Tuesday, March 17, 2009

Real Estate accounting- understanding revenue recognition and reported Earnings of Indian Real Estate firms


Real Estate accounting- understanding revenue recognition and reported Earnings of Indian RE firms

  • Cost completion method is used to recognize revenues.
  • Accounting standards -AS7 & AS 9 & Guidance Note on Recognition of Revenue by Real Estate Developers by ICAI
  • Hazard of using P /E ratios to value Real Estate firms – The reported `E` in the P&L or Income Statement is not at all related to Cash Earnings. Let me explain with an example.
  • Key terms for Real Estate Accounting -Agreement for Sale, Sales booked, Cost completed
  • Example ( click on pic above)

As you can see , in the intial years, Revenue is overstated in P&L vs Cash Revenue and Cost is understated in P&L vs Cash spent , EBIDTA is overstated in P&L vs Cash EBIDTA.

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