A real estate developer registered in a UAE Free Zone is constructing a mixed-use residential and commercial building. Some works are performed by the developer's own workforce; others are carried out by third-party contractors. Sales of residential apartments take place both on an off-plan basis (through an escrow account) and after construction is completed.
Developers in this position frequently ask which construction-related costs must be capitalised as part of the cost of the development asset, and which costs may be recognised as an expense in the period in which they are incurred.
Four questions arise.
A: The governing principle is direct attributability. Under IAS 2, all costs that are directly incurred to bring the development asset to its intended condition and location for sale must be capitalised as part of the cost of that asset. They are accumulated in a Construction in Progress or Development Cost account until the project reaches the point of completion or sale.
Co...