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Recently, we were looking at PPT of a real estate company which kept talking about highest ever quarterly sales in Q3 of Rs 500 cr +.
However, reported sales numbers were only Rs 200 cr +.
What's the catch here?
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Revenue recognition in case of Real Estate stocks
- Unlike other products wherein buying raw material, processing and selling to customer takes 2-3 months. In case of real estate, project initiation, construction to final delivery can take 2-5 years
- Thus, real estate companies report different metrics which can be confusing
- In the above example when the company talks about Rs 500 cr + sales in Q3, it means 500 cr worth of flats booked by customers in Q3 the delivery of which will happen on project completion
- While reported sales of Rs 200 cr + meant final delivery of projects worth 200 cr to end customers in the quarter
So, how are real estate companies supposed to report sales to exchanges?
- Till FY18, Percentage of Completion method (POCM)
- Under POCM, revenue was recognized if actual construction and development cost (excluding land cost) incurred was 25% or more of estimated cost, or
- At least 25% of saleable project area was secured by contracts with buyers and at least 10% of the total revenue as per sales agreement is realized as of the reporting date
- Refer screenshots to understand revenue recognition based on POCM
- However, POCM was subject to a lot of manipulation. Further, a lot of projects remained unfinished while the companies recorded the sales
- On 28 March 2018, MCA notified Ind AS 115, revenue from a contract with Customers with effect from 1 April 2018
- Thus, from FY 19, real estate companies started reporting sales on Completed Contract Method (CCM) basis
- Under the same, revenue from contracts is recognized when control over the property has been transferred to the customer
- Under CCM, Revenue is recognized at a point in time, when:
- The company has transferred to the customer all significant risks and rewards of ownership and the company retains no effective control of the real estate unit to a degree usually associated with ownership.
- Thus, because of significant time lag (2-3 yrs) between the booking of the flat by customer to the ultimate delivery, companies share the following metrics in their PPT
- Booking sales (worth of flats booked)
- Reported sales (as per CCM)
- Collections (amount collected)
Disclaimer: The securities quoted are for illustration only and are not recommendatory.
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