Hello Sir,

Hope you are doing well.

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?

Let's understand:


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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.


Best Regards,

Ekansh Mittal
Research Analyst
Web: https://www.katalystwealth.com/


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