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Jamil Khatri's IFRS Diary: Part 12

Published on Tue, Jan 13,2015 | 17:17, Updated at Tue, Jan 13 at 17:17Source : 

By: Jamil Khatri, Global Head-Accounting Advisory Services, KPMG

New IFRS Roadmap: Same Challenges, Different Outcome?

Overview of the new roadmap

Finally, the Ministry of Corporate Affairs (MCA) has announced the long awaited Ind AS roadmap with a detailed notification to follow.  The roadmap provides for a phased implementation of IFRS converged standards in India (Ind AS) for companies other than banking companies, insurance companies and non-banking finance companies.  Considering the large number of companies that would be impacted, the phased approach is logical.  Under the roadmap, from 1 April 2016, Ind AS would be mandatory for (a) companies having a net worth of Rs 500 crore or more and (b) holding, subsidiary, joint venture or associate companies of such companies.  Further, from 1 April 2017, Ind AS would be mandatory for (a) companies whose equity and/or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of less than Rs 500 crore (b) unlisted companies having net worth of Rs 250 crore or more but less than Rs 500 crore; and (c) holding, subsidiary, joint venture or associate companies of such companies.
One important change from the earlier roadmap is the requirement to present financial information for the comparative year on the basis of the Ind AS.  This is a significant improvement since it will help users of the financial statements to understand and compare the performance and financial position of the companies under Ind AS.  This requirement also aligns the presentation of financial statements with the requirement of global IFRS (IFRS).  In the earlier roadmap, comparatives were not required as per Ind AS.  Thus companies covered in phase one of the Ind AS transition, will prepare their first Ind AS financial statements covering the period 1 April 2015 to 31 March 2016, with an opening transition balance sheet as at 1 April 2015.  This date is not too far away.
Companies are also allowed to apply Ind AS on a voluntary basis, from the accounting periods beginning on or after 1 April 2015, with the comparatives for the periods ending 31 March 2015 (with the date of transition being 1 April 2014).  However, given the several challenges relating to Ind AS transition, it is unlikely that the voluntary adoption option will be used on a large scale.
The roadmap brings under its umbrella all the related entities (holding, subsidiary, joint ventures and associate companies) of the companies covered in the mandatory phase.  This approach would help the entire group apply a single set of accounting standards, bring efficiency in the group and eliminate the need for multiple reporting.
Once a company opts to follow Ind AS, it will be required to follow Ind AS for all the subsequent financial statements. Companies not covered by the revised roadmap could continue to apply existing accounting standards prescribed under Indian GAAP.

Next steps
While the roadmap is a useful first step, a lot still needs to be done.  The immediate next step would be the issuance of the final Ind AS in the coming months.  The final Ind AS are likely to be different from the set of Ind AS issued in February 2011 in two important aspects.  First, there has been an attempt to align the Ind AS a bit more closely with IFRS.  This is a welcome move, which will enable the full benefits of the transition to accrue for Indian companies.  Secondly, the final Ind AS would be updated for IFRS issued since 2011.  Thus, the final Ind AS would be updated for IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, IFRS 12, Disclosure of Interests in Other Entities, IFRS 13, Fair Value Measurements, IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments.  While the alignment is logical, this will pose a practical challenge in the case of IFRS 15 & IFRS 9, since the global implementation dates for these new standards will be 2017 or beyond, making Indian companies that adopt the standards in 2016-17, the first set of companies to adopt these standards.
One of the significant road block for adoption of Ind AS in 2011 was the lack of clarity on the tax implications of this transition.  The good news is that the Ministry of Finance has very recently issued revised drafts of 12 Income Computation and Disclosure Standards (ICDS) that would govern the computation of taxable income irrespective of whether a company follows Indian GAAP or Ind AS.  This would insulate the tax computations from the several new concepts (including fair value measurements) under Ind AS.  One downside to this approach is that companies would need to track the differences between the accounting records and the computation of taxable income.  While companies may be doing this in some form even currently, the adoption of Ind AS and ICDS will likely result in a larger number of differences between the accounting and tax records, posing record keeping challenges.
In addition to the direct tax implications covered by the ICDS, the regulators would also need to make conforming changes to other regulations such as the Companies Act and other areas of taxation such as indirect taxes.
Several of these regulatory challenges were the reason why India was unable to meet its original commitment of adopting Ind AS from 1 April 2011.  The sooner that the regulators are able to conclude on the above matters, the smoother will be India's path to Ind AS transition this time around.  International experience shows that companies would require adequate preparation time to plan a smooth transition and to communicate the impact of the transition to key stakeholders such as the Board, lenders, investors and analysts.  This is particularly relevant since the impact on sales, earnings and net worth for several companies may not be insignificant.
While the regulators need to do their bit, there is a need for an active debate amongst companies, industry associations, lenders, investors and analysts on the impact and challenges relating to the transition.  Further, bodies such as the ICAI would need to play a leading role in capacity building.  Each company would need to plan & execute its own transition plan based on the extent of impact & it's current degree of preparedness.
I hope that you contribute to this debate at your own organisations and look forward to your feedback and comments.


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