http://www.straitstimes.com/Money/St...ry_658756.html

Apr 20, 2011

Property firms' profits may see sizeable swing

Change to how revenue is recognised in account may affect numbers

By Jonathan Kwok


PROPERTY firms, especially those with overseas investments, may report more volatile profit numbers following a change as to how revenue from projects is recognised in their accounts.

The amendments, to kick in for annual periods starting from Jan 1 this year, could lead to sizeable swings in revenue and profits from year to year, accountants told The Straits Times.

Property firms listed here are already gearing up for the changes. Industry giants Keppel Land and CapitaLand have disclosed in their annual reports how profits would have been affected last year, if the new rules had applied then.

Others indicated in their annual reports that they are assessing the possible impact of the changes.

Currently, developers smooth their revenue streams from projects, progressively recognising income over the contract period as certain milestones are met.

But under the changes announced by Singapore's Accounting Standards Council (ASC) last August, revenue will be reflected only when control of the property is transferred to the buyers.

The change is officially known as an 'interpretation' of the Financial Reporting Standards. But accountants say the concept of revenue recognition when transfer of control is passed is fairly new.

For most property developments in Singapore, the laws mean that control is continuously transferred to the buyer as the construction progresses, said an accompanying note by ASC last August.

But this may not be the case overseas, leading to 'lumpy' recognition of revenues and profits as and when the project is completed, say accountants.

Some Singapore property agreements also do not allow for continuous transfer of control, said Ms Kok Moi Lre, assurance partner at PricewaterhouseCoopers (PwC).

Mr Shariq Barmaky, partner of assurance and advisory at Deloitte Singapore and South-east Asia, said: 'If terms and conditions overseas are different from Singapore, under this interpretation, it could be possible that revenue is recognised only when the project is completed, rather than on a continuous basis.'

Already, developers are mobilising their accounting teams to determine just what this means for their numbers.

Keppel Land said in its latest annual report that when it applies the interpretation retrospectively, revenue last year would have dropped by about $38.8 million, while net profit would have slid $12 million. The value of properties held for sale as at Dec 31 last year would also be expected to decrease by about $192.2 million.

For last year, Keppel Land reported revenue of $792.3 million and net profit of $1.05 billion.

CapitaLand said in its annual report the changes applied retrospectively would have meant it reported a $152.5 million rise in net profits last year, and a fall in net assets of $152.3 million. The company said earnings per share last year would also have risen by 3.6 cents.

CapitaLand reported full-year profits of $1.27 billion last year, and net assets as at Dec 31 were $18 billion.

PwC's Ms Kok said that companies' past year revenues and profits may go up or down after applying the accounting change retrospectively. This depends on the timing of construction and completion of the affected properties, she added.

UOL said in its report that the accounting policy may need to be changed for its overseas projects. 'The change will, however, not result in any material effect on the amounts reported for the current or prior financial years,' it added.

Allgreen Properties said its management is 'considering the criteria...to assess if there is any impact arising from the revenue recognition of the overseas construction contracts'.

It does not anticipate that the accounting changes will result in any material impact on the financial statements when implemented this year.

Wing Tai's report for the year to June last year said the company is currently assessing the impact of the rule changes to its financial statements.

Kim Eng analyst Wilson Liew, who covers several property stocks, said the accounting moves will not change the way he looks at companies. 'It's basically an accounting change, in terms of the operations, there shouldn't be much impact... The valuations wouldn't be impacted.'

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