ICAI NOTE MAY DELAY REVENUE BOOKING, ERODE PROFITABILITY OF REALTY FIRMS

CAI NOTE MAY DELAY REVENUE BOOKING, ERODE PROFITABILITY OF REALTY FIRMSThe latest guidance note brought out by the Institute of Chartered Accountants of India (ICAI) on accounting in real estate transactions may delay revenue bookings by realty companies and erode their profitability. According to the note, initial revenues from a project can be recognised only when all critical approvals are in place and 25 per cent of die project is sold. At least 10 per cent revenue realisation is yet anoth¬er recommendation by ICAI. The note applies to revenue recogni¬tion in projects that will commence on or after April 1,2012, and to those that have started but their revenue recognition will start on or after Arpil 1,2012. Although such notes are recom¬mendatory in nature, these become accounting norms by default, auditing companies say. "In most cases, the revised note may require deferral of revenue until the stat¬ed criteria are met. So, top line and bot¬tom line of companies with a lot of proj¬ects at nascent stage may get considerably impacted," says V Venkataramanan, partner (accounting advisory services) at global audit and advisory firm KPMG. At present, property developers start recognisng revenues at different stages of construction. The range is between 20 and 30 per cent of completion of a proj¬ect. While the country's largest realty developer DLF starts recognising rev¬enues after 30 per cent of construction is complete, Unitech starts it at 20 per cent. The different methods followed by realty companies have made it difficult for investors to compare the financials of tiiese companies. The new threshold of 25 per cent is expected to bring unifor¬mity in accounting practices and bridge the gap in comparison, say analysts. "Now all real estate companies have to adhere to the new norms," says a senior executive of Godrej Properties which used to start booking revenues after 20 per cent of the project was completed. The note also excludes land costs in the calculation of the minimum thresh¬old of 25 per cent. This, too, is likely to impact the revenue recognistion of real estate companies like DLF, Parsvnath and others that include land costs while recognising revenues in their books. "Unless your project is 25 per cent complete, you can not include land costs in the recognition of revenues," says S Bhaskaran, chief financial officer at Bangalore-based Sobha Developers. A senior finance executive at DLF says: "It is a question of phasing of your revenues. It will be lower at the begin¬ning and higher in the middle and at the end." According to property developers, the delay in recognition of revenues, coupled with fixed costs like salaries, interest charges, depreciation and marketing — which constitute 20-25 per cent of rev¬enues — could erode profitability of com¬panies. "When you recognise less revenues and costs remain the same, profits will be less," says the CFO of a Mumbai-based developer on the condition of anonymity. At a time when real estate developers are battling falling sales, declining prof¬its and rising costs, the hew note could exert additional pressure on developers. "Generally, the revised note is expected to put pressure on most real estatedevelopers,"    says    KPMG's Venkataramanan. However, Vishal J Shah, executive director, PricewaterhouseCoopers India, believes that though there could be a short-term impact, in the long run, the removal of accounting discretion would set in a common base of comparison and evaluation for investors, lenders, cus¬tomers and the other stakeholders. "This would bring in a lot more confi¬dence and greater interest from stake¬holders, particularly the foreign private equity and REIT (real estate investment trust) investors. The note could become a key catalyst in bringing a positive image makeover for the industry, which has been hit by the overall economic slow¬down," he says. – www.business-standard.com