The implementation of a new accounting standard from this fiscal will force listed real estate companies to write back profits made over the past few years from all projects that are not complete. That could hit the balance sheets of companies, many of which are still recovering from their debt-fuelled spending binges of the past decade or so. Developers have written to the government seeking relief.
Under IND-AS 115, in line with international norms, listed real estate companies will have to write back about Rs 20,000 crore from their net worth in the current fiscal itself, said a top industry executive, asking not to be named. The new accounting standard took effect in April.
Real estate companies will have to switch to the Project Completion Method from the existing Percentage Completion Method (POC). Under the previous norm, home buyer payments toward the purchase of under construction flats were declared as turnover by companies and net income generated from such projects was treated as profit.
“The developers would need to write back the profit booked till date on all the ongoing projects which are not 100% complete under the new rule,” Adhidev Chattopadhyay, research analyst with ICICI Securities, said in a recent report. “This would happen in the first quarter on a retrospective basis and would lead to a hit on the net worth and lead to a temporary spike in companies’ debt-equity ratio.”
Under the new rule, home buyer payments toward ongoing projects will be treated as advances or loans and not as income from sales. “Any change from Percentage of Completion (POC) accounting to accounting on Completion of Project would have a very significant revenues and cost reversal as at the opening balance sheet and re-recognition of the same in ensuing period,” the National Real Estate Development Council (Naredco) said in a submission to the ministry of corporate affairs.