India Economy

What’s changed, with Ind-AS

Sumit Seth | Updated on January 16, 2018 Published on October 02, 2016

The new accounting standards will have an overarching influence across sectors

Starting June 2016 quarter, many companies reported their results under Ind AS, the accounting standards derived by converging the Indian Accounting Standards with the International Financial Reporting Standards (IFRS).

The adoption of these standards has resulted in a majority of companies reporting adjustments related to income tax, financial instruments (including derivatives) and revenue recognition. Additionally, retirement benefit obligations, share-based payments, and business combinations and consolidation were also impacted.

Deferred taxes under Ind AS are more broadly defined, resulting in deferred taxes on more items such as undistributed earnings from subsidiaries and joint ventures and unrealised profits on intra-group transactions.

Moreover, the lower recognition threshold under Ind AS compared to the virtual certainty required to recognise deferred tax assets on carried forward losses under Indian GAAP has also resulted in the reporting of increased deferred tax assets/tax credits.

India has decided to be the first to adopt IFRS 9 equivalent — Ind AS 109, the new standard on financial instruments. Ind AS 109 provides extensive guidance on identification, classification, recognition and measurement of financial instruments. Additionally, it provides guidance on de-recognition of financial instruments and hedge accounting and has extensive disclosure requirements.

Presently, there is no comprehensive mandatory guidance on financial instruments under Indian GAAP. At a high level, the use of fair value and present value in recording financial instruments such as investments, derivatives and long-term deposits has increased. Additionally, the new model for the recognition of impairment losses, i.e. the ‘expected credit loss’ model, has also led to an increased charge on impairment loss. Based on Ind AS quarterly results declared during Q1 2016, the impact of this standard is seen on various companies and industries such as automotive, power and mining, metals and telecom.

Ind AS 18, Revenue, covers transactions from sale of goods, sale of services and use by others of assets belonging to the entity. Adoption of Ind AS has resulted in reduction of revenue due to netting of awards and incentives to customers and linked transactions involving sale and subsequent repurchase from suppliers.

Significant adjustments

In Q1 2016 Ind AS results, companies have reported adjustments to revenue on such arrangements, including reduction of revenue due to gross vs net presentation of revenue based on whether the entity is acting in the capacity of a principal or agent. Technology, pharmaceuticals, life sciences and healthcare, metals and automotive are a few sectors that have reported significant adjustments to their reported revenue on adoption of Ind AS.

Reporting of revenue gross of excise duty, with a corresponding adjustment to expense, was one of the major adjustments to revenue that was seen during the June 2016 quarterly result. However, many companies continued with the SEBI format for quarterly results, presenting revenue net of excise duty. In order to have a uniform approach with respect to disclosure, SEBI recently issued a clarification allowing companies to present financial results inclusive of excise duty, instead of net of excise duty, as specified in the Companies Act, 2013.

Finally, the impact was noted in the area of employee benefits, resulting in higher expense due to recognition of stock compensation using fair value of the share-based awards.

Adjustments were also noted due to actuarial gains/losses on defined benefit obligations getting accounted in other comprehensive income under Ind AS instead of the income statement.

At an overall level, the impact of adoption is clearly pervasive and not restricted to only one sector or industry.

The shift from the historical cost convention to increased use of fair value and increased focus over substance rather than the legal form of the underlying transaction has impacted every company and industry sector. The adoption of Ind AS requires the retroactive restatement of certain historical period information presented within a company’s first set of Ind AS-based financial statements.

These restated periods will show a variety of changes to a company’s key metrics, including reported top line, bottom line, financial position and net worth. Also, the quantum of disclosures will increase multifold. This will surely allow companies to tell their story to investors and also provide more meaningful information for informed users of financial information.

However, companies will have to invest time and effort into preparing for the extensive data requirements and disclosures. They will have to start discussing disclosures on significant judgments and estimates in more detail, including what goes behind the reported numbers.

The impact of Ind AS adoption is also beyond accounting, cutting across organisation and various functions/areas such as direct and indirect taxes, contractual arrangements with customers, suppliers, lenders, HR and incentive policies, IT systems and controls, including requiring timely communication with various stakeholders.

The adoption of Ind AS puts India at the centre stage of high quality and transparent financial reporting. Finally, this phased Ind AS transition process adopted by India is helpful, especially for Phase II companies, including banks, NBFCs and insurance companies as they benefit from the transition experience and journey from Phase I companies.

The writer is Partner - Price Waterhouse & Co

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