In a move that will bring a major relief to real estate firms such as DLF and Unitech, the corporate affairs ministry has decided to dilute a key provision in the new accounting standards IFRS which will allow real estate companies to show the percentage of completion of a building project in their quarterly results as per the current Indian GAAP requirements.
The change is significant because IFRS, as followed globally, treats under-construction properties as inventory and revenues for such properties could only be reflected once it is fully constructed.
Therefore it bars companies from showing only a percentage of completion of the project in their results. The rationale behind it is that since customers would not come into possesion of an incomplete project it will not be viable to report it in the quarterly results.
“The change has been brought about because real estate companies, which are coming out of the recession, would have been severely impacted and further affect their funding plans,” a source privy to the government’s move told FE.
Sources said a real estate delegation had met the accounting standard board of the Institute of Chartered Accountants of India (Icai) which forwarded its recommendations to the National Advisory Committee on Accounting Standards (Nacas). “The Nacas has accepted the recommendations,” he added.
“This is a very important change that has been brought about. Since project takes around 2-3 years for completion, real estate companies would not have been able to show the revenues till it was absolutely completed,” said Jamil Khatri, executive director & head accounting advisory services for KPMG.
Dolphy D’Souza partner at Ernst & Young said, “Real estate companies feel that completed contract method under IFRS would result in lump accounting, that is revenue/profits are reflected in the year of completion of contract, which may not happen on a linear basis.” He explained that this will not truly reflect the nature of their activity.
However, Khatri added that real estate companies now seeking to raise capital abroad will have to maintain two books, one adhering to the Indian variant of IFRS and the other the original IFRS. “Abroad the Indian variant may not be recognised, hence real estate firms will have to follow an additional book,” he said.
This is the second instance when MCA has decided to change an integral provision of IFRS which could create some uneasiness in the minds of the global investors. The government in September decided to change provisions relating to foreign exchange differences arising out of currency fluctuations.
Khatri said going by the government’s insistence on changing provisions it would create a lot of anxiety among foreign investors. “The government has diluted about 25% of the original IFRS. The current changes may help Indian companies in the short run however in the long run it would not.”