Let’s Be accountable
The Indian Accounting Standards (Ind AS) is not alien to anyone in India anymore. Last year has been a landmark year in making Phase I companies Ind AS complaint — i.e. shaping them into this new accounting framework converged with the IFRS. Through this, the journey towards global reporting standards has marked its foot in the country. It is a small step by regulators, but a giant leap for Indian corporates.
It is clear from the experiences of Phase I companies that converting into Ind AS is not just an accounting exercise, but a complete “overhauling of the entire system” of an organisation. Hence, adopting Ind AS has affected many facets of an organisation, beyond financial reporting. Its impact is evident across various areas such as internal controls, corporate governance, the IT framework, taxation, and stakeholder communication. Therefore, in this case, the Ind AS transition process and the implications of the conversion, varied widely amongst companies based on a number of factors such as nature of industry, available resources, controls in place and levels of expertise available.
Based on the results published by listed entities, the impact of Ind AS on Phase I companies reflects a mixed trend. Out of the 22 companies that have recently published their results, around 50 per cent experienced more than a 5 per cent impact on their after tax net profit, which was attributable to the Ind AS adoption on standalone basis. Meanwhile, on a consolidated basis, around 59 per cent companies have reported the same result. It might be possible that a significant impact might have been offset by the exemptions availed by Phase I companies, endowing them with an insignificant net profit impact. However, the impact on individual accounting captions might be significant. Most of these companies had also reported fair value adjustments; however, as compared to the net profit reported as per the previous Indian GAAP, the impact was not significant.
Similar results were also observed with respect to Actual gain/(loss) on a defined benefit obligation. On the basis of the profit reconciliation presented by these companies in their financial results, the other areas which gave rise to the delta between the reported profit as per the previous Indian GAAP and that under Ind AS, were adjustments made on account of the following: property, plant & equipment, depreciation and amortisation, expected credit loss on trade receivables, d government grants, tax (current & deferred) and other adjustments.
Based on the overall review of companies, which published their results during 2016-17, Ind AS largely impacted revenue recognition, accounting for financial instruments, accounting in general, presentation and disclosures of property, plant & equipment, accounting for business combinations, share based payments, employee benefits, deferred tax leases, segment information and contingent assets.
As a consequence of the above, many companies experienced a change in their key financial ratios such as the gross margin ratio, earnings per share, price earnings ratio etc. One of the key factors which contributed to this change was the new Ind AS mandate, requiring classification of debt and equity. Due to this reclassification, certain financial ratios such as debt to equity, net worth and interest coverage also underwent change. Further, due to this revision, some of the companies had to alter some of their debt covenants with their lenders.
On the obvious note, transition to Ind AS was not a cake walk for the Phase I companies. Most of them have only made the mandatory disclosures. Further, the companies did not seem to provide non-GAAP financial information on being a global practice, explaining their performance in their financial statements. Phase II companies, which were not covered in the first implemenration phase, are generally medium-sized companies, having lessor or insufficient accounting resources, less robust IT systems, fewer expert accounting resources etc.
It is believed that the Ind AS conversion process would be somewhat easier for Phase II companies, having learnt from their predecessors. However, despite having this information, the new/ revised requirements with the introduction of the GST, MAT implications, and applicability of revised ICDS would also pose a new challenge for them. Further, complexities would arise in terms of revisiting internal financial controls to ensure a smooth transition to Ind AS, training need assessment, modifying IT systems and making other structural changes. To encounter this, Phase II companies would need to plan their transition as early as possible.
Fortunately, there is a breather for the listed Phase II companies, as provided by SEBI; these companies, while publishing their first Ind AS-based financial results for the year 2017-18, can avail similar relaxations with respect to certain reconciliations and disclosures requirements that were provided to Phase I companies.
Adoption or convergence with the IFRS is happening across the globe. Therefore, together with Phase I companies, Phase II companies can also learn from their global peers, which have undergone similar experiences. The following are some of some of the lessons learnt:
Absence or lack of adequate support from the senior management at an early stage of the project.
Lack of technical training and misunderstanding of results.
The quantum, complications and related timeframe of the project getting undermined.
Failure in a timely updation of modified numbers into the systems.
Underestimating the effect of marginal accounting differences, which turned into significant items impacting the financial reporting system.
Though the conversion process and its effective implementation is a tough and ongoing job, it could turn into a worthwhile effort and provide results. Comparable and reliable financial information provide a strong path, enabling global markets to operate effectively, and pave the way for international investments and business.
Hence, considering this goal at the macro level, it will give a boost to everyone to gear up to the pace of the globally changing and challenging environment. It is not yet too late. Then why not start today and plan for the holistic move and implementation within the available short timeframe- especially for the companies that are yet to fall within Phase II, and other companies such as NBFCs, Banks and Insurance Companies etc.
(The writer is a director at Mazars India and has authored two books, one on Companies Act and the other on Ind AS)