New Delhi: The convergence of Indian accounting standards with International Financial Reporting Standards (IFRS) beginning in April is expected to see power companies struggling with significant first-time adoption impact.
Companies that will feel the impact on their balance sheets include state-owned NHPC Ltd, NTPC Ltd and Power Grid Corp. of India Ltd (PGCIL), and Tata Power Co. Ltd and Reliance Infrastructure Ltd.
The convergence with IFRS, experts say, will affect the profits, net assets and debt governance of these companies.
This is because IFRS does not recognize as an asset or liability the components of electricity prices set by the regulator for future adjustments, unlike under the present system they follow. Under Indian GAAP (generally accepted accounting principles) these companies have recognized as an asset or liability the components such as tariff and fuel adjustments and advance against depreciation.
The initial impact on the account of these regulatory assets under IFRS can be as high as Rs745 crore in case of Tata Power, Rs1,034 crore for Reliance Infra, Rs311.5 crore for NTPC and upwards of Rs346 crore for PGCIL.
“Under Indian GAAP many indian companies have recognized government promises as revenue and asset. Such companies’ balance sheet will be significantly impacted. Consequent impacts would be felt on ratios, debt covenants, distributable profits, future revenue recognition, etc.,” said Dolphy D’Souza, partner and national leader of IFRS services at Ernst and Young. He added that under the current IFRS framework, rate-regulated assets/liabilities do not fulfil the definition of an asset/liability as they are dependant on future sale/rendering of services.
In case of PGCIL, according to its March 2010 balance sheet, liability under advance against depreciation is up to Rs2,213 crore and under current assets, deferred foreign currency fluctuation asset/liability is Rs346 crore.
In Tata Power’s case, according to its March 2010 balance sheet, current assets, loans and advances include fuel adjustments of Rs185 crore and tariff adjustments of Rs560 crore.
In NHPC’s case, according to its 2009 annual report, sales and current liabilities have tariff adjustments of Rs0.98 crore. And in case of NTPC, according to its balance sheet of 2010, Rs311.5 crore has been recognized as sales during the year. In addition, Rs5.3 crore has been recognized as sales during the year out of advance against depreciation consequent to this change.
“There will be an initial impact no doubt, but the Icai (Institute of Chartered Accountants of India), through its Accounting Standards Board, is doing its best to recommend to the government that the transition and first-time adoption is made smooth for various sectors,” said Icai president Amarjit Chopra.
According to D’Souza, under IFRS, the recognition of rate-regulated assets/liabilities has gained significant importance across various countries.
“This is because electricity companies in the US, which is planning to adopt/converge to IFRS, is estimated to have regulatory assets and liabilities of $675 billion and $450 billion, respectively, in 2007. Canada, too, is sitting on a huge amount of rate-regulated assets,” he added.
The power companies, however, don’t seem to be perturbed by the implications of IFRS and remain confident that they would find a way out.
“The tariff adjustment of Rs.0.98 crore was made in 2008-09 to take care of reduction in tariff arising out of negative capitalization in respect of some of the power stations. All these already stand adjusted in the year 2009-10,” NHPC said in a written response to queries from Mint.
The statement added that the adjustments were carried out following the principle of conservatism, which allows an accountant to decide between two alternatives, and IFRS does not dispute the principle.
However, the statement added, that the work of IFRS convergence is under process in NHPC and the overall impact would be known once the opening balance sheet under IFRS is prepared.
J. Sridharan, director (finance) PGCIL, said: “These components typically come under standards for regulated assets and PGCIL has been adhering to these standards under the Indian GAAP and will continue to do so under IFRS. We’ll also carry each part of such revenue in future years so that there is not major initial shock. PGCIL has also engaged the services of the Institute of Cost and Works Accountants of India to consult on IFRS and training its staff to be IFRS-compliant.
An NTPC official said: “Advance against depreciation is allowed and therefore there is no problem. NTPC has applied the principle of conservatism because of which IFRS will not impact it. Besides, Rs311.5 recognized as sales in 2009-10 is based on conservative figures where income-tax was added in income.”
Reliance Infra and Tata Power didn’t respond to emails.