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ICAI issues new guidelines for realty, carbon trading cos
February, 22nd 2012

Real estate companies and companies involved in carbon trading will have to change the way they recognise revenues. It's all thanks to a new guidance note issued by the Institute of Chartered Accountants In India (ICAI), reports CNBC-TV18's Payaswini Upadhyay.

In a move to reduce the disparate practices of revenue recognition by real estate companies, ICAI has issued a guidance note identifying threshold limits when revenues from projects can be recognised.
These thresholds are:

When all critical regulatory approvals are secured
When 25% of the project is completed
When 25% of the project's inventory is sold
When at least 10% of the expected revenue is received

This is in sharp contrast to the current practise, where revenue recognition differs from company to company... And experts say this will mean a change in valuations and quarterly profit statements.
Dolphy D'Souza, Partner, E&Y says, "It is going to have a significant impact and a significant spike in your revenue and profits that you recognise. In terms of the real estate companies, because of the spikes, you will not see stable earnings and you will not see a stable earning per share and that may have an impact on the valuation of these real estate companies."

In addition, firms like Aditya Birla Nuvo , Triveni Engineering , and Orient Papers which trade in carbon credits, will also have to change the way they recognise revenues from these credits.
Currently, revenues are recognized either when they file an application with the united nation framework convention on climate change, or at various stages of production, provided there are reasonably sure of the credit.
D'Souza adds, "This is obviously going to impact the profits you recognize, on your earning per share and everything will be linked to certification by the UNFCCC and this would also probably create volatility because it will be dependent on when UNFCCC certifies those carbon credits.

Balancesheets apart, this ICAI move gains importance given the move to converge with IFRS. The guidance on both these fronts are at odds with the recognition prescribed under IFRS. Experts say the international accounting standards board is expected to mirror the ICAI's guidance on real estate revenues. But the ICAI's stand on carbon credits comes as a surprise.

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