The implementation of IND-AS-115 rule will increase compliance and clerical work for real estate companies apart from forcing them write back profits of previous years from all projects which are not complete, developers said.
As per the new norm, real estate companies will have to switch to the project completion method from the existing percentage completion method. 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 Chattopadyay, an analyst with ICICI Securities 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,” he said.
Though reports said that the country's largest real estate firm DLF will have to write back profit of a significant amount from its net worth, its chief executive Rajeev Talwar said the company does not see much impact as most of its projects are complete.
"We have changed our policy to complete projects and sell," Talwar said,
However, JC Sharma, vice chairman at Bengaluru based Sobha said that the new rule will increase the compliance and unnecessary accounting work.
"IT department is collecting income tax from percentage completion method. Now the new rule is talking about completion method. WE have to maintain a separate set of books," Sharma said.
He added that they would not mind applying new rule for new projects but for complete projects, why they should go for so much compliance and paperwork, he said.