An important provision in the International Financial Reporting Standards (IFRS), which will be followed by all Indian companies starting 1 April, has been dropped to favour real estate companies in the country.
Companies will have to prepare their financial statements for the year 2011-12 based on the IFRS norms instead of the present accounting system, the Generally Accepted Accounting Principles (GAAP). In phase I, this would apply to companies listed in India or outside and firms that are not listed but have net worth of at least Rs1,000 crore. Phase II will include companies, whether listed or not, having a net worth of at least Rs500 crore but not exceeding Rs1,000 crore. Phase III will begin in April 2014 and include listed companies with net worth less thanRs500 crore.
As per the internationally accepted IFRS norm, real estate companies are able to book revenue only through project completion method. They can recognize revenue only upon completion of the project. But since real estate companies sell during the construction period, the new norm would have prevented them from showing the sale proceeds in the revenue. Therefore, the government decided that real estate companies can show these sales figure from a particular project in their quarterly results.
Under GAAP, real estate companies can book revenue even before they start construction. This is possible by use of the percentage of completion method of accounting. This allows companies to book revenues provided an agreement of sale has been signed with the buyer and a specified percentage of the project cost, including land and approvals, has been incurred. As a result, Indian real estate companies’ revenues are higher compared with the work done by them. For example, a company announces a project in, say, October 2010 and starts booking apartments. The company will show these booking amounts as revenue in the October quarter result. However, the construction of the project will take at least three-four years.
What it means for you
As an investor, it would be easy for you to compare two realty companies on the basis of their revenue recognition policy. As a consumer, you can get information about the sales performance of the company. Since companies will disclose the amount of space sold every quarter, it would give you an indication of the status of various projects.