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IND-AS: One Month To Go!

Published on Sat, Feb 06,2016 | 14:53, Updated at Mon, Feb 08 at 17:57Source : CNBC-TV18 |   Watch Video :

In about a month's time, Indian accounting will undergo a sea change as companies shift to the new IFRS based Indian accounting standards or IND-AS. And yet 40% of India Inc has not done an impact assessment! You know how they say well begun is half done! Well, among those that have done an impact assessment - almost half believe that both their net worth and net income will change by about 20%! Those are the findings of a PwC survey that spoke to 100 companies, most of which will have to adopt IND-AS starting April 1, 2016. Sumit Seth of PwC is here to take us through the key findings of the survey…

IND-AS: ONE MONTH TO GO!

39%
HAVE DONE NO IMPACT ASSESSMENT!

#PWC Survey

IND-AS: ONE MONTH TO GO!

55%
NET INCOME/NETWORTH IMPACTED BY 20%

#PWC Survey

Below is the transcript of Sumit Seth’s interview with Menaka Doshi on CNBC-TV18.

Doshi: Let us start with the very first big headline that emerges from this survey and that is that 39 percent of the respondents said that their companies are yet to start planning for the impact assessment of IND-AS adoption. If I was to break that down 11 percent said that they have done nothing to date and 28 percent said that they are planning to do something in the near future. How disastrous is this for these companies?

IND-AS: ONE MONTH TO GO!

Completed Impact Assessment                     23%
Preparation Of Financial Information            26%
Planning To Do Impact Assessment             28%      
Nothing Done To Date                                 11%
Not Applicable                                             12%

#PWC Survey

Seth: This is a very interesting finding. It is also consistent with what we are seeing as we interact with clients. There are some large groups, also mid-sized companies who are now starting to do or planning impact assessment. There is also a thinking that may be IND-AS will get deferred.

Doshi: Aren’t they too late in the process?

Seth: I think they are. They need to obviously work much harder because it is not just about accounting. There are going to be many other changes along with it whether in terms of looking at your IT systems, internal controls, income taxes, so I think company need to do quickly on this.

IND-AS: ONE MONTH TO GO!

TOP CHALLENGES

Education & Training
IT Systems Changing
Resourcing Of Staff
Changes To Internal Control

#PWC Survey

Doshi: 55 percent of the companies that you all surveyed said both net worth and net income will have a potential impact of up to plus or minus 20 percent on the adoption of IND-AS. I think this is really the big take away, right, because this is something that is going to show up in their financial earnings starting the first quarter of the next financial year and impact how investors perceived these companies. Can you break some of these numbers down for us?

IND-AS: ONE MONTH TO GO!

POTENTIAL IMPACT ON NET WORTH

Impact                                 Companies
80%                                       1%         
60%                                       3%
40%                                       8%
20%                                      29%
0%                                       27%
-20%                                    27%
-40%                                     4%
-60%                                     1%

#PWC Survey

IND-AS: ONE MONTH TO GO!

POTENTIAL IMPACT ON NET INCOME

Impact                                 Companies
80%                                       1%         
60%                                       1%
40%                                       7%
20%                                      26%
0%                                       29%
-20%                                    29%
-40%                                     6%
-60%                                     1%

#PWC Survey

Seth: To begin with, again this is a good finding and it is not just going one way as you just mentioned. People generally apprehend that because of IND-AS the net worth or net income will be adversely impacted.

Doshi: Why? Can you give us very quick reasons, why?

Seth: It is in terms where they talk of revenue recognition, they talk about financial instruments; I think the accounting based on that result in more expenses and liabilities to be booked. That is the apprehension which generally people have about it. If you look at the survey findings it is also going to go other way round which is there is a pretty large population of companies who is going to show a positive net worth and positive net income.

Again if you look at it, some of these could be because of areas such as financial instruments again. If you look at Indian Generally Accepted Accounting Principles (GAAP) the investments are accounted at cost not fair value so you don’t recognise gains but losses. However, in the IND-AS you would recognise gains also. Similarly, hedging if you look at it derivatives in the Indian context companies again are required to record losses but don’t have to recognise gains but now in the IND-AS it is both ways, so I think some of these differences is going to result in a changes both way positive and negative.

Doshi: Can we break that down a little further? First up let us start with net income and those companies or groups or sectors that have said that net income could in fact decline by up to 20 percent, can you talk us through which those sectors are and what those reasons could be?

IND-AS: ONE MONTH TO GO!

UPTO 20% DECLINE IN NET WORTH

Industrial Manufacturing
Financial Services
Chemicals
Capital Projects & Infrastructure
Pharmaceuticals, Life Sciences, Healthcare

#PWC Survey

IND-AS: ONE MONTH TO GO!

UPTO 20% DECLINE IN NET INCOME

Capital Projects & Infrastructure
Pharmaceuticals, Life Sciences, Healthcare
Retail & Consumer
Industrial Manufacturing
Financial Services

#PWC Survey

Seth: So, if you look at the report the key, the big sectors where the net income could decline to begin with is infrastructure. One of the key reasons why it could impact is because of the entire revenue recognition area. So, in the new standards you have this whole service concession accounting which doesn’t exist under Indian GAAP so that could be one area.

Also this sector particularly lot of financing is done through preference share capital. Under IND-AS preference share capital is no longer capital but a debt and because of that even preference dividends interest expense. So, that is kind of two big reasons if I could ascribe.

Doshi: On why the net income could fall as much as 20 percent?   

Seth: The next sector if you look at is retail and consumer. So, again if this sector you look at it the key aspects is revenue where these companies and the sector provide discounts, loyalty schemes, rebates.

Doshi: These are all accounted for differently under IND-AS as opposed to iGAAP.

Seth: Some of that will have an implication for this sector.

Doshi: There is also pharmaceuticals here which will be negatively impacted in a big way.

Seth: Absolutely similarly.

Doshi: Same reasons, discounts therefore topline will look different therefore net income will look different?  

Seth: Absolutely, similar reasons. Then you look at industrial manufacturing, again a big sector. Now this sector, think about auto another kind of industries they use lot of leasing in terms of toll manufacturing type arrangements. Lot of these will now be classified probably as leases. If you do account for them as leases so there could be kind of higher recognition expense in the earlier part of the service contract period. So, some of that could have an impact on the sector and pervasively some of this also could be because of consolidation. Some entities may get consolidated.  

Doshi: Because you now have included those entities only that you control and nothing else.

What about financial services that sector too seems to expect that net income could in fact be hit by up to 20 percent? However for these companies we won’t at least in this first quarter earnings season of the next fiscal we will not see it happen? We will only see it happen if the convergence happens 2018 onwards which is where the road map is right now.

Seth: Yes, 2018-2019 it is expected, that is the time. However, they have responded and they have come to conclusion that look this standard because of expected credit losses will have an impact on this.

Doshi: So, essentially they will be providing for more losses on their loan portfolios.

Sectors that in fact believe net income will improve by up to 20 percent. That is interesting.

IND-AS: ONE MONTH TO GO!

UPTO 20% GAIN IN NET INCOME

Technology
Telecom

#PWC Survey

Seth: I think if you see here it is a technology sector and the telecom sector. If you look at it some of the reasons could be –one could be derivatives. Now in the Indian GAAP context when you have derivatives, losses get recognised but not necessarily income. Now in the IND-AS and if you look at technology they have lot of foreign currency derivatives. If you do have these gains, now in the IND-AS you have to recognise gains, so that will be one reason.

Doshi: Aren’t most technology companies today, at least the large software exporters like Tata Consultancy Services (TCS), Infosys, Wipro are they all expressing their accounts in International Financial Reporting Standards (IFRS) in its self already? Most analyst and investors follow their IFRS numbers not their iGAAP numbers. So, actually optically nothing is going to change for that set of companies, right?

Seth: So, not for the large companies, like you have just mentioned but if you see this.

Doshi: Many of the smaller ones. Telecom is more interesting because telecom the impact is not yet being factored in, right?

Seth: So, telecom, try to understand this, one reason could be if you look at telecom sector when they pay commissions to secure more business in the Indian GAAP this gets expensed. Under IND-AS they may be able to amortise this over a period of time. So, that could be one reason.

Doshi: Why they think that net income could in fact move up by almost 20 percent?

Seth: The other reason could be deferred taxes. So, if you are under the Indian GAAP, deferred taxes on losses are not recognised unless it is virtual certainty. In the IND-AS you could recognise deferred tax asset so long as probable, so threshold has come down. So, if some of these are in that kind of stage where their losses be moving on they could recognise may be more assets, deferred tax assets so that could be another reason for telecom.

Doshi: When you look at the list of companies that believe that net worth could be impacted negatively by up to 20 percent or positively by up to 20 percent, I think it is an almost similar list.

Seth: Yes it is.

Doshi: So, can very quickly run through if there are any standouts there.

Seth: It is pretty similar. It is industrial manufacturing, financial services, pharma which you spoke about and infrastructure.

Doshi: Where the net worth will decline by up to 20 percent. On the other end where net worth could improve by up to 20 percent?

Seth: Again it is technology and telecom which is the major.

Doshi: I want to go on to this third headline from your survey and that is that taxes were viewed as the number one area to have a significant impact on a IND-AS at option, explain that?

IND-AS: ONE MONTH TO GO!

KEY IMPACT AREAS

Taxes
Revenue Recognition
Operating Segments
Financial Instruments
Leases
Consolidation & Joint Arrangements
Share-based Payments
Business Combinations

#PWC Survey

Seth: One I said is deferred taxes on losses that is going to be one important area. The other most important area is minimum alterative taxes (MAT). That is not just about accounting; because of IND-AS and due to the fair value accounting lot of accounting the gains could get recognised now in the income statement unless of course companies decided to hedge accounting. Because of that the accounting income is expected to be higher in some of these situations and we just discussed about that.  
 
Because of that companies who probably are in MAT situation could actually see higher pay out of taxes because of MAT.  

Doshi: But don’t we have simultaneously the introduction of tax accounting standards and will this get mitigated by the introduction or the implementation of Income Computation & Disclosure Standards (ICDS) which are the tax accounting standards which I might point out also that the Easwar Committee report has suggested the deferral but nonetheless do the ICDS help in mitigating this optical illusion of higher accounting income and therefore more MAT to be paid.

Seth: Actually it doesn’t and that is one thing which they should clarify in my view. At this point in time ICDS just deal with taxable income and not MAT.

Doshi: In short then, last final question does it look as if India Inc is ready for quarter one FY17 and are investors ready to see this new numbers?

Seth: I think I would also look at the other two-third, who have done it. That is a pretty sizeable population so if they are ready and they are doing a pretty good job on it so that is good. In terms of investors, companies may want to at least try and communicate to investors ahead of the quarters to what could be the key areas of impact on their business on their company. So, that they can well prepared to see what the numbers look like when they are really published in June quarter.

Doshi: As yet only one company has done that, it is the company we talk about frequently, even we talk about IND-AS and that company is Hindustan Unilever (HUL) so the rest of you ought to wake-up.
 
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