With the ministry of corporate affairs, reiterating its commitment to conform to Indian Accounting Standards to International Financial Reporting Standards (IFRS) by next year, this central shift will have a significant impact on the future growth of the real estate companies. By Sunil Aggarwal, Chief Acquisition & Development Officer, SARE, India.
India has achieved significant growth in the past decade and is likely to witness equally impressive growth for the next two decades. And it is imperative for the growth of Indian companies to achieve global scale. And for that, they would need to attract global capital. Most of the global market analysts understand the IFRS and not the IGAAP, i.e., Indian Generally Accepted Accounting Practices. Also in most sophisticated economies companies source and invest capital not only by way of equity and debt but through other instruments like the derivatives etc. And IGAAP is not up to speed on these instruments. It is therefore not only increasingly important for Indian companies to adopt these practices but a question of their survival.
Indian government has made a number of changes to its accounting practices and will in a phased manner ask companies to adopt these standards. In the initial phase these are likely to be made compulsory for listed companies having a turnover of more than 1000 crores. The key issues involving the implementations of IFRS, will have a critical implications for the real estate industry.
Revenue Recognition: In the current Indian practices revenue can be booked provided an agreement of sale has been signed with the buyer and a specifi ed percentage of the project cost has been incurred, including land cost. This can lead to infl ated sales when actually there are none. Also the developer’s execution capability seems overstated in this case.
For example, assume a project costing Rs. 100 crore of which Rs. 30 crore is land cost, and the estimated sales value is Rs. 120 crore. Since the cost incurred on land is 30% of the total cost a developer can book through percentage completion method a revenue of 36Cr and thus he is able to recognize revenues ahead of construction and accounting doesn’trefl ect the substance of the transaction.