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Business News/ Opinion / Transition to IndAS: Key sectoral considerations
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Transition to IndAS: Key sectoral considerations

A look at key issues from a sectoral perspective, for companies to consider as they look to deal with the IndAS reporting complexities going forward

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A KPMG analysis of quarterly results shows that all companies have been impacted, although there have been sectoral variations. Here are some of the key issues from a sectoral perspective, for companies to consider as they look to deal with the IndAS reporting complexities going forward: 

Technology, media and telecom

The sector sees a lot of inorganic growth and therefore, acquisition-related accounting needs focus. Acquired intangibles will be accounted at fair value and, unlike goodwill, are generally amortized and will impact earnings per share. Further, goodwill from past acquisitions, which may represent finite life intangibles, may need close monitoring for potential impairment. Employee stock options and other stock-based structures will need careful evaluation to minimize impact to earnings. Customer contracts, especially when there are multiple elements, will also require analysis to ensure revenue is not unduly deferred. Certain customer service contracts using dedicated facilities may also take the colour of lease arrangements.

Pharmaceuticals and healthcare

Acquisitions will be a focus area, similar to the technology sector. Apart from goodwill and other intangibles, acquired in-process research and development needs specific focus. Out-licensing arrangements will also need close evaluation, as revenues may get deferred in line with corresponding obligations. Other regular sales arrangements also need evaluation, together with related sales promotion and incentives as well as potential returns, all of which may require to be estimated and reduced from sales. Contract manufacturing arrangements will also need evaluation to determine if these are in-substance lease of those facilities.

Real estate and infrastructure

For a sector that’s highly leveraged and operates generally through multilayered special purpose vehicle (SPV) structures, the new rules on debt-equity classification require specific focus, especially when raising finance through various structured instruments, including convertible instruments, preference shares, etc. Further, arrangements assuring minimum return, including through redemption premium, will need to be accounted through profit and loss over the life of the arrangement. There is also a chance that firms may trip up on key covenants in loan and other investment agreements, on debt-equity ratio or interest coverage, etc., unless these are renegotiated using IndAS norms. Further, if veto rights over key decisions are given to financial investors at the SPV level, these entities may cease to be subsidiaries, and thereby not consolidated in full.

Power and utilities

Power and utility companies need to closely evaluate pricing arrangements, especially those with variable elements to see they might impact timing of revenue recognition. Further, contracts with customers, which have take-or-pay clauses, may be considered as a lease of the facility with an operations and maintenance arrangement; if this lease is considered a finance lease, potential implications could be more significant. Some of these arrangements, when entered into with state-owned bodies, might also be considered as a service concession arrangement. Arrangements where customers provide assets such as transformers or power lines that are used to provide ongoing access will also need careful evaluation as these would be accounted at fair value and will impact both revenues and costs going forward.

FMCG and retail

Incentives to customers, including through loyalty programmes, require evaluation as these could result in deferral or reduction of revenue. Contract manufacturing arrangements also need to be evaluated if these are in essence lease of manufacturing facilities. Accounting for acquired brands with indefinite life is an important area. Evaluating arrangements for principal versus agency relationships are also important as these might impact the quantum and timing of revenues recognized. 

Koosai Lehery is partner (accounting advisory services) at KPMG in India.

The views are personal.

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Published: 19 Sep 2016, 11:42 PM IST
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