learnings from ind as implementation phase i - · pdf filehul, l&t, wipro, tata chemicals....

Learnings from Ind AS Implementation –Phase I

CA Sudhir Soni

CA Suresh Yadav

2 August 2017

Learnings from Ind AS Implementation – Phase I

IFRS truly a Global Standard

Source: www.ifrs.org, Who uses IFRS Standards?

• 131 countries have adopted IFRS

• India is amongst the 10 countries in the world

converging to IFRS

• China, Hong Kong, Japan, and Sri Lanka are other

major economies with convergence

• US is one amongst the nine preferring local GAAP

131

10

9

Number of countries

Adopted IFRS

Converged to IFRS

Prefer Local GAAP

http://www.ifrs.org/


Key steps in Ind AS implementation journey

Impact Assessment

Solution Development

Implementation of Ind AS

Preparation of Financial Statements under Ind AS

► Evaluation of key arrangements

► GAAP differences identification

► Financials & system-related impacts

► Technical evaluation & memos

► Identification of policy choices

► Benchmarking with industry peers

► Engaging with fair valuers

► Identification of policy choices on transition date

► Redesigning chart of accounts

► Adjustment entries outside systems

► Initiating system changes

► Finalization of technical positions and accounting policies

► Going live on systems

► Opening Balance Sheet and Equity Reconciliations

► Comparative Information & Equity / Profit Reconciliations

► Preparation of first Ind AS financial information

► Presentation & Disclosure under Ind AS

~ 1 month

~ 1 month

~ 1 - 2 months

~ 2 - 3 months


Key Considerations for smooth transition

► Leveraging on resources available ► Education materials by ICAI on IND AS topics

► ITFG views on questions raised by the industry

► Detailed guidance available through IASB publications/clarifications

► Guidance note on IND AS compliant schedule III

► Illustrative IND AS financial statements issued accounting firms

► Published IND AS financial statements of Phase I Companies

► Considerations of Quarterly Reporting► SEBI circular of July 5, 2016 is also applicable to Phase 2 companies in its first year of IND

AS implementation and provide relaxation for first 2 quarters

► Deadline extended by 1 month for submission of results

► Exemption from presenting

► Results for the last quarter of preceding year

► Results for the last full year & In Q2 - Balance sheet for the previous year

Some companies made detailed presentation to investors

Company Presented on

HUL Dec 2015

TCS April 2016

L&T June 2016

GCPL July 2016

Emami July 2016► In quarterly results, the corresponding quarters shall be provided.

► Limited review or audit of the same is not mandatory.

► Disclosure required that previous year’s quarters have not been subjected to limited review or audit.

► However, the management has to exercise necessary due diligence to ensure it provides a true and fair view of

its affairs.


Opening Balance Sheet considerations


Key Ind AS impacts – Phase I entities

► Each exemption to be evaluated for entity’s objectives:

► Recasting the balance sheet through fair valuation options

► Reflect the economic value of the past acquisitions

► Alignment with IASB IFRS

► Tax implication on transition date and going forward

► Availability of historical information

► Exemptions can be finalized before the finalization of first annual IND AS financial statements


Deemed cost of PPE and Intangibles

Re-computation of costs – Historical cost

break-up

De-capitalization of cost not eligible for

capitalization under IND AS, foreign

exchange, etc.

Assessment of previous GAAP

depreciation whether acceptable under IND

AS?

Retrospective adjustments to Borrowing

Costs

First-time adoption choices

Retrospective IND AS cost

Fair Value as deemed cost

Previous GAAP Carrying Amount

All items vs select items fair value

Impairment v/s fair value downgrade

Impact on Return on Capital Ratios and

impact on profitability

Presentation of Gross Block – Carrying

value to become new gross block

Selection for all PPE or a class of PPE –

ED has been issued for this

Presentation of Gross Block – Carrying

value to become new gross block

Retrospective adjustments to Borrowing

Costs

Tata Motors, Bharti

Airtel, Hindalco, Tata

Power, M&M, TCS

Tata Motors,

Tata Power,

Tata Steel

ITC,

HUL, L&T,

Wipro, Tata

Chemicals


Restating Business Combinations

Key Learnings

► Understand data requirements for valuation

► Financial projections for valuation of intangibles

► Use of hindsight is restricted

► Evaluate impact on equity and profitability and return

on capital employed

Determining the

date of

restatement

Availability of

historical

financial

projections

Extensive

disclosure

requirements

Reduction in Goodwill

Fair

valuation of

tangible

assets,

inventory &

contingent

liability

Availability of

Ind AS

financials of

acquired

entities

Key

Challenges

Amortization

impact on fair

value uplift

Company Name Restated From

Bharti Airtel Ltd. July 07, 1995

UPL Ltd. June 01, 2005

Tata Chemicals Ltd. April 01, 2007

Wipro Ltd. Apr. 01, 2008

TCS Apr. 01, 2013

Cipla Ltd. July 15, 2013

Sun Pharma Annual Report not available


FTA – Investments in subsidiaries, associates and joint ventures

Company

Name

Investment In Group

Entities

Impact on net worth

(Standalone FS)

Bharti Airtel Ltd. Fair value of certain

subsidiaries

Increase

Cipla Fair value of certain

subsidiaries

Decrease

Tata Steel Fair value of a subsidiary Decrease

ITC Ltd. Previous GAAP carrying

amount

No change

HUL Previous GAAP carrying

amount

No change

M&M Previous GAAP carrying

amount

No change

Tata Power At Cost No change

L&T Ltd. At Cost No change

FTA – Investments in subsidiaries,

associates and joint venture

► Cost as per Ind AS 27

► Deemed Cost as per Ind AS 101:

► Previous GAAP carrying value

► Transition date fair value


Ongoing implementation considerations


Wider ambit of Control framework

Contractual

arrangement

Participative v/s

protective rights

Control

through agents

Potential

voting

rights

De-facto

control

An investor controls an

investee when it is exposed,

or has rights, to variable

returns from its involvement

with the investee and has the

ability to affect those returns

through its power over the

investee.

Control of

silo

Key Learnings

► Assessment of contractual arrangements

► Impact on the KPIs, profitability and equity

► Data/financial information requirements

► Communication with the key stakeholders

Company Name Application of new Control framework

HUL HU Foundation;

Child Nutrition Initiatives

TCS Employee welfare trusts

Tata Chemicals Change in control assessment impacted

the profit by INR 57 crores

ITC No change

L&T Some of the subsidiaries treated as JV

In most companies impacted on account of change in

joint venture accounting from proportionate

consolidation to equity method of accounting


Financial Instruments

► Debt v/s Equity:

► L&T – FCCB split accounting; Preference Shares

treated as liability

► Tata Steel/Tata Power – Perpetual securities/loans

treated as Equity

► Raymonds – Change of terms of Preference Shares

and debentures in subsidiaries

► Grasim – Preference Shares treated as liability

► Adani Ports – Split accounting into liability and

equity components

► ITNL – Preference shares treated as liability

► Financial guarantee contracts (standalone

financial statements:

► Separate accounting for parent vis-à-vis subsidiary

► Drawn v/s undrawn commitments

► Business model assessment and contractual cash

flows test assessment for financial assets:

► Fair valuation of unquoted equity investments

► Evaluation of historical portfolio churning

► Options of FVTPL or FVOCI for equity investments

► Expected Credit Loss (ECL):

► Availability of historical credit information

► ECL provision based on historical loss rate +

expected default + Time value of money

► Unbilled receivables – Whether a financial assets?

Whether ECL provision is required?

► De-recognition of financial assets

► Assessing risk v/s rewards in factoring /

securitization arrangements

► Bills discounting shown as borrowings


Deferred Tax

► Balance Sheet Approach vs income statement approach

► Deferred tax on unabsorbed depreciation and carry forward losses

► Virtual certainty vs. reasonable certainty assessment

► Deferred tax impact on all transition date adjustments

► Deferred tax presentation – Items recognized in OCI or equity

► Deferred tax implication in the consolidated financial statements

► Impact of deferred tax on consolidation adjustments e.g. unrealized profits

► Stock reserve – Tax rate to be of the destination country

► DTL on undistributed profits of subsidiaries, associates and joint venture

► Key disclosure requirements

► Effective tax rate reconciliation – More critical if different tax jurisdictions

► Expected utilization on DTA on tax losses and unrecognized DTA


Revenue Recognition and government grant

► Presentation of revenue –

► Gross v/s Net of Excise Duty

► Pre-GST v/s post-GST

► Netting off discounts (trade and cash), rebates, sales promotion

► Export incentives – Other operating income v/s Other Income ?

► EPCG – capital grant v/s revenue grant

► Deferred income – Tata Steel, Century Textiles, Adani Ports, Cipla

► Deferred income – whether to be recognized over a period of useful

life of assets or based fulfilment of related export obligation

► Sales-tax exemption schemes

► Whether a capital grant vs. revenue grant

► ICAI EAC opinion – Revenue grant

► Extract of HUL IND AS Investors presentation


Extensive Presentation & Disclosures

Key Disclosures

required

Net worth reconciliation

Financial Instruments

Business combinations

& Consolidation

Effective Tax Rate, key

estimates and judgements

Operating Segments

Related Party Transactions

42

50

56

46

32

61

87

76

63

54

0

10

20

30

40

50

60

70

80

90

100

TCS ITC HUL Tata Motors Emami

PAGES OF CONSOLIDATED F INANCIALS

Mar-16 Mar-17


Operating Segments

Company IGAAP IND AS

Godrej Consumer Not Reported 4

Ashok Leyland Not Reported 2

TVS Motors 3 -

M&M 10 7

L&T 6 5

HUL* 5 5

* HUL has changed its segment in line with its recent change in organization structure and in accordance with IND AS 108

► Most companies reported no change in the segment reporting

► However, in case of some companies segment reporting has been changed due to

► Difference between risk and return approach under Indian GAAP vs. Management Approach (Basis CODM reviews the business components)


Ind AS 107 – Financial Instruments: Disclosures

► Critical financial instrument disclosures

► Fair value – including for financial assets and financial liability measured at amortized

cost

► Fair value hierarchy – disclosure based on inputs (Level 1, Level 2, Level 3)

► Financial risk management

► Capital management

► Qualitative and quantitative disclosures of financial risk management

► Market risk – interest rate risk, foreign currency risk, other price risk

► Credit risk – details of ECL allowance (12-mths, lifetime), reconciliation of carrying

amount of assets on which ECL is provided

► Liquidity risk – maturity profile of financial liabilities based on undiscounted cash flows

► Capital management – Objective, net debt, gearing ratio


Most common reconciliation items

Particulars INR

IGAAP net worth as at April 1, 2015 XXX

Reconciliation items

Proposed Dividend and related DDT XX

Gain on fair value of investments / derivatives XX

Impact on measuring financial assets/liabilities at EIR XX

Impact on account of fair value of PPE considered as

deemed cost

XX

Impact on account of restatement of past business

combination

XX

Impact on account of ESOP accounted at fair value XX

Impact on accounted on expected credit loss method XX

Deferred tax impact on above adjustments XX

Ind AS net worth as at 1 April 2015 XXX

Equity reconciliation as at 1 April 2015

Particulars INR

IGAAP net income as at March 31, 2016 XXX

Reconciliation items:

Gain on fair value of investments / derivatives XX

Reclassification of actuarial gain on defined benefit

obligations

XX

Impact on measuring financial assets/ liabilities at EIR XX

Impact on accounted on expected credit loss method XX

Impact on account of ESOP accounted at fair value XX

Amortization/depreciation impact on fair valuation of

PPE considered as deemed cost and restatement of

past business combinations

XX

Deferred tax on above adjustments XX

Ind AS net income as at 31 March 2016 XXX

Net Income reconciliation for y/e 31 March 2016


Court Scheme v/s Ind AS

► Court scheme approved in pre-transition period

► Scheme accounting vs. IND AS

► Court scheme approved in comparative period

► Scheme accounting vs. IND AS

► Accounting at appointed date vs. effective date

► Relevance of appointed date vs. effective date

► Restated from the earliest period presented

► Pooling of interest method is mandatory

Business combination other than common control transactions

Common control business combinations

► Most companies followed scheme accounting for all schemes approved before the pre-transitioned

period

► After IND AS – All schemes to comply with the requirements of IND AS


Standards / EDs issued but not effective

Ind AS 115 –

Revenue from

contract with

customers

► ED has been issued in April 2017 with proposed to date of

applicability 1 April 2018

► Standard provides two approaches under transitional provision with

some practical expedients

► Companies transitioning to IND AS Phase II, will have to apply the

requirements of the new standard immediately next year

► New standards requires significant judgement and estimates while

applying the its proposed revenue model

ED on

Ind AS 116 -

Leases

► Proposed applicability from 1 April 2019

► Lessees will recognize most leases on their balance sheet

► Lessor accounting is substantially unchanged

► Transition – Permits to use either full retrospective or a modified

retrospective approach with the options to use certain transition

reliefs


Early identification of strategic objective to be achieved out of Ind AS conversion

Effective project management for better co-ordination internally and externally

Minimal outside system changes help track adjustments and reconciliations

Consider the impact on investor communications

Focus on education and training of staff and engage experts early

Best Practices from Phase I

THANK YOU

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