How Indian Real Estate Companies Inflate Revenues through Creative Accounting

India’s Real Estate Sector is one of the most unloved sectors in the Stock Market.Even Fund Managers shun this Sector because of the complete lack of trust in the financial statements published by the Real Estate Companies.With the whole industry most unogranized and companies playing with their books,its not a wonder that the sector continues to languish nearly 70-80% of its 2008 peak despite the broader market being only 10% below its all time peak.Real Estate Companies trying to raise funds in the Primary Market have been stymied by the lack of interest and distrust by the investor community.Recent IPO’s like Nitesh Estates and Jaypee Infratech have rewarded investors with huge losses in a rising Stock Market.The Industry is Synonymous with Frauds and Scams besides everyday violation of norms and contracts.Even the most famous Real Estate Groups are frequently in the news for scams and frauds.Here is a real life example of the ways that these companies inflate their revenues and profits through use of creative accounting.

Real Estate Accounting – The Rainbow Investor

At a recent real estate seminar, I met the CFO of a large real estate company and we were discussing the intricacies of the interpretation and implementation of the percentage completion method. He gave me an interesting example. Suppose you have a project with a total size of 1,000,000 sq ft out of which 200,000 sq ft has been launched and about 50,000 sq ft has been sold. Assume that the land cost is Rs 500 sq ft, estimated construction cost is Rs 1500 sq ft and the actual cost incurred till date is Rs 200 sq ft (on the 200,000 sq ft). Now, suppose you had to compute the percentage completion, the logical way would be to compute the land cost of 200,000 sqf (Rs 100 million) add the cost incurred ( Rs 40 million) and divided it by the total estimated cost (Rs 100 million land plus Rs 300 million). This comes to approximately 35% (140/400). However, there is an another method. Since you have already paid for the 1 million sq ft of land, you can essentially include the entire land cost of 1 million (Rs 500 million) in the percentage completion computation. This means the ratio becomes (Rs 500 million + Rs 40 million)/ (Rs 500 million + Rs 300 million), ie 68% instead of 35%. Essentially, you can frontload the entire land cost on a smaller phase of the project to boost up the percentage completion ratio. This enables companies to book a higher revenue since revenue booking is directly dependent on the percentage completed. Such accounting policies are technically not incorrect and have been approved by the auditors of the company !

CCI gets complaint against DLF for alleged abuse of dominance – ET

Khurshid was responding to a query whether government was aware of the various kinds of fraud and malpractices being adopted in the realty sector. “Ministry of Corporate Affairs is concerned with taking action against the developers in the realty sector which are registered as companies … for offences/violation of the provisions of the Companies Act 1956, as and when noticed,” he said.

Hiranandani Group denies Rs 168cr scam – TOI

The Hiranandani Group, the city’s leading realty developers, on Wednesday hit back at the provident fund (PF) department and the Central Bureau of Investigation (CBI) for implicating it in what it claimed were “manipulated allegations”.

In a statement here on Wednesday – responding to Tuesday’s CBI “look-out notice” against Niranjan Hiranandani and his brother Surendra Hiranandani – the company said that the PF department had in March 2008 alleged a Rs 1.68 billion (Rs 168 crore) fraud by the group.