The Business Weekly got an opportunity to talk to Dr Barry Jay Epstein (Ph.D and CPA), partner Russell Noval & Company, Chicago. TBW was able to discuss with Dr Barry a few hot issues relating to accounting while he was here to attend the Morison International Asia Pacific Annual Conference, hosted by Morison Menon Group. A financial reporting expert, author, and litigation consultant with over 40 years experience as an accountant, auditor and financial executive, Dr Epstein has consulted and/or testified as an expert witness for plaintiff and defense attorneys in over 90 cases. He has done substantial work for the Securities and Exchange Commission (SEC), the Department of Justice and other agencies. TBW has time and again discussed the issue of how property companies have been recognising revenue and profits. Most of the companies in the UAE, or maybe, all companies, follow the system of recognising revenue and profit on 'percentage-of-completion' method. Most accountants, though favour this system, Dr Barry is of the view that for the companies that roll out projects year after year, it would be better to recognise revenue and profit once the project is completed. He said percentage-of-completion is best suited for long-term project whose completion period could go very long and when the project is one-off. "If you are constructing one or more buildings every year, why should you insist on percentage-of-completion method," he asked.
Property development industry has acquired an indisputable place in UAE's economy. If it was only Dubai which was driving this industry until about two years ago, all emirates, with a special mention to Abu Dhabi and Ras Al Khaimah, have jumped on to this bandwagon. We had only one public joint stock company, Union Properties, until the late 90s, when Emaar became a PJSC and got listed on Dubai Financial Market (DFM). Today we have more than five public joint stock companies in the property sector. When it comes to market cap and number of shareholders, this sector has a big role to play on DFM as well as Abu Dhabi Securities Market (ADSM).
According to Raju Menon, managing partner, Morison Menon and board member of Morison International Asia-Pacific, the practice of percentage-of-completion method has so ingrained in the system that it would be difficult to think against that in the present context. He said even if the property companies want to follow the system of recognising revenue and profit after the completion of project, it will impact the performance of the company in the initial years.
The nature of the companies such as Emaar Properties, Aldar Properties, Deyaar Properties and Union Properties does not warrant them to follow the percentage-of-completion method at all. "In the percentage-of-completion, you should be able to measure accurately your projected profits on a percentage-of-completion basis. This is a challenge and you have to be very careful," Dr Barry added. He said, but if the company is making a speculative investment, without knowing how much profit it will make on the completion of project, then the percentage-of-completion can turn against the company.
A firm contractual commitment with credit-worthy customers is a mandatory condition in this system. "The more risk in terms of the pricing, the less you can justify the percentage-of-completion method," he said.
The reason we have percentage-of-completion is that the project is going to take more than 'one period' and hence it will not be realistic to report 'nothing' in one period, and 'everything' at the end of the all periods.
The method, according to some experts, is meant for long-term projects where the project is completed sporadically like in the case of ships. But if a company is in a regular production job, rolling out projects regularly, recognising revenue and profit at the end of the project is more suitable for them, according to experts.
Though the companies following the percentage-of-completion method can switch to end-of-project recognition method, the process has to be carried out with utmost care. "Because consistency is very important and achieving this is challenging," Dr Barry added.
He said if the company knows it is going to be in mass production - even rolling out towers on a regular basis - percentage-of-completion need not be a better option.
Revaluation gains
Dr Barry said it is optional for the companies to book profit from revaluation of investment properties, which has been the trend in the property development companies. "It is important that the financial statements distinguish between realised and unrealised gains and losses. However, if it is possible to measure accurately, when the value goes up and comes down, it should be reported. Under IAS 40 you have the option to recognise it on a cost basis or on fair value basis for investment properties," Dr Barry clarified.
However, Raju Menon believes it would be prudent on the part of the companies to observe some restraint on this as the market is in its infancy and the same growth can turn out to be a fall in the next year, whereby the companies will have to book a heavy loss which the shareholders may find unacceptable at this juncture.
© The Business Weekly 2007
