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IFRS Convergence: Next Steps?

Published on Fri, Jan 09,2015 | 22:08, Updated at Tue, Jan 13 at 17:39Source : CNBC-TV18 |   Watch Video :

As the year turned, India made its second commitment to IFRS convergence. The Ministry for Corporate Affairs issued a Circular making it mandatory for all companies with a networth of 500 crore rupees or more and their holding, subsidiary, joint venture and associate companies to apply Ind-AS starting FY17. Companies with a networth of 250-500 crores and companies with listed debt or equity and their holding, joint venture, subsidiary or associate companies…must apply Ind-AS starting FY18. To talk about India’s 2nd attempt at converging with IFRS, CNBC-TV18’s Menaka Doshi speaks to Amarjit Chopra, Chairman of the National Advisory Committee on Accounting Standards.

INDIA -----> IFRS?
MCA Roadmap
Accounting period starting Apr 1, 2016
- Companies with networth of Rs 500 cr or more
- Companies whose equity or debt securities are listed in India or outside (networth > Rs 500 cr)
- And their holding, subsidiary, jv or associate companies
With comparitives for period ending March 31, 2016
INDIA -----> IFRS?
MCA Roadmap
Accounting period starting Apr 1, 2017
- Companies with networth of Rs 250-500 cr
- Companies whose equity or debt securities are listed in India or outside (networth < Rs 500 cr)
- And their holding, subsidiary, jv or associate companies
With comparitives for period ending March 31, 2017

INDIA -----> IFRS?
MCA Roadmap

- Banking companies, Insurance companies and Non-Banking Financial Companies (NBFCs) currently exempted from applying Ind AS
- Companies listed on SME exchanges not required to apply Ind AS

Doshi: Let me start by asking you for what you believe will be the next steps as India makes the second effort to converge with International Financial Reporting Standards (IFRS)?
Chopra: As the things stand today, the government has already announced the roadmap and we have already said what that roadmap is. To me, the more important issue would be that we also come up - in consultation with Reserve Bank of India (RBI) and Insurance Regulatory Development Authority (IDRA) - as to when they want these Ind-AS to be implemented. So far as immediately the next step is concern, I can only say that the government has to go forward and notify whatever the standards the National Advisory Committee on Accounting Standards (NACAS) has already handed over to the government for the purpose of notification. I personally feel the only hitch right now is that the translation in Hindi is taking place and it is likely to take about another fortnight and once that Hindi translation is over, after that the government will be able to notify these standards.
Doshi: So there are going to be 39 Ind-AS or Indian Accounting Standards that will converge us to IFRS?
Chopra: Yes; 39 Ind-As.
Doshi: I am going to try and understand from you what the impact of these new accounting standards will be on how India Inc. reports its financials, the key areas of impact because obviously we cannot do this on a company-by-company basis. I have been looking at a Grant Thornton list- they have identified five areas of change that IFRS usually brings about. They have said accounting for financial instruments undergoes a comprehensive change, group  structures are likely to include more entities because of the new definition of control or new understanding of control, use of fair value is going to be extensive and complex, accounting for business acquisitions will become more challenging and revenue recognition will witness certain high-impact changes. In your assessment, what are the areas that India Inc will see the maximum change in?

INDIA -----> IFRS?
5 key transition areas

- Accounting for Financial Instruments will undergo comprehensive change
- Group Structures are likely to include more entities
- Use of fair values is going to be extensive and complex
- Accounting for business acquisitions will become more challenging
- Revenue recognition will witness certain high-impact changes

Grant Thornton India Report
Chopra: To me the most important challenge is so far as the Ind-AS 109 is concerned. That is equivalent to IFRS 9- that is the financial instruments. Earlier we had Ind-AS 39 but that is now virtually an outdated standard. I think this is one standard wherever the treasury transactions are high in the case of various companies, it is going to impact them, there is no doubt about it but I think that is one thing that needs to be done and we definitely needed it.

Ind AS 109: Financial Instruments
Doshi: Can you explain to us- in a broad sense - what this new Ind-AS 109 will mean in terms of the changes to how companies report or account for financial instruments?
Chopra: If you look at it, today this preferential capital as in all the corporates is being treated as a part of the capital but the moment these standard comes in, preferential capital being redeemable, will be considered to be a liability and it will be a debt basically. So accordingly the entire thing undergoes a change. Whatever dividend, even if you declare with respect to the preferential capital, will not be considered to be dividend. That will be considered to be an interest in respect thereof.
So to my mind this is a very significant challenge which is going to be there. Today, we have a very simple standard, which is called AS 13 to be applied with regards to valuation of investments; basically investment accounting. Now that does not meet the requirements at all under any circumstances. So when this Ind-AS 109 comes into play, it will deal with the complex issue of the derivatives, it will deal with the complex issues of the hedging also. So I think lot many things are going to be there on the plate and in the bargain, the accounting will become far more transparent but the maximum impact of this particular standard will be on the banks and insurance companies. But they are not going to implement...(Interrupted by Anchor)
Doshi: As of now they are not going to be part of the roadmap that has been announced.
Chopra: Yes; truly and the next standard to my mind, which is going to impact is the standard on agriculture. We have been an agricultural dominant economy in all these years but we didn’t have any standard, which was to deal with the agricultural operations at all. So we will have Ind-AS 41, which will be dealing with the agricultural operations and when we deal with the agricultural operations - I am also talking of the livestock etc to be dealt with.

And the third standard which is going to impact our financial segment will be with regards to the revenue because Ind AS 115, with regard to the revenue, because now even the construction contracts etc will all be covered in one Standard. Earlier this particular part has been covered in different Standards. We were dealing in AS 7 so far as the construction contracts were concerned, revenue recognition was dealing with the sales and sale of goods and this was also dealing with the sale of services, this was dealing with use of our resources by someone else. Now all these things will fall under one Standard and to me more important under this Ind AS 115 is going to be the matter of that, there are certain concepts which are going to be there and that is going to impact us. So far whatever credit period we have - that does not impact too much of our accounting and everything is considered as a sale but now if you are going to give a longish credit period which is abnormal, probably the difference in the sale price as a consequence thereof, would be considered to be a finance charge and it will not be considered to be a revenue from the sale operations. So there could be different ways of looking at, and you look at it a little differently- if your product has a warranty and that warranty is for a period of five years, generally you give a warranty of one year. This four year warranty basically is the difference in the charge, as a consequence thereof is not your sale operation and that will have to be considered little bit differently.

Ind AS 115: Revenue from Contracts with Customers
So the revenue part when I look at it from the operations, when I look at the entire revenue from the sales could be slightly different. So to my mind in the periods to come, I am not talking of the profitability figures right now, I think in some of the circumstances the profitability figures may remain the same, in some circumstances the profitability figures might undergo a change but the depiction from where this income is coming, will definitely undergo a change in the periods to come.
Doshi:  I do want to ask you, what you consider will be the top challenges that India Inc faces as it converges to Ind-AS or converges to IFRS. Over 660 listed companies in this country have a networth of Rs 500 crore or more. Even if I were to take banking, non-bank financial companies (NBFCs) and insurance companies out of that list, we do have a sizeable list of companies that will need to adopt Ind-AS in a very short period from now. What do you expect will be the challenges as India Inc goes about this process?
Chopra: To my mind, there are three or four major challenges. Number one challenge is the tax system in the country basically. If you remember in the last attempt that we had in 2010-2011, one of the biggest issues was with regard to the tax structure of the country.

India’s first attempt to converge with IFRS in FY12 failed after the deadline was suspended
There are certain countries where the tax is applied on consolidated financial statements. In our case this is applied on the standalone financial statements and the moment you talk of the fair valuation, one of the fears in the mind of industry has been that when you fair value something, if you have a gain, the assessing officer is going to tax it, and when there is going to be a fair value loss probably the assessing officer is going to say, no - it is not the incurred loss at the present moment, so I am going to disallow this particular part.
Rather than mitigating this particular hardship, the Central Board of Direct Taxes (CBDT) has been coming up with the idea of having tax computation standards. One of the very basic purposes of introducing the IFRS equivalent standards in the country was that the cost of duplication of the effort should be minimized. Now if you are going to have tax computation standards, which are based upon the cost concept, in that particular case what is going to happen to some extent, there will be a duplication of the records, there is no doubt about it and which will mean that there is some kind of a cost to be incurred in maintenance of that record.
Again, I am coming over to certain indirect tax challenges also. Now as I said, to begin with when I was talking about the revenue recognition, at that particular point of time when I talked of Ind-AS 115, if you say that certain sale component is in the nature of the finance charge and I am going to show it as a finance charge, will the excise people agree to that? Excise people are still going to say no, it's the part of my sale price; so that is another change, change in the indirect taxes.
The second challenge to my mind will be with regard to the Information Technology (IT) systems and these IT systems will have to undergo a change and this will involve some kind of a cost, there is no doubt about it. Some of the bigger industries, which have already raised money from abroad are seized of the matter, they have already implemented those systems. However, this cost as and when it comes to the banks and insurance companies, it will have a huge amount.
That is the way I look at it but these systemic changes will have to be brought in so far as this particular issue is concerned. Another challenge, which to my mind will be there will be, there are certain carve outs that we are going to bring and those carve outs will be absolutely minimal, but keeping in view the requirement of the Indian industry and certain other factors, where probably some of the options may not be misused by anyone. So we have opted for those minimal carve outs.
Doshi: What are those carve outs, if you could share with us please?
Chopra: One of the carve outs is that, if you look at Ind-AS 1 itself, internationally when you define a current liability, what you say is that if you have taken a loan, if you have borrowed certain amounts from a bank and there were various covenants and if you breach any of the covenants and if the lender has got a right to recall the loan irrespective the fact whether they have recalled the loan or not, in that particular case it will be considered to be a current liability.

Ind AS 1: Presentation of Financial Statements
However, what we have said is that, if we do this in Indian circumstances, you will ask me, what kind of current liabilities people will we have to show in the books of accounts? You know it and where the current ratios will go- I don't know. So what we have said is that wherever there are material breaches of the covenants but that irregularity has been set right before the adoption of the accounts, in that case, it may not be treated as a current liability and as a consequence of that we will have to even have a carve out in Ind-AS 10 also which deals with events after the reporting date. So we will have certain carve outs. Now this carve out is in the favor of the industry if you ask me.

Ind AS 10: Events after the Reporting Period
Doshi: Yes.
Chopra: In the case of the leases what was going to happen is, that if any agreement contained a clause of escalation, it said that you consider all those escalations and then treat it based upon the straight line - just write off those escalations also along with the lease rentals. What we have said is that if the escalation is linked with the inflation, in that case you need not straight line it. So to that extent there will be relief for the Indian corporates for that matter and certain options we have done away with, like in investment property, the option was that you could fair value it and still take it to the revenue account. We said nothing doing, if you allow this option in that case people will take something to the revenue, declare their dividend, distribute their dividend out of unearned income, which is not realized so far. So, we have tried to avoid those kind of situations.
Doshi: I do want to ask you for a clarification. These Ind-AS and this roadmap to IFRS, will it apply to standalone financial accounts or consolidated accounts?
Chopra: To us it is very clear that it is going to apply to both. One of the demands of the industry was that you apply it only on the consolidated financial statements but then both the Accounting Standard Board (ASB), the Institute and the NACAS were of the opinion that the moment you make it only based upon the consolidated accounts, the confusion is going to be far more than what it is today because from standalone, consolidating and then converting it to IFRS will not serve the purpose. Whichever countries it is happening probably there the taxation structure is different, there taxation structure is only consolidated financial statements. In India, the taxation structure is based upon the standalone financial statements; so accordingly we must apply to the standalone financial statements and then move on to the consolidated and both these statements must comply with the Ind-AS requirements.
Doshi: My final question then has to do not with IFRS or Ind-AS but some of the other changes that NACAS is currently attending to which is changes to Indian GAAP to bring them closer to where Ind-AS is currently or will be in a few weeks from now. If you could very briefly outline to us what some of those key changes will be?
Chopra: I can only tell you that one of the changes which will be coming will be componentisation approach in the property plant and equipment which is not there. Today if you have machinery, you have a machinery in hand but if there is a significant component thereof you don't have the values thereof and you don't depreciate those separately.
Now, once Ind-AS is implemented, it is going to be there but if you look at the Schedule 3 today and Schedule 2 today of the Companies Act, Schedule 2 has already required this approach to be followed but then the Institute went to the Ministry of Corporate Affairs (MCA) and the chambers also went to the MCA and they have agreed that this componentisation approach will be effective only from 2015.
Now we will definitely have to bring our AS 10 today- property, plant and equipment in line therewith. Today we don't have the componentisation approach. So that is what we are going to have . Similarly the revenue recognition will have to undergo a change and definitely to some extent and we will have to see how do we bring the real estate transactions, under which Act these are going to be taxed and how do we deal with the construction contracts if you are going to implement AS 115 later on. So to my mind there are certain Standards, which have to be brought in line with and today whatever AS 1 we have, that is with regard to the disclosure of the accounting policies; that is too primitive. We will have to bring it in line with the Ind-AS 1 for that matter presentation of financial statements. So this is what is going to happen.


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