1. The Shift — From Percentage of Completion to Control-Based Recognition
Before IND AS 115, most Indian real estate developers followed the ICAI Guidance Note on real estate transactions (built around AS 7 and AS 9 principles), which allowed — and in practice usually meant — recognising revenue progressively as construction advanced, using the percentage-of-completion method, once certain thresholds (like a minimum level of construction and buyer commitment) were crossed. Revenue tracked physical construction progress, largely independent of whether legal control of the unit had actually passed to the buyer.
IND AS 115 discards that model entirely. It asks a single question for every contract: has control of the asset transferred to the customer, and if so, when? Revenue follows the transfer of control — either progressively over time (if specific criteria are met) or in one lump sum at a single point in time. For the vast majority of Indian residential real estate sale agreements, the answer is a point in time, and that point is typically possession or registration — much later than when percentage-of-completion accounting would have started recognising revenue.
2. The Over-Time Test — Why Most Indian Sales Fail It
IND AS 115 recognises revenue over time only if one of three criteria is met: the customer simultaneously receives and consumes the benefits as the entity performs; the entity's performance creates or enhances an asset the customer controls as it's created; or the asset has no alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.
For a typical Indian apartment sale agreement, this test usually fails. The unit generally does have an alternative use to the developer until it's specifically allotted and sold (the developer could, in principle, sell a similar unit to someone else), and — critically — most sale agreements and RERA-regulated payment schedules don't give the developer an enforceable right to demand payment for work performed to date if the buyer were to walk away partway through construction. Without that enforceable right, the "no alternative use" criterion can't be satisfied either. The result: revenue recognition defaults to a point in time.
This isn't a blanket rule — it depends on the specific legal terms of each contract, particularly the cancellation and refund clauses and whether local RERA rules or contract drafting genuinely create an enforceable payment right. But as a practical matter, most Indian developers concluded point-in-time recognition applies to the bulk of their unit-sale portfolio.
3. RERA Escrow Accounts — What Changes and What Doesn't
The Real Estate (Regulation and Development) Act requires developers to deposit at least 70% of amounts collected from buyers for a project into a separate escrow account, to be used only for that project's construction and land costs, released against certified progress. This is a cash-management and regulatory requirement, not an accounting standard — RERA doesn't itself determine when revenue is recognised under IND AS 115.
What RERA does affect is presentation and disclosure: escrowed cash is restricted and should be presented/disclosed as such, and the specific release conditions tied to the escrow arrangement are one of the facts a developer weighs when assessing whether it genuinely has an enforceable right to payment for work completed — since RERA-driven release schedules are typically tied to construction milestones rather than a legally enforceable claim against the buyer independent of project progress.
4. Variable Consideration in Real Estate Contracts
Real estate sale agreements commonly include variable consideration that must be estimated and factored into the transaction price:
- Early-payment / down-payment discounts — reduce the transaction price if triggered
- Price escalation clauses — additional consideration tied to construction stage or cost indices
- Delay penalties payable to the buyer — reduce the transaction price under RERA-mandated compensation for possession delays
- Cancellation and refund clauses — affect how much consideration the developer can reliably expect to keep
Under IND AS 115, a developer estimates variable consideration using either the expected value method (probability-weighted) or the most likely amount method, whichever better predicts the outcome, and includes it in the transaction price only to the extent it's highly probable that a significant revenue reversal won't occur later when the uncertainty resolves.
5. Contract Costs — Land, Construction and Selling Costs
Costs that relate directly to a contract and are expected to be recovered are capitalised as contract costs (effectively inventory / work-in-progress on the balance sheet) rather than expensed as incurred. For a developer recognising revenue at a point in time, this means:
- Land cost and construction costs accumulate on the balance sheet throughout the build
- They are expensed as cost of revenue together, in the same period as the lump-sum revenue is recognised — i.e. at possession/registration, not progressively
- Incremental costs of obtaining a contract (e.g. sales commissions specifically tied to signing a buyer) are capitalised if the amortisation period is expected to be more than one year, and amortised consistent with the pattern of revenue recognition for that contract
6. Worked Example — Point in Time vs Old Percentage of Completion
Scenario: Skyline Developers sells a residential unit for a total contract price of ₹1,20,00,000. Construction runs over 3 years. Under the old percentage-of-completion approach, the company would have recognised revenue as construction progressed. Under IND AS 115, the sale agreement doesn't give Skyline an enforceable right to payment for work completed, so revenue is recognised at a single point in time — possession, at the end of Year 3.
| Year | Construction progress | Old method — revenue recognised | IND AS 115 — revenue recognised |
|---|---|---|---|
| Year 1 | 30% complete | ₹36,00,000 | ₹0 |
| Year 2 | 70% complete (cumulative) | ₹48,00,000 | ₹0 |
| Year 3 | 100% complete — possession handed over | ₹36,00,000 | ₹1,20,00,000 |
| Total | ₹1,20,00,000 | ₹1,20,00,000 | |
The total revenue recognised over the project's life is identical — ₹1,20,00,000 either way. What changes is timing: under IND AS 115, Years 1 and 2 show no revenue from this unit at all, while the entire contract price lands in Year 3. Costs (land, construction, capitalised selling costs) that would have been matched against revenue progressively under the old method instead sit on the balance sheet as contract costs / work-in-progress through Years 1 and 2, then flow to the income statement together with the revenue in Year 3.
(Illustrative cost figures. In Years 1 and 2, all land and construction spend would instead have been debited to Contract Costs / Work-in-Progress rather than to any cost-of-revenue account, since no revenue was recognised in those years.)
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| Aspect | Old Guidance Note (AS 7 / AS 9 based) | IND AS 115 |
|---|---|---|
| Recognition trigger | Physical construction progress + buyer commitment thresholds | Transfer of control to the customer |
| Typical pattern | Progressive, tracking % construction complete | Usually a single lump sum at possession/registration |
| Legal enforceability of payment right | Not a determining factor | Central to the over-time vs point-in-time test |
| Variable consideration (discounts, penalties) | Typically adjusted when finalised | Estimated upfront, constrained to avoid probable reversal |
| Land & construction costs | Matched against revenue as construction progresses | Capitalised as contract costs, expensed together with lump-sum revenue |
8. Disclosures Required
- Disaggregation of revenue (e.g. by project, by recognition timing — point in time vs over time)
- Significant judgements made in determining the timing of revenue recognition, including why the over-time criteria were or weren't met
- Contract balances — contract assets, contract liabilities (customer advances), and significant changes in these balances during the period
- Methods, inputs and assumptions used to estimate variable consideration and to constrain it
- Remaining performance obligations — the transaction price allocated to units sold but not yet handed over, and when that revenue is expected to be recognised
9. Common Mistakes CAs Make
Error 1 — Defaulting to over-time recognition out of habit from the old percentage-of-completion method. IND AS 115 requires an active, contract-specific assessment against the three over-time criteria. Assuming over-time treatment because "that's how real estate has always been accounted for" is exactly the mistake the standard was designed to correct.
Error 2 — Treating RERA escrow compliance as proof of an enforceable payment right. Depositing collections into an escrow account is a cash-custody requirement, not evidence that the developer can legally demand payment for work completed if the buyer defaults or cancels — these are separate questions.
Error 3 — Expensing land and construction costs as incurred instead of capitalising them as contract costs. For point-in-time contracts, costs must sit on the balance sheet as work-in-progress until the matching revenue is recognised — expensing them early distorts interim results and mismatches costs against revenue.
Error 4 — Ignoring variable consideration constraints on price-escalation and delay-penalty clauses. These must be estimated and included in the transaction price to the extent a significant reversal isn't probable — not simply recognised when they're finally settled in cash.
Error 5 — Applying the same conclusion across an entire project without contract-by-contract review. Different buyers can have differently negotiated terms (especially large bulk-purchase or institutional buyers), and the over-time vs point-in-time conclusion should, strictly, be assessed per contract, not assumed uniformly across every unit in a project.
10. FAQs
Do real estate developers recognise revenue over time or at a point in time under IND AS 115?
Most Indian residential real estate sales are recognised at a point in time, not over time. Over-time recognition requires the developer to show it has an enforceable right to payment for performance completed to date, and in practice most Indian sale agreements (especially RERA-regulated ones) don't give the developer this enforceable right until possession or registration — so revenue is typically recognised only when control transfers at that point, not progressively during construction.
How is this different from the old percentage-of-completion method?
Under the earlier Guidance Note on real estate (aligned to AS 7/AS 9), developers commonly recognised revenue progressively as construction progressed, using the percentage-of-completion method, regardless of whether legal control had transferred to the buyer. IND AS 115 replaced this with a control-based model — revenue is deferred until the specific over-time criteria are met (rare for most Indian projects) or, far more commonly, recognised in one lump sum at possession/registration. This defers revenue recognition significantly for projects sold during construction.
How does RERA's mandatory escrow account affect IND AS 115 accounting?
RERA requires developers to deposit at least 70% of amounts collected from buyers into a separate escrow account, used only for that project's construction and land costs. This is a cash-management and legal requirement, not an accounting standard — it doesn't itself change the IND AS 115 revenue recognition conclusion. However, the restricted nature of escrowed cash affects balance sheet presentation and disclosure, and the contractual terms tied to escrow release conditions are one of the facts considered when assessing whether the developer has an enforceable right to payment.
What variable consideration is common in real estate contracts?
Common variable consideration includes early-payment discounts, price escalation clauses tied to construction stage, penalties for delayed possession payable to the buyer, and cancellation/refund clauses. Under IND AS 115, a developer estimates variable consideration using the expected value or most-likely-amount method and includes it in the transaction price only to the extent it's highly probable a significant revenue reversal won't occur later.
How are land costs and construction costs treated as contract costs?
Costs directly related to a contract that are expected to be recovered are capitalised as contract costs (inventory/work-in-progress) rather than expensed immediately, and are recognised as cost of revenue when the related revenue is recognised. For point-in-time recognition, this means land and construction costs accumulate on the balance sheet throughout construction and are expensed together, matched against the lump-sum revenue, at possession/registration — not progressively.
Can a real estate developer ever qualify for over-time revenue recognition?
Yes, but it's uncommon in India for standard residential sale agreements. It typically requires either that the asset has no alternative use to the developer (customised to the specific buyer) and the developer has an enforceable right to payment for work completed to date, or that the buyer controls the asset as it's created (common in some contracted construction/EPC arrangements, less so in typical unit-sale agreements). Each contract's specific legal terms need to be assessed — this is not a sector-wide default.