With the dB degree increasing on the IFRS ( International Financial Reporting Standards ) forepart, a natural anxiousness among investors is about how the acceptance of planetary norms will impact the different sectors. Thankfully, there are no industry specific criterions under IFRS, observes N. Venkatram, IFRS Country Leader, Deloitte Haskins & A ; Sells, Mumbai.
“ The consequence of following IFRS will depend on each single administration ‘s fortunes and concern patterns. That being said, altering to IFRS may impact certain industries more than others, ” he adds, during the class of a recent telephonic interaction with Business Line.
Excerpts from the interview in which Venkat looks at what the new coverage model may bode for a few sectors.
Technology, media and telecommunications ( TMT ) sectors.
The impact of IFRS on the TMT sectors, chiefly in the country of gross acknowledgment, is expected to be high.
These industries normally have a high incidence of what is known as bundled minutess or multiple deliverable agreements. A common illustration would be in the nomadic section where bundles offered to stop users include proviso of French telephones either at a subsidized rate or free of cost, pre-paid proceedingss, free SMS, price reductions, particular offers and other inducements.
In these instances it may be necessary to use the acknowledgment standards to the individually identifiable constituents of a individual dealing in order to reflect the substance of the dealing. The determination to account for a dealing in its entireness or unbundle the merchandise into its single constituents can hold a important impact on an operator ‘s fiscal statements.
For case, dividing French telephone grosss from ongoing service may ensue in increased gross upfront but at that place may besides be cases where dividing a contract into constituents may postpone gross acknowledgment.
The accounting intervention for indefeasible rights of usage ( IRU ) in the telecom sector will hold to be determined by the commercial substance of each single agreement. When finding the appropriate accounting for IRUs under IFRS, it will be necessary to first see whether the agreement is, or contains, a rental in the visible radiation of the commissariats of IFRIC 4.
If it is considered a rental, so the appropriate accounting will be determined in conformity with IAS 17. If non considered a rental, it will hold to be ascertained whether the agreement constitutes the sale of goods or the rendition of services. Consequently the relevant portion of IAS 18 will hold to be applied to find the appropriate accounting of gross.
The media sector could be impacted by the application of SIC-31, Revenue – Barter Transactions Involving Advertising Services, which deals with the fortunes where an entity enters into a barter dealing to supply advertisement services in exchange for having advertisement services from its client.
Real estate sector.
The real property sector would besides be affected due to the commissariats of IAS 40 which allow investing belongings to be measured at cost or utilizing the just value theoretical account with alterations in just value being recognised in net income or loss for the period. Accounting investing belongingss at just values can take to a great trade of volatility in the income statement every bit good as balance sheet.
Agreements for the building of existent estate take diverse signifiers – some understandings are for the proviso of building services, others are in substance for the bringing of goods ( e.g. lodging units ) that are non complete at the clip of come ining into the understanding.
Therefore, the per centum of completion method is appropriate for some understandings for the building of existent estate, but for others gross should be recognised merely at the point that the constructed existent estate is delivered to the client.
IFRIC 15 Agreements for the Construction of Real Estate addresses whether an understanding is within the range of IAS 11 or IAS 18, and when gross from the building of existent estate should be recognised.
An understanding for the building of existent estate will run into the definition of a building contract when the purchaser is able to stipulate the major structural elements of the design of the existent estate before building begins ; and/or stipulate major structural alterations one time building is in advancement.
In contrast, if purchasers have merely limited ability to act upon the design ( for illustration, to choose from a scope of entity-specified options, or to stipulate merely minor fluctuations to the basic design ) , the understanding will be for the sale of goods, and be within the range of IAS 18. Application of IFRIC 15 is expected to hold an impact on the timing of gross acknowledgment for most real property houses.
For substructure houses, the application of IFRIC 12, Service Concession Arrangements, could alter the manner grosss are accounted for. A typical agreement is a ‘build-operate-transfer ‘ agreement where an operator constructs the substructure to be used to supply a public service and operates and maintains that substructure for a specified period of clip. The operator is paid for its services over the period of the agreement.
The substructure within the range of IFRIC 12 is non recognised as belongings, works and equipment of the operator. This is because the operator does non hold the right to command the plus, but simply has entree to the substructure in order to supply the public service in conformity with the footings specified in the contract.
It is besides non treated as a rental as the operator does non hold the right to command the usage of the plus. Alternatively, the operator ‘s right to consideration is recorded as a fiscal plus, an intangible plus or a combination of the two.
The banking industry will besides be affected with an impact expected on the capital adequateness ratio. At the highest degree, Indian Bankss, being capable to the RBI ‘s rules-based accounting would necessitate to travel towards principles-based accounting of IFRS.
This differentiation may turn out more vexing than it ab initio appears, because most accounting and finance professionals in India have been used to the regulations of the RBI. The overruling lesson from their old ages of survey and work is this: If you have an issue, look up to the RBI. On the other manus, IFRS is a far shorter volume of principles-based criterions, and accordingly requires more judgement than Indian comptrollers are accustomed to.
With less than a twelvemonth to travel before Indian fiscal statements sync with IFRS ( International Financial Reporting Standards ) , it may be about clip for the puting community to besides understand the impact of the alterations to the net incomes of their favorite companies and sectors. Here is N. Venkatram, IFRS Country Leader, Deloitte Haskins & A ; Sells, Mumbai, taking us through some of the deductions of the alteration.
Excerpts from the interview:
What are the countries in a net income and loss history that an investor may hold to watch for alterations after IFRS comes in to play?
Comprehensive income: The net income and loss history is traveling to look really different under IFRS. IAS 1 requires that all points of income and disbursal be presented either in a individual statement – a ‘statement of comprehensive income ‘ ; or in two statements – a separate ‘income statement ‘ and a 2nd statement get downing with net income and loss and exposing constituents of other comprehensive income – ‘a statement of comprehensive income. ‘
Presently, in India, there is no construct of other comprehensive income. Under IFRS, an entity is permitted to sort disbursals based on map or on nature, whichever provides information that is dependable and more relevant. Entities sorting disbursals by map are required to unwrap certain extra information on the nature of disbursals. In India, Schedule VI requires an analysis of disbursals by nature.
Fiscal instruments: In the country of ‘financial instruments, ‘ you are likely to see major net income and loss impact. Additions and losingss originating from derived functions that are non designated as hedge instruments are included in the net income or loss for the period taking to a great trade of volatility in the income statement and drastically altering the reported net income figure.
IFRS is likely to curtail the de-recognition of fiscal assets, which means that fewer additions will be recognised upfront. Investing belongingss measured utilizing the just value theoretical account will besides necessitate alterations in just value to be recognised in the net income or loss.
IFRS has more elaborate counsel on gross acknowledgment ; hence there could be a difference in the gross reported under Indian GAAP and IFRS.
Anterior period points: Prior period points are besides accounted otherwise under IFRS, with material anterior period points being corrected retrospectively by repeating the comparative sums for anterior periods presented in which the mistake occurred or if the mistake occurred before the earliest period presented, repeating the gap balances of assets, liabilities and equity for the earliest anterior period presented. Under Indian GAAP, anterior period points are usually included in the finding of net net income or loss of the period in which the mistake is discovered with a separate revelation so that its impact on the current net income or loss can be perceived.
Depreciation: Even the depreciation charge under IFRS, based on the constituent attack and the estimated utile life of an plus, could be rather different than that presently reported under Indian GAAP utilizing the rates specified in Schedule XIV to the Companies Act, 1956.
Deferred revenue enhancement, share-based payments: Since the construct of “ impermanent differences ” under IFRS is much wider than the construct of “ timing ” difference under Indian GAAP, even the deferred revenue enhancement Numberss will be different.
The accounting for share-based payments under IFRS 2 which covers share-based payments both for employees and non-employees could besides impact the net income for the period as the usage of the intrinsic value for finding the costs of benefits is prohibited under IFRS.
The transition to IFRS may besides alter the constituents and computation of finance charges and finance income.
Consolidation, JV: In the amalgamate fiscal statements, the inclusion of assets and liabilities at just values on the day of the month of the concern combination will alter the related depreciation charge. Recognition of deal purchases in the income statement will heighten the net income for the twelvemonth under IFRS.
Besides, if alternatively of utilizing the proportionate consolidation method, the equity method is used for accounting for an involvement in a joint venture ( JV ) under IFRS, the gross and cost figures reported under Indian GAAP would undergo a alteration, thereby making a perceptual experience that the volume of concern has reduced which is non really the instance.
Would rating of stock list undergo a alteration?
There are no important differences between the Indian Standard and IAS 2. Use of same cost expression for stock lists holding similar nature and usage under IFRS may hold some impact on stock list rating.
For stock lists purchased on deferred colony footings, the difference between the purchase monetary value of stock lists for normal recognition footings and the sum paid for deferred colony footings is recognised as involvement disbursal over the period of funding under IFRS.
How will plus rating be impacted?
IFRS requires greater usage of just values in fiscal coverage on the land that just values are more relevant to users of fiscal statements than historical costs.
After acknowledgment as an plus, an point of belongings, works and equipment can be carried at its cost less any accrued depreciation and any accrued damage losingss ; or belongings, works and equipment whose just value can be measured faithfully can be carried at a re-valued sum, being its just value at the day of the month of the reappraisal less any subsequent accumulated depreciation and subsequent accumulated impairment losingss.
Additions or lessenings in an plus ‘s transporting sum as a consequence of a reappraisal are normally recognised in other comprehensive income and accumulated in equity under the header of reappraisal excess.
Investing belongingss can be measured utilizing the cost or the just value theoretical account, with alterations in just value recognised in the net income or loss. The extended usage of just values particularly in relation to belongings, works and equipment and investing belongingss may increase the value of net assets.
Under IAS 39, fiscal assets are classified as just value through net income or loss, held-to-maturity, loans and receivables or available-for-sale. ( Note that these classs will alter one time IFRS 9 is adopted by an entity ) .
Held-to-maturity investings and loans and receivables are measured at amortised cost utilizing the effectual involvement method. Investings classified as just value through net income and loss are carried at just value with alterations in value being recognised in net income and loss. Derive or loss due to alterations in just value of available-for-sale investings are recognised in other comprehensive income.
Even a non-current plus ( or disposal group ) classified as held for sale will hold to be measured at the lower of its carrying sum and just value less costs to sell under IFRS. Derived functions ( which can be assets or liabilities ) will hold to be carried at just value on the balance sheet at each coverage day of the month, thereby taking be to a high grade of volatility in net assets.
Would the current AS-11 ( on effects of alterations in foreign exchange rates ) and AS-30 ( accounting for fiscal instruments used for fudging hard currency flows ) undergo important alterations one time IFRS is adopted?
Under Indian GAAP, AS-11 presently deals merely with foreign currency frontward exchange contracts. There is no criterion which trades with other types of derivative instruments. Under IFRS, the accounting for all derived functions is covered by IAS 39. After AS-30 becomes effectual, this difference between Indian GAAP and IFRS will discontinue to be.
In November 2009 the IASB issued chapters of IFRS 9 associating to the categorization and measuring of fiscal assets. The IASB intends that IFRS 9 will finally replace IAS 39 in its entireness. When that happens, AS-30 excessively will hold to be replaced.
Convergence to IFRS: impact on the IT sector
The passage to International Financial Reporting Standards ( IFRS ) is all set to impact the gross top-line being reported by IT companies
India Inc is all set to meet with International Financial Reporting Standards ( IFRS ) , effectual April 1, 2011, and since comparatives are required, the gap IFRS bell will peal on April 1, 2010. IFRS is a really different accounting model since it focuses more on substance and is mostly just value driven, which is a important going from the current accounting surroundings.
All cardinal industries will acquire wedged and fiscal consequences may change well on passage to IFRS. The good facet about IFRS is that it is aware of the concerns that preparers and users of fiscal statements have and is seeking to bridge the spread with US GAAP so that the universe can eventually be on a common accounting platform. Just as engineering is invariably germinating, so is IFRS. Here we will analyze a few countries that will majorly impact information engineering companies.
First and first, IFRS may hold a important impact on the gross top-line being reported by engineering companies. Technology companies enter into lump amount contracts for sale of licences, execution fees, guarantee, care and free ascent services, etc. , over a period of clip.
Under IFRS, a cardinal issue will be to find whether the constituents of a individual dealing can be separated from an duties public presentation point of view i.e. from a proficient and commercial position. In such cases, bundled contracts and multiple offerings under a bundle will necessitate just rating of different constituents and grosss would be recognized consequently. Indian GAAP does non supply any specific counsel on this and, hence, inconsistent patterns are soon being followed by assorted companies. Some companies defer the gross acknowledgment till the full undertaking is completed. Other companies recognize grosss and supply for costs associated with pending post-sale contractual duties. Very late, the research commission of the ICAI has come out with a proficient usher on gross acknowledgment for package companies, which is really similar to Sop 97-2 followed in US GAAP. However, this is non a notified accounting literature under Indian GAAP and companies may non be required to follow it compulsorily.
The other country where IT companies will acquire impacted is stock options. Under IFRS 2, share-based payments cover non-employees besides. If certain non-employee duties are settled through ESOP, IFRS will necessitate just value accounting for such options and be derived function between grant monetary value and just value will hold to be recognized. Furthermore, subordinates will necessitate to account for the ESOP costs for options granted to its employees by the parent company, with corresponding impact in capital part by the parent as per demand of IFRIC 11. This is likely to hold a major impact in the instance of many IT transnational subordinates runing in India, since many of their senior executives are given stock options in the parent company listed in the US/global markets, and where such accounting was non required under Indian GAAP so far.
Another cardinal facet is that Indian GAAP allows intrinsic method of accounting, in which instance the ESOP cost is by and large lower since it merely takes into history the value of option as at the day of the month of its grant and does non capture the likely accumulation in just value over the full vesting period. Share based payment costs are expected to increase on application of the IFRS, which will eat into the profitableness of IT companies.
Large outsourcing contracts are rather common in the IT sector. Often a important portion of the capacity is being utilized by a specific client or installations may be specifically earmarked to provide to the demands of a peculiar client. Normally in such instances, the pricing of the contract is besides agreed on particular footings, maintaining in head the costs incurred by the IT company in supplying such services. In such scenarios, one will hold to measure whether provision/receipt of services constitutes or contains a rental agreement under IFRIC 4. Fiscal statements would alter rather significantly if it is determined that such minutess contain an component of rental, peculiarly if they satisfy the standards for a finance rental. Under Indian GAAP, such agreements are usually considered as those for supplying services and non a leasing activity.
IFRS entails discounting of future receivables and payables to their current values utilizing expected involvement rates. The application of ‘time value of money ‘ construct will hold impact on the sums recorded for long-run security sedimentations, payables falling due after one twelvemonth and grosss earned in progress for long-run contracts/ agreements. Imputed involvement sums will besides hold an impact on net incomes reported by IT companies.
Last but non the least, big companies with active exchequer operations will besides hold to follow with IAS 39 on fiscal instruments, peculiarly with respect to accounting for derived functions. Under IFRS, hedge accounting is permitted for such minutess provided entities have robust certification and certain conditions are met. Thus, entities will hold to set in necessary procedure in topographic point to fulfill demands of IAS 39. Most IT companies have immense exposure to currency motions, so they will necessitate to do immediate readyings for the coming of IFRS and get down seting in topographic point systems and procedures for derived functions ( including embedded 1s ) , every bit good as hedge accounting.
In drumhead, convergence to IFRS is non a mere accounting exercising and will hold important concern deductions. Hence, companies would augur good to get down fixing early and non wait for the last minute to hotfoot to meet.
Navin Agrawal is Director, Ernst & A ; Young India Private Limited. The positions expressed herein are the personal positions of the writer and do non needfully stand for the positions of Ernst & A ; Young Global or any of its member houses.