The Securities and Exchange Board of India (Sebi) has asked the Institute of Chartered Accountants of India (ICAI) to clarify the accounting standards that real estate companies have to follow.
The capital market regulator has noticed that different real estate firms have been using varied methods for accounting revenues.
According to the ICAI, there are two methods of accounting for real estate revenues. The one followed by most companies accounts for revenues according to the stage of completion of construction. If a particular project is half complete, the company will account for half of the project revenues.
The other method is to account for the entire revenue only on completion of the project. ICAI officials said, “A few years back, we had issued real estate accounting guidelines, which advised companies to adopt the first method and recognise revenues on the basis of percentage of completion of the project.”
However, Housing Development and Infrastructure, the real estate arm of Wadhawan Group with operations in the Mumbai Metropolitan Region, are recognising revenues only on project completion.
Most real estate majors such as DLF and Omaxe follow the accounting method prescribed by the ICAI.
The ICAI’s stand, however, is not in line with international accounting principles such as the International Financial Reporting Standards (IFRS).
Real estate accounting is a controversial issue worldwide. 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.
Sebi has, therefore, asked the institute to clarify on the correct accounting method to be followed by domestic real estate firms.
“The expert advisory committee of the ICAI is examining the matter and will give its opinion to the regulator,” officials said.
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