IMPACT OF ON THE

INDIAN REAL ESTATE SECTOR

 ABSTRACT

 The real estate sector being global in its approach

and competitive in its attitude needs the adoption of
IFRS to consolidate it’s diversifications on a single
platform.

 This report also analyses how the convergence with

IFRS standards is set to change the landscape for
financial reporting in India particularly the real
estate sector.
 OBJECTIVE
S
 To highlight the importance of I.F.R.S. in the Accounting Aspect of the
Indian Real Estate Sector.

 To gauge the changes that this sector will undergo post adoption.

 To study the impacts of IFRS where it has already been implemented

(European countries) so as to determine its simulated impact in India.

 To accentuate the differences between the ACCOUNTING

STANDARDS currently followed in INDIA and the proposed
ACCOUNTING STANDARDS.
 Research Methodology

I have mainly concentrated on secondary data, the data that already exists and has been collected
by some person or organization for previous research purposes and is generally made available to
other researchers free or at a concessional rate. In simple terms secondary data is the data that is
neither collected directly by the user nor specifically for the user. There are various sources of
secondary data collection but due to resource constraints we have managed to access a few of
those, which include the following:

Sources Annual Reports

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Media sources, journals, external experts

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Category Industry Experts

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Books
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Medium Hard copy

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● Internet
 I . F. R . S : A n O v e r v i e w

 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) are

principles-based Standards, Interpretations and the Framework (1989) adopted by the
INTERNETIONAL ACCOOUNTING STANDARDS BOARD(IASB).

 Many of the standards forming part of IFRS are known by the older name
of INTERNATIONAL ACCOUNTING STANDARDS (IAS).

  IAS were issued between 1973 and 2001 by the Board of the INTERNETIONAL
ACCOUNTING STANDARDS COMMITTEE(IASC).

 On 1 April 2001, the new IASB took over from the IASC the responsibility for setting
International Accounting Standards. During its first meeting the new Board adopted
existing IAS and SICs. The IASB has continued to develop standards calling the new
standards IFRS.
 I . F. R . S F r a m e w o r k

International Financial Reporting Standards (IFRS) —

standards issued after 2001

International Accounting Standards (IAS)—standards

issued before 2001

Standing Interpretations Committee (SIC)—issued

before 2001

Framework for the Preparation and Presentation of Financial

Statements (1989)

Interpretations originated from the International Financial

Reporting Interpretations Committee (IFRIC)—issued after 2001
 I . F. R . S : To d a y a n d To m o r ro w

Today Tomorrow

•Used in over 100 countries and by

approximately 40% of the Global
Fortune 500.
•Required for listing companies
across all EU countries in Asia
Pacific including China.
•Adoption date announced by large
countries like Brazil, Canada and
India.
•Expected that all major
countries will have adopted IFRS
to some extent by 2011
•Substantial majority of Global
Fortune 500 will report under
IFRS.
 I . F. R . S : S c h e d u l e C o n v e r g e n c e

Convergence has been rescheduled to a later period; however no date has been announced. The
chart given represents
Convergence has beentherescheduled
earlier dates
to for convergence.
a later period; however no date has been announced. The chart
given represents the earlier dates for convergence .
 I . F. R . S : 1 ( F i r s t T i m e A d o p t i o n o f
IFRS)
In order to successfully converge the Financial Statements with the provisions of IFRS,
the Real Estate companies will have to abide by the rules as set in IFRS 1.

 An entity shall prepare an opening IFRS Balance Sheet at the date to transition to IFRS. This is the
starting point for it’s accounting under IFRS.

 In general, IFRS requires an entity to comply with each IFRS effective at the reporting date for it’s first
IFRS Financial Statements.

 The opening Balance Sheet will be made considering the following points:

1) recognize all assets and liabilities whose recognition is required by IFRSs;

2) not recognize items as assets or liabilities if IFRSs do not permit such recognition;
3) reclassify items that it recognized under previous GAAP as one type of asset,
liability or component of equity, but are a different type of asset, liability or
component of equity under IFRSs; and
4) apply IFRSs in measuring all recognized assets and liabilities.

 Disclosures that explain how the transition from previous GAAP to IFRSs affected
the entity’s reported financial position, financial performance and cash flows.
 A Glimpse of the Revised Schedule V I

 The Ministry of Corporate Affairs has issued the Revised Schedule VI to the Companies Act 1956 on
the 28th February 2011
 Has been framed as per existing NON-CONVERGED Indian Accounting Standards notified under
the Companies (Accounting Standards), Rules, 2006 and has nothing to do with the converged
Indian Accounting Standards.
 Will apply to all the companies uniformly from the Financial Year 2010-11 onwards.
 No possibility of conflict between Accounting Standard and Schedule VI as on modification of
Accounting Standards prescribed under the Companies Act, Schedule VI would stand modified
accordingly.
 The disclosure requirements of Revised Schedule VI are in addition to that required Accounting
Standards prescribed under the Companies Act.
 All disclosures required by Companies Act to be made in notes to Accounts.
 One year comparatives required.
 Classification of all Assets and Liabilities into Current and Non-Current.
 Debit balance of Profit or Loss Account to be shown as negative figure in surplus.
 Reserve and Surplus balance can be negative.
 Indian Real Estate Sector : Ground Zero Facts

 Commercial real estate sector is in boom in India.

 In the last 20 years post liberalization of the economy, Indian Real Estate
business has taken an upturn and is expected to grow from the current USD 25
billion to USD 102 billion in the next 10 years.
 This growth can be attributed to

Favorable Demographics Increased purchasing power

Existing of customer friendly banks Professionalism in Real Estate sector

Favorably reforms initiated by the Availability of pool of highly skilled

government to attract global engineers and technicians.
investors.
Reports of the International Property Consultants

India may need $ 1.5 billion of IT office space and a few billion
dollars of other investments.

Office market in India to grow at annual rate of 20-25 % over

the next 10 years, which equates to 500-650 million square feet.

New housing demand in India by 2015would be 4-6 billion

square feet.

India ranked 5th in the list of 30 emerging retail markets with an

impressive 20% growth rate.
 Challenges to the Regulatory Environment;

Lack of trained and experienced resources;

Business performance measurement and educating Investors and Boards;

Greater complexity in the financial reporting process;

Significant one-time costs.

 IFRS significantly improves the comparability of entities;

IFRS gives better access to global capital markets and reduces the cost of capital;

IFRS provides impetus to cross-border acquisitions;

Will improve the quality an consistency of information, avoid multiple

reporting and reduce cost of finance function;

An IFRS Balance Sheet will be closer to Economic value;

Economic growth and opportunities for Accounting Professional.

The four action plan for success
 Four actions for the Real Four actions for the Real
Estate Executives Estate CFOs

• Determine how the company’s • Assess the potential benefits of

standing in the industry will be representing the company’s financial
impacted by a conversion to IFRS. data on IFRS basis.

•Conduct a competitive analysis. • Assess the impact of reporting under

Which of their first- and second tier IFRS. Consider factors such as
competitors are, or are going to be, volatility of earnings, inappropriate
reporting under IFRS? IFRS-based financial measures.

•Would it be advantageous to be a • Create a project management office

leader into this new world of financial (PMO) for planning, coordinating and
reporting? oversight.

• Decide whether early adoption of •Access to global capital markets.

IFRS aligns with and could be Examine the potential impact on
leveraged to support the strategy of financing as well as remuneration and
your company. other KPIs in business and accounts.
 IFRS IAS
IFRS 1 First Time Adoption of IFRS IAS 1 Presentation of Financial Statements
IFRS 3 Business Combinations IAS 2 Inventories
IFRS 5 Non-Current Assets Held for IAS 7 Cash Flow Statements
Sale and Discontinued Activities
IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors
IFRS 7 Financial Instruments: IAS 10 Events after the Balance Sheet Date
Disclosures
IAS 11 Construction Contracts
IFRS 8 Operating Segments
IAS 12 Income Taxes
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS 18 Revenue
IAS 21 The Effects of Changes in Foreign Exchange
Rates
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosures
IAS 27 Consolidated and Separate Financial
Statements
IAS 28 Investments in Associates
IAS 31 Interests in Joint Ventures
IAS 32 Financial Instruments: Presentation
IAS 33 Earnings per Share
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets
IAS 40 Investment Property
 Major impacts of IFRS on the Indian Real Estate Sector

Financial and Accounting Non-financial

From profit and loss account From balance sheet

point of view point of view

1) Human Resources
1) Construction 1) Investment properties ( IAS 40)
contracts (IAS 11) 2) Mergers and
2) Property, Plant , equipment Acquisition
2) Revenue recognition (IAS 16)
(IAS 18) 3) Tax
3) Leases (IAS 17)
3) Agreements for the 4) Sale of real estate 4) Treasury
construction of real
estate (IFRIC 15) 5) Sale-lease back Transaction 5) Information
technology
6) Joint venture
Financial and
Accounting issues
for Real Estate
Companies
There are manifold technical and accounting issues considering the real estate companies. Some of them affect the
balance sheet (referred to as Statement of Financial Position as per IFRS), while others, the profit and loss
statement (referred to as Income Statement as per IFRS). Therefore, management will be required to use more
professional judgment than they are accustomed to.
The sets of standards differ on a number of points and can significantly affect a company’s financial results.
Although the extent of these differences is dwindling as a result of convergence, significant differences
remain in areas such as revenue recognition, investment properties, PP&E, leasing, impairment and income
taxes. Also, as IFRS generally allows for more choices than GAAP, there may differences in accounting for
similar transactions under IFRS. This is particularly evident in the accounting for investment properties under
IFRS which allows the choice of accounting using historical cost or fair value.

Financial and technical

accounting issues

From profit and loss From balance

statement point of view sheet point of view
 IAS 11 ( Construction Contract )

 A construction contract is a contract specifically negotiated for the construction of an

asset or a group of interrelated assets.

 Under IAS 11, if a contract covers two or more assets, the construction of each asset
should be accounted for separately if separate proposals were submitted for each
asset , each proposal was negotiated separately and costs and revenues of each asset
can be measured.

 If the outcome of a construction contract can be estimated reliably, revenue and costs
should be recognized in proportion to the stage of completion of contract activity.
This is known as the PERCENTAGE OF COMPLETION METHOD of accounting.

 To be able to estimate the outcome of a contract reliably, the entity must be able to
make a reliable estimate of total contract revenue, the stage of completion, and the
costs to complete the contract.
 If the outcome cannot be estimated reliably, no profit should be recognized.
Instead, contract revenue should be recognized only to the extent that contract
costs incurred are expected to be recoverable and contract costs should be
expensed as incurred.

 An expected loss on a construction contract should be recognized as an expense

as soon as such loss is probable.

IAS 11 AS 7

Contract Revenue under IAS AS 7 does not refer to fair

11 is measured at the fair
value of the consideration
received or receivable.
value and states that
Contract revenue is
measured at the
consideration received or
receivable.
 IAS 9 ( Revenue Recognition )
 The gross inflow of economic benefits (cash, receivables, other assets) arising from the
ordinary operating activities of an entity (such as sales of goods, sales of services,
interest, royalties, and dividends).
 Revenue should be measured at the fair value of the consideration received or
receivable.
 If the inflow of cash or cash equivalents is deferred, the fair value of the consideration
receivable is less than the nominal amount of cash and cash equivalents to be received,
and discounting is appropriate.

Sale of Goods:
Revenue arising from the sale of goods should be recognized when all of the following
criteria have been satisfied:

1) the seller has transferred to the buyer the significant risks

and rewards of ownership ;
2) the seller retains neither continuing managerial involvement
to the degree usually associated with ownership nor effective
control over the goods sold;
3) the amount of revenue can be measured reliably;
4) it is probable that the economic benefits associated with the
transaction will flow to the seller, and
5) the costs incurred or to be incurred in respect of the
can be measured reliably .
 Rendering of Services:
For revenue arising from the rendering of services, provided that all of the following criteria are met,
revenue should be recognized by reference to the stage of completion of the transaction at the balance sheet
date (the percentage-of-completion method):
 the amount of revenue can be measured reliably;
 it is probable that the economic benefits will flow to the seller;
 the stage of completion at the balance sheet date can be measured reliably; and
 the costs incurred, or to be incurred, in respect of the transaction can be measured reliably.
When the above criteria are not met, revenue arising from the rendering of services should be recognized
only to the extent of the expenses recognized that are recoverable (a "cost-recovery approach".

IAS 18 AS 9
Under IAS 18, revenue from sale of goods cannot AS 9 does not contain any such stipulation.
be recognized when entity retains continuing
managerial ownership or effective control over
the goods sold.

In case of revenue from rendering of services, AS 9 allows only completed services contract
IAS 18 allows only percentage of completion method or proportionate completion method.
method.

Under IAS 18, payments received in advance for AS 9 permits recognition when the goods are
goods yet to be manufactured or third party sales manufactured, identified and ready for delivery in
cannot be recognized as revenue until such such cases.
goods are delivered to the buyer.
IFRS addresses the risks associated with revenue recognition

 Market Risk
A fall in real estate prices below the purchase prices would result in homebuyers asking for a refund of
their payment amount. Most builders allow refund after deducting a penalty. Therefore, if sales are
recognized at the time of signing of sale agreement, sales will have to be reversed at the time of
cancellation. For some companies, cancellation and revenue restatements can be material.

 Execution Risk
Execution risk becomes critical, especially during an economic downturn when most projects get
delayed because the builders have little or no cash. For partially completed projects, recognizing a
portion of the total revenues may not properly reflect the execution risk inherent in these projects. Since
IFRS allows revenue recognition only if the project has been delivered, an IFRS compliant company’s
financial statement will provide a better perspective of its execution capabilities.
 IFRIC 15 (Agreements for the Construction of Real Estate)

THE BIG QUESTION :IAS 11 or IAS 18

IFRIC 15 provides guidance on how to determine whether an agreement for the construction of real estate is
within the scope of IAS 11 (Construction Contracts) or IAS 18 (Revenue) and, accordingly, when revenue
from the construction should be recognized:
 An agreement for the construction of real estate is a construction contract within the scope of IAS 11 only
when the buyer is able to specify the major structural elements of the design of the real estate before
construction begins and/or specify major structural changes once construction is in progress (whether it
exercises that ability or not).
 If the buyer has that ability, IAS 11 applies.
 If the buyer does not have that ability, IAS 18 applies.

THE NEXT BIG QUESTION : PRODUCT OR SERVICE

 The fundamental issue is whether the developer is selling a product (goods) – the completed apartment or
house – or is selling a service – a construction service as a contractor engaged by the buyer.
 Revenue from selling products is normally recognized at delivery. Revenue from selling services is normally
recognized on a percentage-of-completion basis as construction progresses.
If IAS 11 applies, what is the accounting?

If IAS 11 applies, revenue is recognized on a percentage-of-completion basis

provided that reliable estimates of construction progress and future costs can be
made.

If IAS 18 applies, service or goods?

Even if IAS 18 applies, the agreement may be to provide construction

services rather than goods. This would likely be the case, for instance, if
the entity is not required to acquire and supply construction materials. If
the entity is required to provide services together with construction
materials in order to perform its contractual obligation to deliver real
estate to the buyer, the agreement is accounted for as the sale of goods
under IAS 18.
 IAS 40 ( Investment Property)

 Investment property is property (land or a

building—or part of a building—or both)
held (by the owner or by the lessee under a
finance lease) to earn rentals or for capital
appreciation or both.

 Investment property shall be recognized as

an asset when and only when:

1) it is probable that the future economic

benefits that are
associated with the investment
property will flow to the entity; and 
2) the cost of the investment property can
be measured reliably.

 An investment property shall be measured

initially at its cost.
 Measurement subsequent to initial recognition
 An enterprise may choose either a fair value or cost model to value investment properties
and apply the same to all its investments uniformly.

 A change from one method to another should only be made where it will result in a more
appropriate presentation.

 The Standard envisages that a change from fair value to cost is unlikely to be appropriate.

 Where the cost model is chosen, the fair values of the investment properties must be
disclosed.

Fair Value Model Cost Model

• An enterprise that chooses the fair value model • An enterprise that chooses the cost model, values
should, after initial recognition, value all its all its investments at cost.
investment properties at their fair values.
• Any permanent decline in the value of the asset is
• A gain or loss arising from a change in the fair accounted for.
value of an investment property should be included
in the net profit or loss of the period in which it
arises.
 IAS 16(Property, Plant and Equipment)
IAS 16
Componentized significant parts of an
Real Estate and Equipments having
different estimated useful life i.e. each
significant part is depreciated
separately.
Provides option for accounting
• historical method, or
• revaluation method
Under IAS 16, if subsequent costs are
incurred for replacement of a part of an
item of fixed assets, such costs are
required to be capitalized and
simultaneously the replaced part has to
be de-capitalized.
AS 10
The assets or the equipments are taken
together and depreciated as a single unit.
Measured only at historical cost
AS 10 provides that only that
expenditure which increases the future
benefits from the existing asset beyond
its previously assessed standard of
performance is included in the gross
book value, e.g., an increase in capacity.
 IAS 17 (Lease Accounting)

IAS 17 AS 19

AS-19 - “Accounting for

Under IAS-17 it has been clarified
that land and buildings elements Leases" at it stands at present
of a lease of land and buildings does not deal with lease
need to be considered separately. agreements to use lands. Hence,
The land element is normally an the classification criteria are
operating lease unless title passes
to the lessee at the end of the applicable only to buildings as a
lease term. The buildings element separate asset
is classified as an operating or
finance lease by applying the
classification criteria.

The definition of residual value is AS 19 defines residual value.

not included in IAS 17.

IAS 17 specifically excludes lease There is no such exclusion

accounting for investment
property and biological assets. under AS 19.

IAS 17 does not prohibit upward AS 19 permits only downward

revision in value of un-guaranteed
residual value during the term of revision
lease.
 Potential Potential Implications
Differences Financial Statements
IFRS gives an option to report at
Investment Properties either fair value or historical cost
with disclosure of fair values.
IFRS requires componentization
Property, Plant and approach for significant parts of
Equipment PP&E; revaluation model optional.
IFRS has only one-step
Impairment impairment test based on
recoverable amount, IFRS
impairment losses may be
reversed if recovery occurs.
IFRS classification criteria contains
Leases no bright lines; broader than just
land and PP&E
IFRS consider transfer of risks
Sale of Real Estate and rewards model, but without
bright lines and little guidance on
continuing involvement.
No specific guidance related to
Taxes uncertain tax positions in IFRS;
IFRS deferred taxes not required
on certain JVs domestic
undistributed earnings.
Process/IT
Increased need for qualified
independent or internal
valuations; systems modifications
to track fair values necessary.
Systems modifications may be
necessary to track components
and separate depreciation
amounts.
Changes in impairment analysis
and system modifications to
track impairments for future
reversal.
Changes to classification
analysis including new data
considered.
Changes to sale recognition
and/or gain recognition evaluation, for condominium unit sales and
including increase in professional similar transactions.
judgment.
Tax accounts and processes for
deferred taxes and uncertain tax
liabilities may change
Other Issues
May need to manage external
stakeholder reactions to volatility in
fair values and debt covenant
compliance may be at risk.
Potentially difficulty in transition
of existing assets to
componentization depending on
age of assets and detail
information available.
Increased focus on periodic
assessments and possibly
increased volatility from more
frequent write-downs and
reversals.
Pre-EITF 01-8 contracts (not
previously evaluated as containing
leases under U.S. GAAP) will
require evaluation as potential
leases under IFRS.
IFRS changes revenue recognition
Foreign taxes in some foreign
jurisdiction based on reported
earnings may change.
IFRS impact
beyond the
Financial
Statements
Human Resource
 IFRS will likely influence the Real Estate company’s hiring,
training, compensation, and termination practices.

 Consider hiring:

1) How many of the finance staff are currently versed in

IFRS?
2) Assuming a talent shortfall, how will the difference be
made up?
3) If sufficient people are not employed can existing staff be
trained?

 Differences in the calculation of bonuses on profit.

 Questions to be considered by investors:

1) Differences between familiar GAAP Standards and

IFRS.
2) Its impact on the financial position of the company.
3) Impact of Fair Value accounting of Real Estate.
 Tax

 Fluctuations in the payment of

income based taxes.

 IFRS may result in changes in the

profit recognition and ultimately
pre-tax income.

 The many changes to the financial

reporting of assets, liabilities, profits,
and losses may result in significant
impacts on compliance with
regulatory requirements.
Treasury

 Moving to a global financial

reporting model may open up
access to new sources of capital.

 Many global lenders, global private

equity firms prefer IFRS reporting
due to it’s transparency and fair
value requirement.

 Furthermore, with reporting or

disclosure of the fair values of
investment properties, management
will likely need to understand,
evaluate, and manage the expected
market reactions to reported
volatility in property values.
Information Technology

 From leasing data to depreciation

schedules to tax record keeping there’s
plenty of financial information for real
estate companies to track. Hence many
of the industry’s largest players are
currently planning or engaged in major
IT initiatives, consolidating disparate
systems down to a single platform.
 However, much of the work may be for
naught if IFRS is not factored into the
upgrade. If the ERP systems are not
planned for an IFRS conversion at the
earliest stages of their upgrade, the
companies will likely find themselves
engaged in a lengthy and expensive
reconfiguration effort a few years down
the road.
 Anecdotes from the European Experience

• A growing realization that the initiative was

much broader, larger, and more complex than
just being a accounting issue.

• Adoption of a more holistic approach by the

companies where impacts of IT, HR and taxes
were taken into consideration.

• Lower volumes of Accounting reports as large

amounts of assumptions and notes that were
earlier parts of these statements were
incorporated in IFRS.

• Moreover, The highest quality financial data

is obtained when a company fully integrates
 Findings and Conclusion

The Indian real estate sector is going through a transition phase hence it
has to adopt the following steps to ensure stability of its future prospects:

 Educating their stakeholders

Align its performance-linked compensation policies
To address the impact on managerial remuneration
 Impacts and interactions with taxation regulations

Instead of asking the government for extensions the companies should

take the first step towards this convergence process because…
A Good
A Better