Thanks to the high returns, real estate is an attractive sector for most investors. Though the international market may have taken a hit due to the sub-prime crisis, analysts see good demand in the domestic market. With the growth opportunities leading to increased participation by global investors, there is need to align the industry’s financial reporting principles to global standards.

In 2008, the International Financial Reporting Interpretations Committee (IFRIC) of the International Accounting Standards Board (IASB) issued the ‘Agreements for the Construction of Real Estate’, clarifying on accounting and financial reporting issues, including

determining whether an agreement for the construction of real estate is within the scope of the International Accounting Standard (IAS) 11 — ‘Construction Contracts’, or IAS 18 — ‘Revenue’; and

when the revenue from construction of real estate should be recognised.

Contracts and arrangements where the buyer can specify major structural elements of the real estate design before construction begins and/or specify major structural changes once construction is in progress (whether or not they have that ability) are to be accounted under the percentage completion method, according to IAS 11.

Contracts and arrangements where the construction takes place independent of the agreement, and the buyers have limited ability to influence the real estate design (for instance, choice of designs specified by the seller, or only minor variations to the basic design) are to be accounted under the completion method, according to IAS 18 — namely, when the control, significant risks and rewards of ownership of the real estate have been transferred to the buyer in entirety at a single time (for example, at completion, upon or after delivery).

IFRIC 15 has introduced revenue recognition based on ‘stage of completion’ as set out in the contract/agreement, where the control and significant risks and rewards of ownership are deemed to have been transferred to the buyer as the construction progresses.

In India, the current framework consists of the Guidance Note on Recognition of Revenue by Real Estate Developers, issued by the Institute of Chartered Accountants of India in 2006 and revised in 2012.

The revised note primarily provides guidance on the application of the percentage of completion method, wherever such transactions and activities of real estate have the same economic substance as construction contracts. It draws upon principles enunciated in AS 7 — Construction Contracts. For real estate transactions that are in substance similar to delivery of goods, the principles enunciated in AS 9 — Revenue Recognition are applied.

Hence, a different accounting framework prescribes a different accounting treatment for similar transactions — that is, completed contract method under IFRIC 15 and percentage completion under the Guidance Note.

Indian Accounting Standards (IND AS) 11, notified by the Ministry of Corporate Affairs, prescribes percentage completion method for real estate transactions and ignores IFRIC 15.

Recently, the IASB issued an exposure draft, IAS 18, which specifies revenue from contracts with customers, determining when the transfer of goods or service is achieved over time. The exposure draft is however under discussion, and the final IAS 18 may be different.

Hemant M. Joshi is Partner and Yogikumar Patel is Senior Manager, Deloitte Haskins & Sells

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