China lc meter
Realestate companies have so far been accounting their revenue based on the completion method' where revenue is recognised in proportion to the costs incurred and not when the project is completed. But the proportion in which revenue was recognised varied across companies. DLF, for instance, starts booking revenues on a project when it incurs at least 30 per cent of the estimated project cost. For Unitech, this proportion stands at 20 per cent. For investors to interpret their numbers more easily, the Institute of tcs meter of India has come up with a draft guidance note on revenue recognition by companies in this sector. This draft, if cleared, will result in companies following similar rules on when, what and how to recognise revenue in their books. The idea is to enable realestate companies adopt uniform practices in computing their revenue and act more prudently in measuring their sales and accounting dues from customers. While companies may choose not to follow this guidance, such defiance will result in a qualification note from the auditors a situation most companies prefer to avoid. The proposed guidance will result in some companies booking revenues much later than is currently done. This may depress their sales numbers when there are multiple projects at an initial phase of work. The note will also ensure that there is more certainty in recovering the revenue booked by keeping away contracts where buyers default. Why this guidance?The absence of consistent accounting practices on when to start recognising revenue or what proportion of cost to bring to book, has led to the realty sector seeming to lack in accountability. Varied accounting practices have led to constant sense of mistrust, especially in the stock market. Comparing performance between companies can also be misleading as a result of varied lc meter. For instance, midsized Mumbai realty player, Orbit Corporation, saw a dip in its revenue in FY11. While this may seem like poor performance compared with peers, its annual report reveals that it has actually sold more area than a year ago. It could not recognise revenue, as quite a few large projects had not hit the threshold limit for revenue recognition. Simply put, it was merely a postponement of accounting the revenue, not a case of poor business performance. Key changesWe look at three key issues of importance to investors, which will ensure: There is construction activity' on a project before it is accounted; there is some effort to sell a good part of the project before booking revenue, and that only those dues from customers where there is no default are eligible to be called a sale. The guidance makes it clear as to when the revenue meter should start ticking for realty companies. Companies need to incur at least 25 per cent of the estimated construction and development costs before they start booking revenue. That may not seem too different from the 2030 per cent threshold that most companies are now following. But here is the catch: The threshold of 25 per cent would not include land costs. Land costs typically account for 3050 per cent of a total project cost. So, it is easy for a company to start recognising revenue without really incurring china lc meter on the construction activity by citing the acquisition cost of the land. If you look at the accounting policies of DLF or Mahindra Life Space Developers, you will find that, to reach the threshold of 25 per cent or 30 per cent, these companies include the land cost. With the proposed change, they would have to spend at least 25 per cent of their estimated development cost before they can showcase revenue on the project.