Real estate sector under Sebi scanner

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The real estate sector is once again under scanner, this time for accounting reasons. Market regulator Sebi seems puzzled by different accounting policies followed by real estate companies.

 

 

As the real estate sector is witnessing unprecedented growth in revenues, it is facing a unique problem - how to account for it?

 

To simply put, there are 2 methods of accounting for real estate revenues. The one, that's followed by most companies, is to account for revenues as per the stage of completion of the construction. Which means, if a particular construction or project is half complete, a company will account for half of the project revenues.

 

The other method is to account for entire revenues only on completion of the entire project. The Institute of Chartered Accountants of India issued real estate accounting guidelines few years' back, which advises real estate companies to adopt the first method and recognise revenues on the basis of percentage of completion of the project.

 

The ICAI stand however is not in line with international accounting principles like IFRS.  Real estate accounting is a controversial issue worldwide. But the IFRS has recently come out with a draft interpretation that will require real estate companies to account for revenues only on completion of the project. That directly contradicts the ICAI 's accounting policy treatment.

 

 

But some real estate companies like HDIL , which listed recently at the stock exchanges, are recognizing revenues only on project completion. And on questioning by Sebi, HDIL got an auditor 's opinion in its favour.

 

One of the leading audit firms of Mumbai, Haribhakthi & Co. backed HDIL 's accounting policies, on grounds that ICAI 's real estate accounting norms only applied to contractors and not developers like HDIL.

 

And hence, it said that HDIL should only recognise revenues when it transfers possession of property to the buyer.

 

But SEBI is not convinced and has written to ICAI stating that most real estate developers like DLF and Omaxe are recognising revenue as per the accounting treatment prescribed by ICAI.  SEBI has asked the Institute to clarify - how the case of HDIL is different from other real estate companies and also the correct accounting treatment to be followed by the real estate sector.

 

 

" The expert advisory committee of the ICAI is examining the matter on the basis of the institute 's guidance note and will give its opinion to the regulator. " Pankaj Jain, Central Council Member and VC, Accounting Standards Board, ICAI

 

 

But according to sources, the ICAI, which deliberated on this matter last week, is likely to stick to its prescribed accounting treatment.