Auditing real estate revenue recognition under Ind AS 115 means testing a specific judgement the developer made at contract inception: whether control of the asset transfers to the buyer over time as construction progresses, or only at a point in time (typically possession or registration). For most Indian residential projects sold under standard agreements for sale, the developer retains control of the work-in-progress asset until completion — the buyer cannot direct the use of a half-built flat or compel another builder to finish it — which generally points to point-in-time recognition rather than the percentage-of-completion approach many developers used before Ind AS 115 and still default to out of habit.
Why this is a judgement call, not a formula
Ind AS 115 asks three specific questions to decide whether revenue is recognised over time: does the customer simultaneously receive and consume the benefit as the entity performs; does the entity's performance create or enhance an asset the customer controls as it is created; and does the asset have no alternative use to the entity while the entity has an enforceable right to payment for performance completed to date. For a typical under-construction flat sold before the super-structure is complete, the answer to all three is usually no — the developer can, as a practical and often legal matter, sell the same unit to someone else if the first buyer defaults, and construction financing is typically secured against the project as a whole rather than against an enforceable per-unit payment right.
| Arrangement | Typical conclusion | Why |
|---|---|---|
| Standard agreement for sale, under-construction flat | Point in time, usually at possession/registration | Asset has alternative use; no enforceable right to payment for work done absent default |
| Plotted development with no construction obligation | Point in time, on transfer of title | No performance obligation being satisfied over time at all |
| Contract with a specific, named customer customising a unit with no resale right and an enforceable payment schedule | Can be over time | Asset may have no alternative use and payment right may be enforceable — needs its own analysis |
A developer that recognised revenue over time under the old guidance and simply continued doing so under Ind AS 115 without redoing the three-question analysis for its specific agreement terms has not actually made the Ind AS 115 judgement — it has carried forward the old policy. This is one of the more common findings in a first-time Ind AS 115 adoption review for a developer.
Auditing a point-in-time conclusion
- 01Read the actual agreement for sale, not a summaryThe alternative-use and enforceable-payment tests turn on specific clauses — cancellation rights, the developer's right to re-sell on default, and what happens to instalments paid if the buyer walks away. Read a sample of the standard agreement text directly.
- 02Confirm the point of transfer used matches the agreement and local lawPossession, registration, or an earlier point depending on the specific legal transfer of control in that state — this needs to be tested against the facts, not assumed to be a fixed date like possession in every case.
- 03Test cut-off around the recognition point specificallyUnits handed over or registered close to the period end are where recognition timing errors concentrate. Test possession/registration dates against revenue booked dates for units around the cut-off.
- 04Check that cost of construction is being carried as inventory, not expensed as incurredUnder point-in-time recognition, construction cost sits in inventory (work-in-progress) until the unit is recognised as sold, which means the balance sheet carries the real exposure, not the income statement.
Where an over-time conclusion is used
Some developers, particularly on specific contract or joint-development structures, do have a defensible over-time basis. Where that is the conclusion, the audit shifts to testing the percentage-of-completion input — actual costs incurred to date against total estimated project cost — and this brings back the estimation risk that Ind AS 115 was partly designed to reduce: total estimated cost is a forecast, and a developer under pressure to show revenue has every incentive to understate it.
How we think about this
The audit risk in real estate revenue recognition was never really the arithmetic of percentage-complete. It is whether the entity made an honest, documented application of the control-transfer test to its own specific contracts, rather than inheriting whichever method it used before the standard changed.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Revenue, receivables & cut-offRevenue recognition testing in a statutory auditThe transfer-of-control test that governs when a sale is recognised, the misstatement patterns that recur in practice, and what evidence ties a recognised sale to an underlying document.
- Revenue, receivables & cut-offMatching dispatch, invoice and ledger for revenue testingThe sales-side mirror of the purchase three-way match: what breaks it in practice, and why the unmatched population should be sized by value, not count.
- Inventory & stockWork-in-progress valuation in a manufacturing auditStage-of-completion estimation challenges, testing the bill of materials and standard cost build-up, and the physical verification difficulty of WIP.
- Audit workflow & automationSA 540: auditing accounting estimates, where judgment replaces a verifiable numberAn estimate can't be vouched to a source document the way an invoice can. SA 540 is about what replaces vouching when there's no single right answer to check against.
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