Decoding the IndAS Impact for Indian Companies

29 Pages·2016·2.97 MB·English

Decoding the IndAS Impact
for Indian Companies
Q1 Reporting Under the New IFRS Converged Framework
Foreword
The prescribed listed companies in India have started reporting under the new Indian Accounting
Standards (IndAS) from the current financial year (2016-17). IndAS are the IFRS converged finan-
cial reporting standards and will have to be followed by all the listed companies and certain private
companies going forward, in a phased manner. Listed companies with net worth of more than INR
500Cr have reported their Quarter 1 (Q1) results for 30 June 2016, under the new standards.
We at Protiviti, have followed the transition closely and analysed the impact of this significant change
on most of the sectors. As part of our study, we have analysed the Q1 IndAS results of almost 125
companies, across all major sectors and attempted to decode the impact, in a simplified manner. The
study includes selected companies that have declared the Q1 results under IndAS, up to 16 August
2016 and is based on publically available information. The last date for submission of Q1 results has been
extended to 14 September 2016 by, The Securities & Exchange Board of India (SEBI).
The Q1 results reported by the companies are as per the prescribed format issued by SEBI, which
requires companies to provide GAAP reconcilliation only of Profit after Tax (PAT) for the compara-
tive quarter i.e., quarter ended 30 June 2015. As such, most companies have not provided GAAP
reconcilliation, as at the transition date (1 April 2015) and some companies (approx. 40% of the
companies selected) have included a PAT reconcilliation for the full year ended 31 March 2016
(comparative year).
In view of the above, our study and analysis is primarily based on the PAT reconcilliation reported
by the companies, for the first quarter comparative period ended 30 June 2015. There could be
material adjustments made to the equity/reserves at the transition date i.e. 1 April 2015, which
could not be analysed in our study, due to inadequate number of companies providing the transi-
tion date equity reconcilliation.
Considering that the number of companies that have reported under the new regime are only a very
small percentage of the total companies that are yet to transition, we hope that the study will provide
insights to the remaining companies on the transition impact, relevant to their business.
We have also included a section at the end of the study to enable companies to carry out an initial
self-assessment of their preparedness, for the significant transition.
Vishal Seth
Managing Director and Leader
Financial Reporting and Transaction Advisory
Decoding the IndAS Impact for Indian Companies 1
Index
1. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Decoding the Impact on Various Sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
– Automotive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
– Energy, metals and mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
– Information technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
– Infrastructure and real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
– Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
– Media and entertainment . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . 13
– Pharmaceutical and biotechnology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
– Retail and consumer goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
– Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3. Decoding the Major GAAP Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
– Adjustments to fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
– Consolidation related adjustments, including adjustments to past business combinations . . . . 16
– Share based payments and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
– Adjustments to carrying value of financial instruments . . . . . . . . . . . . . . . . . . . . . . . . 18
– Derivatives and hedge accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
– Service concession arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
– Intangible assets and goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
– Lease related adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
– Revenue recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
– Adjustments related to foreign exchange gain or loss . . . . . . . . . . . . . . . . . . . . . . . . . 21
– Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
– Transition date exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4. Closing Comments . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5. Is Your Company Ready for the Transition? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6. Appendix A: IndAS Preparedness Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7. Appendix B: List of Companies Included in the Study . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8. About Protiviti . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2 Decoding the IndAS Impact for Indian Companies
1. Executive Summary
As Indian companies declare the results for the first quarter of the 2016-17 financial year, under the
new IndAS regime (IFRS converged accounting standards in India), we at Protiviti have analysed the
impact of adopting IndAS by these companies. Our analysis has been carried on a sample of almost
125 companies, across all the major sectors and industries, except for the banking and financial service
industry (BFSI), for which the transition shall commence from financial year 2018-19 onwards. This
study has been performed based on the analysis of the quarterly results reported by the listed compa-
nies, with the net worth of more than INR 500Cr (US$75mn).
The overall impact of GAAP adjustments made on the profit after tax (PAT) for 30 June 2015 is
approximately INR 20bn (US$ 300mn) decrease in PAT (net of debit and credit adjustments of INR
57bn and INR 37bn respectively). The total absolute value of the GAAP adjustments made by the
selected companies, ignoring debit or credit adjustments in 30 June 2015 quarter is approximately
INR 94bn (US$ 1.5bn).
40% of the companies that are included in the study have provided a profit (PAT) reconcilliation,
for the comparative financial year ended 31 March 2016. The total impact of adjustments made by
these companies is of INR 8bn, increase in PAT (net of INR 121 bn and INR 113 bn credit and debit
adjustments respectively).
Our analysis covers 26 of the 41 eligible Nifty 50 companies and 74% of the total companies included
in our study are large cap and mid cap companies. 9 of the Nifty 50 companies represent the BFSI
sector which is not required to transition to IndAS until financial year 2018-19.
Although, companies have reported the quarter 1 results under the IndAS framework, they will
have time until 31 March 2017 to re-look at the transition adjustments, in light of any change in the
regulation/s that take place before 31 March 2017, which will be the first annual reporting period
under IndAS. For example, the ongoing amendments/clarifications to the recommendation by
Central Board of Direct Taxes (CBDT), on the treatment of Minimum Alternative Tax (MAT) for the
adjustments to retained earnings, could result in additional companies opting for the fair valuation
exemption with respect to property, plant and equipment.
Decoding the IndAS Impact for Indian Companies 3
Highlights of selected high value adjustments made by individual companies include:
Company’s
Nature of adjustment/s Magnitude of the impact (in INR)
sector
3 bn adjustment recognised in the income statement for the quarter
Change in the Functional
ended 30 June 2015 and 9.5bn adjustment recognised in the income Oil&Gas
Currency
statement for 31 March 2016 comparative year.
Fair value adjustment on
450bn adjustment to the reserves as at 31 March’16. The adjustment
transition date of company's
was net of increase in the value of land and reduction in value of some Oil&Gas
fixed assets on opting for the
producing assets.
deemed cost exemption
Restatement of past business 210bn adjustment made to the reserves as at 31 March 2016 with
combination/s with a reversal adjustment to profit/s for 30 June’15 quarter and 31 March 2016 Telecom
of goodwill amortisation financial year of 7bn and 27 bn respectively.
A company changed it's accounting policy on capitalisation of exploration
Change in accounting expenditure from full cost method to successful effort method.
policy on capitalisation of Impact of 395bn adjustment to reserves for 31 March 2016 with some Oil&Gas
expenditure impact on profits for quarter ended 30 June’15 and comparative year ended
31 March 2016.
Change in accounting policy
12bn adjustment to the profits for the financial year ended 31 March Oil&Gas,
on depletion and amortisation
2016 and 800mn adjustment to profit for the quarter 30 June 2015. Mining
of oil producing assets
A power company has increased the carrying value of it's fixed assets
Adjustment/s to the carrying (reason undisclosed) with additional depreciation impact recognised. Power
value of fixed assets
Impact of 10bn adjustment to the profit for the quarter ended 30 June 2015.
a. Sectoral split of companies: Our sample covered prescribed companies across all major sectors.
In case of the Aviation sector, most of the companies are covered in phase 2 of the transition. BFSI
companies shall start the transition from financial year 2018-19 onwards.
For further analysis on each of the sectors, refer to section 2 of our study.
Sector Split (%)
4%
7% Telecommunication
Retail &
Personal Care
12%
Automotive
15% 13%
Pharmaceuticals Energy, Metals
& Biotechnology & Mining
4% 8%
Media Information Technology
& Entertainment
7%
30% Infrastructure
Manufacturing & Realty
Refer to Appendix B for the complete list of companies covered by our study.
4 Decoding the IndAS Impact for Indian Companies
b. Number of adjustments made by companies in the respective sectors: On this parameter,
companies in manufacturing and information technology sectors had the maximum number of
accounting adjustments, followed by the telecommunications, mining/metals and energy sectors.
On an average, more than 50% of the companies have made more than 10 adjustments to the
reported profits, for the quarter ended 30 June 2015.
Number of Adjustments
13 12
Telecommunication Automotive
15
Retail &
Personal Care
18
Energy, Metals
13 & Mining
Pharmaceuticals
& Biotechnology
17
Information Technology
10
Media
& Entertainment
10
Infrastructure & Realty
22
Manufacturing
c. Major accounting adjustments made by companies: Almost all companies have made adjust-
ments with respect to fair valuation of financial instruments, employee benefits and deferred taxes.
Significant number of companies have made adjustments for consolidation, accounting for deriva-
tives/embedded derivatives, restatement of past business combinations, revenue recognition and
fixed assets. Adjustments related to intangible assets are primarily on account of restatement of past
business combinations, as per IndAS.
Top 10 Adjustments (% of Companies)
12 12
Intangible assets Business combinations
15
Lease related adjustments
20
85
Consolidation adjustments
Employee benefits
17
Derivatives and
embedded derivatives
21 83
Revenue recognition Impact on financial
instruments
19 83
PPE and depreciation Tax expense
(including deferred tax)
Decoding the IndAS Impact for Indian Companies 5
Detail analysis on the key adjustments is discussed in sections 2 and 3 or our study.
d. Snapshot of the impact of the accounting adjustments: The following graph provides a split
of the GAAP adjustments made by the companies. The impact (if INR 94bn) is in absolute value
(ignoring the impact of debit or credit adjustments). Of the total adjustments made to the June
2015 PAT, more than 50% of the adjustments are on account of fair valuation of financial instru-
ments, consolidation and fixed assets. 35% of the total adjustments represent restatement of
past business combinations, forex gains and losses, tax adjustments and employee benefits.
Overall Impact
absolute amounts, INR in Millions
Impact on
23,006
financial instruments
Consolidation adjustments 13,737
PPE and depreciation 13,358
Tax expense
12,069
(including deferred tax)
Business combinations 7,810
Employee benefits 7,275
Forex adjustments 5,656
Intangible assets 3,126
Others 2,718
Accounting for derivatives and
1,663
embedded derivatives
Accouting policy 1,535
Revenue recognition 1,030
Lease related adjustments 684
Inventory 366
Impairment of financial assets 94
Government grant 91
Dividend 66
Functional currency impact 65
Service concession
56
arrangement
6 Decoding the IndAS Impact for Indian Companies
Capital intensive sectors, in particular, the telecommunications and metals/mining & energy
sectors contributed nearly 70% of the total adjustments (in absolute value). These two sectors also
include the top business groups that have significant global operations and a history of multiple
business acquisitions.
Absolute Amt of Adjustments (%)
33% 4%
Telecommunication Automotive
2%
Retail &
Personal Care 37%
Energy, Metals
& Mining
8%
Pharmaceuticals
& Biotechnology
4%
Information Technology
1%
Media & Entertainment
6% 5%
Manufacturing Infrastructure & Realty
Decoding the IndAS Impact for Indian Companies 7
2. Decoding the Impact on Various Sectors
The impact analysed is on the IGAAP PAT for 30 June 2015 and is in absolute value (i.e. it ignores
the debit and credit adjustments). This section includes the discussion on the sector specific issues.
Adjustments that are common to most companies such as, adjustments with respect to employee
benefits or fair valuation of financial instruments etc. are discussed in section 3 of the study.
a. Automotive sector includes both the original equipment manufacturers (OEM) and the auto
component suppliers (ACS). Sector specific impact includes adjustments to revenue recognition.
In particular, there has been deferral of revenue in case of future performance obligation/s (such
as service warranties), and also adjustment for recognition of cash/trade discounts. No material
impact was noted on account of embedded lease arrangements in this sector.
Impact on Automotive
absolute amount, INR in Millions
Impact on
2,359
financial instruments
Employee benefits 286
Revenue recognition 273
Tax expense
271
(including deferred tax)
Others 205
Accounting for derivatives and
45
embedded derivatives
Business combinations 37
Consolidation adjustments 25
Forex adjustments 16
PPE and depreciation 14
Impact on PAT: Increase Decrease Increase and decrease
8 Decoding the IndAS Impact for Indian Companies
b. Energy, metals and mining includes oil & gas companies, companies in mining of natural
resources, power companies and steel manufacturing companies. Given the sector is capital inten-
sive and exposed to the global commodity/currency markets, the sector noted some high value
adjustments. These included forex gains and losses (particularly due to change in the functional
currency of the company and of it’s foreign operations), restatement of past business combina-
tions (including common control acquisitions), change in accounting policy (primarily for oil and
mining companies) and adjustments to the carrying value of property, plant and equipment. The
adjustments made to fixed assets include impact of INR 10bn of additional depreciation charged
by a company as a result of significant increase in the carrying value of it's fixed assets (the specific
reason for the increase has not been disclosed in the reconcilliation).
Sector specific impact included, impact of change in the functional currency (US$) by some companies,
accounting for service concession arrangements (by power companies) and embedded lease arrange-
ments (by power companies). In case of embedded finance lease arrangements, companies that had
previously capitalised fixed assets on their balance sheet have de-capitalised the fixed asset/s, reversed
the corresponding depreciation charged and recognised a finance lease receivable.
Impact on Energy, Metals & Mining
absolute amount, INR in Millions
PPE and depreciation 12,068
Impact on
7,792
financial instruments
Tax expense
3,970
(including deferred tax)
Forex adjustments 2,844
Intangible assets 2,313
Employee benefits 1,942
Accouting policy 1,535
Others 712
Accounting for derivatives and
546
embedded derivatives
Lease related adjustments 386
Business combinations 231
Inventory 179
Functional currency impact 65
Service concession
56
arrangement
Impact on PAT: Increase Decrease Increase and decrease
Decoding the IndAS Impact for Indian Companies 9