ICAI’s revenue recognition clause to help control project delays

The guidance note issued by the Institute of Chartered Accountants of India (ICAI), to streamline the accounting practices of real estate developers in India, can be a blessing in disguise for property buyers.

As per the Note, a developer has to obtain all critical approvals related to the project before recognising revenue from sale of units. In particular, a developer must obtain all environmental clearances as well as necessary permissions with respect to plans and designs. The title of the land must also be clear and undisputable.

This comes as a sigh of relief for the common man who suffers delays in possession of property. There are several instances of highly-acclaimed real estate projects that got delayed by several years, and even cancelled after several months of launch. In the name of refunds, buyers who continued paying installments as per the schedule, receive only the principal amount without any interest. And many of them have to run from pillar to post to get even the principal amount.

The ICAI guidance note compels developers to obtain all necessary approvals in advance. This restricts the possibilities of projects being delayed or cancelled due to lack of permissions at a later stage. “The guidance note has made developers conscious about permissions and approvals, and this should work in favour of the masses in general,” says Jamil Khatri, Global Head, Accounting Advisory, KPMG.

But then the question is: why would a developer be eager to recognise revenue in the books of accounts early as it would make him liable for taxes? “If a developer is looking for finance or equity investment, he has to show a sound balance sheet to prospective investors and that drives him to window-dress his financial statements,” a senior finance officer from a real estate group answered the question on the condition of anonymity.

Source :- MagicBricks.com Bureau