As projects take time, realty firms find it difficult to build on IFRS

Written by Neha Pal | Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: Jan 20 2010, 03:41am hrs
With the ministry of corporate affairs reiterating its commitment to converge Indian accounting norms with the international financial reporting standards (IFRS), the real estate companies are finding it tough to handle the effects of the implementation of the international standards as it will impact the basis for recognising revenues.

Under IFRS, real-estate accounting is largely based on completed contract method wherein revenue is recognised once the project is completed and sold. Under Indian generally accepted accounting principles (GAAP), there is no specific definition of investment property and there are varying practices of classifying such properties. Mostly, the real estate accounting is based on percentage of completion method wherein revenue is recognised as the project is being constructed. The real estate experts are of the view that in a country like India where real estate projects atleast take around 3-5 years for completion, the fair value accounting might become a pain point. The experts are of the view that the government needs to make changes in the income-tax laws so as to not disincentivise tax payers.

The first challenge is to see that all related notifications for different regulators like RBI, Irda is brought together, so that there is clarity, said SP Chakraborty, deputy director, Insurance Regulatory and Development Authority.

Anil Kumar, CEO and deputy MD of Ansal API told FE, This will adversely affect the revenue in the initial years thereby having an impact on profitability. This may have an impact on fund raising options also. Presently, real estate companies are recognising revenue which is based on project progress. Under IFRS, revenue is recognised upon project completion and sales.

According to Dolphy DSouza, partner and national leader (IFRS practice) for Ernst and Young, Under IFRS, real-estate accounting is largely based on completed contract method wherein revenue is recognised once the project is completed and sold. Whereas, under the Indian GAAP, the accounting is based on percentage of completion method wherein revenue is recognised as the project is being constructed. Under IFRS, revenue in earlier years would be much lower.

He added, This would have significant implications like the income tax liability would get deferred. On the other hand, the profits may dip in the initial years and this may have a negative impact on investors decisions. If executive compensation is based on the results under Indian GAAP, then the set arrangement needs to be suitably modified so that it doesnot have a negative effect arising from change from Indian GAAP to IFRS.

DSouza further said, Either the income-tax laws may need certain changes so as to not disincentivise tax payers or alternately income tax payments would still continue under Indian GAAP framework. The latter is cumbersome and not sustainable in the long run because it results in maintaining sets of books under two accounting normsthe Indian GAAP and the IFRS.

The ministry of corporate affairs has reiterated its commitment to converge Indian accounting norms with the international standards by 2011 and said it has the industrys support on the same.

However, experts say the preparedness in the country for the convergence with IFRS is low. According to global financial consulting firm, KPMG, the current level of preparedness within the country for implementing IFRS is low and ICAI recognises the urgent and pressing need to create a resource pool of professionals to manage the conversion.

As Indian companies go global, experts say, convergence with IFRS would eliminate the need for multiple reporting in most cases as the same set of financial statements can be used for reporting at the entity. Many countries like the US , China , Brazil , South Korea and Canada have announced their intention to adopt the IFRS.