23.1.

2 Measurement of and accounting for real estate

Measurement of real estate assets
In many cases it is necessary to allocate the cost carried forward to individual components of a property of development project. For example, in land development the costs carried forward must be allocate to individual lots so that the appropriate cost of goods sold can be matched with sales revenue when a lot is sold. This is necessary because not all the lots may be sold in the same reporting period. Consequently, errors in the allocation of cost to individual lots will influence both reported profit and inventory valuation. In practice, three cost-allocation methods are employed: the specific identification method, the area method and the value method. 1. Specific Identification Method. The specific identification method allocates the costs that can be identified with an individual lot directly to that lot. This method should be used wherever practicable. 2. Area Method. The area method allocates the costs on the basis of the area of each lot. However, this method will not always result in an appropriate allocation of cost. For example, the location of the lots in a subdivision, rather than their size, may be the most important determinant of their value. Under the area method, therefore it is possible that some lots could have costs allocated to them in excess of their realisable values or appraised values. As a result, this method should only be used where lots with the same area are expected to have approximately the same realisable value or appraised value. 3. Value Method. The value method allocates the capitalised costs in proportion to the values of the lots. Values are indicated by the expected realisable values or appraised values of the individual lots. It overcomes the problem associated with the area method in cases where realisable values or appraised values very markedly among lots. The area method of accounting for real estate costs is illustrated by example 23.1 Example 23.1 On 3 july 2005, Dandenong Developments purchased Broadacres for development as a light industrial estate. The following costs were incurred in purchasing the land: Contract price of the land Legal costs on purchase Stamp duty on purchase After the land had been purchased, the developer incurred the following costs during the development and construction phase :

Rezoning Survey fees Town planning costs Clearing and levelling costs Roads and drains Water reticulation costs Sewerage costs Landscaping costs Design and engineering department fees Council rates Land tax Interest attributable to the development

Dandenong Development capitalised the costs of purchase and development of the estate in the following accounts : 1.Land cost, comprising the contract price of the land, legal costs on purchase and stamp duty, of $778 250 2.Development Costs, comprising rezoning, survey fees, town planning costs, clearing and leveling costs, roads and drains, water reticulation, sewerage and landscaping costs, of $523 000 3.Indirect costs, comprising design and engineering department fees, of $4 000 4.Holding costs, comprising council rates, land tax and interest, of $260 500. Work on development of the estate was completed by 30 April 2006. The completed estate consisted of 60 lots. As this was an industrial estate, the location of each lot on the estate was not expected to have any marked effect on ecah lots selling price. The capitalised cost of the estate was, therefore, allocated to each lot on the basis of area.

Accounting For Real Estate Assets

Real estate assets may be divided into three types : 1. Property held as inventory 2. Property held to generate revenues 3. Property held as a non-current asset for use by the owner. The method of accounting for each type of real estate asset is considered in turn.