pool and gym, are allocated to the saleable area because they cannot be sold separately.

The entry logic on transfer day is to debit cost of sales and credit units ready for transfer at the cost per unit currently in use, together with recognising revenue for the same unit. Transfer-day fees and taxes are shown within selling expenses and not mixed into COGS.

Chapter 14 Ownership transfer and closing the sale

Transfer day is the point where money, ownership, revenue and tax come together. The process starts with the customer's loan, followed by unit inspection and fixing of defects, the transfer appointment, and registration at the land office together with registration of the customer's mortgage. The accountant should check documents such as the clearance letter, the SPA and the fee receipts before recording.

The entries are made together as a set. The first set records receipt of the remaining balance, clears the contract liability and recognises revenue. The second records cost of sales. The third records SBT, the share of the transfer fee borne by the company, and the withholding tax deducted at registration as a tax credit. The fourth expenses the contract cost asset for commission on that unit.

SBT and fees arising because of the sale are selling expenses and are not included in the cost of inventory. Clarity on who bears each cost must come from the contract, while the customer's mortgage registration fee is the customer's own cost.

Sinking fund contributions and advance common-area charges that the company collects on behalf of the condominium juristic person are liabilities, not revenue, and must be handed over to the juristic person by the due date. Meter deposits that are refunded reduce the deposit account. A car park with separately registered ownership should be a separate obligation, with its own revenue and cost recorded, and subject to SBT as a sale of real estate. If it is included in the unit price, treat it as part of the unit. For usage rights without ownership, the nature of the contract must be reviewed first.