Transition to Indian Accounting Standards: The final lap begins
With the close of the first full fiscal year of reporting under Indian Accounting Standards (IndAS), it still appears that there is some ground to be covered by both companies as well as the key stakeholders in the corporate ecosystem.
With the Securities and Exchange Board of India (Sebi) relaxation of timelines not applicable anymore, all the BSE 100 companies announced their third-quarter IndAS results within the regular 45-day window. While this could be an indicator of a greater level of preparedness to generate IndAS numbers within the stipulated timelines, it’s also important to note that close to half these companies still report only their stand-alone rather than consolidated results.
The last quarter also saw a few other regulatory developments impacting the transition to IndAS.
There is finally some clarity on how companies reporting under IndAS would compute Minimum Alternate Tax (MAT), with the Finance Bill 2017 proposing amendments to section 115JB of the Income-tax Act to provide a formula for computation of book profit under IndAS, while also proposing an extension of the period for carry-forward of MAT credit to 15 years. The budget memorandum also refers to the fact that Income Computation and Disclosure Standards (ICDS) for computation of taxable income have been issued to ensure horizontal equity across companies irrespective of whether they follow IndAS or the existing Indian GAAP (generally accepted accounting principles), and this comes as a reaffirmation of the need for ICDS and that they are here to stay, despite demands for its repeal. The Central Board of Direct Taxes (CBDT) has also issued FAQs on ICDS last quarter.
The other big development is the notification of several sections of the Companies Act, in particular those relating to the process to be followed for mergers, demergers, reorganizations, etc. and bringing these under the purview of the National Company Law Tribunal. Under the new process, companies have to ensure that the accounting treatment being proposed under these schemes is compliant with IndAS requirements, and this is likely to impact the accounting treatment that was being proposed for various classes of assets, goodwill, reserves, etc. as part of these transactions.
Now with the stage being set for the grand finale—the annual results—here are a few things for companies and their stakeholders to watch out for.
Considering that many companies will be reporting their consolidated IndAS numbers for the first time, they should gear up for the complexities around consolidated reporting under IndAS. The fourth-quarter results also require significantly enhanced disclosures, including those relating to the transition date impacts, and reconciliation of net worth and profit for historical periods between IndAS and the old Indian GAAP. Companies should closely evaluate the key areas of impact, and develop an appropriate strategy for communication to stakeholders to minimize any surprises or adverse reactions.
Further, with clarity emerging on the computation of MAT, companies should revisit the first time adoption policy choices made at the transition date, if required. In particular the treatment of valuation of land and other fixed assets, valuation of investments in subsidiaries, associates, joint ventures as well as those in equity of other companies, may undergo a change, as companies seek to better reflect their balance sheet, without any adverse tax implications.
With consolidated results being available for all companies, investors will get a better sense of how IndAS has impacted companies across sectors, as it is expected to better reflect economic realities. Till the third quarter, it’s just a little over half of the BSE 100 companies that reported results on a consolidated basis, and that proportion is likely to be lower if the remaining companies are considered. The consolidated results could look different as many new entities may get consolidated, while some others get deconsolidated, debt/liability levels in consolidated books may go up, especially where financial investors have invested in subsidiaries or SPVs (special purpose vehicles), recent acquisitions may show lesser goodwill and higher intangibles and other assets, etc.
Also with all companies publishing their net-worth reconciliations and other related disclosures, there will be clarity on the nature and extent of adjustments made to opening reserves, and the likely impact of this on future earnings. IndAS provides an opportunity within the first year to revisit transition date choices and policies and, therefore, investors should also watch out for any such changes being made, and understand how this impacts previously reported earnings as well as future earnings.
As companies gear up for reporting their annual numbers, in view of the varying disclosure practices seen over the past three quarters, Sebi should consider providing guidance on acceptable practices as regards disclosures on IndAS transition. In particular, guidance on aggregation/netting off of impacted items and prescribing thresholds for items warranting specific disclosure (say, items with an impact over X% of Indian GAAP profit) would be welcome. Further, while CBDT has provided clarity on the MAT issue, it should also clarify the position on tax allowability of adjustments made to opening retained earnings under IndAS (especially for items not specifically covered under the ICDS transition guidelines). Lastly, the ministry of corporate affairs should consider evaluating the impact of IndAS on a company’s ability to distribute dividends. Key questions that require consideration are: would an addition to reserves on transition be treated as free reserves; would a significant reduction to reserves on transition impact the ability to declare dividends out of future profits; and can all of current profits be distributed as dividends, even if it represents significant unrealized gains?
While there is a lot to look forward to for various stakeholders, it’s ultimately the spirit with which the standards are applied by companies that will determine whether the IndAS transition has been successful in meetings its objectives.
Sai Venkateshwaran is partner and head (Accounting Advisory Services) at KPMG in India.