Land Cost cannot be withdrawn from Escrow in RERA Registered Projects upfront

rerabookBy Dr Sanjay Chaturvedi, LLB, PhD

The land cost is one of the major component in any real estate project. This needs to be invested first along with all permissible permissions which includes sanction plans, Environmental permissions, Commencement Certificates, Fire and Traffic NOC, Civil aviation NOC and TDR. It is common connotation that whatever invested or spent on the project, if greater than receivable, then it can be withdrawn 100%. But the RERA Act is absolutely clear on this.

RERA Relevant Section 4 2. (D) that seventy per cent. of the amounts realised for the real estate project from the allottees, from time to time, shall be deposited in a separate account to be maintained in a scheduled bank to cover the cost of construction and the land cost and shall be used only for that purpose:

Provided that the promoter shall withdraw the amounts from the separate account, to cover the cost of the project, in proportion to the percentage of completion of the project:

 

Background :

The Ministry of Corporate Affairs (MCA) vide notification dated 30 March 2016 issued the Companies (Indian Accounting Standards) Amendment Rules, 2016. The amendment rules omitted Ind AS 115, ‘Revenue from contracts with customers’ and replaced it with Ind AS 11, ‘Construction contracts’ and Ind AS 18, ‘Revenue’. These standards are aligned with the present International Accounting Standards (IAS) on the subject matter, except that the International Financial Reporting Interpretations Committee (IFRIC) Interpretation 15, ‘Agreements for the construction of real estate’, which provides guidance to determine whether an agreement for the construction of real estate is within the scope of IAS 18, ‘Revenue’ or IAS 11 ‘Construction contracts’, was not incorporated. Instead, a footnote in Ind AS 18 stated that for real estate developers, revenue shall be accounted for in accordance with the guidance note (GN) on the subject matter to be issued by the Institute of Chartered Accountants of India (ICAI). On 10 May 2016, the ICAI issued the GN on accounting for real estate transactions for entities to whom Ind AS is applicable. The objective of the GN is to recommend the accounting treatment to be followed by the entities dealing in real estate as sellers or developers. The term real estate refers to land as well as buildings and rights in relation thereto. This alert highlights the key provisions of the GN

 

Explanation:

The land cost or any sunk cost which is invested upfront cannot be withdrawn but according to percentage of completion method of the project. Any cost and any component of Estimated Cost which is subject to 70% Escrow mechanism need certificate from Chartered Accountant as to the percentage completion. The said method is according to Accounting Standard 7 and 11 of the Institute of Chartered Accountant.

 





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