Grand Finale (3)

8/6/2019 Grand Finale (3)

1/46


2/46

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.


3/46

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.


4/46

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


5/46

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.


6/46

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)


7/46

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.


8/46


9/46

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.


10/46

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.


11/46

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.


12/46

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.


13/46

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.


14/46


15/46

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.


16/46


17/46

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;


18/46


19/46

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.


20/46

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


21/46

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


22/46


23/46

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


24/46


25/46

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 )


26/46

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


27/46

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 )


28/46

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.


29/46


30/46

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)


31/46

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.


32/46


33/46

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)


34/46

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.


35/46


36/46

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


37/46

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.


38/46


39/46

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.


40/46

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


41/46

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


42/46

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.


43/46

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


44/46

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


45/46


46/46

Grand Finale (3)

Documents

Transcript of Grand Finale (3)