My Space: There is no one size that fits all

Malaysia’s listed property developers must have celebrated the country’s 53rd Merdeka Day with more gusto than usual — not because the local property climate has been kinder than elsewhere across the globe, but because the implementation of IFRIC 15, a new accounting practice, has been deferred. It was supposed to have taken effect two months ago.

On Aug 30, the Malaysian Accounting Standards Board (MASB) announced the postponement of the new ruling under the International Financial Reporting Interpretations Committee (IFRIC) to January 2012, much to the relief of industry players who had been lobbying against the accounting practice over the last few months before it became a reality from July 1.

A bit of background for the benefit of those who have not been following the much-debated IFRIC 15 — this accounting practice recognises developers’ revenue only upon completion of projects. Revenue from billings will not be recognised progressively, which is the current practice for projects that are sold off the plan.

In the Malaysian context, only a handful of projects are sold upon completion. Interestingly, some units that are marketed under the build-then-sell concept are in fact those that had been launched but stayed unsold, making them build-then-sell products by default.

For property stock investors, the implementation of IFRIC 15 would have meant witnessing irregular reported earnings, given that a landed housing property typically requires two years to be completed, and a high-rise at least three years.

Add to the confusion the fact that the Inland Revenue Department has kept mum about IFRIC 15. The market has taken this to mean that IFRIC 15 or not, development companies will continue to be taxed on progressive revenue collection and not only when a project is completed.

For compliance all around, development companies would have no choice but to keep two sets of accounts — one under IFRIC 15 and the other as per the current practice for taxation purposes. Such a practice will, inevitably, translate into rising costs for developers, the amount of which can be substantial.

Malaysian developers are not frowning upon IFRIC 15 in its current form without basis. While the spirit behind IFRIC 15 — part of an effort to streamline accounting standards worldwide — is laudable, expecting Malaysia to embrace it wholesale is stretching it.

Foreign interest
What works in the West, in this instance, does not work in this part of the world. As build-then-sell homes are not yet the norm in Malaysia, IFRIC 15 cannot be a true or even fair reflection of the financial health of a listed property company.

One can argue that since foreigners account for at least 10% of Malaysia-listed property stocks, they would be familiar and comfortable with IFRIC 15. However, this also means 90% of the investors are locals who understand and accept the existing accounting structure.

Under the circumstances, a deferment of IFRIC 15 is the best solution. It gives the MASB time to understand the issue better and the developers time to build their case against the accounting practice in its current form. A task force formed by the Real Estate and Housing Developers Association Malaysia (Rehda) to review IFRIC 15 has been in the forefront of a lobby against its implementation.

With the postponement, the task force, comprising several CFOs of Malaysia’s top listed property firms, has bought itself time to research and compile data to support its views on IFRIC 15.

China, in particular, will be an interesting case study, what with its numerous provinces and municipalities. Real estate is a hot commodity in China and the government is known to take swift action to moderate activities. When then should developers’ revenue be recognised?

Clearly, IFRIC 15 as it stands is not applicable across the globe. There is no one size that fits all — a balanced approach is called for.

Presence of mind must prevail, pride must not be allowed to stand in the way. Let us steer clear of a decision that could potentially cause irreparable damage to the Malaysian stock market, a measure of the economic health of the nation.

Au Foong Yee is editor of City & Country, theedgeproperty.com and haven, a bi-monthly design and garden magazine published by The Edge

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 822, Sep 6-12, 2010