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Sai Venkateshwaran (left), head of accounting advisory Services at KPMG India, and Hans Hoogervorst, chairman of the International Accounting Standards Board.
Sai Venkateshwaran (left), head of accounting advisory Services at KPMG India, and Hans Hoogervorst, chairman of the International Accounting Standards Board.

Adopting Ind-AS norms might lead to more foreign investment

India's new accounting standards are very similar to IFRS, say IASB chairman Hans Hoogervorst and KPMG India's Sai Venkateshwaran

Mumbai: Financial reporting by Indian firms is set for a revamp with the introduction of Indian Accounting Standards (Ind-AS) by the ministry of corporate affairs.

The government is planning to come out with a notification for the implementation of the proposed Ind-AS in a month’s time, A.S. Bhatia, joint secretary, ministry of corporate affairs, told the Press Trust of India on Friday.

The new standards, which will be fully implemented by fiscal 2017-18 by all listed companies, are very similar to International Financial Reporting Standards (IFRS), laid out by the International Accounting Standards Board (IASB), according to Hans Hoogervorst, chairman of IASB and Sai Venkateshwaran, head-accounting advisory Services, KPMG India. Hoogervorst and Venkateshwaran say that the new standards will make financial reporting more transparent thereby improving global investor sentiment towards India.

Edited excerpts from an interview:

Could you tell us about the status of IFRS adoption by Indian companies?

Hoogervorst: India is taking a gradual approach, with the new Ind-AS bringing new accounting standards much closer to IFRS. There will only be seven or eight exceptions, which are not very big.

Venkateshwaran: If you look at the Nifty 50 companies, about seven of them currently use IFRS and they would represent around 25% of the market cap of these companies. There are few others, outside the Nifty 50, also using IFRS. Most companies use IFRS because they are also listed in the US, but many have seen the benefits when they showcase their companies to overseas investors.

Once a majority of Indian companies get closer to adopting the new Ind-AS standards, will it positively impact the way foreign investors look at India?

Hoogervorst: Absolutely.

There has been academic research about the benefits of IFRS to reduce capital costs in Europe. And here, we are speaking about mature economies.

For emerging economies, the impact will be even bigger. And that is why countries like Brazil or Korea have decided they want to adopt IFRS. The Indian stock markets already have a high percentage of foreign owners; that might further increase and the ratios may get better.

Venkateshwaran: If you look at the extent of foreign institutional investors (FII) and foreign direct investment (FDI) that is coming into the country, today most of them are forced to rely on Indian Generally Accepted Accounting Principles (GAAP) which all of them know are very different from the international standards.

The moment companies start reporting under Ind-AS or IFRS, the overall confidence in the quality of financial reporting will go up significantly and therefore, the risk premium otherwise getting attached or even the discount getting attached to the reported earnings of the companies will go off.

This will ultimately result in lowering the cost of capital.

We still have a large chunk of companies that need to move into the new reporting standards. When will we see all of them convert?

Venkateshwaran: The roadmap that the ministry of finance has released targets to cover all the listed companies in two years. In the first phase, all companies with a net worth of more than 500 crore will need to report under the Ind-AS standards by 2016-17 and the remaining listed companies by 2017-18.

What sort of financial reporting changes will the new standards bring?

Venkateshwaran: Apart from the traditional income statement, balance-sheet and cash flow statements, firms will also have to provide disclosures explaining each of those numbers and how have they computed them, assumptions that have gone in, sensitivity analysis, and a lot more of information regarding the key transactions among others. All business relationships and investments will be explained.

A lot of Indian business groups have cross holdings in various companies, and it is often challenging to trace that when the earnings are reported. How will the new standards address this?

Hoogervorst: This is going to be one of the major fields of improvements. Our standards don’t say consolidate numbers on the basis of the stake held.

We say if the company has de facto control over another company irrespective of the stake, it has to consolidate. There is no playing around the shares and it is more principle based. This will be disadvantageous for companies who do not want to be transparent in reporting.

Venkateshwaran: It will be moving away from the more legal form of relationships to look at the crux of the arrangement. If you are controlling that business, you have to consolidate, even if you just have 20% holding. At present, many companies say I have a less than 50% holding, so I will not consolidate. It will lead to transparency and ultimately, better governance.

Will the adoption of the new standards lead to downward corrections in many of the parameters like valuation, for instance, for companies?

Venkateshwaran: It is a question of engaging with your stakeholders. You have to tell investors the change you are anticipating. Things that are already reported but in a different manner, if explained well, may not have much of an impact.

But where there are things that have remained off the balance-sheet or haven’t been disclosed and start coming on your reports, that’s where investors might start making corrections to valuation.

What could be some challenges in implementing the Ind-AS?

Hoogervorst: India has chosen a very strict time path. So, it has to be done in a short period and in a military precision, I would say.

Venkateshwaran: Time is really short and within a span of 53 days, the government needs to also clarify on all the standards since they are not publicly available. In a short time, companies will need to understand what these standards mean and what needs to be done and then work on an implementation plan. The first public reporting will be in the June 2016 quarter.

What are the key learnings Indian companies could take from global firms who have already adopted IFRS?

Hoogervorst: It takes a lot of preparation and focus of the management to get it done. This is not something that the company can leave to its accounting department. You have to engage your investors to explain the changes that are going to happen.

It is quite a humongous effort and it is also important for the management to understand the standards. It can be a very good opportunity for the management to refresh its accounting knowledge which is often lacking.

What are some of the key advantages global companies have gained by adopting the IFRS?

Hoogervorst: For most companies, it is better accounting, so there will be more transparency, better investor relations across the world and third, especially for multinational companies, it will be less costly to have one accounting language.

The quality of reporting will be much more superior for Indian companies and there will be international comparability.

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