Project Completion Method treats promotional expenses as revenue, while project-specific costs remain part of work-in-progress.

In a real estate project under the Project Completion Method, advertisement, business promotion and commission expenses were treated as revenue expenditure because they were promotional in nature and did not bring inventory to its present location and condition under Accounting Standard 2; they were therefore not required to be capitalised as work-in-progress. By contrast, loan processing charges and security expenses were found to be project-specific costs directly attributable to the development activity and necessary for the project inventory, so they were correctly included in work-in-progress. The appeal was partly allowed by deleting capitalisation of promotional s while sustaining capitalisation of project-specific expenses.

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Issues: (i) Whether advertisement, business promotion and commission expenses incurred by a real estate developer following the Project Completion Method were allowable as revenue expenditure or required to be capitalised as work-in-progress; (ii) whether loan processing charges and security expenses were project-specific costs forming part of work-in-progress.

Issue (i): Whether advertisement, business promotion and commission expenses incurred by a real estate developer following the Project Completion Method were allowable as revenue expenditure or required to be capitalised as work-in-progress.

Analysis: Under Accounting Standard 2, only costs incurred in bringing inventories to their present location and condition form part of inventory cost, while selling and distribution costs and administrative overheads that do not contribute to such condition are excluded. Expenses incurred for business promotion, advertising and commission to agents are promotional in nature and do not directly create or improve the inventory, nor do they bring the project inventory to its present location and condition. Such expenditure is therefore revenue in nature even where revenue recognition is deferred under the Project Completion Method.

Conclusion: The advertisement, business promotion and commission expenses were allowable as revenue expenditure and were not required to be capitalised as work-in-progress.

Issue (ii): Whether loan processing charges and security expenses were project-specific costs forming part of work-in-progress.

Analysis: Costs that are directly attributable to the project and necessary for bringing the inventory to its present location and condition are includible in work-in-progress. Loan processing charges and security expenses, on the facts recorded, were project-specific and directly connected with the ongoing development activity. They therefore fell within the cost base of the project inventory under the applicable accounting principles.

Conclusion: The loan processing charges and security expenses were correctly capitalised as work-in-progress.

Final Conclusion: The appeal was partly allowed by deleting the capitalisation of promotional expenses while sustaining capitalisation of project-specific expenses.

Ratio Decidendi: In real estate projects following the Project Completion Method, expenses that are promotional or otherwise unrelated to bringing inventory to its present location and condition remain revenue expenditure, whereas costs directly attributable to the project are to be included in work-in-progress.

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