Monday, November 10, 2008 | MANILA, PHILIPPINES
[ BusinessWorld Online ]
BY KRISTINE JANE R. LIU and DON GIL K. CARREON
Accounting rule set to take effect next year deferred to 2012
THE REAL ESTATE SECTOR has been granted a reprieve from the implementation of a new accounting rule which would have significantly affected bottom lines amid a global financial downturn.
A man carries his suit as he walks past a real estate advertisement in Makati. Photo taken on Friday. — Reuters
The disputed standard, which states that property buyers’ payments cannot be booked as revenues until projects are completed, would have taken effect starting next year.
Fe B. Barin, head of the Securities and Exchange Commission (SEC), yesterday said the rule would be deferred to January 1, 2012.
On Friday, officials of the corporate regulator said the deferment had been approved in principle and that a formal SEC order could be issued following an en banc session on Thursday.
Property developers have been up in arms over the new rule — Interpretation 15 issued by the International Financial Reporting Interpretations Committee covering "Agreements for the Construction of Real Estate," or simply IFRIC 15 — as it would ban the industry practice of booking revenues even for projects still in the "pre-selling" stage.
IFRIC 15 still recognizes the cash flow from buyers who have yet to get hold of their condominium units or houses and lots but the money will have to be recorded as "deposits from customers" in the liabilities section of the balance sheet instead of revenues on the topline of the profit-and-loss statement.
The international rule is retrospective.
This would have affected property firms’ bottomlines, and lower profits would have led to less dividends for shareholders.
Last month, four industry associations wrote the SEC requesting for the three-year moratorium.
They said implementing the rule next year would "impact adversely on the industry and could likely trigger a meltdown in the stock [market] index as investors lose confidence in the [real estate] business from the resultant low income or even loss during the period when the project is under construction."
The October 20 letter, to the SEC’s Office of the General Accountant, was signed by the Subdivision and Housing Developers Association, Organization of Socialized Housing Developers of the Philippines, National Real Estate Association, and the Chamber of Real Estate Builders’ Association.
The groups also wrote to Vice-President Noli L. de Castro, head of the Housing and Urban Development Coordinating Council, to seek support.
They said there would be improper matching of revenues and expenses since firms must recognize costs as they occur but revenues would only be realized upon completion of a project.
"We are afraid the industry is not prepared to adopt this new interpretation on Jan. 1, 2009 ... The real estate sector would require ample time to evaluate and formulate a set of accounting standards that would be responsive to the local setting and practice in the industry."
The groups also said the new rule should not be applied retroactively, adding they did not want to restate previous financial statements.
Top property firms, however, said they were willing to adopt the new rule as it would have had no significant impact.
Jaime E. Ysmael, senior vice-president and chief finance officer of Ayala Land, Inc. said IFRIC 15 would not have made a dent as the company was "well-diversified" and had a strong income base.
Corazon P. Guidote, SM Investments Corp. vice-president for investor relations, said the company would follow whatever the SEC’s ruling.
A stock market analyst, however, said the industry’s concerns regarding stock market performance were valid.
"This will affect the bottom-line of companies which will make it hard to attract investors. Investors look at companies’ financial statements to decide whether a company is standing on strong fundamentals," he said.
Postponing the rule was a good decision as the country faces a worldwide economic slowdown, the analyst said.
"We are in a global financial crisis and we need more relaxed accounting standards so as not to hamper companies’ ability to borrow money from banks."
Victor Asuncion, research head of CB Richard Ellis, said the new accounting policy would have affected only listed firms, but added that its postponement was a "prudent undertaking".
However, he also said adopting the rule as planned would be beneficial as "it will also prevent speculation on a company’s share price and in effect give it a fair market value since everything will now be based on real revenue."
Claro G. Cordero Jr. of Jones Lang La Salle Leechiu & Associates agreed.
Adopting the rule, he said, would mean "People will now be informed wisely. They will protected from companies who do not finish their projects or invest the money they get from pre-selling elsewhere."
________________________________________________________________
