ICAI note may delay revenue bookings of realty firms
March, 03rd 2012
The latest guidance note brought out by the Institute of Chartered Accountants of India (ICAI) on accounting in real estate transactions may delay revenue bookings by realty companies and erode their profitability.
According to the note, initial revenues from a project can be recognised only when all critical approvals are in place and 25 per cent of the project is sold. At least 10 per cent revenue realisation is yet another recommendation by ICAI. The note applies to revenue recognition in projects that will commence on or after April 1, 2012, and to those that have started but their revenue recognition will start on or after Arpil 1, 2012.
Although such notes are recommendatory in nature, these become accounting norms by default, auditing companies say. In most cases, the revised note may require deferral of revenue until the stated criteria are met. So, top line and bottom line of companies with a lot of projects at nascent stage may get considerably impacted, says V Venkataramanan, partner (accounting advisory services) at global audit and advisory firm KPMG.
At present, property developers start recognisng revenues at different stages of construction. The range is between 20 and 30 per cent of completion of a project. While the countrys largest realty developer DLF starts recognising revenues after 30 per cent of construction is complete, Unitech starts it at 20 per cent. The note also excludes land costs in the calculation of the minimum threshold of 25 per cent.