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Business News/ Opinion / Online-views/  IndAS: A transparent reporting framework
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IndAS: A transparent reporting framework

Despite the initial transition-related issues, India is certainly moving to a much higher quality and transparent financial reporting framework, and all users will benefit from this transition over time

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The impact of the adoption of Indian Accounting Standards (IndAS) on fiscal first-quarter corporate results has been rather tepid. KPMG’s analysis of the results of Nifty 100 companies that have announced their IndAS results shows that the impact on revenue in the June 2015 quarter was just over 3%, whereas Ebitda (earnings before interest, tax, depreciation and amortization) and net profit increased by a little over 6%. 

The extent of impact has been largely influenced by two factors—firstly, the first-time adoption policies and exemptions chosen and secondly, the use of carve-outs (deviations from International Financial Reporting Standards) provided in IndAS. 

Further, the consistency in the application of IndAS will take a while to become a reality. To illustrate, some 50% of these companies have only announced their stand-alone results, which represent results of the legal entity rather than consolidated, which represents the results of the group as a single economic entity. Many IndAS requirements including those on acquisitions, consolidation, etc. are more likely to impact consolidated results. Another example is the reporting of revenue—only about one-fifth of the companies have reported revenues and excise duty as required by IndAS, whereas all the others continued to use the earlier reporting format based on the relaxations provided by the Securities and Exchange Board of India (Sebi). 

The other key reason why these results haven’t raised a few eyebrows is the ability of companies to drip-feed information on their transition-related impact over a few quarters rather than all of it becoming fully evident in the first quarter, based on the recent Sebi circular relaxing IndAS transition disclosures. As evident from the results, less than 5% have provided a net-worth reconciliation between Indian GAAP and IndAS as on 1 April 2015, the date when all the transition adjustments were made directly to opening reserves.

Accordingly, the full purport of the transition choices made by these companies is still not evident, and much of this may come to light only with their annual results early next year, which will have the net-worth reconciliation. This will give some sense of the potential impact of those adjustments on current and future earnings. 

However, while the transition impact may have been minimized, the adoption of IndAS is definitely changing life for India Inc., as these standards seek to reflect the economic substance of transactions. New arrangements ranging from acquisitions, financing and strategic partnerships to even customer contracts are quite often being entered into after evaluating them using an “IndAS lens", to avoid any unintended implications on financial reporting. The year-end disclosures will also provide a much better perspective on what assets have been written off, and which others have been valued upwards, and the net impact of all of these on earnings going forward. 

One other unresolved matter is the tax implications of the transition to IndAS. The Central Board of Direct Taxes (CBDT) has still not finalized its position on levy of minimum alternate tax based on IndAS accounts. Once CBDT’s position is crystallized, we may see companies revisiting some of the transition date adjustments, to minimize any unplanned tax implications. 

Despite the initial transition-related issues, India is certainly moving to a much higher quality and transparent financial reporting framework, and all users will benefit from this transition over time.

Sai Venkateshwaran is partner and head (accounting advisory services) at KPMG in India.

The views are personal.

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Published: 19 Sep 2016, 11:55 PM IST
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