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The implementation of a new Accounting Standard is expected to impact real estate developers’ revenue recognition in the first quarter of the current fiscal.
This could also affect their credit rating, especially of the publicly listed developers, which may lead to sovereign/pension funds revisiting their investment plans.
Project completion
With the implementation of IND AS 115, real estate developers will have to replace the existing percentage completion method with the project completion method.
“This is not a mere accounting change as it will have a severe impact on the ways and means in which real estate developers run their business, raise funds, price and sell projects,” said Anuj Puri, Chairman, Anarock Property Consultants.
Under the percentage completion method (old accounting standard), advance payments received from a home buyer for an under-construction flat were considered as revenue and added to the company’s turnover and the net income generated from such projects were treated as profits.
“The effect of the sales recognition method is a temporary phenomenon and in no way affects the ultimate health of a company. What is not projected now will get into the next quarter and increase the projection. Any analyst will understand this and has no impact on the rating,” explained S Suresh Hari, Vice-President, Credai.
However, under the project completion method (new accounting standard), advance payments received from a home buyer will have to be treated as a loan and not income from sales. “For the purpose of income computation, the company will continue to compute and pay taxes on the percentage completion basis,” said JC Sharma, Vice-Chairman and Managing Director, Sobha Ltd.
‘Temporary impact’
“In all likelihood, there will be some issues pertaining to Minimum Alternate Tax (MAT). So, companies will have additional compliance requirements. Optically, the balance-sheet will look weaker than what it is. Comparative data will be difficult to analyse. At the same time, it will not have any material impact on the cash flows and the overall profitability of an organisation,” he added.
Ashish R Puravankara, Managing Director, Puravankara Ltd,, said: “It appears that this impact will be temporary. To have comparative revenue profits in every quarter, the company is required to have a combination of completed and ongoing projects which will bridge the gap to a great extent. This may happen only after a reasonable period.”
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