The Ind AS 115 or Indian Accounting Standard 115 will be implemented from the 1st of April, 2018 as per reports. Under these standards, homebuyer protection levels will go up, thereby increasing positive sentiments in the industry and boosting real estate markets in the long run. Under Ind AS 115, builders will have to show all payments to homebuyers including advances that have come in for projects which are ongoing as loans and these will not be reported as income from property sales. This will change the operational methods of many real estate companies but will secure homebuyers since advances that they pay will show as loans in the balance sheets of realty companies.
With RERA already in operation, these regulations may make it tougher for realty companies to recognize substantial revenues over the construction period. However, it will certainly boost sentiments of homebuyers in India. This decision, according to many experts, is in sync with the recognition of homebuyers as financial creditors in the Insolvency and Bankruptcy Code or IBC. Real estate developers will now have to shelve their current percentage finishing system and move onto the project completion system. Under the earlier system, payments received as advances from homebuyers came into company turnover and net income from the projects was taken to be the profit.
However, profits made over the last few years from projects that have not been completed will now have to be written off by real estate developers. Stock prices of realty firms may correct based on this decision as per experts. The industry will see the survival and growth of realty players who are established and financially stable. There will be major consolidation amongst developers and those who are already over-leveraged across multiple ventures will find the going tougher. Additionally, credit ratings may be impacted for developers and this may lead to a re-jiggling of future investment blueprints of pension/sovereign funds.
Experts also feel that renegotiations may take place for ongoing institutional or PE investment deals since projections will change for the real estate companies in the picture. However, the decision has found support from established real estate developers and bodies like CREDAI. Since income is only recognized when the project has been delivered to the customer, this decision is in sync with RERA. Experts also feel that this bodes well for generating higher real estate demand in the future and valuations of developers will be impacted only temporarily since the established players will only change their modus operandi. However, many smaller realty players may merge into bigger firms or consolidate projects with joint ventures.
