New Delhi: As the Indian companies transition from Generally Accepted Accounting Principles (GAAP) to Indian Accounting Standards Rules, 2015 (IndAS) for financial accounting and reporting, their profitability and valuation could change by more than 5%, according to a report by ratings agency Crisil Ratings.

A Crisil study of 80 rated companies that have reported their first quarter results as per IndAS showed that there was a deviation in profitability by 5% or more for around a third of the companies.

The changes in profitability were largely on account of lease expenses, changes in consolidation, recognition of gains/losses for financial instruments designated at fair value through profit and loss (FVTPL), and amortization of goodwill, said the report released on 29 August.

The IndAS rules are different from GAAP as they are based on the fair valuation method. In accounting, fair value is a rational estimate of the potential market price of goods, services or assets. It takes into account factors such as acquisition, production and distribution costs.

On the balance sheet side, out of the 80 companies, only eight reported information on changes in net worth as on 31 March, under revised accounting standards. In four of these companies, the deviation in net worth was 5% or more.

The changes in net worth are largely one-time in nature stemming from fair valuation of financial instruments, fixed assets and deferred taxes, the report said.

The government notified the rules on IndAS in February 2015, which became mandatory for companies from 1 April 2016.

Also Read: IndAS and why the numbers don’t add up

The reported profitability number would be more volatile because of the migration and the companies most likely to be impacted would be in sectors such as capital goods, infrastructure, retail, IT services and auto ancillaries, the report added.

The migration to Indian Accounting Standards will be implemented in a phased manner. Under Phase I, all companies having a stand-alone net worth greater than 500 crore will transition to IndAS.

In a reprieve to the listed companies, capital markets regulator Securities and Exchange Board of India had deferred the reporting of June and September quarter results by three months to the middle of September and December, respectively.

Indian companies, while getting their house in order to comply with the new norms, were skeptical of meeting the FY 2017 deadline set by the ministry of corporate affairs, Mint reported on 6 July.

Under Phase II, which will start in 2017-18, the implementation of revised accounting standards will be applicable to all listed entities. Banks, non-banking finance companies and insurance companies will also migrate to the new standards from 2018-19 in a phased manner.

The accounting changes will provide better insights on companies and will facilitate the benchmarking of financials of Indian companies with global peers, which may improve the accessibility of Indian companies to foreign funding, the report said.

Also Read: MAT liability on Indian firms may reduce on switching to IndAS

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