Cancellations, defaults and repossessed units

Cancellation waves during market downturns can reverse previously recognized revenue and expose repossessed units to further impairment, so getting the forfeiture-income and inventory-write-down mechanics right prevents overstated income during exactly the periods when balance sheet resilience matters most.

What does the contract and local law entitle the developer to retain on cancellation (a capped forfeiture) versus what must be refunded? For over-time projects, is a cancellation/default rate estimate being applied as a constraint on cumulative revenue recognized, based on historical experience by project? Is forfeiture income recognized only once legal entitlement is established, rather than as soon as a default is asserted? Are repossessed units returned to inventory at the lower of original cost and current NRV, tested against the prevailing (not original launch) market price?

1) Determine the recognition pattern already established for the project (point-in-time or over-time, per RECON-001), this drives how a cancellation is treated. 2) For point-in-time projects: while the contract is still live pre-handover, treat cash received as a contract liability; on cancellation, first assess the contract's default terms to determine what the developer is legally entitled to retain (a capped forfeiture/penalty) versus what must be refunded. 3) For over-time projects: build an estimate of expected cancellation/default rates using historical experience by project/segment, and apply this as a constraint on cumulative revenue recognized (do not recognize revenue that is probable to reverse on cancellation), reassess each period as actual experience emerges. 4) On confirmed cancellation, derecognize the corresponding contract asset/liability and revenue previously recognized (for over-time contracts), recognize forfeiture income only when the developer's entitlement to retain the amount is legally established (not merely asserted), and return the unit to inventory. 5) Measure the repossessed unit's re-entry into inventory at the lower of its original cost and current net realizable value, testing against realistic resale prices in the prevailing (often weaker) market rather than original launch pricing.

Measurement base: forfeiture income is measured at the amount the developer is legally entitled to retain (established by contract terms and, where relevant, local law/court practice), not the full amount collected; the refund payable, if any, is a financial liability measured at the amount due. Subsequent measurement: repossessed units are remeasured on return to inventory at the lower of original allocated cost and current NRV (estimated selling price in the prevailing market less remaining costs to complete/sell), with any shortfall expensed immediately as an impairment; for over-time projects, the cancellation constraint on revenue is reassessed and trued up each reporting period as actual cancellation experience updates the estimate.

Disclose cancellation/default rate experience by project or portfolio segment where material to revenue estimates or the transaction price constraint; present forfeiture income separately from property sales revenue (typically within other income); disclose the impairment/write-down recognized on repossessed units returned to inventory and the basis for the revised NRV; disclose the accounting policy for constraining variable consideration for expected cancellations in over-time contracts.

• Recognizing the full forfeited deposit as revenue/income without legal confirmation of entitlement, and without also recognizing any impairment on the returned unit
• failing to apply any constraint on cumulative over-time revenue in projects with visibly deteriorating sales or rising default rates, resulting in later revenue reversals
• returning repossessed units to inventory at their original (pre-downturn) cost without testing against current, weaker resale prices
• netting refunds due to the customer against forfeiture income rather than presenting the developer'
• s actual legal entitlement
• not distinguishing between voluntary cancellations (often smaller penalty) and developer-initiated terminations for cause, which can have different contractual entitlements.