The government is considering a shift to an accounting year ending in December, instead of March. That could mean companies too will follow suit, causing one more disruption for investors to contend with, just as a new accounting system has kicked in. FY17 has seen the first phase of roll-out of the new Indian Accounting Standards (IndAS), modelled on the International Financial Reporting Standards.

These standards have introduced several changes in the way companies report financials, including how they account for income and expenditure and items in the balance sheet. In effect from 1 April for companies with a net worth over 500 crore, the June quarter is the first one where its impact becomes visible on the profit and loss account. The impact on the balance sheet will be visible later.

However, one fact was missed out. The start date was 1 April. So calendar year-ending companies have said they will comply from 1 January 2017, when their next fiscal year starts. So their FY17 numbers will be as per old standards. There are 15 companies in the BSE500 which follow a calendar year-ending, and their market cap makes up for 2.5% of the total of BSE500. These include companies such as ACC Ltd, ABB India Ltd and Nestle India.

For the rest, the June 2016 profit and loss statement is now made under IndAS. All companies have restated year-ago quarterly numbers for comparison. A Mint study of 56 non-finance companies in the BSE 100 Index, comparing their earlier and restated numbers for June 2015 quarter, showed 23 companies reporting a decline in their restated aggregate profit of 8.4%. The remaining 33 companies saw their profits increase by 10.1% in aggregate. A Crisil study of 80 companies shows a deviation in about a third of companies of more than 5% in profitability. That gives a glimpse of the changes that have taken place.

Capital markets regulator Securities and Exchange Board of India (Sebi) also gave some exemptions to listed companies from the prescribed rules. For instance, companies had a choice to give net sales for the first two quarters of FY17, instead of gross sales as prescribed (excise is to form a part of expenditure). Since this was an option, some companies reported net sales, some gross sales and excise separately, and at least one company gave only gross sales (with excise included under other expenses).

Sebi made one more important exemption. Companies were not compelled to give March 2016 for sequential comparison. Again, some gave the numbers, while others did not. This is a temporary problem, as the data will be provided when the March quarter numbers are disclosed, but the confusion was avoidable. The problem: in industries where sequential revenue growth and profit is relevant, metals for instance, it is not available. Sequential change in profitability is a relevant yardstick but may not be available for some quarters.

These are the inconsistencies. The deviations themselves are due to changes in the accounting standards. Year-ago numbers are being restated for factors such as goodwill that was amortized being written back, fair valuation of investments, derivatives and foreign exchange-related adjustments, and changes in accounting for employee benefits. These are some of the recurring ones but there can be many smaller adjustments individual to a company.

Take Tata Motors Ltd. Its June 2015 net profit doubled due to IndAS adoption which sent its net profit for the June 2016 quarter down by 57%. Consider how the restatement of June 2015 profits has changed bottomlines. Tata Power Ltd saw its profit gain by 25.6%, Bosch Ltd by 30.5% and Cadila Healthcare Ltd by 30.2%. Bharti Airtel Ltd saw a 23% decline, while Hindalco Industries Ltd saw a 43% decline.

On the balance sheet side, the Crisil study says that only eight out of 80 companies have reported deviation in net worth as of 31 March, and of these four have seen more than a 5% deviation. The rest will report deviation in net worth along with their year-end financials. Again, this was an exemption given by Sebi.

Also Read: IndAS to change profitability, net worth of Indian firms by 5%: Crisil report

What are some of the changes to keep track of? While companies have to report gross sales, even the definition of sales has changed. For instance, promotional offers by consumer companies will now be reduced from sales. Earlier, some were part of sales, and advertising and promotion. This has led to lower reported revenue.

To sum up, sales and profits were being reported in a certain way till March 2016. That has changed from 1 April. Year-on-year comparisons are possible over FY16 for individual companies, and a new data series begins from this year onwards (actually FY16 if you take the comparable data given). However, data cannot be compared accurately with earlier years any more. That’s for annual numbers.

For quarterly numbers, the exemptions have messed things up more. For instance, Sun Pharmaceutical Industries Ltd has given gross sales (without separately giving excise), while compatriot Lupin Ltd has given net sales. Individual cases can be adjusted for analysis but aggregates are likely to get affected by such inconsistencies in reporting.

Consider what will happen in FY18. The exemptions will not be available. So companies will perhaps restate the FY17 numbers to reflect full IndAS compliance. This will mean one more round of adjustments to the data of FY17

Next, consider this. Sales and profits were being reported in a certain way till March 2016. That has changed from 1 April. Year-on-year comparisons are possible over FY16 on an individual basis and a new data series from this year onwards. However, comparing with earlier years will not be accurate any more. That’s for annual numbers.

For quarterly numbers, the exemptions have messed things up more. For instance, Sun Pharmaceutical Industries Ltd has given gross sales (without separately giving excise), while compatriot Lupin Ltd has given net sales. Individual cases can be adjusted for analysis but aggregates are likely to get affected by such inconsistencies in reporting.

Consider what will happen in FY18. The exemptions will not be available. So companies will perhaps restate the FY17 numbers to reflect full IndAS compliance. This will mean one more round of adjustments to the data.

Segment reporting has changed in some cases. Hindustan Unilever Ltd has changed its segments. Historical comparison becomes difficult for its main categories. ITC Ltd was giving net sales for segments but has shifted to giving gross sales numbers from the June quarter.

This is just one part: companies above 500 crore net worth that have shifted to IndAS. The rest in the listed pack will join in FY18. Meanwhile, apples and oranges are sitting in the same basket. The size of the big companies may mean aggregates won’t get affected much, but comparing big and small company performances is best avoided for FY17.

Also, corporate financials are being used not just by investors but even in economic forecasts and as inputs for the Reserve Bank of India. They need to factor in the blips caused by IndAS.

Just as the revised gross domestic product numbers don’t mean India’s economy has changed, the underlying business of India Inc is as strong or weak as earlier. The new numbers are supposed to be a better way of presenting their financial statements, and closer to internationally prescribed standards. Time will tell how that works out. And, as the Crisil study points out, “The underlying cash flows and economic risks of these entities will continue to remain unaffected by the impact of the revision in accounting standards."

What gets really affected is comparison when looking at a time series for years or quarters. The differences may be relatively small at the aggregate level but can affect the conclusions one reaches by looking at the data. If you see FY17 and FY18 in a time-series of financials, just be alert to the possibility of an IndAS bias.

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

The writer does not have positions in the companies discussed here.

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