Plan For Property Developers To Change Way Of Reporting Revenue

Source : The Straits Times, 13 Sept 2007

Call for income to be booked only upon completion of a project, not gradually.

MANY real estate developers may soon have to change the way they treat sales revenue in their financial accounts.

Under a proposal submitted by the Council on Corporate Disclosure and Governance, developers will have to recognise revenue only upon completion of their projects - instead of doing so gradually, as the projects are being built.

Mr Ernest Kan, vice-president of the Institute of Certified Public Accountants of Singapore (Icpas), which assisted in preparing the proposal, said yesterday: ‘Most developers now recognise revenue progressively. Under this new interpretation, you can only recognise it as revenue upon a temporary occupation permit, unless you are providing construction services.

‘Most developers here would not fall into that category, as they are only involved in sales, not construction and allowing the buyer to decide what to build.’

Dr Kan said the proposal has been submitted to the industry’s international body. It should make a decision by year-end.

‘The earliest it would have an impact here is during financial year 2008,’ he added.

He said the current interpretation meant revenue flow is more even. Under the proposal, revenue will tend to ‘become more lumped up’. This move aims to standardise the accounting practice among developers.

Currently, developers interpret the global Financial Reporting Standards (FRS) differently and record revenue for the sale of units at different times.

Some record revenue only when they have handed over the completed unit to the buyer, while others book gains earlier, as construction progresses.

This move proposes that revenue should be recorded as construction progresses only if the developer is providing construction services, rather than selling units.

In some countries, the prevailing practice has been to view the FRS as contracts for the sale of goods; in this case. completed real estate units, for which FRS 18 is the applicable accounting standard.

Applying this standard, revenue is recorded only when control - and the risks and rewards of ownership - are transferred to the buyer, typically when the unit is ready for occupancy and handed over to the buyer.

In other countries, the practice is to view the sales agreements as construction contracts, for which FRS 11 is the applicable standard.

Applying this standard, revenue for constructing an asset for a customer is recorded as construction progresses - by reference to the stage of completion of the construction.

The new draft proposes that FRS 11 be used only if the sale agreement is a contract to provide construction services to the buyers’ specifications.

Analysts say the proposed change will result in more volatile earnings. However, it should not affect pricing and cash flow.

Said DBS Vickers property analyst Wallace Chu: ‘The money’s still in the bag. It’s just how you recognise it when it comes in.

‘It will affect those developers who are involved in long projects more. Revenues are likely to fluctuate for those with big projects, especially when there’s a long construction period.’