Lot cost and the percentage-of-completion method

Hi All -

You may have seen my other thread about the accounting basis for a custom homebuilder. After reading the literature (both the FASB pronouncements and the PPC guide I shelled out for) on a fairly in-depth basis (get it? Basis?...no?), I have but one lingering question:

I believe the percentage of completion method is appropriate as we have estimable costs, revenue, specific enforcement in the contract, and the expectation that both buyer and seller will perform.

That said, I'm not sure how to handle the up-front purchase of lots on which the houses are built. It seems that they relate to up front costs that don't actually progress the project. (I.e. under ASC 605-25-75). I can't find a specific example as the one homebuilder illustrative financial statements I can find (from PPC) show the use of the completed contract method for a builder that does mainly homes on spec. (Our client does custom homes on contract almost exclusively.)

So, it seems reasonable alternatives would be:

-Exclude the lot cost from the calculation of revenue earned. Recognize the related revenue over the course of the contract. Or;

-Carry the lot as inventory and not recognize it until the end of the contract (I can't find specific guidance that says this is ok and it seems like really more appropriate for the completed contract method.

Either way, I need some way to recognize the purchase of the lot (i.e. either cr. loan, dr. inventory, or cr. loan, dr. costs in excess of billings.)

Thank you all for your help! It's great to be here.

I have never seen a homebuilder use POC unless they are building a custom home for a specific homeowner who is funding the draws. That said..the LOT should be in the total estimable cost.

Thanks southpark! I actually figured this out on my own (as it was due yesterday AM). In the depths of the PPC guide, my question was answered. You are correct that POC should only be used on custom homes when draws are funded by the customer. Funnily enough, that's exactly the case for some of the contracts. The PPC guide recommended a hybrid method of POC for those contracts and the "deposit" method, which is essentially the completed contract method for the "held" lots.

If anyone is new to this stuff, buy the PPC guide. It cost me $385 but was probably more valuable than my E&O insurance! ha! =)