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Business News/ Opinion / Transition to Ind As—connect the dots to see the real picture
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Transition to Ind As—connect the dots to see the real picture

The numbers certainly seem to indicate that the balance sheets under Ind AS are looking healthier than under the old rules, but they do not tell the full story

Regulators and standard setters, including Sebi, should consider providing some guidelines on which practices are acceptable and which ones are not. Photo: Aniruddha Chowdhury/MintPremium
Regulators and standard setters, including Sebi, should consider providing some guidelines on which practices are acceptable and which ones are not. Photo: Aniruddha Chowdhury/Mint

The second quarter results under Indian Accounting Standards (Ind AS) assume greater significance since this is the first time that companies have disclosed their balance sheets in accordance with the new rules. 

The transition to Ind AS is meant to usher in higher quality reporting, and bring in greater transparency and comparability. While these benefits will certainly play out over time, transparency is certainly not one of the hallmarks of corporate results of the first two quarters post the transition. This was partly aided by the disclosure relaxations provided by the Securities and Exchange Board of India (Sebi), and further bolstered by the sketchy notes and disclosures made by several companies. 

Of the 64 companies forming part of the BSE 100 that published their balance sheets as on 30 September (results published till 18 November), only about half have presented a comparative balance sheet. 

For the 34 companies, whose comparable numbers are available, the reported net worth under Ind AS as 31 March 2016 has gone up by approximately Rs43,000 crore, and the reported debt has decreased by approximately Rs18,000 crore. These numbers certainly seem to indicate that the balance sheets under Ind AS are looking healthier than under the old rules. 

The real picture

However, the trends thrown up by headline numbers do not tell the full story. For example, while many companies have reported insignificant movements in net worth or even some increase in net worth, these movements in certain cases represent the net impact of large write-downs of certain assets and large write-ups on other assets. 

The written-down assets in many cases are those that would have been amortized/depreciated or impaired in subsequent periods. This is evident from the reversal of some of these charges in the income statements of subsequent periods reported by some of these companies under Ind AS. As a result, the net worth under Ind AS is not impacted significantly while the profit and loss (P&L) performance may look better. 

While Sebi has diluted some of the disclosure requirements in the quarterly reports, it still required companies to provide disclosures to enable the investors to understand the material adjustments to the P&L account and balance sheet on account of the transition. 

However, companies haven’t necessarily been forthcoming with the expected disclosures in their quarterly reports, especially on the description and characterization of the impact of the transition on the results and the adjustments that have been made to opening reserves at the date of transition to Ind AS. 

Had companies embraced higher standards of disclosure, it may have enabled greater understanding of the adjustments and could prevent surprises at the year-end when the dust settles on all of this. 

Considering the significance of these changes, the regulators and standard setters, including Sebi, should consider providing some guidelines on which practices are acceptable and which ones are not, especially when it comes to aggregation of unrelated items, offsetting material adjustments, and also on the extent of disclosures that are required. 

ALSO READ | The Rs10,000 crore profit adjustment

The way ahead

The declared results are not without uncertainties on regulatory developments. The positions taken by companies on their transition may have an impact on the amount of minimum alternate tax (MAT) payable as also on their distributable profits/reserves. 

The Central Board of Direct Taxes (CBDT) continues to evaluate the applicability of MAT to opening balance sheet adjustments.While some of those gains/losses may possibly be considered for MAT in the year of realization, many other items of adjustments may be considered for MAT computations over a three-year period starting from the year of transition, thereby resulting in cash outflows even where there may be no actual realization of the underlying gains or income. 

The other contentious point that remains is on the applicability of MAT to unrealized fair value gains/losses recorded in the P&L account. The CBDT committee has a view that since the reported profit (including the unrealized gains) can be distributed as profits, hence it should also be subject to MAT. An alternative view is that these unrealized gains should neither be available for distribution as dividend nor be subject to MAT. 

The characterization of the reserves arising from the transition is another important consideration. Whether reserves are characterized as general reserve, free reserve, revaluation reserve or any other type of capital or restricted reserve, it has a bearing on how various stakeholders including investors, lenders, regulators, etc. evaluate the financial position of a company, including key measures relating to net worth, etc. Many such evaluations typically exclude items such as revaluation reserves. Therefore, it becomes important for companies to have clarity on the nature of reserves as they seek to comply with various stakeholder requirements and covenants. 

As more regulatory clarity emerges over the next two quarters, this may certainly impact the way companies deal with their transition choices and policies in the second half of the year, as they gear up to present their first annual Ind AS financial statements.

Sai Venkateshwaran is partner and head of accounting advisory services at KPMG in India. Ajit Vishwanath, director of accounting advisory services at KPMG in India, contributed to this story. 

The views and opinions expressed herein are those of the author(s) and do not necessarily represent the views and opinions of KPMG International or KPMG in India.

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Published: 31 Jan 2017, 01:24 AM IST
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