The property development industry is a dynamic and thriving sector, with a promising outlook for revenue generation. But, as always in business: nothing comes easily.
Property developers don’t only run into operational difficulties, they also encounter a multitude of administrative challenges.
At Fusion, our CPAs have spent years working alongside businesses in this sector. We have implemented accounting systems to help businesses operate efficiently and save money.
In this article, we take a look at the intricacies of navigating accounting challenges in property developments, and how to overcome financial difficulties.
Common accounting challenges for property development businesses
Revenue recognition, capitalization dilemmas, and collaborative ventures pose a number of accounting challenges to this sector.
1. Revenue Recognition
Property sales are not straightforward transactions; they demand careful accounting scrutiny. The Financial Accounting Standards Board (FASB) standards for revenue recognition in property sales are designed to ensure transparency and accuracy. But, it adds a layer of complexity to an already intricate process. The FASB standards introduce the percentage of completion method. This method brings you the concept of recognizing revenue over time. This may bring with it the benefits of delayed taxation for longer projects, but it presents the industry with a challenge…
While it offers a more accurate reflection of revenue earned during the construction process, it requires meticulous documentation and continuous monitoring. This challenge is exacerbated by the ever-evolving nature of property development projects, where timelines and milestones can shift due to various factors.
Project managers in this industry may already be inundated with a number of moving parts to track. They may battle to stay abreast of this as well. Consulting with a CPA in this regard is useful.
2. Land and development costs
The distinction between capitalizing and expensing costs in the realm of land and development is a complex issue for property developers. It involves making critical decisions about how certain costs are treated on the balance sheet and how they impact the financial health of a development project.
Land acquisition costs are generally capitalized, as they form the foundation of the project. However, the intricacy arises when dealing with pre-development costs, where the line between capitalizing and expensing becomes blurred. Similarly, construction costs, including materials and labor, are also capitalized as they contribute directly to the creation of the asset. But, the challenge here too lies in accurately allocating and tracking these costs, especially in projects with multiple phases or components.
The decision between capitalizing and expensing impacts when and how costs are reflected on the financial statements. This can influence reported profits, assets, and the overall financial position of a business.
The capitalization vs. expense dilemma in land and development costs demands a delicate balancing act that requires a deep understanding of accounting principles. It is advisable to consult with your accountant to make the best call for your business in this regard.
3. Joint ventures and partnerships
From investors to other development firms, many development projects involve multiple stakeholders. Accounting for these joint ventures, especially when ownership percentages or profit-sharing terms change, can be intricate.
Diverse ownership structures complicate profit sharing, risk allocation, and decision-making processes. The challenge often lies in determining the appropriate accounting method for these collaborations, with choices like the Equity Method and Proportional Consolidation.
- The Equity Method involves reporting the investor’s share of the investee’s net assets,
- Proportional Consolidation consolidates the proportionate interests of all parties involved.
Each method carries its own set of rules and implications, requiring careful consideration based on the specific dynamics of the joint venture. This often requires the expertise of a CPA to advise on the best method for both businesses.
From navigating complex accounting standards to offering strategic forecasting insights. Partnering with a CPA can have many benefits.
- At Fusion, we implement accounting and business intelligence software to ensure compliance,
- We look at financial data and contracts to offer tailored financial advice,
- We make recommendations along the way to help you save money in taxes.
We take pride in presenting accurate data to enable property developers to make informed decisions, mitigate risks, and foster sustainable growth. Contact us for assistance today!
_______________________________________________________
This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.