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| Govt to allow realtors to book revenues at different work stages Wed, 13 Oct 2010 18:37:18 GMT |
| The Economic Times Govt to allow realtors to book revenues at different work stages NEW DELHI: The government will drop a key rule from the new international accounting norms Indian companies have to follow from next year to permit real estate companies to book revenues as they build a property, 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 cleared 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 impact of the economic downturn. A change in accounting practices would have weakened 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 reflect the real 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 take several years to complete, therefore they are allowed to follow what is known as the percentage method wherein they proportionately show revenues in their books of account as 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 of corporate affairs. “This can also adversely impact investments by mutual funds with focus towards regular return 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 completed and the ownership is transferred. The reworked move expected to shield the sector from the adverse impact of sudden slumps 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 of corporate affairs who asked not to be named. “While the move will not see any 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 welcomed the move, saying it suits the way the real estate business works. “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 , welcomed the moved 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. |
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