A real estate developer signs a sale agreement for an apartment, receives payments from the buyer and reports strong bookings for the quarter. Yet, the revenue from that sale may not qualify for recognition in the financial statements.
Under Ind AS 115, Revenue from Contracts with Customers, a property sale does not automatically translate into accounting revenue. The developer must assess when control of the property transfers to the customer and whether the conditions for recognising revenue over time are satisfied.
The distinction that matters
Consider a developer who sells an apartment for ₹1 crore while construction is still underway. The buyer has signed the agreement and paid the initial instalment. Construction is progressing, and the sales team has recorded the transaction as a booking.
From a business perspective, the sale is an important milestone. But the accounting assessment requires a different examination.
Has the developer satisfied its performance obligation, or is it still required to deliver the property to the customer?
That distinction determines whether revenue can be recognised as construction progresses or only when control transfers at a particular point in time.
When can a developer recognise revenue over time?
Ind AS 115 permits revenue recognition over time when at least one of the criteria in paragraph 35 is met.
For real estate developers, paragraph 35(c) is particularly relevant. It requires both of the following:
- The property being created has no alternative use to the developer.
- The developer has an enforceable right to payment for performance completed to date.
The second condition deserves particular attention.
A builder may have entered into a binding agreement and collected an advance. However, if the buyer terminates the contract, can the developer legally enforce a right to payment that compensates it for the work completed to date?
The answer depends on the contract terms, applicable law and relevant legal precedents. Cancellation clauses, termination rights and the legal framework, including applicable RERA provisions, may all be relevant to the assessment.
A payment schedule linked to construction milestones does not, by itself, establish an enforceable right to payment for performance completed to date.
The developer must evaluate the substance of its contractual and legal rights rather than assume that revenue can be recognised progressively.
The Institute of Chartered Accountants of India has also clarified that Ind AS 115 permits revenue recognition as construction progresses when the prescribed criteria are satisfied. The assessment must be made with reference to the facts and circumstances of the individual contract.
What if the criteria are not met?
Revenue is recognised at a point in time when control of the property transfers to the customer.
The developer must assess the relevant indicators of control, including the customer’s rights to the property, possession, legal title, payment entitlement and acceptance, where applicable.
Possession or registration may provide important evidence, but neither should be treated as an automatic answer without examining the contractual arrangements and the facts.
This is where the timing of revenue recognition can materially affect reported performance.
Suppose the developer has sold several apartments during a financial year, but the applicable recognition criteria are satisfied only when control transfers later.
The bookings may be strong. Customer advances may have been received. Construction expenditure may have accumulated.
Yet, the revenue and associated profit may not appear in the same period in which the sales team reports those bookings.
The difference is not merely a matter of presentation. It can affect quarterly revenue, reported margins, profit trends, contract balances and the interpretation of financial performance by lenders and investors.
What should finance teams examine?
For a real estate developer, the revenue recognition assessment should not be left until financial statement finalisation.
Finance teams should examine:
- Builder-buyer agreements: Do the contractual terms support recognition over time, or do they indicate that control transfers at a point in time?
- Enforceable payment rights: What can the developer legally claim if the customer terminates the contract for reasons other than the developer’s failure to perform?
- Alternative use: Is the specified property contractually or practically restricted from being redirected to another customer?
- Progress measurement: Where revenue is recognised over time, does the chosen measure faithfully represent progress towards satisfying the performance obligation?
- Project reporting: Are sales bookings, cash collections, construction progress and recognised revenue tracked separately?
These assessments should be documented and applied consistently to contracts with similar characteristics, while accounting for differences that may affect the conclusion.
The commercial takeaway
Property bookings tell management how much business has been contracted. Cash collections show how much money has come in. Construction progress indicates how far the project has advanced.
Recognised revenue answers a different question: how much of the developer’s contractual performance qualifies for recognition under the applicable accounting standard?
For real estate businesses, keeping these measures distinct is essential to understanding financial performance and avoiding premature revenue recognition.
The sale may be commercially significant from the day the agreement is signed. The accounting recognition, however, must follow the requirements of Ind AS 115.