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IND-AS: Enhancing Cross Border Investment Flows

Published on Thu, May 14,2015 | 20:26, Updated at Thu, May 14 at 20:26Source : 

By: Pankaj Chadha, Partner, Member firm of EY Global

Notification of Indian standards aligned with IFRS (Ind-AS) is a big leap towards simplifying financial reporting needs for the foreign investors, both existing and potential. India has joined growing number of countries, currently more than 100, in aligning accounting standards for cross-border applicability and facilitation of capital flows.  

Indian headquartered global business houses, companies that are planning to invest overseas or further expand its existing footprint, companies with significant foreign investors and those that are aspiring to access funds globally shall prefer to stay as close to IASB IFRS. All classes of foreign investors prefer IFRS compliant financial information due to various expected benefits including

-       Reduced complexity in understanding the financial information

-       Overcomes to issue of limited global knowledge of current Indian GAAP

-       Increased comparability of results with peers, including global peers

-       Lower cost of capital and resultant higher liquidity due to improved access to global markets

-       Long term cost benefits/synergies in investment strategy

Mostly all the mature stock markets like Singapore, AIM of London, LSE, NYSE,  Hongkong, Nasdaq etc require and/or accept IFRS based financial reporting.  

Though some significant differences exist between the Ind-AS and IASB IFRS, these differences are expected to fade away in next 3-4 years with exception of certain carve outs that might still remain and cause companies to make adjustments to make its financial reporting fully IASB IFRS compliant. With careful planning, Ind-AS could serves as enabler that shall substantially ease the process of cross border fund raising for Indian companies and provide foreign investors with financial information that is at par with financial information from any other part of the world, including developed countries. Voluntary adoption is a serious option to be evaluated.  

Ind-AS is not same as IFRS. It is a separate accounting framework based on IFRS created by the MCA and has certain carve-outs.  Following are some key carve-outs in Ind-AS vis-à-vis IFRS as issued by IASB:

.   IFRS 1 defines previous GAAP as the basis of accounting that a first-time adopter used immediately before adopting IFRS. However, Ind-AS 101 defines previous GAAP as the basis of accounting that a first-time adopter used for its reporting requirement in India immediately before adopting Ind-AS. The change makes it mandatory for Indian entities to consider the financial statements prepared in accordance with existing notified Indian accounting standards as was applicable to them as previous GAAP when it transitions to Ind-ASs.

.   Foreign exchange fluctuations: Ind-AS provides an option to continue with the policy adopted for accounting for exchange differences arising from translation of long-term foreign currency monetary items recognised in the financial statements for the period ending immediately before the beginning of the first Ind-AS financial reporting period as per the previous GAAP. Under IFRS, such exchange difference is charged to the income statement.  

.   Foreign currency convertible bonds (FCCB): Ind-AS states that where the exercise price for the conversion of the FCCB is fixed, irrespective of any currency, it is to be classified as equity rather than as an embedded derivative. IFRS on the other hand, requires that where the conversion of bond into equity shares is fixed, but the exercise price for such conversion is defined in currency other than the functional currency of the entity, the conversion aspect is to be accounted as embedded derivative.

.   Straight lining of lease rentals: Keeping in mind the Indian inflationary situation, Ind-AS states that the straight lining of lease rentals may not be required in case the periodic rent escalation is due to inflation. IFRS does not provide an exception to straight lining lease rentals where the rent escalation is due to inflation.

.   Property, plant and equipment: Ind-AS permits an entity to use carrying values of all property, plant and equipment as on the date of transition to Ind-AS, in accordance with previous GAAP as an acceptable starting point under Ind-AS. IFRS does not provide a similar option on first-time adoption.

.   IFRS 3 requires bargain purchase gain arising on business combination to be recognised in profit or loss. Ind-AS 103 requires the same to be recognised in other comprehensive income and accumulated in equity as capital reserve, unless there is no clear evidence for the underlying reason for classification of the business combination as a bargain purchase, in which case, it shall be recognised directly in equity as capital reserve.

.   Consequent to changes made in Ind-AS 1, it has been provided in the definition of ‘Events after the reporting period’ that in case of breach of a material provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand on the reporting date, if the lender, before the approval of the financial statements for issue, agrees to waive the breach, it shall be considered as an adjusting event. Similar guidance is not prescribed in IFRS.

Whilst above carve-out’s may make dual compliance potentially challenging, however if an entity makes right accounting policies; do not opt for India specific optional carve-outs and if they do not have material transaction where there are mandatory carve-outs then it is possible to be very close to IASB IFRS – in some cases might lead to dual compliances.  

For foreign investors, proper evaluation of accounting policies, both under the transition standard (Ind-AS 101) and other under other accounting standards, would be key to ensure that financial reporting for the investor group becomes simpler and efficient.  

The expected benefits of Ind-AS are compelling. The use of one set of high quality standards by companies throughout the world has the potential to improve the comparability and transparency of financial information and reduce financial statement preparation costs over medium to long term.  

When the standards are applied rigorously and consistently, investors and other capital market participants will have higher quality information and can make better decisions. Thus markets allocate funds more efficiently and companies can achieve a lower cost of capital. Critically, success of Ind-AS implementation is not achieved merely by notification of globally acceptable accounting standards but also requires an infrastructure to support to be in place at a national and international level, both for the companies and the regulators. The full benefits of Ind-AS are more likely to be realised when their application is supported by competent professionals and adequate corporate monitoring and enforcement.


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