Change In Accounting Norms To Hit Value Of Listed Builders

Worried about the repercussion that a tweaking in accounting norms will have on listed real estate companies, National Real Estate Development Council (Naredco) has written to the corporate affairs ministry seeking relief.

The ministry has in March this year notified Ind AS 115, Revenue from Contracts with Customers as part of the Companies (Indian Accounting Standards) Amendment Rules, 2018. Under the changed rules, listed realtors will have to switch to the project completion method from the existing percentage completion method while reporting their profits, a move that would significantly lower the valuation of listed real estate companies, including the country’s biggest developer DLF and realty giant Lodha Group.

This means realtors can no more report payments received by homebuyers of under-construction properties as turnover while declaring their income. The income thus generated would be treated as loans under the changed norms. This change would force all listed realtors to write back profit they reported on their under-construction projects. The change is in line with global standards.

Companies that have been working towards launching an initial public offering would also have to change their plans owing to the change in accounting norms.

“Any change from percentage-of-completion accounting to accounting on completion of project would have a very significant impact on revenues,” Naredco wrote to the ministry.

"This would happen in the first quarter on a retrospective basis and would lead to a hit on the net worth and lead to a temporary spike in companies’ debt-equity ratio,” a report in The Economic Times quoted ICICI Securities Adhidev Chattopadhyay as saying.

A slowdown in the real estate sector has already made a dent in the profit margins of sector bigwigs. The launch of the real estate Act can as another blow as far as profits of builders were concerned. The change in accounting norms would further sharpen their short-term pains.