FAQ on impact of transition to IND AS
By Pankaj Chadha & Jigar Parikh ( both partners with India member firm of EY Global)
Considering many companies did IND AS transition efforts in 2011 or report under IFRS
for the purpose of cross border listing or group reporting purpose, is it fair to assume
that transition efforts will be minimal for such Indian companies?
Existing IFRS reporters or company who undertook IND AS transition efforts in 2011 will have great advantage of knowing
significant impact areas on transition and will be able to better estimate the time and cost effort required for the conversion.
However it will be not be appropriate to say that transition impact will be minimal.
Current IFRS reporters and companies who have performed an IFRS diagnostic review in 2011 will also need to step up their
IND AS transition efforts due to following reasons:
► IND AS 2014 is different from IND AS 2011 and IASB IFRS
This time around there is a two way balancing act being done as regards the IND AS differences with IFRS: a) certain
additional carve-outs have been introduced to suit Indian business nuances in 2014 and b) certain carve-outs
existing in 2011 are proposed to be deleted in an attempt to more closely align with IFRS. Certain IFRICs like IFRIC 4
and IFRIC 12 which had not been notified in 2011 will now be applicable as a part of IND AS 2014. Hence, both
current IFRS reporters and companies who have performed an IFRS diagnostic review in 2011 will need to align their
reporting capabilities to these new changes very swiftly in order to meet the timelines prescribed in the new
roadmap.
► IFRS 9 Financial Instruments and IFRS 15 Revenue Recognition
Both these standards have been newly issued by the IASB and are expected to have a transformational impact on
accounting for financial instruments and revenue recognition for entities worldwide. These standards are expected to
be effective globally from 2017 or beyond. Comparable IND ASs (Ind AS 109 & Ind AS 115) were not issued in 2011.
Hence impact of these companies would not have been assessed and detailed diagnostic needs to be performed as
a part of current transition plan.
► First time adoption framework under IND AS is different
The first time adoption framework under IND AS 2014 is different both from the perspective of IND AS 2011 and
extant IFRS. As compared to IND AS 2011, Indian companies will be required to provide comparative financial
information on the basis of IND AS in the year of transition i.e. for companies in phase 1, the opening balance sheet
date for IND AS will be April 1, 2015. Additionally, even current IFRS reporters will be treated as first-time adopters
for the purposes of IND AS and will need to make all policy choices afresh as needed: this is a very good opportunity
to carefully select policies and options to eliminate many differences with IFRS.
► IND AS 2014 is aligned with the new IFRS developments
This time around there has been an attempt to align IND AS more closely with extant IFRS. Many carve-outs that were
proposed in IND AS 2011 have been relooked at this time around. Further, IND AS 2014 will be updated for all IFRS
issued since 2011. This would include IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements,
IFRS 12 Disclosure of Interests in other entities, IFRS 13 Fair Value Measurements as well as IFRS 9 and IFRS 15.
Companies who have performed an IFRS diagnostic review in 2011 will need to reassess the carve-outs proposed in
IND AS 2014 as well as assess the impact of all the new IND AS standards and establish a transition approach as
well as a communication plan for key stakeholders.
► IND AS transition is applicable to all holding, subsidiaries, joint ventures or associates of the companies covered in
Phase 1 and 2 and it is also applicable to standalone and consolidated financial statements
Unlike 2011 wherein the roadmap did not cover related entities of covered companies, this time around the
roadmap explicitly applies to all holding, subsidiaries, joint ventures or associates of the companies covered in
Phase 1 and 2. This will be beneficial for companies as the entire group will transition at the same time contributing
to efficiency and cost effectiveness. It should also be noted that even though the roadmap is not applicable to the
financial sector, if a financial services company is a subsidiary, associate for joint venture of a company covered in
Phase 1, it will need to prepare IND AS financial statements for group reporting purposes. Existing IFRS reporters
and companies who have performed an IFRS diagnostic review in 2011 should ensure that their related entities are
geared up for the transition to IND AS.
Considering the fact that all major regulatory developments like GST, Tax Accounting
Standards and IND AS are expected to be “go live” at around the same time, how
should company manage this transformation process?
The speed of regulatory change is such that companies find it difficult to keep pace. With limits on resources, availability of
talents and different reporting needs there is a tremendous stretch on companies to manage compliance and improve
reporting efficiency.
Considering such a volatile environment in regulatory and reporting landscape, following areas will be topmost priority areas
to manage these transformation process (a) Adopt integrated impact assessment approach (b) Move towards connected
reporting framework (c) Invest in technology & talent.
Integrated impact assessment will involve assessing impact of transition to new framework (be it IND AS, Tax accounting
standards or GST) on all areas of organisation like accounting and reporting, tax, systems and processes, human resources.
Organisation should consider clubbing transformation projects, to the extent possible, to consolidate efforts of managing
change at same time. This will result in cost saving and reduction in overall transformation efforts.
Connected reporting is an approach to develop an organization’s current reporting to bridge the gap between the different
information requirements of internal and external audiences. It enables organizations to communicate their financial and
nonfinancial information, using consistent data, simplified IT structures and methods, in order to reduce complexity in the
reporting process. Companies can do this by integrating or upgrading IT systems, making data more consistent and widely
available, investment in data analytics and optimizing processes.
Rapid changes in regulation are exposing companies to risk of impairment of their existing resources. Reskilling of resources
is becoming number 1 priority for all organisation. Companies will need to invest heavily into training to ensure that their
people are geared up to deal with ongoing regulatory developments.
Other than financial reporting, which other business areas will be affected by the
conversion?
Ind-AS will affect a wide range of business functions beyond financial reporting. These may include changes to
management’s internal reporting, data gathering and IT systems, the use of key performance indicators, the content of
employee and executive compensation plans, the activities of investor relations, changes to policies and procedures and
the resultant impacts on internal control documentation and certification requirements.
The following outlines some of the potential effects:
1. Performance reporting — The accounting recognition and measurement changes brought about by Ind-AS will affect the
measures used by companies and investors to assess performance and may lead to a realignment of management’s
performance targets, financial covenants and performance-related remuneration.
2. Financial covenants — Key performance indicators and ratios used by businesses to measure performance are also
closely tied to the financial covenants a company may have in its contracts. A complete review of and modification to
contracts containing financial covenants will likely be required
3. Executive compensation — Compensation committees should be able to articulate their process for establishing
compensation for executives based on objective criteria tied to the company’s performance targets. Companies should
expect earnings, earnings per share and financial position to change. Insofar as these changes also affect the metrics
used to evaluate or compensate executives, evaluation and compensation guidelines may also need to change.
4. Investor relations — During the transition, it will be important to manage investor expectations and respond quickly to
issues to avoid misunderstandings. Going forward, companies will need to be aware that analysts will have access to
comparable global data on their industry sectors against which they can benchmark their results, and be prepared to
react accordingly. An effective communication strategy to respond to investor queries and concerns arising during and
immediately after the transition will be vital.
5. Dividend distribution policies — Boards may need to review and, if necessary, amend dividend distribution policies in
light of the company’s changed financial situation that could emerge from applying Ind-AS.
6. Regulatory capital — For companies operating in a regulated environment (for example insurance companies, banks,
etc.) and where the Ind-AS financial statements will be the basis for regulatory reporting, conversion to Ind-AS will likely
have an impact on regulatory capital. This may require additional capital and, where regulated subsidiaries are
involved, restrict the amount of distributions to the parent.
What are some key implications of transition to IND AS on the taxable income of the
company?
Non-clarity on tax impact was one of the key reasons for deferral of IND AS in 2011. The current thought process of
Government is to delink accounting profit with computation of taxable income. Government has proposed new tax
accounting standards for computation of taxable income of businesses. Hence transition to IND AS will not have any
significant impact on computation of taxable income except for computation of minimum alternate tax. For all practical
purposes, companies will have to prepare memorandum books of account for tax purposes. This will significantly raise the
cost of implementation.
IND AS financial statements are based on IASB IFRS, albeit with some carve-outs. Will
IND AS financial statement be accepted outside India for capital raising purpose?
Currently most of stock exchanges across the world like LSE, NYSE, Euronext accept IASB IFRS financial statement.
Companies preparing IND AS financial statements will not be able to claim dual statement of compliance with IASB IFRS
due to various carve-outs proposed in IND AS. Hence IND AS financial statements will not be accepted outside India for
capital raising purpose. However, if company chooses right accounting policy and exemptions prescribed in IND AS which
are aligned with IASB IFRS then efforts for presenting IFRS financial statements for raising capital based on IND As financial
statement will be significantly less.
What will be the effect on management reporting?
The changes to accounting policies expected from applying Ind-AS and the need to record and classify information in
specific ways to comply with the new standards may affect the financial information generated by the business.
Management reporting formats and processes will need to be reviewed and updated accordingly. In addition, management
will need to consider the effects on the key performance indicators used for measuring success and reviewing trends. There
may also be effects on the way budgeting and planning functions operate.
One of the significant trends reported in Europe was the increased use by management of “non-IFRS” measures1 (i.e.,
performance indicators not defined under IFRS) when communicating business performance to the market. Certain Indian
companies are already using non-GAAP measure for purposes of communicating their results to the markets. It is expected
that in the initial years of Ind-AS application, an increased number of companies may resort to non-GAAP measures till the
time they achieve confidence that the numbers generated by the new standards are well understood by the stakeholders.
How will converting to Ind-AS affect our stakeholders and what should be done to
manage the expectations of capital markets?
The European and Australian experience in adopting IFRS was that the conversion from the various local accounting
frameworks to IFRS did not, in and of itself, affect market ratings. Many attributed this fact to the effective communication
with investors, analysts and regulators about the possible effects of IFRS on their financial reporting. These communications
were made periodically throughout the conversion process. In the context of European Union (EU) transition to IFRS in 2005,
the Committee of European Securities Regulators (CESR) published detailed recommendations on how listed EU entities can
effectively communicate to investors the potential impact of transitioning to IFRS in 2005. The recommendations identified
the following four key milestones in the transition process:
•
Publication of the 2003 annual report (including the 2003 financial statements). Entities should explain (a) how
they intend to carry out the transition to IFRS (plans and degree of achievement for the transition), and (b) the key
differences between their present accounting policies and the ones they know with sufficient certainty they will have to apply
under IFRS.
•
1
Publication of the 2004 annual report (including the 2004 financial statements). As soon as an entity can quantify
Observations on the Implementation of IFRS, published by Ernst & Young LLP, 2006.
the impact of the change to IFRS on its 2004 financial statements in a sufficiently reliable manner, it should disclose the
relevant quantified information.
•
2005 interim financial reports (half-yearly and quarterly financial reports). In interim financial reports for 2005,
listed entities should start applying as of 1 January 2005 either IAS 34 Interim Financial Reporting, or, if this is not possible,
at least the IFRS recognition and measurement principles that will be applicable at year end.
•
2005 annual financial statements. For most listed entities in Europe, these will be the first complete set of
financial statements presented under IFRS.
Unlike Europe, the regulators in India, viz., ICAI or MCA have not prescribed any specific disclosures that should be made
during the transition period. Nonetheless, frequent communication with investors and analysts is equally important for
Indian companies. Managing investors’ and other stakeholders’ expectations with respect to the effects of Ind-AS and the
company’s progress towards conversion will be an important area for boards to monitor. Clear, continuous and consistent
communication with stakeholders will reduce the risk of misunderstandings and aid a smooth transition. Indian companies
will need to sound investors/ analysts about the expected changes in advance. They will also need to provide assistance to
investors/ analyst to understand financial reporting under Ind-AS to avoid the potential risk of misinterpretation.
Date of transition to IND-AS is April 1, 2015 for all companies covered in phase 1. Hence
in the first year of IND-AS reporting i.e. financial year 2016-17, companies will have to
restate their comparatives for the financial year 2015-16 as per IND AS. Will such
restatement of comparative impact dividend distribution for the financial year ended
2015-16?
As per Companies Act 2013, distributable profits are computed based on financial statements prepared based on
accounting standards prescribed in Section 133 of the Companies Act 2013. IND AS will be considered as applicable
accounting standards only from financial year ended March 31, 2017. Hence till financial year ended, all companies will
continue to prepare financial statements as per current Indian GAAP. Hence dividend distribution based on profits as per
current Indian GAAP for the financial year ended March 31, 2016 will not be impacted.
What can we learn from the conversion experiences of others, including Europe and
Australia?
Indian business has the benefit of the experience of countries that have already converted to IFRS. Below are some of the
issues encountered and the key lessons one can learn from their experiences.
Issues Identified
Key lessons learnt
Scale and complexity of the project and
the time frame needed were
underestimated.
Conducting a thorough impact assessment followed by a detailed planning
exercise up front is crucial to a successful transition. Conversions could entail
functional changes as well as technical accounting changes.
Project lacked adequate buy-in from
senior management early on in the
project.
The “tone from the top” is an important driver of change. Board sponsorship of
the project is crucial.
Projects suffered from poor project
management
The importance of having a proper project management office function capable
of coordinating project activities and a well- structured conversion
methodology cannot be overemphasized.
Slight accounting differences can have a
significant effect on financial results.
A methodical approach to review accounting differences is essential to assess
financial effects.
Unfamiliarity of “numbers” and principles
Technical training will be a critical component of the conversion, especially for
business unit heads that may not be familiar with the implications of the
arising from changes.
changes that new standards will bring. Investor relations will also need a strong
educational grounding to communicate the impact to investors.
Poor communication existed between
project team and business units
regarding effects of changes.
Invest the time necessary to roll out business process changes such as
accounting practices, updated control mechanisms and changes in reporting
requirements to the wider organization.
Changes were often not fully embedded in
back offices and general ledger systems.
As a result, “stand-alone manual
workarounds” were created, including
“spreadsheet accounting.”
EU companies that used manual workarounds to meet short deadlines are now
redesigning processes and augmenting their systems to eliminate the
inefficiencies these workarounds created. Indian companies should use time
available to proactively address these changes.
Top-side solutions did not work.
Top-side solutions don’t cause the organization to adjust, and the finance
group feels “all the pain.” It is important to “push down” the conversion to the
transaction level throughout the organization as early as possible.
Tax
personnel
were
frequently
underrepresented in the conversion
process.
Tax implications of the conversion process may extend beyond accounting
effects. Involving tax personnel early in the process may mitigate the potential
for unexpected results. Companies will benefit from sufficient resources and
adequate lead time to address tax issues and to make necessary changes to
tax processes and technology.
What shall be the transition date to IND AS for companies having December or June
year-ends?
Companies covered in phase 1 need to prepare their opening IFRS balance sheet as at 1 April 2015. If the financial year of a
company commences at a date other than 1 April, then it shall prepare its opening balance sheet at the commencement of
immediately next financial year. Accordingly, for companies having June and December year end, the date of transition is 1
July 2015 and 1 January 2016 respectively. Similar considerations shall apply for determining transition date in the later
phases as well.
Press release states that Roadmap issued is applicable only to companies other than
banking, NBFC and Insurance companies. What will be reporting GAAP for a banking /
NBFC / Insurance companies, if they are subsidiary, associate or joint venture of a
company covered in phase 1 or 2 of IND AS roadmap?
The roadmap does not specifically provide clarity on this issue. Considering requirements of Companies Act 2013 and IND
AS, it seems banking / NBFC/ Insurance company will present their own standalone and CFS as per current Indian GAAP.
However they will have to report IND AS numbers to their holding company / investors / venturers to enable them to prepare
their IND AS consolidated financial statements. This effectively means that they will have to maintain two sets of books – a)
Indian GAAP for their own statutory financial statements b) IND AS for group reporting purpose.
What is the meaning of the term “net worth” for deciding applicability of IND AS?
The roadmap specifically states that the term “net worth” shall have the meaning assigned to it in the clause (57) of section
2 of the Companies Act, 2013, as below:
“2(57). ‘net worth’ means means the aggregate value of the paid-up share capital and all reserves created out of the
profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred
expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves
created out of revaluation of assets, write-back of depreciation and amalgamation”
The above definition does not specifically deal with debit balance in the profit and loss account, required to be shown as
negative amount under the head “surplus” in the balance sheet. We believe that ideally, the same should also be reduced in
arriving at “net worth.”
Can a company stop reporting under IND AS if in future it does not meet the eligibility
thresholds prescribed in the roadmap?
Roadmap issued by the MCA clearly provides that once a company opts to follow the Indian Accounting Standards (Ind AS),
it shall be required to follow the Ind AS for all the subsequent financial statements. Hence company cannot shift back to
Indian GAAP.
Whether the conversion roadmap shall make it mandatory to prepare both Standalone
financial statement and consolidated financial statements as per IND AS?
Yes - IND AS will be applicable to both standalone and consolidated financial statements of the Company.
Roadmap extends applicability of IND AS to holding /subsidiaries/joint
ventures/associates of companies covered under the conversion roadmap. Can you
please share your thoughts on whether determination of holding /subsidiary /associate
/joint venture should be based on definition given in Companies Act 2013 or as per
accounting standards?
Definition of holding, subsidiary, associate and joint venture is different under Companies Act 2013 and Accounting
standards. In our view, if any entity is considered as holding, subsidiary, associate or joint venture of the company covered in
phase 1 or 2 either as per Companies Act 2013 or as per accounting standards, IND AS requirements will be applicable to
all those entities.
How different is IND AS from Indian GAAP?
There are many areas of differences between Indian GAAP and IND AS because current Indian GAAP is driven by ‘form’ in a
number of areas rather than ‘substance’. However, certain critical areas which would have a transformational impact are:
1.
Financial Instruments (IND AS 109)
Extant Indian GAAP does not currently include mandatory guidance for accounting for financial instruments. The
standards for accounting for financial instruments are recommendatory and have not been notified by the MCA.
Per the current roadmap, India will directly transition to IND AS 109, ahead of the equivalent IFRS 9, which shall
be implemented in 2018 in other jurisdictions which have adopted IFRS or permit IFRS. Extant Indian GAAP in the
area of accounting for financial instruments is mainly driven by ‘form’. IND AS 109 would have a significant impact
on the way financial assets and liabilities are classified and measured, resulting in changes in volatility within
profit or loss and equity. The new impairment model will have significant impact on the systems and processes of
entities due to its extensive requirements for data and calculation. Additionally, there will be significant impacts in
the areas of debt vs. equity classification, compound financial instruments, derivatives and hedging and foreign
currency convertible bonds.
2.
Consolidated Financial Statements (IND AS 110)
IND AS 110 establishes a single control model that applies to all entities (including ‘special purpose entities,’ or
‘structured entities’ or ‘variable interest entities’). The implementation of this standard will require management to
exercise significant judgment to determine which entities are controlled, and therefore are required to be
consolidated by a parent. It changes whether an entity is consolidated, by revising the definition of control. This is
a radical change in the Indian environment, because by applying the new ‘control’ definition, it may change which
entities are included within a group. This will be a high impact standard for companies that have complex holding
structures and have formed special purpose vehicles.
3.
Revenue Recognition (IND AS 115)
The core principle of this standard is that an entity will recognise revenue when it transfers control over goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for underlying performance obligations arising from the transaction. This will require entities to use more
judgement and make more estimates than under today’s revenue standards. IND AS 115 is likely to have an
impact on identification of performance obligations, warranties, sales incentives, right of return and options
granting a material right. Gaining an understanding of the effects of the new standard, providing early
communication
to
stakeholders
and
advanced
planning
will
be
critical.
4.
Business Combinations (IND AS 103)
Under extant Indian GAAP, there is no comprehensive standard that deals with business combinations. There are
separate standards that deal with amalgamation, consolidation and assets acquisition. IND AS 103 will apply to
all business combinations, including amalgamations. Once IND AS 103 is effective, all assets and liabilities
acquired will be recognized at fair value. Additionally, contingent liabilities and intangible assets not recorded in
the acquiree’s balance sheet will be recorded in the acquirer’s balance sheet on acquisition date. Goodwill on
acquisition will not be amortized, but may only be tested for impairment.
Whether interim financial information also needs to be IND AS compliant?
Preparation or presentation of interim financial information is governed by Clause 41 of the Listing Agreement. Thus, this
aspect will get addressed clearly as part of changes to the SEBI regulations. However, we believe that it is natural, if a
company is using IND AS for annual financial statements, it will use the same standards for quarterly reporting also.
Considering the fact that IND AS will be applicable for phase 1 companies from April 1, 2016, clarification from SEBI will be
required whether quarterly results for first 3 quarters for the year ended 2016-17 will be required as per IND AS or Indian
GAAP. If SEBI mandates quarterly reporting under IND AS from first quarter itself then companies will have only 9 months to
get ready for reporting as per IND AS.