New accounting rules may deal Rs 20,000 crore blow to builders
The implementation of a new accounting standard from this fiscal will force listed real estate companies to write back profits made over the past few years from all projects that are not complete. That could hit the balance sheets of companies, many of which are still recovering from their debt-fuelled spending binges of the past decade or so. Developers have written to the government seeking relief.
Under IND-AS 115, in line with international norms, listed real estate companies will have to write back about Rs 20,000 crore from their net worth in the current fiscal itself, said a top industry executive, asking not to be named. The new accounting standard took effect in April.
Real estate companies will have to switch to the Project Completion Method from the existing Percentage Completion Method (POC). Under the previous norm, home buyer payments toward the purchase of under construction flats were declared as turnover by companies and net income generated from such projects was treated as profit.
“The developers would need to write back the profit booked till date on all the ongoing projects which are not 100% complete under the new rule,” Adhidev Chattopadhyay, research analyst with ICICI Securities, said in a recent report. “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.”
Under the new rule, home buyer payments toward ongoing projects will be treated as advances or loans and not as income from sales. “Any change from Percentage of Completion (POC) accounting to accounting on Completion of Project would have a very significant revenues and cost reversal as at the opening balance sheet and re-recognition of the same in ensuing period,” the National Real Estate Development Council (Naredco) said in a submission to the ministry of corporate affairs.
‘IMPACT ON CREDIT RATING’
“New accounting norms will impact not only revenue recognition but also have consequential impact on net profits and net worth of a real estate company,” said Saumil Shah, partner, Dhruva Advisors. ATS Infrastructure chairman and managing director Getamber Anand said the government should have grandfathered the ongoing projects till March 2018 so that the industry had time to adopt the new norms.
According to experts, India largest real estate firm DLF will have to write back profit of a significant amount from its net worth. “DLF may have to take a one-time hit on its net worth in Q1FY 19 with a writeback of profit booked from existing projects not 100% complete under IND-AS 115 definitions,” said Chattopadhyay.
DLF declined to comment. Lodha Developers, which filed its draft red herring prospectus in April this year and is currently conducting roadshows, may have to revise the document and restate financial results, said a top investment banker. The company plans to raise about Rs 6,700 crore, including a fresh issue of Rs 3,750 crore. Lodha Developers declined to comment.
It is expected to write back a substantial amount of profit from its net worth (Rs 4,659 crore). This will have a direct bearing on the debt-equity ratio of the company – it has debt of Rs 17,973 crore. “The new accounting standard will have an impact on borrowing capacity of the company or credit rating of a company and therefore an impact on the borrowing cost,” said the banker cited above. “Further, an impending IPO may get potentially impacted due to the changes in the accounting norms.”
Considering the applicable legal framework in India, including the Real Estate (Regulation and Development) Act (RERA), it may be difficult for such entities to recognise revenue over the period of construction, said a top official at one of the top four consulting firms. “This change will significantly impact revenue recognition of real estate developers. This may also lead to higher tax outflow considering prevailing tax provisions (primarily minimum alternate tax) in India for such entities,” he added.