The change to the new Indian Accounting Standards (IndAS) Rules at the beginning of the fiscal year has prompted a number of revisions to profits and revenues of firms in the June and September 2015 quarters, arising from factors such as reversing goodwill amortization and revaluing assets. By far, the most significant change in numbers for the December 2015 quarter has been the upward revision of revenues due to a change in the way excise duty is considered.
For 72 companies from the BSE 100 whose numbers have been computed by audit and consulting firm KPMG, the restatement of revenues in the December quarter touched Rs41,049.89 crore.
The numbers show changes in the December 2015 quarter, the latest quarter for which a comparison of financials under the two norms is possible, because numbers were made available with the December 2016 results. All figures compare December 2015 numbers under IndAS and Indian GAAP (Generally Accepted Accounting Principles).
The revenue revision is higher than the Rs40,659.77 crore in the preceding quarter and has come largely from oil sector firms. Overall, the December quarter revisions show a 5.36% increase over the Rs7.66 trillion revenue recorded under Indian GAAP. Revenues had risen 5.37% to Rs7.98 trillion in the September quarter as well.
Four oil sector companies— Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Reliance Industries Ltd— accounted for Rs29,252 crore, or 71.26% of the net revenue revisions.
The persistent increase in revenue revisions is because excise duty is now considered part of the revenues for the oil sector. This means that revenues go up, even though there is limited impact on profits. This is borne out by the fact that the rise in BSE 100 revenues has not resulted in significant increase in profits.
In fact, profit after tax fell Rs455.53 crore, or 0.78% to Rs58,074.95 crore under IndAS. Earnings before interest, taxes, depreciation and amortization, another measure of profitability, fell by close to 1%.
That is a stark difference from the previous quarter which had shown profit increases of over Rs10,000 crore on account of property, plant and equipment (PP&E) adjustments. These PP&E adjustments depend on asset write-downs taken in previous quarters. For example, companies had written down assets in the September quarter under the old accounting standards. They subsequently wrote up the value of these assets under the new accounting standards’ fair valuation framework. This had resulted in profit adjustments of more than Rs10,000 crore in the September quarter. The PP&E adjustments in the December quarter show more limited changes under the old norms and therefore, there was a limited impact on profits as well.
Companies separately provide reasons for change in profits through a profit reconciliation disclosure. This section gives the reasons for changes in profit numbers. There is a lack of uniformity on how profit is defined in the reconciliation disclosure section (some use profit after tax, or PAT, others might use profit after adjusting for minority interest, etc.), but one can understand broad trends on what has affected profits based on these numbers.
One interesting tailwind for profit increases in the December quarter is upward revisions due to business combinations. These added Rs720 crore to profit.
Sai Venkateshwaran, partner and head (accounting advisory services) at KPMG, said this is because of the way in which the new accounting standards treat goodwill. Goodwill is the premium that companies pay for an acquisition over and above what the company is worth based on its assets and liabilities. The assets and liabilities are based on historically recorded financial numbers under the old norms called book value. The new norms require these assets and liabilities to be priced at fair value. This causes the company to be valued at a higher price. This means that a hypothetical acquisition of Rs100 would attribute less money to goodwill under the new norms than it did under the old norms. If Rs30 was accounted as goodwill, it could now be Rs15, using illustrative numbers.
“Further, under certain situations, under Indian GAAP, companies used to amortize goodwill. Under IndAS, such amortization is not permitted,” said Venkateshwaran.
Companies have to report acquisitions after 1 April 2015 as per the new rules. They also have the option of restating prior acquisitions. This can act as a profit tailwind.
Financial instruments added another Rs398 crore to profits. Lower accounting for taxes added Rs139 crore. Foreign exchange fluctuations subtracted Rs837 crore. These and other adjustments resulted ultimately in a profit decline. Chart 2 has details.
The sector which contributed the most to the profit adjustments as per profit reconciliation numbers was electric utilities and telecom services. Their profits rose by Rs300 crore and Rs260 crore, respectively. Cars and utility vehicle companies showed an increase of Rs190 crore in profits under IndAS. Chart 3 and 4 have details on total profits and percentage changes among sectoral gainers and losers.
Among individual companies, Tata Power Co. Ltd had the biggest positive gain in PAT. The number rose Rs408.79 crore, jumping from Rs24.46 crore to Rs433.25 crore, because of changes to derivative positions it held and adjustments to profits of joint ventures and associates. These helped it overcome forex losses and tax adjustments.
Vedanta Ltd’s PAT was up Rs390.67 crore, rising from Rs17.91 crore to Rs408.58 crore, mostly due to fair value adjustments.
The transparency of company financials has improved over the years, said Pankaj Pandey, head of research at ICICIDirect.com. There are fewer occasions now when you can’t tell the true worth of a company’s assets. Though there is more that could be done, “it is still better than the earlier scenario”, he said.