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Date:1st March 2010 |
Compiled by: M Sathya Kumar |
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Under current accounting rules, once a project is 30%
completed, companies can recognize sales from it. But IFRS rules disallow
sales recognition unless a project is fully completed International
Financial Reporting Standards, or IFRS, could shave at least 10% off the net
profit of firms in sectors such as real estate, financials, automobile and
capital goods when the new global accounting rules kick in from April 2011,
said a study by the Anglo-Indian research house Noble Group Ltd. The property
sector is likely to be affected the most. As a
result, several companies could see their valuations go down (as measured by
the price-earnings multiple) and might even have to revisit debt covenants,
the note said. “We
expect to see a lot of cases where profits will reduce even if it’s a
short-term impact,” said Jamil Khatri, head of accounting advisory
services at audit firm KPMG. Collectively,
property companies could see their net profits slide by 13% and their net
assets reduce by half as the new rules call for stricter accounting of
revenues, and how firms can merge the financial numbers of their arms. Noble
has calculated these figures based on the fiscal year 2008 numbers and warns
these might change as the economic environment changes, and firms gear up for
the new rules. Under
current accounting rules, once a project is 30% completed, companies can
recognize sales from it. But IFRS rules disallow sales recognition unless a
project is fully completed. Secondly, companies
sometimes lend or transfer money to third parties, who use the money and
place “orders” back. Under IFRS, companies won’t be able to
inflate sales and profits through the “creative” use of their own
money. “Companies
will become more cautious about undertaking projects with longer gestation
periods (as the risks would sit on the balance sheet of listed companies
rather that in out-of-sight SPVs or special purpose vehicles),” wrote
Noble’s Bhargav Buddhadev and But real
estate companies say that this would be a one-time impact only. “There
is a change only in the timing (in the sense that profit and sales would be
spread across quarters),” said R. Nagaraju, general manager of
corporate planning at Unitech Ltd, India’s second largest property
company. “Total revenue and profits remain the same.” “Investors
are likely to attach a premium to builders who can execute quicker (and hence
book earnings quicker),” the analysts wrote. “At present, many
Indian builders tend to take the advances from their customers quickly and
then make the customer wait for at least three years for delivery of the
flat/office.” Unitech’s
Nagaraju believes that once IFRS norms are adopted, investors would pay
closer attention to cash flows rather than the price-earnings multiple, which
looks at how many times the stock price is quoting relative to the earnings
per share. The
disruptive effects of IFRS on corporate numbers is not new, Noble noted. In
the Indian real
estate companies are preparing for the shift. For
instance, Housing Development and Infrastructure Ltd, the country’s
fourth largest developer by market value, started training its staff on these
new standards three months ago, while Orbit Corp. Ltd started this process
almost a year ago. Companies will need to provide much more information than
they are currently giving out. Article by Madhurima Nandy in |
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