Accounting Alert

Accounting for Cancellation of Real Estate Sales

This Accounting Alert is issued to circulate Philippine Interpretations Committee (PIC) Questions and Answers (Q&A) 2020-05 dated November 6, 2020 which supersedes PIC Q&A 2018-14 on accounting for cancellation of real estate sales.

​Issue 1

For real estate developers which use the percentage of completion method in recognizing revenues, how should it account for cancellation of real estate sales and repossession of the related property?

Consensus

There are three approaches on how real estate companies can account for sales cancellation and repossession of the related property.

Approach 1: The repossessed property is recognized at fair value less cost to repossess

Repossessed property will be accounted for as inventory and will be initially measured at cost in accordance with paragraph 9 of PAS 2, Inventories.

Approach 2: The repossessed property is recognized at fair value plus repossession cost

As there is no specific guidance in PAS 2 on accounting for repossessed property, reference can be made to the guidance in paragraph 24 of PAS 16, Property, Plant, and Equipment, and paragraph 27 of PAS 40, Investment Property, for property acquired in exchange for a non-monetary asset/s or a combination of monetary and non-monetary assets.  Under these paragraphs, the asset received (e.g. the uncompleted repossessed property) is recognized at fair value.  Any cost incurred to repossess the property will be capitalized in accordance with paragraph 15 of PAS 2.

Approach 3: The cancellation is accounted for as a modification of the contract

As the real estate developer will no longer construct the property for the customer, it can be considered that the scope has changed. Applying the provisions of modification of a contract, the real estate developer will have to reverse the previously recognized revenues and the related costs recognized.

Note: All approaches above should consider payments to buyers required under the Maceda Law and the write-off of any unamortized portion of cost of obtaining a contract in its determination of gain/loss from repossession.

Given the history of cancellations, real estate developers should also continuously revisit whether the established level of downpayment over the total contract price (equity down payment) is still the level which indicates that it is probable that it will collect the entire consideration under the contract, which is one of the criteria to be met before the revenue recognition model applies.

The PIC has concluded that all approaches are acceptable as long as this is consistently applied.

Issue 2

Would the accounting for the repossession change if the repossessed property is already 100% completed?

Consensus

No, the state of completion of the repossessed property will not impact the accounting treatment. It is only relevant in determining the fair value of the property.

Status and Effectivity

This Q&A is still subject for approval by the Board of Accountancy as of January 11, 2021. The effective date of the consensus in this Q&A follow that of PIC Q&A 2018-12, upon approval by the Financial Reporting Standards Council which is November 11, 2020.

See attached PIC Q&A 2020-05 for further details.