NEW DELHI: The Government will eliminate a key rule from the new international accounting norms that Indian companies have to abide by from next year to permit real estate companies to book revenues as they develop a property, making it a cumulative process & allowing them to maintain a healthy profit and loss account.
A recent meeting of the expert group of the Ministry of Corporate Affairs favoured the existing ‘percentage completion method’, even as the country prepares to align its accounting practices with the globally recognised International Financial Reporting Standards (IFRS), which allows developers to book sales only when the project is complete.
The current move, which was approved by the National Advisory Committee on Accounting Standards (NACAS), is expected to bring some relief to the country’s real estate sector, which is yet to recover fully from the fallout of the economic downturn. A change in accounting practices would have enervated the position of real estate firms while dealing with investors and lenders.
Real estate firms welcomed the move, calling it a step in the right direction. “It will display the true picture as regards the execution and marketing capabilities of a real estate company as well as its cash flow,” said Manoj Goel, Vice-president of Raheja Developers.
Real estate projects consume several years for completion. Therefore they are permitted to follow what is known as the ‘percentage method’ wherein they proportionately show revenues in their account statements as & when projects are executed.
“Any lack of visibility on performance and reported earnings, lenders and banks could be more stringent in lending to this sector,” industry body National Real Estate Development Council (NAREDCO) had said in a representation to the Ministry. “This can also adversely impact investments by mutual funds with focus towards regular returns to unit holders,” it said.
Under IFRS, real estate accounting is based on ‘completed contract method’, wherein revenue is recognised only when the project is accomplished and the ownership is transferred. The improvised move expected to shield the sector from the adverse impact of sudden slumps is in demand.
“With the NACAS clearing the proposal, it is just a matter of time before the government issues a notification to clarify this aspect,” said an official with the Ministry, who requested anonymity.
“While the move will not reflect any major change in the annual margin of corporates, revenues will be recognised on a quarterly basis,” said Suneel Sehgal, Deputy Director-General of NAREDCO.
Accounting experts also embraced the move, saying it suits the manner in which the real estate business functions. “Given the nature of realty business which follows an extended approach (for completion of projects), the move is appropriate,” said Jamil Khatri, Head of Accounting Advisory Services at consulting firm KPMG.
Varun Gupta, Director Finance in Ashiana Housing Ltd, appreciated the step but cautioned that the change could make comparison between firms difficult if they are provided with an option to follow either of the two accounting formats.
The special feature of the revised revenue version includes:
The alignment of Indian accounting standards with International Financial Reporting Standards will happen in three phases starting April 1, 2011
The convergence will enable Indian companies to have a hold of global financial markets and will encourage free flow of capital, goods and labour across borders
Initially, Sensex & Nifty companies listed on foreign bourses and those with a net worth of Rs 1,000 crore are to switch to IFRS. Banks and Insurance companies will not converge in the first phase
IFRS is expected to benefit investors, customers and other key stakeholders in India and overseas as it will result in a more transparent financial reporting
For companies, it means improved access to global capital markets, benchmarking with global peers, enhanced brand value, avoidance of multiple reporting, reflecting true value of acquisitions among others.