Listed property developers may experience some volatility in the trading of their shares, if a proposed change to real estate financial reporting standard is implemented. The International Accounting Standards Board has been consulting the industry on whether developers should book profits when they sell a new property in advance or when the project is completed.
A similar consultation by the local Council on Corporate Disclosure and Governance was done last month.
Property developers in Singapore sell condominiums as they build them.
They receive progressive payments from buyers and report their revenue and profits each quarter.
But if the new real estate financial reporting standard is implemented, developers can only book their profits and revenue at the end of each project rather than progressively.
Assuming it takes 18 months to build a new property from scratch, the developer will record zero profit for this project in the first year and have a spike in revenue and profit at the end of the second quarter in the second year.
Accountants say the change was proposed because the accounting bodies believe properties should be viewed as goods and not services.
If the ownership of the goods has not been transferred to the buyer, the developer or seller cannot, theoretically, claim he has sold it.
So, even if he has received partial payment, he should not record it in his books as revenue and profit.
Channel NewsAsia understands that developers have submitted their feedback to the Council on Corporate Disclosure and Governance through the Real Estate Developers Association of Singapore (REDAS).
REDAS declined to comment on the issue.
But Dr Ernest Kan, a vice-president at the Institute of Certified Public Accountants of Singapore, said: "The feedback has been mixed. In fact most of them will feel that the current standard seems to be more reasonable, because many of these contracts straddle across the accounting period and normally it lasts more than 12 months, some 18, 24 or even 36, 48 months. So it makes the numbers very volatile, and many developers felt that it's not a logical way of accounting for something."
Some developers also argue that a property is built in parts and therefore can be sold in parts.
They also say constructing a property can also be viewed as the sale of a service rather than as a good.
Dr Ernest Kan said: "So for the retail investors, if they don't quite appreciate that, they'd be wondering: should I buy shares in this company, when every quarter when I look at the announcement, there's no revenue, no profit. Is it something that's worth buying? Whereas during the year, when they see big numbers, then they'd think, 'great, this company is doing very well', without knowing that they had just completed a contract in the quarter."
But experts say the market will eventually adjust and factor in the new accounting rules.
The changes are likely to be effected next year. - CNA/ir
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