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IFRS Diary 14: Ind AS – Finally Here!

Published on Sat, Mar 21,2015 | 10:20, Updated at Sat, Mar 21 at 10:20Source : 

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

Recently, the Ministry of Corporate Affairs (MCA) issued a detailed notification explaining the requirements for transition to Ind AS along with the much awaited Ind AS (39 in number).  The roadmap is along the lines of the press release earlier issued by the MCA and provides for a phased approach for implementation of Ind AS in India for companies other than banking companies, insurance companies and non-banking finance companies (NBFC).

Under the roadmap, from 1 April 2016, Ind AS would be mandatory for (a) companies having a net worth of INR500 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 INR500 crore (b) unlisted companies having net worth of INR250 crore or more but less than INR500 crore; and (c) holding, subsidiary, joint venture or associate companies of such companies.  The notification has a fairly wide coverage as it impacts not just the covered entity, but all entities within the consolidated group to which the entity belongs.  The phased approach is a logical choice considering the large number of companies impacted.  The notification states that for this purpose, net worth would be calculated based on the standalone financial statements as at 31 March 2014 and would be calculated consistent with the provisions of the Companies Act (for example, it would not include reserves created out of revaluation of assets).  The notification also indicates that Ind AS would be applied both for standalone and consolidated financial statements.

Key changes to accounting policies and practices
While practical application of Ind AS may result in numerous impact areas, based on our experience, the key impact areas are summarised below:
- Acquisitions: Ind AS requires that all acquisitions generally be accounted for by allocating the fair value of the consideration (whether paid in cash or through issuance of shares) to individual assets and liabilities, including intangible assets, based on their respective fair values.  This is a fairly elaborate exercise requiring use of valuation techniques and judgement.  Depreciation and amortisation charges for tangible and intangible assets will likely increase under this method.  Conversely, goodwill will not be amortised under any circumstance.

- Consolidation and group structures: Under Ind AS, consolidation is based on an assessment of control.  This may result in entities not being consolidated even if the holding company has more than 50 per cent voting interest (for example, if the minority shareholders have certain significant veto rights).  Conversely, an entity may consolidate another entity where it holds less than 50 per cent ownership, but where it has ‘de facto’ control (for example, the balance shareholding is so widely dispersed that the entity has effective control).  Similarly, entities may need to be consolidated even without control through shareholding, if control exists in any other manner (for example, through holding of a substantive call option).  This evaluation requires significant judgement and may result in changes in the group structure for reporting.  In certain cases, the ability of companies to change the nature of these arrangements may be restricted since other shareholders/partners may not be willing to co-operate.  Lastly, Ind AS does not permit proportionate consolidation for joint ventures.  This may be a big change for certain companies or sectors (for example, infrastructure).  

- Financial instruments:  Ind AS will bring in several fundamental changes in this area.  1. Substantially all investments will need to be fair valued.  Changes in fair value would be recorded in the statement of profit and loss or in Other Comprehensive Income (OCI – a new concept) every period based on the nature of the investment and choices made by the company.  In certain cases (for example, equity instruments held), companies will need to choose between statement of profit and loss volatility versus an accounting whereby even realised gains will not be recorded in the statement of profit and loss.  2. Bad debt/impairment charges will likely increase due to the new provisioning models.  This would be particularly significant for banks and NBFCs.  3. Several funding instruments currently reported as a part of ‘net worth/equity’, would now be reported as debt (example, redeemable preference shares; put options granted on shares of consolidated subsidiaries) with returns being recorded as finance costs. 4. Finance costs reported will also increase for low coupon convertible instruments (since the value of the embedded conversion option will need to be separated) and for redemption premium (which previously may have been recorded by a charge to the share premium account).  5. Several items (for example, security deposits for lease of property) that are currently recorded at cost, would now be initially reported at fair values.  This could pose an administrative challenge if the number of such deposits are significant (retail, banks, multiplexes) 6. All derivatives would be recorded at fair values with changes reported in the statement of profit and loss, except if the hedge accounting criteria are fulfilled.

- Revenue recognition: Ind AS will also bring in fundamental changes in revenue recognition for certain transactions/industries.  For example, based on the terms of the arrangement, real estate developers may not be able to recognise revenues on a percentage of completion basis, but only when the possession of the property is handed over to the customer.  Similarly, non-refundable upfront payments received from customers may need to be deferred.  

- Direct charges to reserves/court schemes: Due to provisions in the Companies Act and terms of court schemes, certain companies may have charged certain costs/impairment losses directly to reserves.  This would likely get more difficult under the new regime. This is either because the enabling provisions in the Companies Act permitting such direct adjustments to reserves may undergo a change; or because courts may no longer support deviations from notified Ind AS.

- Disclosures:  Ind AS would require extensive additional disclosures in several areas.

This is not an exhaustive list.  Based on specific arrangements/industries, there could be other significant impact areas.  For example, for early-stage companies with large employee stock option issuances, recognition of the fair value of these stock option plans could be a significant impact area.

Carve outs
A lot has been talked about carve outs.  When you cut through the noise, the final notified Ind AS are much closer to global IFRS as compared to the 2011 Ind AS.  However, certain differences remain, which can be classified into three broad categories. 1. Optional carve outs – in these cases, Ind AS offers multiple choices one of which is compliant with IFRS.  For example, upon transition to Ind AS, a company has the option either to restate the opening fixed asset balances to be in conformity with Ind AS or carry over the existing balances without adjustment.  If the company elects the former, it would be compliant with IFRS; while if it elects the latter option, its financial statements would not conform to IFRS. 2. Carve outs that restrict choice – in these cases, Ind AS eliminates one of the choices available under IFRS.  For example, if a company has property that is not occupied for own use (rented out), IFRS permits that to be recorded at fair value with changes recorded in statement of profit and loss.  Ind AS does not permit this.  However, since this is a choice under IFRS, the Ind AS financial statements would still conform to IFRS. 3. Mandatory carve outs – these are cases where Ind AS financial statements would never be in conformity with IFRS.  For example, Ind AS provides that in case of operating lease agreements with scheduled rent increases, if the scheduled increase in rentals is in line with general inflation, the rental cost should not be straight-lined.  IFRS requires straight-line recognition in all cases.

Companies would need to carefully evaluate choices and options available under Ind AS.  If a company seeks to be compliant with global IFRS for whatever reasons (potential capital raising in the future; significant global operations), it may elect those options that enable it to achieve dual compliance (comply with both Ind AS and IFRS).  As discussed earlier, this may not be possible in certain limited cases.  

In conclusion
While some work still needs to be done by the regulators (tax; other regulatory implications such as dividend distribution), transition to Ind AS now seems imminent.  Companies need to assess the impact of the change on their own organisations.  This will include an assessment not just of the financial statements impact, but an impact on management information systems; IT systems; business contracts and arrangements; employee skills and training; and the impact on the company’s valuation and communication strategies with investors.

I look forward to your feedback and comments.

To send your comments/feedback to Jamil Khatri  email


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