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Timelines have been released by the ministry of corporate affairs (MCA) for adoption of Indian Accounting Standards (Ind-AS), which are converged with the International Financial Reporting Standards (IFRS).All companies with a net worth of Rs 500 crore or more will have to apply the new Ind-AS from April 1, 2016. Comparative information of the earlier year also has to be provided. Even the holding, subsidiary, joint venture or associate company will have to follow suit.
In a phased manner, Ind-AS will be made mandatory for other companies (see table).Companies, at their option, can adopt Ind-AS for the accounting period beginning April 1 this year. These timelines do not apply to banks, insurance companies and non-banking finance companies.Indian companies will not be adopting in full the internationally accepted accounting standards. But Ind-AS is being viewed as closer to the international norms. This could make it easier for Indian companies to attract foreign investments.
An official release, issued a few days ago, only mentions the stipulated timelines. N Venkatram, managing partner (audit), Deloitte, points out, “In the absence of clarity, it appears that Ind-AS may apply to both standalone and consolidated financial statements of companies. Applicability to standalone financial statements would necessarily impact profits, retained earnings and consequent dividend payout.
There would also be implications for debt covenants.”TOI had done a detailed analysis in its edition dated September 20, 2014, showing that key items like interest on preference shares, debentures, foreign currency convertible bond (FCCB) premium and fair valuation requirements for ESOPs and M&A deals would mean higher debits and, thus, lower book profits.
Audit professionals have welcomed announcement of timelines, but warn of challenges that lie ahead for India Inc. “An enhanced degree of sophisticated judgment will be required in drawing up the financial statements. Companies will need to significantly revamp the information technology infrastructure of their financial reporting systems as reporting in multiple platforms will soon be the order of the day, namely, Ind-AS for statutory reporting, tax accounting standards for filing of the tax returns and IFRS for those companies listed outside India,” points out Ashish Gupta, partner, Walker Chandiok & Co.
Adds Venkatram, “Companies will also have to cope with a change of auditors, either in the year of the accounting change, or immediately thereafter. Given a three-year window for audit rotation, a majority of companies will necessarily have new auditors in the year commencing April 1, 2017, co-coinciding with new Ind-AS for most companies. Quarterly reporting within a 45-day period will be a huge challenge. Additionally, auditors will also have to report annually on the adequacy and operating effectiveness of internal financial controls, which will put great pressure on those charged with governance.”
Some leeway is likely to be provided to India Inc under the new Ind-AS, which will have carve-outs (exceptions) from the more stringent IFRS. The accounting standards board of the Institute of Chartered Accountants of India and the National Advisory Committee on Accounting Standards set up by the government have come out with a final set of carve-outs, confirm government sources.
Key carve-outs include those relating to accounting of foreign currency gains or losses (for transactions already entered into), lease accounting, accounting for FCCBs, and even permitting companies to continue to use the existing cost base for fixed assets. “For instance, the retail sector typically enters into a long-term lease of several years, which has a built-in escalation clause where the rent is hiked by 10-15% say every three years. IFRS requires the hike to be accounted for upfront, resulting in a higher debit to the profit and loss account. A carve-out will help companies that have entered into such lease agreements,” explains Gupta.
Sumit Seth, partner, Price Waterhouse & Co, points out, “Ideally, companies should be given an option to prepare their financial statements in accordance with IFRS (without the carve-outs), especially since some Indian companies listed overseas already do so.”
From the perspective of foreign investors, perhaps the new Ind-AS is a step closer to IFRS, but companies wishing to raise funds from abroad will have to prepare a fresh set of fully IFRS-compliant accounts or provide reconciliation statements, say experts.
The article appeared in the Times Of India. The article can be found here.