The monster killer called IFRIC 15

For the past few months, a lot of developers who knew about IFRIC 15, a new accounting reporting system scheduled to be implemented on January 1, 2009, with a retroactive application, were really worried. I was also very surprised to learn that very few developers have even heard of this issue.
But what really bothered me was that very few of those who have heard about it do not fully realize the impact (or the havoc) it will cause in our industry. Pardon my words, but I figured the whole real-estate industry will definitely be freaking out about IFRIC 15 had it been implemented this year.
The good news, however, is that some reasonable people in the Securities and Exchange Commission have finally agreed with the appeal of the four major real-estate organizations to defer the implementation of this system for at least three years while the developers are preparing their respective systems and while the organizations are studying a more appropriate accounting reporting standard for the Philippine real-estate industry.
Spearheaded by Bansan Choa, president of OSHDP (Organization of Socialized Housing Developers of the Philippines), the other heads of the major organizations, namely, Reghis Romero of CREBA, Eduardo Alunan of SHDA and yours truly of the National Real Estate Association (NREA) appealed to SEC, the PSE and the Bangko Sentral to consider the deferment of the implementation of IFRIC 15 since doing it now will almost surely kill the already ailing real-estate business.
An in-depth study of its impact not only to the industry but to the economy as a whole, together with detailed comparative simulations of the current Percentage of Completion Method and the Completed Contract Method under IFRIC 15, was also submitted to support and justify the appeal.
Another factor for the success of this very timely decision was the support given by Rep. Rodolfo Valencia, who chairs the Committee on Housing in Congress, Sen. Miguel Zubiri, who is the chairman of the Committee on Housing in the Senate, and no less than Vice President Noli de Castro, who is the chairman of the Housing and Urban Development Coordinating Council (HUDCC). It is the unity of these organizations and the concerned departments in the government which made the difference.
What really is the IFRIC 15? It is a new accounting reporting system which the Philippine government has agreed to comply with. IFRIC stands for International Financial Reporting Interpretations Committee of the International Accounting Standards Board (IASB).
On July 3, 2008, this board has released Interpretation 15, which is about Agreements for the Construction of Real Estate. This new system is supposed to take effect on January 1, 2009, and requires retroactive application. Basically, it is a new basis for recognizing income from the sale of real estate. With this standard, developers can only recognize revenues when their projects are already completed and the units are turned over to their buyers.
The current practice now allows developers to recognize revenues based on their percentage of completion and this has been proven to be a practical and acceptable formula for quite some time. While the intention for accepting the system which is really to comply with global standards is good, there are several factors which will make its immediate implementation counterproductive; our developers may not be ready for it yet, the Philippine real-estate industry has a different system compared to our first-world counterparts, and the global crisis is already getting very close to home.
You know how prepared we are? Ask the person beside you, or a developer you know if they have even heard of IFRIC 15. Chances are, they have not. And even if they have, they may not be fully aware of its impact on the industry.
To give you a broad idea, a developer of a typical condominium project which does preselling activities can complete the building and turn over the units after three to five years. This means that this developer cannot recognize revenues until they have fully completed the project and turned over the units to the buyers.
Thus, their financial statements will be reflecting losses for the first three to four years! This will in no way attract potential investors to their companies. Publicly listed companies will definitely be adversely affected by this.
In the same manner, financial statements will not be reflective of the actual performance of the real-estate companies on a year-to-year basis. Moreover, it will require modifications to the accounting information systems and related internal control of the real-estate companies, which will take months to develop. It will also have great effects on taxation since it will definitely cause inconsistent tax reporting, incentives from the Board of Investments, and even on the companies’ executive compensation plans like profit sharing because no profits will be reflected in the books until the project is finished.
Likewise, developers will be facing problems in borrowing funds from the banks and other creditors if their financial statements, which will be the basis for evaluating credit standing, show successive losses.
While the united real-estate organizations were able to successfully appeal for the deferment of the implementation of the IFRIC 15 for three years, it actually just bought a little time so that a more appropriate accounting reporting system which is best suited for the Philippines can be developed.
If there is one good thing that this IFRIC 15 issue has brought about, it has brought these organizations to work together as a team to keep the Philippines real-estate industry alive.