Anuj Puri, Chairman – ANAROCK Property Consultants
With the implementation of accounting standard – IND AS 115, real estate developers will have to do away with the existing percentage completion method and adopt project completion method.
This is not a mere accounting change as it will have a severe impact on the ways & means in which the real estate developers run business, raise funds, price and sell projects.
Under the percentage completion method (old accounting standard), advance payments received from a home buyer towards an under construction flat were considered as revenue and added to the company’s turnover and net income generated from such projects were treated as profits.
However, under the project completion method (new accounting standard), advance payments received from a home buyer towards an under construction flat will have to be treated as loans and not income from sales. This will bear the following impact:
- Real estate stock prices may witness a significant 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.