observations on implementation of ind as

Observations on implementation of Ind ASSeptember 2016

2 | Observations on implementation of Ind AS

We thank the following people for their review and contribution:

• Achal Jain

• Anand Banka

• Jigar Parikh

• Varun Dewan

Acknowledgement

3Observations on implementation of Ind AS |

ContentsExecutive summary 4

Objective of the study and methodology 7

Ind AS impact on KPI 9

Quality of disclosure 17

Ind AS preparedness 20

To sum up 22

Glossary 24

Annexure 26


Executive summary

1


2016 witnessed Indian companies transitioning to Ind AS — a new accounting framework converged with IFRS. The MCA has mandated transitioning to Ind AS in a phased manner based on the listing status and net worth of a company. From 1 April 2016, companies with a net worth of INR500 crore or more have started applying the new standards. The second phase of Ind AS (beginning from 2017—18) will cover all listed entities and other entities with net worth of INR250 crore or more. More than 1,000 companies are transitioning to Ind AS in phase 1!

There are significant GAAP differences between the existing Indian GAAP and Ind AS, especially in areas of financial instruments, business combination, consolidation, revenue recognition, share-based payments, and presentation and disclosures. Considering these GAAP differences, transition to Ind AS was expected to be a challenging affair for Indian companies. Additionally, changes in the standards by the MCA after due notification (Ind AS 115 was omitted and Ind AS 18 and Ind AS 11 were made applicable) also compounded the problem for the companies. SEBI preempted the situation and extended the timelines for the submission of financial results.

European companies also experienced a similar change in 2005 when Europe transitioned to IFRS. The Committee of European Securities Regulator (CESR) recommended companies to add detailed disclosures explaining the transition in their financial statements, as well as disclosures required in IAS 34 Interim Financial Reporting in interim financial results. More than 8,000 listed companies in Europe had moved to IFRS in 2005. EY did a survey1 in 2006 of some of the largest companies in Europe to see how did they had applied IFRS. Some of the key findings of the study were:

a) The 2005 implementation of IFRS was a resounding success overall, even though it involved major changes for all the companies. Of the reviewed companies, 80% were able to issue their first preliminary results announcements under IFRS and their first IFRS financial statements within the same time frame as the previous year.

b) The IFRS financial statements retained a strong national identity. Companies ensured minimal changes in the form of financial reporting under their previous national GAAP.

c) Companies had to apply extensive judgement in selecting and applying IFRS accounting treatments, which restricted consistency and comparability.

d) Companies were not very confident of using IFRS financial information to communicate their performance to the market in the year of adoption of IFRS. As a result, many companies used non-GAAP measures for that purpose.

Transition to Ind AS is big transformational change for Indian companies. To understand the experience of Indian companies in transitioning to Ind AS and whether it was similar to that of European companies, we conducted a review of the financial results of 60 companies in BSE’s top 100 list that are covered in phase 1 of the Ind AS roadmap (the remaining 40 companies were either covered in other phases, had a different year-end or had not published their financial results as of 20 August 2016 — the cut-off date for our review. Refer the annexure for details). The following are some of the themes and trends that emerged from our review, as well as our perspectives on those themes:

A. The impact of Ind AS on companies reflects a mixed trend.

According to the summary results disclosed by companies, 28% of the companies experienced more than a 10% impact on their net profit. Even though this percentage gives an impression that the impact of Ind AS is not very substantial in many cases, we believe that this impression may not be entirely correct. A lot of the impact might have been neutralized by the exemptions availed by the companies. In many cases, the net profit impact may not be significant, but the impact on individual accounting captions may be significant. For example, netting of sales incentives with revenue may have no impact on net profit but can have a significant impact on revenue. Based on our study of the companies in the sample, we did not observe a significant reclassification adjustment been disclosed in the net profit reconciliations. We believe that companies may explain it in more detail in their annual financial statements.

B. Many Ind AS made their presence felt

There are significant GAAP differences between Indian GAAP and Ind AS, especially in areas of financial instruments, business combinations, share-based payments, income taxes, revenue recognition, employee benefits, leases and operating segments. As expected, Ind AS 109 Financial Instruments was one standard that had an impact on the majority of the companies covered in the study.

1 “IFRS - Observations on the Implementation of IFRS”, EY, September 2006.


Some other standards that made their presence felt were Ind AS 12 Income Taxes, Ind AS 19 Employee Benefits, Ind AS 102 Share-based Payments and Ind AS 108 Operating Segments. Surprisingly, GAAP differences with respect to leases, provisions, accounting for group share-based payments and foreign operations did not seem to have a significant impact on Indian corporates as they did not have any specific adjustments in the reconciliation. One of the reasons for this could be the materiality of the impact — for example, a service arrangement may be assessed as a leasing arrangement but not have a material impact on the charge to profit and loss if the lease was assessed as an operating lease. Many standards may not have a big measurement impact but may require significant disclosures of estimates and judgements, such as the assessment of functional currency or whether an arrangement is in substance a lease arrangement. The annual financial statements will provide much better insights on which standards really made their presence felt.

C. More compliance-driven reporting

In 2005, when Europe moved to IFRS, companies made detailed disclosures in line with IAS 34 Interim Financial Reporting for explaining the impacts of the transition. Our study of European companies revealed that many companies also gave significant non-GAAP financial information to the users of financial statements for explaining their performance.

Most of the companies in our study made only the mandatory disclosures, probably because they were not fully ready for the transition. Many of them published un-audited/un-reviewed financial results for the comparative quarter, while 37% published only standalone results. This trend suggests that companies needs more time to be ready for detailed Ind AS reporting. Also, many companies are still evaluating their options and want to re-look at their accounting policy choices based on a study of industry practices. We expect companies to furnish detailed disclosures explaining their choice of exemptions, accounting policies, key estimates and judgements only in their annual financial statements. They will use the

time till then to fine-tune their processes, educate their key stakeholders and do a comparative study with their industry peers. However, it was bit surprising that unlike their European counterparts, most of the Indian companies did not provide any alternate or non-GAAP financial information for explaining their performance. It needs to be seen in subsequent quarters whether the investor or analyst community demands non-GAAP measures or companies voluntarily furnish such information to them.

D. Transition was not a smooth process.

The majority of the companies in our study opted for relaxations from disclosure — only 5% presented equity reconciliation for June 2015, while 37% did not present consolidated financial statements. These figures reflect that companies were not prepared for the transition. Ind AS is not only an accounting change but also has significant business implications. While companies focus on getting their financial reporting right, they will need to quickly shift gears to address other consequential impacts on systems, processes, internal controls, regulatory and contractual compliance and investor communications. Coupled with other regulatory changes on account of GST and Income Computation and Disclosure Standards, transition into a stable platform is going to be daunting tasks for India Inc.

The journey toward global reporting standards has just begun in India. It is a small step by the regulators but a giant leap for Indian corporates. There is still a long way to go before reasonable consistency can be achieved in all areas of financial reporting. Phase 2 companies should modify their transition plan based on the learnings from the reporting done by phase 1 companies. Investors and analysts should also engage with companies and communicate their needs or expectations about information needed for understanding Ind AS impacts. Kudos to the MCA for bringing in a significant change in a planned and phased manner, which has been well supported by finance professionals across the country. There is no doubt that the transition to Ind AS has made a successful start. However, companies need to step up their efforts to successfully transition to sustainable Ind AS reporting.


Objective of the study

2


ObjectiveEurope moved to IFRS in 2005, affecting more than 8,000 listed companies. EY conducted a survey of these companies to understand their experience during the transition. The survey revealed some interesting trends: (a) 80% of the reviewed companies were able to issue their first preliminary results announcements under IFRS and their first IFRS financial statements within the same time frame as the previous year, (b) the transition to IFRS involved major changes for all the companies, (c) companies adopted IFRS in a way to minimize, as far as possible, changes to financial reporting under their previous national GAAPs, (d) IFRS implementation required extensive judgement from the companies in selecting and applying IFRS accounting treatments, restricting consistency and comparability and (e) many companies used non-GAAP measures for communication of their performance in the market.

Indian companies are undergoing a similar transformational change while transitioning to Ind AS. There are significant GAAP differences between extant Indian GAAP and Ind AS, especially in areas of financial instruments, business combination, consolidation, revenue recognition, share-based payments, and presentation and disclosures. It will be interesting to see whether the experience of Indian companies will be similar to that of their European counterparts.

The other main concerns for all the stakeholders are how companies’ key performance indexes (KPIs) will be impacted on

transition to Ind AS, whether they will be able to gear up for Ind AS reporting and whether users of financial statements will be able to appreciate fully the impact of the transition.

To understand the experience of Indian companies of transition to Ind AS and whether it was similar to that of European companies, we conducted a review of the financial results of companies in BSE’s top 100 list that were covered in phase 1 of the Ind AS roadmap. We focused our study on understanding:

• The impact of Ind AS on KPIs

• The quality of information disclosed in the published financial results

• The level of preparedness of companies in their transition to Ind AS

MethodologyOur sample comprised the top 100 BSE companies by market capitalization as on 18 July 2016. Of the 100 companies in the list, only 60 were scoped in our study because the remaining were either covered in other phases, had a different year-end or had not published their financial results as of 20 August 2016 — the cut-off date for our review. (Please refer to the annexure for more details on this, as well as the complete list of companies).

We studied the quarterly financial results and investor presentations uploaded on the website of these companies before 20 August 2016 for the purpose of this study.

Objective Parameters assessed

Impact of Ind AS on KPIs • Impact on revenue for the quarter ended 30 June 2015 • Impact on net worth as on 31March 2016• Impact on disclosures relating to operating segments

Quality of information disclosed in the published financial results

• Profit reconciliation provided for the quarter ended 30 June 2015 and 31 March 2016 with explanatory notes

• Equity reconciliation provided for the opening Ind AS balance sheet as on 1 April 2015 and comparative period ended 30 June 2015 and 31 March 2016 with explanatory notes

• Comparative results provided for the quarter ended 31 March 2016 • Investor presentation or condensed Ind AS financial statements giving detailed

information on Ind AS accounting policies or Ind AS adjustments, Ind AS 101 exemptions and explanation on KPIs

Level of preparedness of companies in their transition to Ind AS

• Availing SEBI’s relaxation for extended timelines• Availing SEBI’s relaxation for disclosures• Whether the Ind AS results were audited/subjected to limited review or unaudited• Whether the financial results presented were consolidated or standalone

We followed the following parameters to study the impact of the transition


Ind AS impact on KPI

3

| Observations on implementation of Ind AS10

*Only 15% of the companies published equity reconciliations for March 2016.

Change in net profit (30 June 2015) Change in revenue (30 June 2015)

Change in net worth (31 Mar 2016)

Standard Percentage of companies impactedFinancial instruments 83%Income taxes 87%Property, plant and equipment 27%Share-based payments 22%Business combination 15%Operating segments 38%

Percentage of companies

72%

8%

20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Less than 10% 10%-20% 20%-100%


56%

22%22%

0%

10%

20%

30%

40%

50%

60%

Less than 10% 10%-20% More than 20%


88%

2%

10%

0% 20% 40% 60% 80% 100%

Less than 10%

10%-20%

More than 20%


Review analysisThe key apprehensions of all stakeholders about the transition to Ind AS are whether it will significantly impact key performance indicators of companies and whether it will bring significant volatility in the financial statements. Our study suggests that the transition impact on KPIs has been a mixed bag — i.e., around 28% experienced an impact of more than 10% on their net profits.

Only 10% of the companies presented equity reconciliation as on 1 April 2015 and only 15% for the year ended 31 March 2016. A study of the equity reconciliation of these companies reveals that 44% of the companies had an impact of more than 10% on their net worth.

While there are many GAAP differences between Indian GAAP and Ind AS, the key accounting standards that have made a difference on the KPIs of companies are:

A. Financial instrumentsInd AS 109 Financial Instruments was expected to have a major impact on most of the companies. Our review suggests that 83% of the companies reported material adjustments on the application of principles for accounting for financial instruments. Based on the reconciliation disclosed by the companies, fair valuation of financial instruments, EIR and ECL have been the common reasons for impact on the net profits and net worth.

A consumer products and retail company reported a 6% increase in net profit in its standalone financial statements due to notional income from corporate guarantees in favor of subsidiaries.

A technology company reported a decrease of INR128 crore in net worth as on 30 June 2015 due to ECL and an increase of INR134 crore in net worth due to fair valuation of investments.

A pharmaceutical company reported a 31% decrease in net profit due to accounting for financial instruments.

A telecom company’s net profit decreased by 16% due to fair valuation of financial instruments.

A company from the extractive industry reported an impact of INR4,188 crore on the net worth as on 31 March 2016 due to fair valuation of financial assets.

An infrastructure company witnessed a 27.70% decrease in net profit due to the application of ECL on financial assets.

Examples of Ind AS impacting companies:


B. Property, plant and equipmentThere are some significant GAAP differences between Indian GAAP and Ind AS with respect to accounting for property, plant and equipment, especially in areas of component accounting, asset-retirement obligations, depreciation based on useful lives and residual value and capitalization of exchange differences. However, the impact of many of these GAAP differences was neutralized by Ind AS 101 exemption for property, plant and equipment, especially allowing companies to grandfather previous GAAP carrying values without any adjustment. Hence, it is not surprising that only 27% of the companies reported adjustments related to property, plant and equipment.


A company from the consumer/industrial products and retail sector reported an increase in depreciation of INR2.3 crore (10% of depreciation according to IGAAP) due to fair valuation of items of PPE.

A company from the extractive industry reported a decrease of INR28 crore (2% of net profit) in net profit due to depreciation on fair valuation of items of PPE and on major overhaul costs capitalized.

A company from the extractive industry fair-valued its PPE, increasing its net worth by INR45,272 crore as on 31 March 2016. This was compensated by a decrease of INR39,570 crore due to a change in the accounting policy for oil and gas activity as on the same date.

A telecom company reported an impact of INR12 crore (2% of net profit) due to depreciation reversal on the asset retirement obligation.

C. Share-based paymentsInd AS 102 requires the accounting for share-based payments based on fair value instead of intrinsic value. Most of the companies reviewed that provided share-based payment to their employee reported an impact of less than 5% on their net profits due to this change in accounting policy. It should be noted that Ind AS 102 also lays down specific accounting guidance with respect to group share-based payments and requires recording of expense when employees receive share-based payments under a group share-based payment plan. Under Indian GAAP, there were diverse accounting practices and the majority of the companies did not record any charge if they did not have a settlement obligation. Surprisingly, very few companies covered in the review reported any specific adjustment on account of group share-based payments.


D. Business combination/consolidationInd AS 110 establishes a single control model for all entities (including special purpose entities, structured entities and variable interest entities). The implementation of this standard will require managements to exercise significant judgment to determine which entities are controlled and are therefore required to be consolidated. Five companies reported an impact on their group structure due to changes in the assessment of “control.”

A company from the consumer/industrial products and retail sector has changed the classification of two entities from joint venture under IGAAP to a subsidiary and an associate under Ind AS.

Another technology company restated its past business combinations, reporting an increase of INR1,135 crore in its net worth as on 30 June 2015.

A technology company consolidated an employee welfare trust under Ind AS.

A telecom company reported an impact of 27% on its net profit due to the reinstatement of previously amortized goodwill and the effect of the reinstatement of past business combinations.

A chemical company consolidated an entity earlier treated as an associate under IGAAP, as a subsidiary under Ind AS.

A technology company reported an impact of INR15 crore on its net profit due to discounting of deferred and contingent consideration payable for business combinations.

Examples of Ind AS impacting companies: Examples of Ind AS impacting companies:

Ind AS 103 requires the assets and liabilities acquired in a business combination to be accounted for at fair value. It also requires the recognition of contingent consideration. Furthermore, Ind AS 103 prohibits the amortization of goodwill. The business combination exemption helped many companies avoid any adjustments arising from any business combination that occurred before date of transition. However, few companies that opted to retrospectively restate the past business combination would see a higher impact of the accounting principles laid down in Ind AS 103.


A consumer products and retail company reported an increase in revenue by 43% from IGAAP to Ind AS. However, it has not disclosed any impact on net profit due to revenue in its reconciliation of net profit.

An automotive company reported a decrease in revenue by 62% from IGAAP to Ind AS. However, its net profit was impacted by only 0.20% because of deferral of revenue on future performance.

A pharmaceuticals company reported an adjustment of INR185 crore in deferred tax, resulting in a 41% increase in its net profit.

A telecom company reported a decrease in revenue by 55% from IGAAP to Ind AS. However, its net profit was impacted by only 3% because of deferral of revenue equalization.

A company from the consumer/industrial products and retail sector, a couple of pharmaceutical companies and a company from the extractive industry reported an increase of more than 20% in net profits due to deferred tax adjustments.



E. Income taxesThe income statement approach under IGAAP has changed to a balance sheet approach under Ind AS. Ind AS also requires deferred taxes to be recognized on consolidation, including the undistributed profits of subsidiaries, associates and joint venture (subject to certain exemptions). All Ind AS adjustments will also have a consequential tax impact. Hence, this standard was expected to have a significant impact on the transition due to a change in the approach. The published results echo this expectation.

F. RevenueThe published information reflects four major reasons for an impact on revenue: advertisement and promotion expenses (cash discounts) being net off with sales, transactions with dealers identified as agents under Ind AS, grossing up of excise duty and deferral of revenue due to unsatisfied performance obligations. However, net profits are majorly impacted by the deferral of revenue.

G. Operating segments

Ind AS 108 requires segments to be identified and reported based on the measure reported to the CODM. Since the approach to identify the segments has changed under Ind AS, it was expected that companies would experience a change in reporting requirements. Of the companies covered in the review, 34 reported more than one segment. Of these, 38% reported changes in the segments presented. This comes across as a significant change in the current reporting practice.


Sector perspectiveThe impact of Ind AS has generally been erratic across sectors. While the majority of the sectors experienced a mixed trend, the consumer/industrial products and retail sectors seem to be the least impacted.

Automotive sector

Telecom sector

Consumer/industrial products and retail sector

Technology sector

Change in net profit (30 June 2015)



88%

12%


0%10%20%30%40%50%60%70%80%

33% 67%

Less than 10% 10%-20%

67%

33%

0%

More than 20%


0%10%20%30%40%50%60%70%80%90%

100%

89%

11%0%



0% 10% 20% 30% 40% 50% 60% 70%

Less than 10%

10%-20%

More than 20%

40%

0%

60%


EY insightsThe study has revealed some very interesting observations: 28% of the companies had an impact of more than 10% on their net profit. Although these figures give an impression that the impact of Ind AS was not substantial in many cases, we believe that this may not be entirely correct. A lot of the impact might have been neutralized by the exemptions availed by the companies. In many cases, the impact on the net profit may not have been significant but the impact on individual accounting captions may have been. For example, netting of sales incentives with revenue will have no impact on net profit but can have a significant impact on revenue. Based on our study, we did not observe companies disclosing significant reclassification adjustments in the net profit reconciliations. We believe that companies may detail them in their annual financial statements.

Ind AS has introduced significant accounting requirements over the current Indian GAAP. For example, 83% of the companies in our study were impacted by the accounting requirements relating to financial instruments. Some other standards that made their presence felt were Ind AS 12 Income Taxes, Ind AS 19 Employee Benefits, Ind AS 102 Share-based Payments and Ind AS 108 Operating Segments.

Surprisingly, many GAAP differences that were expected to have a significant impact on companies did not feature in the list of GAAP adjustments of the companies covered by our study. The following are some examples of such GAAP adjustments that did not have a significant impact :

• No company reported specific adjustments from the application of the principle of whether an arrangement

is in substance a lease. One of the reasons for this could be the materiality of the impact — for example, a service arrangement may be assessed as a leasing arrangement but not have a material impact on the charge to profit and loss if the lease is assessed as an operating lease.

• Very few companies reported GAAP adjustment for the reversal of lease equalization arising from a specific relaxation given under Ind AS for not doing straight-lining of lease rentals if the escalation was due to inflation. One of the reasons for this could be no specific guidance by ICAI on how to do such an assessment. We believe that companies will re-look at their assessment as the industry practice develops. However, one sector where we can clearly see an opposite trend is telecom, with the majority of the telecom players in our study reporting a reversal of the lease equalization adjustment done under Indian GAAP.

• Accounting for group share-based payment is also an area where we expected an impact.

• Many standards may not have a big measurement impact but may require significant disclosures of estimates and judgements, such as the assessment of functional currency or whether an arrangement is in substance a lease arrangement.

Overall, based on a study of the Q1 results, the impact of transition to Ind AS looks like a mixed trend. However, we expect that the transition impact will be better appreciated once the annual financial statements are published. Considering that Ind AS is not only an accounting change, we believe that companies will experience a wider impact across various organization work-streams as they move toward sustainable Ind AS reporting.

Quality of disclosure

4



Ind AS 101 requires a first-time adopter to make detailed disclosures to explain the transition from IGAAP to Ind AS and how it has impacted its reported balance sheet, financial performance and cash flows. However, to ease the transition process, SEBI has provided exemptions from most of these disclosures. SEBI has also provided exemptions from presenting results of some of the comparative periods under Ind AS. To gauge the quality of disclosures in the published results, we gave weightage to parameters such as detailed explanatory notes given to explain Ind AS adjustments, voluntary disclosures furnished with respect to the opening balance sheet, Ind AS results for quarter ended 31 March 2016, equity reconciliations in the published results and condensed Ind AS financial statement or investor presentation published giving details about key Ind AS adjustments, material accounting policies, Ind AS 101 exemptions availed and the impact on KPI.

Our review revealed the following trend:

Opening balance sheetThough Ind AS 101 requires the disclosure of the opening balance sheet in each interim financial period of the first reporting year under Ind AS, SEBI allowed an exemption from this requirement. Only three of the companies reviewed presented an opening balance sheet as on 1 April 2015 to enable the stakeholders to clearly understand the impact of Ind AS.

Quarter ended 31 March 2016SEBI, in its circular dated 5 July 2016, relaxed the requirement of presenting results for the quarter ended 31 March 2016 under Ind AS. Still, 55% of the companies reviewed voluntarily disclosed the results for that quarter.

Profit reconciliation Equity reconciliation

31 March 2016

31 March 2016

30 June 2015

1 April 2015

Optional Optional Optional Optional

50% 15% 5% 10%

ReconciliationsInd AS 101 requires the disclosure of reconciliations (total comprehensive income and equity) in all the interim financial periods of the first reporting year under Ind AS. However, SEBI relaxed that requirement to include only net profit reconciliation for the quarter ending 30 June 2015. The following table summarizes the choice these companies have made in relation to the disclosure of reconciliations of non-mandatory periods:

In cases where reconciliations are provided, the disclosures given about the Ind AS adjustments are very brief, with no detailed explanatory notes. Most of the companies did not furnish reclassification adjustments. For example, sales incentives netted off from revenue have not been disclosed as an adjustment in the reconciliation. A significant number of the companies have not presented details of items included in other comprehensive income – a new addition to the income statement by the Ind AS.

Consolidated financial resultsSEBI has allowed an irrevocable option to companies to present consolidated quarterly financial results. Of the reviewed companies, 63% choose to publish consolidated financial results under Ind AS for the quarter ended 30 June 2016.


Investor presentationAccording to 53% of the reviewed companies, the transition to Ind AS is important enough to be discussed in detail in the investor presentation for the quarter ending 30 June 2016.

Availability of condensed Ind AS financial statements on the websiteOnly four companies have made available condensed financial statements on their website, providing details about Ind AS accounting policies, Ind AS 101 exemptions availed by the company and important disclosures to better understand the financial performance and financial position of the company.

EY insightsThe majority of the companies covered in our study gave only minimum disclosures required in the regulation and did not voluntarily provide additional disclosures to better clarify the transition to Ind AS. Also, the explanations they gave in the reconciliation are not very elaborate in many cases. Internationally, companies made disclosures in line with IAS 34 Interim Financial Reporting, which is a much detailed disclosure explaining the impacts of transition to IFRS. We expected Indian companies to go beyond the SEBI requirements and follow

the footprints of their global counterparts. However, most companies studied opted for relaxations offered by SEBI. One of the key reasons for such an approach could be that companies were not fully ready for the transition. Many companies in the study published un-audited/un-reviewed financial results for the comparative quarter, while 37% published only standalone results. This trend suggests that companies need more time to be ready for detailed Ind AS reporting. Also, many companies are still evaluating the choice of options and want to re-look at their accounting policy choices based on a study of industry practices. We expect the companies to furnish detailed disclosures explaining their choice of exemptions, accounting policies, key estimates and judgements only in their annual financial statements. They will use the time till then to fine-tune their processes, educate their key stakeholders and do a comparative study with their industry peers.

Some of the companies did provide additional information either through investor presentations or through condensed financial statements on their website. We believe this is a good practice and will significantly help all stakeholders to better appreciate the transition impact. We strongly encourage companies to adopt these best practices in their communication with various stakeholders.

When Europe moved to IFRS in 2005, many companies provided non-GAAP information to explain their performance. Surprisingly, we did not see this trend in India. However, it will be interesting to see whether the analyst or investor community demands such information in subsequent quarters or whether companies voluntarily furnish it.


Ind AS preparedness

5


Everyone involved in the process of conversion from IGAAP to Ind AS knows how time-consuming the task was: all GAAP differences needed to be identified and quantified, and new accounting manual and processes adapted. Some of the key changes brought about by Ind AS — in the areas of financial instruments, business combination, consolidation, and share-based payment — have significantly increased the complexity of accounting and reporting processes.

Ind AS was notified as on 16 February 2015 and technically, companies had more than a year to get ready for Ind AS. However, the readiness was impacted quite a lot by uncertainty in areas of applicability of Ind AS, presentation and disclosure requirements, and applicability of Ind AS 115 - Revenue from Contracts with Customers.

Therefore, SEBI, through its circular dated 05 July 2016, allowed an extension of one month in the submission of results for the quarter ended 30 June 2016 — to be submitted by 15 September 2016 instead of 15 August 2016. SEBI also allowed relaxation from limited review/audit of comparative figures.

To assess whether companies were prepared for the transition, we considered the following parameters:

1. Date of filing of results for the quarter ending 30 June 2016 compared to the date of filing of results for the quarter ending 30 June 2015 (companies that filed their June 2016 results within five days of the time taken to file the June 2015 results were considered as companies taking the same time as that in the previous year)

2. Submission of results not subjected to limited review/ audit

3. Submission of consolidated/standalone results

Review analysis:Our review reveals that the companies took more time to present their Ind AS financial results. The fact that 37% of the companies choose to present only standalone financial statement suggests that companies require more time to get ready for publishing consolidated financial results.

24% companies did not file their results within the original due date — i.e., 14 August 2016 — availing the one-month extension allowed by SEBI.

43% companies presented their financial results for June 2015 without subjecting it to an audit/limited review by their statutory auditor.

42% companies took more time to file their financial results in the current year than in the previous year.

63% companies published consolidated financial results.

The results of the study are:

Given that this review only covers the BSE top 100 companies, we expect the percentage of companies taking more time to present their results to be larger if extended to the entire phase I companies. This indicates that Ind AS transition is a time-taking affair.

EY insights:Efforts for transition to Ind AS should not be underestimated. The majority of the companies took more time to report their Ind AS financial results. Many companies presented only standalone financial results, indicating that they need more time to gear up for consolidated financial results. The majority of the companies opted for relaxations from disclosure — only 5% presented equity reconciliation for June 2015. These figures reflect that companies were not fully prepared for the transition.

When Europe transited to IFRS in 2005, an EY study of IFRS implementation had revealed that 80% of the reviewed companies were able to issue their first preliminary result announcements under IFRS and their first IFRS financial statements within the same time frame as the previous year. In comparison, only 58% of the reviewed Indian companies could do so. We believe that this had more to do with regulatory changes such as withdrawal of Ind AS 115, and lack of clarity on the format of quarterly results and on the requirements relating to audit/review. However, we strongly believe that better planning by companies could have resulted in them reporting on time.

Ind AS is not only an accounting change but also has significant business implications. While companies focus on getting their financial reporting right, they will need to quickly shift gears to address other consequential impacts on systems, processes, internal controls, regulatory and contractual compliance and investor communications. Coupled with other regulatory changes on account of GST and Income Computation and Disclosure Standards, transition into a stable platform is going to be daunting tasks for India Inc


.To sum up

6


Our study gives an overview of the financial reporting practices being adopted by Indian corporates pursuant to transition to Ind AS, along with the standards that have had the most impact. Though the companies were able to meet the deadline given by SEBI, it was not a smooth process. The majority of them gave only the mandatory disclosures required by SEBI. Explanation of Ind AS adjustments in reconciliation was not very elaborate to enable users to comprehensively gauge the impact of the transition. We expect that in the coming quarters, investors and analyst will demand more information in areas where they do not get clarity. Going forward, we expect the quality of financial reporting of these companies to improve with more detailed disclosures being made in financial results/ financial statements.

The GAAP conversion strategy of most companies seems to be currently focused only on the financial reporting work-stream, with not enough focus on the impact of the transition in other work-streams such as taxation, corporate governance, internal controls, stakeholder communication and inorganic growth strategies. While this short-term approach may help them meet the reporting timelines, it will not help them achieve their objective of sustainable Ind AS reporting. To move toward sustainable Ind AS reporting, companies need to address all the facets impacting them:

• Internal control over financial reporting

Companies will need to revisit their internal financial controls to ensure that they are geared up for reliable and timely Ind AS financial reporting, especially of the disclosures that are a lot more comprehensive than those of Indian GAAP. Also, companies may need to update their accounting manual and group reporting package to ensure consistency in the accounting policies followed by subsidiaries, associates and joint ventures.

• Management of regulatory compliances

Companies need to ensure that they modify/update their systems and processes to manage compliances or proactively engage with regulators for appropriate solutions in areas such as related-party disclosures, definition of “control,” and classification of debt and equity.

• Modification of IT systems and processes

Companies would need to change certain data-collection efforts as a result of changes in accounting policies and financial statements’ disclosure requirements. As a result, they might need to modify the IT systems used to collect and report financial data accordingly. Some examples where modifications will be required are chart of accounts, fixed asset register, treasury system and MIS.

• Taxation

Ind AS might not directly impact the computation of direct taxes because it is based on the ICDS. However, there are many consequential impacts of Ind AS on taxation that require careful evaluation. For example, the fair valuation of financial guarantees on the initial recognition may not coincide with the fair valuation according to the transfer pricing regulations under the Income Tax Act, 1961. Recently, the MAT Ind AS Committee instituted by the CBDT submitted its report, suggesting a framework for the computation of book profit for the purpose of the levy of MAT under Section 115JB of the Income Tax Act, 1961. The suggestions of the committee, if finalized, could have a significant impact on the MAT liability of companies. The implementation of GST would also have accounting impacts.

In our experience, companies who started early in their initiative to adopt Ind AS were able to do it successfully and with ease. The key takeaway for companies covered in phase 2 of Ind AS implementation is to not underestimate the efforts for transition to Ind AS — gaining an understanding of the effects of the new standard, providing early communication to stakeholders and planning in advance will be critical for a successful implementation.


Glossary

7


Term Particulars

BSE Bombay Stock Exchange

CBDT Central Board of Direct Taxes

CESR Committee of European Securities Regulators

EIR Effective interest rate

ECL Expected credit loss

FVTOCI Fair value through other comprehensive income

FVTPL Fair value through profit or loss

GAAP Generally Accepted Accounting Principles

GST Goods & Service Tax

ICAI Institute of Chartered Accountants of India

ICDS Income Computation and Disclosure Standards

IFRS International Financial Reporting Standard

IGAAP Indian Generally Accepted Accounting Principles

Ind AS Indian Accounting Standard

KPI Key Performance Indicator

MAT Minimum Alternate Tax

MCA Ministry of Corporate Affairs

NCI Non-controlling interest

OCI Other comprehensive income

PPE Property, plant and equipment

RRB Regional rural bank

SEBI Securities and Exchange Board of India

SPPI Solely payments of principal and interest

CODM Chief operating decision maker

| Observations on implementation of Ind AS26

Annexure

8


Companies covered by the review:

List of BSE top 100 companies as on 18 July 2016:

BSE top 100 companies 100

The following companies were excluded:

Financial service sector companies not covered in phase I of Ind AS applicability (marked in X) (15)

Companies with a different year-end (marked in X) (6)

Companies covered in the review 79

Companies that had not submitted the results by 20 August 2016 (19)

Companies considered for sections 3 and 4 of the report 60

S.no. Company Companies excluded

1. Tata Consultancy Services Ltd.

2. Reliance Industries Ltd.

3. HDFC Bank Ltd X

4. ITC Ltd.

5. Infosys Ltd.

6. Housing Development Finance Corp. Ltd. X

7. Coal India Ltd.

8. Hindustan Unilever Ltd.

9. Oil And Natural Gas Corporation Ltd.

10. Sun Pharmaceutical Industries Ltd.

11. State Bank Of India X

12. ICICI Bank Ltd. X

13. Bharti Airtel Ltd.

14. Larsen & Toubro Ltd.

15. Kotak Mahindra Bank Ltd. X

16. Wipro Ltd.

17. Tata Motors Ltd.

18. Axis Bank Ltd. X

19. Maruti Suzuki India Ltd.

20. NTPC Ltd.

21. Indian Oil Corporation Ltd.

22. HCL Technologies Ltd. X

23. Asian Paints Ltd.

24. Ultratech Cement Ltd.

25. Mahindra & Mahindra Ltd.



26. Power Grid Corporation Of India Ltd.

27. Hindustan Zinc Ltd.

28. Bharat Petroleum Corporation Ltd.

29. Bajaj Auto Ltd.

30. Lupin Ltd.

31. Bosch Ltd.

32. Bharti Infratel Ltd.

33. IndusInd Bank Ltd. X

34. Hero Motocorp Ltd.

35. Nestle India Ltd. X

36. Dr. Reddy’s Laboratories Ltd.

37. Dabur India Ltd.

38. Shree Cement Ltd.

39. Godrej Consumer Products Ltd.

40. Eicher Motors Ltd.

41. Tech Mahindra Ltd.

42. Gail (India) Ltd.

43. Yes Bank Ltd. X

44. Vedanta Limited

45. Bajaj Finance Limited X

46. Siemens Ltd. X

47. Aurobindo Pharma Ltd.

48. Adani Ports And Special Economic Zone Ltd.

49. Zee Entertainment Enterprises Ltd.

50. Grasim Industries Ltd.

51. Cipla Ltd.

52. Ambuja Cements Ltd. X

53. Motherson Sumi Systems Ltd.

54. Idea Cellular Ltd.

55. Bajaj Finserv Ltd. X

56. NMDC Ltd.

57. JSW Steel Ltd.

58. Bank Of Baroda X

59. Cadila Healthcare Ltd.

60. Titan Company Limited

61. Pidilite Industries Ltd.

62. United Spirits Ltd.



63. Hindustan Petroleum Corporation Ltd.

64. Marico Ltd.

65. Interglobe Aviation Ltd

66. Bharat Heavy Electricals Ltd.

67. Tata Steel Ltd.

68. Britannia Industries Ltd.

69. Cairn India Ltd.

70. NHPC Ltd.

71. Divi’s Laboratories Ltd.

72. Bharat Electronics Ltd.

73. ACC Ltd. X

74. Oracle Financial Services Software Ltd.

75. GlaxoSmithKline Pharmaceuticals Ltd.

76. Indiabulls Housing Finance Ltd X

77. Shriram Transport Finance Co. Ltd.

78. Container Corporation Of India Ltd.

79. Hindalco Industries Ltd.

80. DLF Ltd.

81. Power Finance Corporation Ltd. X

82. ABB India Limited X

83. Piramal Enterprises Ltd.

84. Ashok Leyland Ltd.

85. Punjab National Bank X

86. GlaxoSmithKline Consumer Healthcare Ltd.

87. LIC Housing Finance Ltd. X

88. Emami Ltd.

89. Colgate-Palmolive (India) Ltd.

90. UPL Limited

91. Torrent Pharmaceuticals Ltd.

92. Glenmark Pharmaceuticals Ltd.

93. Cummins India Ltd.

94. Havells India Ltd.

95. Oil India Ltd.

96. Berger Paints India Ltd.

97. Petronet Lng Ltd.

98. United Breweries Ltd.

99. Steel Authority of India Ltd.

100. Procter & Gamble Hygiene & Health Care Ltd.

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