Manner to recognize profit or loss from the sale of the retail estate is governed and covered under paragraphs 3 to 43 of SFAS 66, which instructs a seller to recognize full profit using accrual method upon giving effect to such sale.
Conditions for recognizing full profit under accrual method:
The sale of real estate must be consummated.
Both buyer and seller of the real estate are bound by the terms and conditions of the contract.
The entire consideration has been exchanged, and nothing is pending.
The buyer is committed to purchasing the real estate.
The consideration to be received by the seller must not have any future subordination.
The seller is not involved with the property after it is sold in any manner whatsoever and must not be entitled to any reward or responsible for any risk.
The profit can be ascertained or determinable.
No significant activity is left to be completed on the part of the seller.
If all the above conditions satisfy, then a seller is free to recognize profit arising from the sale of real estate under the accrual method.
Recognizing Profit or Loss from the Sale of Retail Land
Manner to recognize profit or loss from the retail land sale is governed and covered under paragraphs 44 to 50 of SFAS 66.
Conditions for recognizing full profit under accrual method:
The refund period for making down payment as well as each subsequent payment has expired
The cumulative payments of principal and interest equal to or exceed 10 percent of the contract sales price
The receivables from the sale of retail land must not be subject to future subordination and are collectible
The seller must not have any remaining obligation for the development or construction of retail land If all the above conditions are satisfied, profit can be recognized under the full accrual method. Otherwise, a percentage of completion method shall be used for recognizing profit, which has certain additional conditions to be satisfied.
Additional conditions (In Addition To 1, 2, 3, And 4 mentioned above) for recognizing profit under percentage of completion method:
There are indications that the project has progressed beyond the preliminary stages and will be completed as per the plan.
There must not be any indication that the project might get delayed due to the inability of the seller to obtain:
Labors , materials, etc.
It is established beyond any reasonable doubt that the progress of the project will not be hampered by any legal restriction and basic facilities such as:
Water supply, and
Sewage treatment will be provided within a reasonable time.
If all the conditions mentioned above are satisfied, profit can be recognized under the percentage of completion method; otherwise, an installment method shall be used, which also has certain additional conditions to be satisfied.
Additional conditions (In Addition To 1 And 2 mentioned above) for recognizing profit under installment method:
The seller is financially sound and can provide all the improvements as mentioned in the terms and conditions of the contract.
If all the conditions mentioned above are satisfied, a seller can recognize profit under the installment method. Otherwise, a deposit method will be followed under which a seller cannot recognize a profit. However, the cash received from the buyer, including the initial investment and, all the subsequent cumulative collections of principal and interest are recognized as a deposit on the contract.
Concept of Partial Sale
Paragraph 33 of the SFAS 66 provides provisions to identify and recognize a partial sale. The seller is considered to have made a partial sale if:
The seller maintains or has an equity interest in the property or
The seller has an equity interest in the buyer of the property Profit to be recognized at the date of sale shall be the difference between:
Sales value and
The corresponding cost of the partial interest sold
Conditions to be satisfied for recognizing profit under partial sale:
The buyer has no interest, either equity or debt, in the seller
The buyer is committed to pay and purchase the property
The seller will not be required to support the operations of the property or any other related obligation to an extent greater than its corresponding interest.
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