A life-size wave is all set to bump on the realty builders. As per the wandering industry reports, the implementation of a new accounting standard from this fiscal (starting from 2018) will compel the listed real estate companies to write back profits, that have been consummated from all those projects under completion more than a year now.
This could be another socking line of attack to greet those real estate companies which have been reeling under insolvency code for the past few years or more. However, reports suggest that developers have already submitted their request in written to the government, seeking relief.
Conforming to the global industry standard, IND-AS 115 (new industry standard) mentions that all listed real estate companies will have to write back about Rs. 20,000 crore from their net profit of the current fiscal. The new industry standard started rolling since last April of this fiscal.
Real estate companies will have to run after their project completion with best of their efforts. They will have to switch to Project Completion Method from the existing Percentage Completion Method (POC).
Under the earlier regime, the booking amounts received from the home buyers for under construction projects, used to be shown as yearly turnover and the net income generated from those projects were regarded as gross profit by the builder companies.
Under the revised norm, the amount home buyers would pay towards an on-going project, would be treated as ‘advances’/ ‘loans’; but certainly not as income from sales. The developers have to write back the profit booked till date on all on-going projects that are not fully completed under the new norm.
A recent analytic report published by the ICICI Securities said, “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.”
In a submission to the ministry of corporate affairs the National Real Estate Development Council (Naredco) said, “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.”
This new industry standard is expected to impact on the credit rating part. Starting from the revenue generation to the net profit – every calculation will be under the finest institutional radar. This will not only have a direct outlook on the debt-equity ratio of the companies, but also restrict the borrowing capacity of the companies too.
“Real estate sector in India has been witnessing one after another massive changes during these past 3 years. Under these significant changes and stringent framework, there is no way a builder can escape from the ethics and the industry standards for his survival and sustenance, in the present market scenario. This change in particular, will definitely have a big bite on the revenue generation of the builders and also will give rise to higher tax outflow,” said Mr. Mahesh Somani, Chairman – National RERA Committee, National Association of Realtors, India.