In India’s increasingly regulated and capital-intensive real estate sector, revenue recognition has emerged as more than a compliance requirement, it is a fundamental lens through which financial credibility, investor confidence, and project viability are evaluated. For developers, auditors, financiers, and institutional stakeholders, the adoption of Ind AS 115 (Revenue from Contracts with Customers) has redefined the framework for recognizing revenue with greater precision, accountability, and legal enforceability.
This accounting standard, harmonized with IFRS 15, replaces legacy practices such as the Percentage of Completion Method (POCM), demanding a shift toward contract-driven revenue reporting grounded in the notion of “control” rather than mere “completion.”
Why Revenue Recognition Is Strategic, Not Just Technical
In a sector marked by long gestation cycles, staggered cash inflows, and intricate financing structures, the timing and manner of revenue recognition directly affect:
- Reported profitability and EBITDA margins
- Tax liabilities under income tax and GST laws
- Project valuation, investor assessments, and IPO readiness
- Statutory audit outcomes and regulatory disclosures under RERA
Improper or premature revenue recognition can misstate financial health and invite regulatory scrutiny, while overly conservative accounting may suppress legitimate business performance.
The 5-Step Ind AS 115 Framework: Applied to Real Estate
1. Identify the Contract with the Customer
Only legally enforceable agreements, such as registered agreements for sale, allotment letters, and buyer confirmations, constitute valid contracts under Ind AS 115. Mere expression of interest or token payments without contractual obligations do not suffice.
2. Identify the Performance Obligations
Developers must delineate distinct obligations, such as construction of the apartment, delivery of common areas, parking allotments, or club memberships. These must be explicitly defined and separable to allocate revenue appropriately.
3. Determine the Transaction Price
This includes the base unit cost along with ancillary charges, floor rise, PLCs, parking, maintenance deposits, and any GST applicable. Variable considerations (e.g., discounts or price escalation clauses) must be estimated using either the expected value method or the most likely amount.
4. Allocate the Transaction Price to Performance Obligations
Where multiple deliverables exist, revenue must be apportioned based on the standalone selling price of each component. For example, clubhouse usage rights or maintenance services must be separately valued.
5. Recognize Revenue as and When Obligations Are Fulfilled
Revenue is recognized over time only if control is deemed to transfer progressively, typically when the buyer has enforceable rights to the property under RERA and the project is beyond a critical stage (e.g., 25–30% completion with requisite approvals). Otherwise, revenue is deferred until handover and possession.
Legacy Practice: The Demise of POCM
The erstwhile Percentage of Completion Method, wherein revenue was recognized proportionally based on project cost incurred, has now been largely rendered obsolete under Ind AS 115. It survives only for developers not governed by Ind AS (typically smaller, unlisted entities) or in select circumstances where enforceability and control can be empirically demonstrated.
Practical Complexities in Implementation
Joint Development Agreements (JDAs):
Area-sharing or revenue-sharing agreements with landowners require a nuanced evaluation of control transfer, economic benefit, and enforceable rights.
Delayed Regulatory Approvals:
Revenue recognition is deferred in the absence of critical approvals such as the occupancy certificate (OC) or RERA registration, regardless of construction progress.
Cancellations or Renegotiated Terms:
Revenue adjustments must be made for forfeitures, refunds, or contract modifications, often requiring restatement in subsequent financial periods.
Multi-Component Sales:
Sales often include post-sale services or extended warranties; each must be separately accounted for, increasing the complexity of ERP integration.
GST Synchronization:
The timing of GST liability, often at invoice issuance, must align with revenue recognition to avoid tax mismatches and credit issues.
Regulatory Convergence and Audit Sensitivity
With increasing regulatory convergence among RERA, SEBI (for REITs/InvITs), the Ministry of Corporate Affairs (MCA), and the Income Tax Department, the spotlight on accurate, justifiable revenue recognition has never been sharper. Statutory auditors now demand meticulous documentation, robust internal controls, and contract traceability before certifying revenue figures.
In the current regulatory and financial ecosystem, revenue recognition in real estate is no longer a back-office compliance formality, it is a forward-facing reflection of operational integrity, legal discipline, and financial sophistication. Developers must invest in integrating legal, financial, and sales systems to enable real-time, audit-ready revenue tracking.
In a sector where reputation and investor trust are invaluable, how you recognize revenue may determine not just your quarterly results, but your long-term survival.