Some of India’s large real estate firms are seeking exemption from adopting the proposed International Financial Reporting Standards (IFRS) from the next fiscal year. All real estate companies that form part of the NSE’s Nifty-50 or BSE’s Sensex-30, will have to report financial returns according to the stringent revenue recognition norms laid down by the IFRS.
For years, developers in India have been recognising revenue the moment an agreement for sale of a flat is signed. They do this after completing about 20-25% of the total construction work, mainly to assure investors that the project is safe. So, under India’s Generally Accepted Accounting Principles (GAAP), revenue is earned the moment an under-construction flat is booked. However, under the IFRS, only when an apartment is constructed and ownership rights are transferred will revenue from such transaction be recognised. “It is a challenge to follow the new accounting norms as there will be shortfall of revenue in some quarters,” said S Baaskaran, CFO of Sobha Developers.
According to industry experts, the consequences will also extend to structuring of Esop schemes, training of employees, modification of IT systems and tax planning. Companies will also need to communicate the impact of IFRS convergence to their investors to ensure they understand the shift from Indian GAAP to IFRS. Over 100 countries have accepted IFRS norms.
“IFRS becomes relevant as cross-border transactions involving Indian firms are on the rise. Convergence of Indian accounting standards with IFRS will be a positive thing,” said Ravi Ramu, an accounting expert, who was earlier with technology firms and was involved with Puravankara Projects.
Some of the challenges which the builders are facing are having fully-trained finance staff, revenue recognition, as well as knowledge of impact of IFRS on business.
In the first phase of the roll-out, the IFRS norms will impact companies with networth of over Rs 1,000 crore or those who have issued Foreign Currency Convertible Bonds (FCCBs) or Global Depository Receipts (GDRs). Having studied the detailed impact of IFRS on the realty sector, Confederation of Real Estate Developers of India (CREDAI) plans to take up the matter with the government. Some of the top builders are due to meet next month to discuss this issue to come to conclusion on the same. “Developers would not find it acceptable to pay tax on a notional basis when there is no revenue recognition in the books,“ added Santosh Rungta, president of the CREDAI.
However, the Institute of Chartered Accountants of India (ICAI) is in no mood to exempt any sector/industry from adopting these standards as it could trigger off an avalanche of such requests from sectors like banking.
“We are firm on the implementation meeting the April 2011 deadline. If they (real estate sector) have any objection, let them talk about it,” said Amarjit Chopra, president of ICAI, when queried about the demand from the real estate sector. “Engineering companies like Larsen & Toubro or Hindustan Construction Company will not be impacted as they will continue to follow the percentage completion model,” said Jamil Khatri, executive director of audit and US GAAP services of audit firm KPMG.
However, analysts believe adoption of IFRS norms should not be made mandatory given the challenges surrounding it. “Voluntary adoption of IFRS needs to be encouraged as the understanding of the financial statement under the dual accounting standard will be a challenge,” said Navin Agrawal, director at audit and consulting firm Ernst & Young.
“The revenue recognition is the major challenge, which is not accepted even in some of the developed countries like US. Singapore has not accepted the method and they are continuing with the percentage completion method,” said Jackbastian Nazareth, COO of Puravankara Projects.
Though developers are aware that IFRS will have an adverse impact in the initial few years as the revenue will be skewed in the year of completion, they are preparing themselves for the worst. “We have no choice but to begin implementing the proposed new standards,” added Keshav Pai, CFO of Brigade Group.
