With the Indian Accounting Standard (Ind AS) 115 coming into effect from April 1, real estate developers will be forced to show home buyer all payments, especially advances made towards ongoing projects, as loans and not as income from sales.
The move will have a severe impact on the manner in which realty firms operate, it is expected to "bode well" for homebuyers as advance payments received from them will now be rightfully reflected as loans in the balance sheets of developers, realty experts said.
Moreover, as the Real Estate (Regulation and Development) Act 2016 (RERA) has already coming into force, these new norms may make it difficult for real estate companies to recognise revenue over the period of construction, experts added.
“Although the change in accounting standard will lead to a severe impact on the ways and means in which the real estate developers operate, it bodes well with the amendment in Insolvency and Bankruptcy Code (IBC) which treats home buyers as financial creditors. As a result, the advance payments received from homebuyers will now be aptly reflected as loans on the balance sheets of the real estate developers,” said Anuj Puri, Chairman at ANAROCK Property Consultants.
With the implementation of Ind AS 115, real estate developers will have to do away with existing percentage completion method and adopt the project completion method. This will have a severe impact on the ways and means in which real estate developers run business, raise funds, price and sell projects, he says.
Under the previous norms, home buyer payments received by developers for purchase of flats under construction were declared as turnover by companies and net income generated from such projects was treated as profit.
However, real estate firms will now have to write back profits made over the past few years from all projects that are not complete.
Developers may have to write back profits booked in
For projects under construction, developers will now have to write back profits booked in. This is likely to have an impact on the performance analysis of developers, especially listed ones. The debt to equity ratios will change and revenue recognition will be done only on completion of a project. Also, major expenditure and profits in different financial years owing to a few quarters lag for revenue recognition may mislead analysts to underrating or overrating the performance, says Ashutosh Limaye - Head Research & REIS, JLL India.
Realty stock prices likely to witness correction
Stock prices are a function of the company’s profitability and leverage. With changes in the accounting standards, the price-to-book value ratio will change and will bear an impact on the current stock prices, opines Puri.
Only financially stable developers to survive
Large-scale consolidation in the sector as financially incapable and over-leveraged players will find it difficult to survive – only reputed and financially stable developers will be able to continue with the business and homebuyers can be assured of buying houses in good projects of reputed developers.
Credit rating may get impacted
Significant change in the recognition method – leading to massive revenue and cost reversal in Q1 2018-19 results of listed real estate developers – may result in a negative impact on credit rating which may lead to sovereign/pension funds revisiting their future investment plans. These investors have strict norms under which they invest funds only in companies that are above a certain threshold of credit rating, says Puri.
PE deals may get renegotiated
A few ongoing PE/institutional deals may be renegotiated – ongoing deals will be based on historical and financial projections as per the previous accounting standards. With revisions to the accounting standards, the financial statements will also change. This may impact the developer’s fund raising process/cost and indirectly hamper the prices as well, the ANAROCK chairman adds.
Credai welcomes move
“CREDAI welcomes the uniform accounting practices for the Indian real estate sector embodied in Ind-AS 115. Under Ind-AS 115, income is recognised only when the project is completed which is the accounting standard followed for real estate internationally. After the implementation of Real Estate Regulation Act (RERA), handing over the property to a purchaser is critical, Ind-AS 115 also becomes the right and only acceptable way of accounting for real estate. By not allowing for income to be recognised if the project has not been handed over or the consumer asks for refund, Ind-AS 115 achieves perfect harmony with RERA,” says Jaxay Shah, President of CREDAI National.
With Ind-AS 115 the focus will shift to sustainable EBIDTA levels of listed real estate companies. “Markets are mature enough to realise that valuations for RE companies will have to be made with higher multiples on NPVs of future EBIDTA and, hence, the perception that listed real estate companies will suffer in valuations is only temporary,” adds Shah.