Thursday, June 23, 2011

Sharp accounting by DLF

This piece* in the Economic Times signals severe cash - and reporting - pressure at DLF, India's largest real estate company.

Essentially, it suggests that over 75% of the reported sales by DLF during 2010-11 never took place! That is a truly amazing statistic (my own number work suggests a lower figure, but still very substantial). Sales reporting was done on the basis of 'percentage completion'. This is like Soviet accounting - production is equal to turnover - irrespective of whether the stocks rusted in a corner of the stock yard, and with a total disregard to eventual price realisation.

I asked a CA friend about the accounting practices involved, and he tended to believe that ET had got it wrong. But looking at the skeletal balance sheet on the DLF site, it would seem that there have been some very 'interesting' changes on the company's balance sheet between March 31st 2010 and March 31st 2011:

1. 'Stocks' have gone from Rs. 12481 cr. to Rs. 15039 cr., an increase of roughly Rs. 2500 cr.

2. 'Other current assets' - a convenient grab-bag, have gone from Rs. 4684 cr. to Rs. 7890 cr., an increase of over Rs. 3000 cr. A look at DLF's annual report for 2010 shows that the ET has it right - this includes 'unbilled receivables' - note below.**

For a business with sales recorded at Rs. 9000 crores, over Rs. 3000 crores has appeared by way of unbilled revenues. This is a whopping amount; if the unbilled receivables are not converted into cash soon, DLF is going to have a whopping cash management problem on its hands. 

Meanwhile, between year-end 2010 and year-end 2011, Rs. 5500 crores worth of investments have dwindled to under 1000 cr., a diminution of Rs. 4500 crores in financial assets, while loan funds have gone up by over Rs. 2000 crores.

This all looks like deep distress.

*Real estate: Experts doubt 'percentage completion' method of revenue calculation by builders - The Economic Times

** Here is the relevant revenue recognition policy from the 2010 annual report:
" Unbilled receivables disclosed under Schedule 11 - “Other Current Assets” represents revenue recognised based on Percentage of completion method (as per para no. 7a and 7b above), over and above the amount due as per the payment plans agreed with the customers."


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