Real estate companies don’t record their revenues or profits until they deliver due to the conservatism principle, one of the main accounting principles that ensure that the good or service is delivered to the buyer to complete the sale process.
How do real estate companies record sales when they launch new projects? Here’s an example:
Talaat Moustafa Group opened reservations for apartments in a new project.
On December 31, 2022, an apartment was sold for EGP 75, and the amount is paid in 3 equal annual installments = EGP 25. 1- Construction cost = EGP 50
2- The first installment to be paid immediately = EGP 25
3- Delivery after the 3rd (and final) installment.
The budget on December 31, 2022 Assets = 75 Cash = 25 Receipts under collection (Cheques) = 50
Liabilities = 75 Advance Payments from clients = 25 Cheques received from clients = 50
Assets = Liabilities so the above makes sense.
In 2023, TMG paid EGP 25 to the contractor to build half of the apartment using the down payment. In the same year, the second check was collected = EGP 25.
Note: When a contractor starts a job but has not yet delivered, the part still under construction is recorded as an asset called “Projects in progress” Until this moment, the income statement = 0 because the apartment hasn’t been delivered.
December 31, 2023, Budget Assets Cash = EGP 25 (EGP 25 went to the contractor and EGP 25 from the second cheque) Projects in progress = EGP 25 Receipt papers under collection = EGP 25
Liabilities Advance payments = EGP 50 (2 cheques collected) Cheques received from clients = EGP 25
December 31, 2024 (Final Year) – The company got the last installment = EGP 25 – The contractor received the last 25 and completed the apartment in full – The apartment has been delivered to the buyer As long as the delivery is made, the company has the right to record the revenue, cost, and profits in the income statement.
Balance Sheet 2024 Assets Cash = EGP 25 (EGP 25 for the contractor and the last cheque was collected) Shareholder Rights Profit for the year = 25
Most Important Points 1. The profits disclosed by real estate companies listed in the stock exchange in the first quarter of 2022 are profits for the sales of 2019 and 2020 on average. 2. If you want to know if the company will sell well in 2022, measure the change in two budget lines, but do not look at the 2022 revenue line.
The Two lines are: 1. Cash (compare if debt also increased) 2. Receipts under collection (Cheques)
If they increased significantly since the beginning of the year, then the company has received the money in advance and received cheques from customers in return for new real estate sales.