FRSIC Draft Consensus D 15 : Treatment of Land Cost When Revenue is Recognised Over Time by Measuring Progress Using Input Method, and Our Comment Letter dated 21 April 2016

April 21, 2016 – 

Recently, the Financial Reporting Standard Implementation Committee(FRSIC) of MIA issued the Draft Consensus 15 for comment by the public. The Draft Consensus is in respect to what should be the appropriate method to be used in measuring the progress of the property development for the purposes of recognising the revenue over time where it is allowed under the MFRS 15 Revenue From Contracts With Customers which will be effective from 1 January 2018.

More specifically, the FRSIC tried to determine if land cost should be included in the ‘costs incurred’ method. This literally means if the land cost element should be included or considered in calculating the percentage of completion for the purposes of determining the amount of the revenue to be recognised as income in each reporting period. Basically, the FRSIC is of the view that the land cost shall be excluded in the measure of the progress towards complete satisfaction of performance obligation. This approach is very much consistent with the current practice.
KGNP submitted its comment letter to FRSIC on 21 April 2016 to provide its views and suggestions on this issue. We commended MIA FRSIC for taking this initiative very early considering that MFRS 15 will be effective only from 1 January 2018. Below are extracts from our comment letter.

“It is clear that the property developer is required to deliver a completed property comprising land and building. In the case of landed properties, it is very clear that land is a major part of the goods/performance obligation. The Preamble and clause 23 of Schedule G(standard SPA) would support this. Land is definitely an input to the final product the property developer is selling. The fact that at the point of signing SPA, the building is not fully constructed yet does not mean that land is not an input. In another scenario, the project could be 90% completed when a SPA is signed and this does not mean the performance obligation of the property developer is confined to the balance of 10%. The performance obligation of a property developer when selling an ongoing project is to deliver a completed unit with certificate of completion within the time line which include land and building and all other facilities(especially condominium where there are common facilities).”

“……, MFRS 15 only stated ‘costs incurred’ and in the absence of a definition as to what ‘costs incurred’ comprised of then it should include all costs incurred i.e. all costs capitalized as property development cost which include land and development cost and borrowing cost capitalized (if any). However since MFRS 15 does not specifically state the entire or total costs incurred must be used except that B19 discussed examples of costs that should be excluded, it actually provides rooms for an entity to define and decide the type of costs it chooses to use so long as it best depicts the performance obligation over time. This means an entity can basically choose to follow the current practice(in line with our Property Development Activities standard) where land cost, borrowing costs and advances to contractors will be excluded in the calculation(i.e. based on costs of development activities). Alternatively, it can also choose to use the total costs incurred including land cost(especially) or the total costs excluding borrowing costs only. It should be an issue of accounting estimation similar to what depreciation method and rate to use.

Since land is a significant part of a property, it can never be wrong to include that unless the Standard specifically excludes it. The fact that it is not clearly stated in the Standard is in fact the reason why a FRSIC Consensus is felt necessary.”

“…the next point I would like to bring to the attention of the FRSIC to deliberate is to examine the possible impact of Para 35(C), the basis to argue why the revenue from residential property sold under Schedule G and H can be recognized over time. In the SPA with purchasers, the property developer is only entitled to payment based on the Schedule of Payment/Progress Billings. The Schedule of payment is based on a mixture of milestones; based on key event of signing SPA and delivery of vacant possession and in between, based on the stage of work on the building.
Whichever method is used to recognize the revenue over time and in respect of ‘costs incurred’ method, whether or not land cost is include or excluded, the question is whether the accumulated amount revenue recognized should not exceed the accumulated progress billing.

Even under the current accounting standards and practices, there are times where the percentage of completion far exceeded the progress billings resulting in a significant amount of ‘Accrued Billings’ included as Current Assets. This represents work done that cannot be billed yet according to the SPA. Does this contradict Para 35(C) which stated that ‘…..the entity has an enforcement right to payment for performance completed to date’. As at that point, the property developer has no right for payment for that part of work done but eventually if and when it completes it, the right to payment will arise. Since the right will only arise at a later stage, can revenue relates to that part be recognized just because a method chosen ( whether Output or Input Method ) provides a higher figure of the revenue that can be recognized as compared to progress billings. I suggest FRSIC to study further this issue/potential issue if it has not done so.”

Note : You can download the Draft Consensus D15 from MIA website

Release of first issue of ‘How’s the Economy’ report

April 19, 2016 – 

‘How’s the Economy?’ is a report that KGNP engaged Mr Lee Heng Guie, an experienced independent economist in Malaysia, to write for the benefits of our clients and business associates. Mr Lee will certainly bring to us his much sought after perspective on Malaysia’s economic trends and indicators.

This ever and fast changing domestic economic environment as well as a complex global landscape presents both threats as well as opportunities to Malaysian businesses and corporates. It is important to track both external and domestic economic developments and indicators over time. As such, we hope that this report, which provides coverage of key economic highlights, backed by current and forward indicators would assist as well as facilitate businesses’ planning strategy. Mr Lee’s comments and views will obviously be very useful toward meeting this objective.
We intend to issue this report on a quarterly basis so as to be ‘always up-to-date’. I thank Heng Guie for his contributions. We hope that you will find this report useful and enjoy reading through it; picking up the key pointers and the answer to your question of how’s the economy doing?

Below is the message from the writer, Mr Lee Heng Guie:
“The Bank Negara Malaysia’s Annual Report, 2015 and the International Monetary Fund (IMF)’s World Economic Report, April 2016 are the prime focus of this report. The IMF’s report paints a slow yet fragile global growth outlook, threatened by prominent downside risks. Bank Negara Malaysia maintains a cautious optimism about Malaysia’s economic outlook, expecting real GDP growth of 4.0-4.5% this year compared to 5.0% in 2015.

I concur with the central bank’s fair assessment and maintain a guarded stance on Malaysia’s growth trajectory. Malaysia is facing moderation in growth momentum this year and will continue to face the on-going external headwinds and domestic challenges. Malaysia not only needs to withstand negative spillovers from a weak global environment, including continued uncertainties associated with the Fed’s rate actions path and China’s slowing growth, but also has to navigate through the adjustments brought about by the on-going domestic economic reforms.”

To request a copy of this report, send a message to us through Contact Us

Release of the revised GST Guide on Land & Property Development (1 April 2016) by RMCD and Our Review of Key Change

April 11, 2016 – 

When the previous Guide on Property Developer dated 30 March 2015 (the Previous Guide) was issued, it was very much a total revamp of the earlier guide dated 11 March 2014. Exactly another one year later, this revised Guide dated 1 April 2016 with the amended title of GST Guide on Land and Property Development (the Revised Guide) is probably a partial revamp of the Previous Guide. So yes, the GST guide for property development industry has evolved a lot over the last two years. Each time, a number of rules were changed and a number of unclear areas were clarified. A few new issues arose as well. It is therefore important to identify all these changes and developments in order to better manage the GST issues of this industry.

The Revised Guide consists of 90 pages with 68 Q & A as compared to 64 pages with 53 Q & A in the Previous Guide. It includes additional topics or areas and provides more examples and Q & A to explain selected issues in this industry. Out of the 44 pages of the main content section(page 6 to page 49), about 20 pages were devoted to discuss the different category of land and building for GST treatment – whether Exempt, Standard-rated or Relief Supplies. Another 15 pages were used up to discuss the GST issue and treatment for Joint Development. The discussion on holding and disposal of properties was extended to cover disposal by company and individual joint owners in addition to disposal by individual.

This publication, the GST Quick Update – Special Issue, is intended to only highlight key changes from the Previous Guide on selected areas and issues and it is never meant to serve as a complete summary of the differences between this Revised Guide and the Previous Guide. Readers should always refer to the Revised Guide for the complete coverage of the rules and guidelines on GST for land and property development.

It should also be noted that all GST Guides issued by the Customs as well as the DG’s Decisions are not legally binding. In fact, in all the recently issued Guides, Customs have included a Disclaimer statement which, inter alia, states that ‘….the RMCD will not be responsible for any mistakes and inaccuracies….All information……… is subject to change when necessary.’

As such, if you disagree with what is stated in the Guide, you may take your own position if you could defend it based on the laws on hand. We would advise that you seek professional advice if you have any contentious issues that may have significant impact on the tax liability.