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The real estate sector being global in its
approach and competitive in its attitude
needs the adoption of IFRS to consolidate
its diversifications on a single platform.
This report also analyses how the
convergence with IFRS standards is set to
change the landscape for financialreporting in India particularly the real
estate sector.
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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 postadoption.
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.
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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 neithercollected 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:
Annual Reports
Media sources, journals, external experts
Sources Industry Experts
BooksCategory
Hard copy
InternetMedium
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INTERNATIONAL FINANCIAL REPORTING STANDARDS
(IFRS) are principles-based Standards, Interpretations and theFramework (1989) adopted by the INTERNETIONAL ACCOOUNTINGSTANDARDS BOARD(IASB).
Many of the standards forming part of IFRS are known by the older nameofINTERNATIONAL 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 responsibilityfor setting International Accounting Standards. During its first meeting thenew Board adopted existing IAS and SICs. The IASB has continued todevelop standards calling the new standards IFRS.
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International Financial Reporting Standards
(IFRS)standards issued after 2001
International Accounting Standards (IAS)
standards issued before 2001
Interpretations originated from the International
Financial Reporting Interpretations Committee
(IFRIC)issued after 2001
Standing Interpretations Committee (SIC)
issued before 2001
Framework for the Preparation and Presentation ofFinancial Statements (1989)
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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.
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Convergence has been rescheduled to a later period; however no date has been
announced. The chart given represents the earlier dates for convergence.Convergence has been rescheduled to a later period; however no date has been
announced. The chart given represents the earlier dates for convergence.
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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 its accounting under IFRS.
In general, IFRS requires an entity to comply with each IFRS effective at the reporting
date for its 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 entitys reported financial position, financial performance and cash flows.
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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.
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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 thenext 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 government to attract
global investors.
Availability of pool of highly
skilled engineers and
technicians.
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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 4-6billion square feet.
India ranked 5th in the list of 30 emerging retail
markets with an impressive 20% growth rate.
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Challenges to the Regulator Environment;
Lack of trained and experiencedresources;
Business performance measurement and educating Investors and Boards;
Greater complexity in the financial reporting process;
Significant one-time costs.
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IF S si ificantly improves t e comparabilityof entities;
An IF S Balance S eet will be closer to conomic val e;
Will improve t e q alityan consistencyof information,avoidmultiple
reportingandreduce cost of finance function;
conomic growt andopportunities for Accounting Professional.
IF S provides impetus to cross-borderacquisitions;
IF S gives betteraccess toglobal capital markets andreduces t e cost of capital;
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Fouractions for t e eal
state xecutives
Fouractions for t e eal
state FOs
Determine ow t e companys
standing in t e industrywill be
impactedbya conversion to IF S.
onduct a competitiveanalysis.
W ic of t eir first- and second tier
competitors are,oraregoing tobe,
reportingunder IF S?
Would it beadvantageous tobea
leader into t is newworldof financial
reporting?
Decidewhetherearlyadoptionof
IF S aligns withand couldbe
leveraged to support the strategyof
your company.
Assess the potential benefits of
representing the companys financial
dataon IF S basis.
Assess the impact of reporting
under IF S. onsider factors suchas
volatilityof earnings, inappropriate
IF S-based financial measures.
reatea project management
office (PMO) for planning,
coordinatingandoversight.
Access toglobal capital markets.
xamine the potential impact on
financingas well as remuneration
andother KPIs inbusiness and
accounts.
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IFRS IAS
IFRS 1 First Time Adoption of IFRS
IFRS 3 Business Combinations
IFRS 5 Non-Current Assets Held for Saleand Discontinued Activities
IFRS 7 Financial Instruments:
Disclosures
IFRS 8 Operating Segments
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 7 Cash Flow StatementsIAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors
IAS 10 Events after the Balance Sheet Date
IAS 11 Construction Contracts
IAS 12 Income Taxes
IAS 16 Property, Plant and Equipment
IAS 17 LeasesIAS 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
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Major impacts of IFRS on the Indian Real Estate Sector
Financial and Accounting Non-financial
From profit and loss accountpoint of view
From balance sheetpoint of view
1) Construction
contracts (IAS 11)
2) Revenue recognition
(IAS 18)
3) Agreements for the
construction of real
estate (IFRIC 15)
1) Investment properties ( IAS 40)
2) Property, Plant , equipment
(IAS 16)
3) Leases (IAS 17)
4) Sale of real estate
5) Sale-lease back Transaction
6) Joint venture
1) Human Resources
2)Mergers and
Acquisition
3) Tax
4) Treasury
5) Information
technology
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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 companys
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 historicalcost or fair value.
Financial and technicalaccounting issues
From profit and lossstatement point of view
From balance sheetpoint of view
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A construction contract is a contract specifically negotiated for theconstruction 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 bemeasured.
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.
IAS 11 ( onstruction ontract )
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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.
Contract Revenue under IAS
11 is measured at the fair
value of the considerationreceived or receivable.
AS 7 does not refer to fair
value and states that
Contract revenue ismeasured at the
consideration received or
receivable.
IAS 11 AS 7
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The gross inflow of economic benefits (cash, receivables, other assets)
arising from the ordinary operating activities of an entity (such assales of goods, sales of services, interest, royalties, and dividends).
Revenue should be measured at the fair value of the considerationreceived or receivable.
If the inflow of cash or cash equivalents is deferred, the fair value ofthe consideration receivable is less than the nominal amount of cashand cash equivalents to be received, and discounting is appropriate.
Saleof Goods:
Revenue arising from the sale of goods should be recognized when allof 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 involvementto the degree usually associated with ownership nor effectivecontrol 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 .
IAS 9 ( evenue ecognition )
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Renderingof 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
be recognized when entity retains continuing
managerial ownership or effective control over
the goods sold.
AS 9 does not contain any such stipulation.
In case of revenue from rendering of services,
IAS 18 allows only percentage of completion
method.
AS 9 allows only completed services contract
method or proportionate completion method.
Under IAS 18, payments received in advance for
goods yet to be manufactured or third party sales
cannot be recognized as revenue until suchgoods are delivered to the buyer.
AS 9 permits recognition when the goods are
manufactured, identified and ready for delivery in
such cases.
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THE BIG QUESTION :IAS 11 or IAS 18
IFRIC 15 provides guidance on how to determine whether an agreement for theconstruction of real estate is within the scope ofIAS 11 (Construction Contracts) or IAS18 (Revenue) and, accordingly, when revenue from the construction should berecognized:
An agreement for the construction of real estate is a construction contract within thescope 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 structuralchanges 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 : PRODU T OR SERVI E
The fundamental issue is whether the developer is selling a product (goods) thecompleted apartment or house or is selling a service a construction service as acontractor engaged by the buyer.
Revenue from selling products is normally recognized at delivery. Revenue from sellingservices is normally recognized on a percentage-of-completion basis as constructionprogresses.
IFRI 15 (Agreements for the onstructionof Real Estate)
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If IAS 11 applies,what is theaccounting?
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, serviceorgoods?
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 isrequired 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.
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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 berecognized 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.
IAS 40 ( Investment Property)
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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 fromfair value to cost is unlikely to
be appropriate.
Where the cost model is chosen, the fair values of the investment
properties must be disclosed.
Measurement subsequent to initial recognition
Fair Value Model Cost Model
An enterprise that chooses the fair value
model should, after initial recognition,value all its investment properties at their
fair values.
A gain or loss arising from a change in the
fair value of an investment property should
be included in the net profit or loss of the
period in which it arises.
An enterprise that chooses the cost model,
values all its investments at cost.
Any permanent decline in the value of the
asset is accounted for.
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IAS 17 (Lease Accounting)
IAS 17 AS 19
Under IAS-17 it has been clarifiedthat land and buildings elements ofa lease of land and buildings needto be considered separately. Theland element is normally anoperating lease unless title passesto the lessee at the end of the leaseterm. The buildings element is
classified as an operating or finance lease by applying theclassification criteria.
AS-19 - Accounting for Leases"
at it stands at present does not
deal with lease agreements to
use lands. Hence, the
classification criteria are
applicable only to buildings as a
separateasset
The definition of residual value is
not included in IAS 17.
AS 19 defines residual value.
IAS 17 specifically excludes leaseaccounting for investmentpropertyand biological assets.
There is no such exclusion
under AS 19.
IAS 17 does not prohibit upwardrevision in value of un-guaranteedresidual value during the term oflease.
AS 19 permits only downward
revision
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Potential
Differences
Potential Implications
Financial Statements Process/IT Other Issues
Investment Properties IFRS gives an option to report ateither fair value or historical cost
with disclosureof fair values.
Increased need for qualified
independent or internal
valuations; systems modifications
to track fair values necessary.
May need to manage external
stakeholder reactions to volatility in
fair values and debt covenant
compliance may be at risk.
Property, Plant and
Equipment
IFRS requires componentization
approach for significant parts of
PP&E;revaluation modeloptional.
Systems modifications may be
necessary to track components and
separate depreciation amounts.
Potentially difficulty in transition
of existing assets to
componentization depending on
age of assets and detail
information available.
Impairment IFRS has only one-stepimpairment test based on
recoverable amount, IFRS
impairment losses may be
reversed if recovery occurs.
Changes in impairment analysis
and systemmodifications to track
impairmentsfor future reversal.
Increased focus on periodic
assessmentsand possibly increased
volatility from more frequent
write-downs and reversals.
Leases IFRS classification criteria containsno bright lines; broader than just
land and PP&E
Changes to classification analysis
including new data considered.
Pre-EITF 01-8 contracts (not
previouslyevaluated as containing
leases under U.S. GAAP) will
require evaluation as potential
leasesunder IFRS.
Sale of Real Estate IFRS consider transfer of risksand rewards model, but without
bright lines and little guidance on
continuing involvement.
Changes to sale recognition
and/or gain recognition evaluation,
including increase in professional
judgment.
IFRS changes revenue recognition for
condominiumunit sales and similar
transactions.
Taxes No specific guidance related touncertain tax positions in IFRS;
IFRS deferred taxesnot required on
certain JVs domestic undistributed
earnings.
Tax accounts and processesfor
deferred taxes and uncertain tax
liabilities may change
Foreign taxes in some foreign
jurisdiction based on reported
earnings may change.
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HumanResource
IFRS will likely influence the Real Estatecompanys hiring, training, compensation, andtermination practices.
Consider hiring:
1) How many of the finance staff arecurrently versed in IFRS?
2) Assuming a talent shortfall, how will thedifference be made up?
3) If sufficient people are not employed canexisting staff be trained?
Differences in the calculation of bonuseson profit.
Questions to be considered by investors:
1) Differences between familiar GAAPStandards and IFRS.
2) Its impact on the financial position of thecompany.
3) Impact of Fair Value accounting of Real
Estate.
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Fluctuations in the payment
of income based taxes.
IFRS may result in changes inthe 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.
Tax
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Moving to a global financialreporting model may openup access to new sources ofcapital.
Many global lenders, globalprivate equity firms preferIFRS reporting due to itstransparency and fair valuerequirement.
Furthermore, with reporting ordisclosure of the fair values of
investment properties,management will likely need tounderstand, evaluate, andmanage the expected marketreactions to reported volatilityin property values.
Treasury
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InformationTechnology
From leasing data todepreciation schedules to taxrecord keeping theres plenty offinancial information for realestate companies to track. Hencemany of the industrys largestplayers are currently planningor engaged in major IT
initiatives, consolidatingdisparate systems down to asingle platform.
However, much of the work maybe for naught if IFRS is notfactored into the upgrade. If theERP systems are not planned for
an IFRS conversion at theearliest stages of their upgrade,the companies will likely findthemselves engaged in a lengthyand expensive reconfigurationeffort a few years down the road.
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Agrowing realization that the initiativewas much broader, larger, and morecomplex than just being a accountingissue.
Adoption of a more holistic approach bythe companies where impacts of IT, HRand taxes were taken into consideration.
Lower volumes of Accounting reports aslarge amounts of assumptions and notesthat were earlier parts of thesestatements were incorporated in IFRS.
Moreover, The highest quality financialdata is obtained when a company fullyintegrates IFRS into its systems
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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
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