The Developers’ Disclosure Guide to Ind AS 115
Ministry of Corporate Affairs (MCA) brought Ind AS 115 as part of the Companies Amendments Rules 2018. Ind AS 115 replaces Ind AS 11and 18 which are related to revenue and construction contracts. MCA has introduced Ind AS 115 with an objective to establish the principles that an entity should apply, to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows, arising from a contract with a customer.
The Institute of Chartered Accounts of India (ICAI) said ”IND AS 115, based on IFRS 15 Revenue for Contracts with Customers, is the culmination of IFRS and US GAAP (Generally Accepted Accounting Principles) convergence project. Information about revenue is essential and is used to assess a company’s financial performance and position and to compare that company with other companies.” It stated that the new revenue standard would bring about a comprehensive and robust framework for recognition, measurement and disclosure of revenue.
Ind AS 115 is also in sync with Real Estate (Regulation & Development) Act (RERA), to a large extent. RERA mandates the sales proceeds of an ongoing project to be maintained in a separate escrow account.
In most of the developed markets, accounting practices recognise income only after the delivery of the project since customers can cancel their booking and request refund at any time before the delivery. IND AS 115 is said to improve disclosures and reduce the possibility for varied interpretations.
IND AS 115 replaces the ‘fair value’ concept with ‘transactions price; that is better suited for measurement of revenue. Developers should only book profits under the ‘Project Completion Method’ and can no longer book under ‘Percentage Completion method’. The business payments received before delivery will be termed as ‘loan’ or ‘advance payments’ and cannot be booked as revenue while the project is still under construction. Thus the revenues can be compared across entities, industries and global capital markets. Thus analysts and investors will have a better understanding of an entity’s revenue.
The AS 115 may also lead to a large-scale consolidation: Developers who are financially weak and over-leveraged and who may have multiple projects and seemingly strong balance sheets may find it difficult increasingly to obtain funds if they don’t have a good track record of delivery. Thus, IND AS 115, could benefit the home buyers and therefore overall effect the real estate market.