(Yicai) Aug. 17 -- Evergrande Real Estate, a unit of struggling real estate developer China Evergrande Group, is being investigated by China’s securities regulator for suspected manipulation of its financial data.

Evergrande Real Estate, which has almost 300 projects underway in 139 cities, did not go into any details about the charges, but they might be connected to the drastic change in the company’s contract liabilities, which represent unfulfilled obligations to buyers, that were reported in its 2021 annual report.

Evergrande Real Estate’s contract liabilities swelled more than five-fold at the end of 2021 from the year before to CNY974.3 billion (USD133 billion), according to China Evergrande’s annual report for the year 2021. As of the end of 2022, it still had CNY721 billion of these debts on its books.

The big swing in contract liabilities has to do with how the company calculates its revenue. China Evergrande started to count funds received for pre-sold properties towards revenue and profit after the law changed in Hong Kong in 2017, allowing revenue to be logged even when the projects had not been completed. This boosted its profit for three years from 2017 to 2019. Its contract liabilities, which refer to what used to be booked as advance receivables, were also on the decline from 2017.

But in 2021, China Evergrande changed its accounting methods. This resulted in the reallocation of CNY664.3 billion (USD90 billion) that had been posted as revenue in previous years to contract liabilities. This adjustment caused a huge spike in its contract liabilities, and also reduced its shareholders’ equity from CNY350.4 billion (USD47.8 billion) at the end of 2020 to minus CNY473.1 billion at the end of 2021, making the company insolvent.

This raised huge doubts in the industry about the methods previously used by China Evergrande to recognize revenue.

China Evergrande used to report profits when the projects were unfinished and the costs not fully incurred, then it would dish out dividends, a manager at a real estate firm said.

China Evergrande may have been engaged in illegal accounting practices, performance manipulation, and financial fraud, other insiders said.

China Evergrande, which has debts of over USD300 billion, is desperate to avoid default. The company proposed an overseas debt restructuring plan in March and it recently secured USD500 million in investment for its electric vehicle arm Evergrande NEV. But the outlook remains uncertain.

The creditors’ meeting has been delayed until Aug. 28, China Evergrande said yesterday. Before the meeting, foreign creditors will decide whether they agree to the restructuring plan that the Shenzhen-based firm has proposed.

Editor: Kim Taylor