Companies have begun preparations for adoption of the Indian Accounting Standards. Rahul Chattopadhyay, Partner in Price Waterhouse Chartered Accountants LLP, discussed relevant issues for companies and its stakeholders in an interview with BusinessLine . Edited excerpts:

Is India Inc gearing up for the adoption of Indian Accounting Standards?

Companies having a net worth in excess of ₹500 crore are required to adopt these new Ind AS standards for their March 31, 2017 year-end financial statements.

However, companies are also required to present their financial information for the financial year ending March 31, 2016 under the new Ind AS when they present their 2017 financial statements.

In addition, the listed companies who meet the threshold criterion are likely to present their quarterly financial information beginning June 30, 2016 along with corresponding previous period figures.

Companies now understand there is little time left to begin the preparatory work and therefore, they have started their initial assessment process to understand and evaluate the changes, which may emerge from these new reporting standards.

What is the most important step in the preparatory work for the changeover?

A diagnostic study for required compliance and systems checks is important. The study will identify the gaps and determine the steps to be taken to meet the requirement.

Could you elaborate on how different revenue has to be recognised under the new rules compared to the Indian GAAP?

The extent of difference varies across companies depending on the nature of transactions and the business they are in. It is possible the timing of recognition of revenue may shift from one period to the other, consequently impacting the reported revenue and thereby the profit.

Further, the new model will require significant upfront estimates for determining the possible discounts and price variability.

It also introduces ‘present value’ concepts in a situation where there is an inherent financing arrangement with the customer.

Following a credit loss model, the treatment of bad debts, defaults and write-downs would undergo a change…

The expected credit loss model is a model to measure the expected loss on a receivable and recognise that loss in financial statements. It may result in early identification of receivable provisioning. However, this model may impact the financial services sector more than any other sector.

The basis for accounting for convertible capital raising instruments in the books would change. Could you give clues for reading such new treatments?

This is a completely new accounting area that may have substantial impact on companies having such convertible instruments on their balance sheet. Usually, such instruments are either treated as pure debt or pure equity under the existing accounting standards.

However, Ind AS will necessitate that we examine the terms and conversion feature of such instruments and thereafter conclude whether these are pure debt, pure equity or compound instruments, which have both debt and equity features. Therefore, these instruments may significantly change the balance sheet net asset position or debt equity ratio, if the features indicate that they need to be treated as instruments, different from the previous classification.

Is there any other area in India AS which requires scrutiny?

My advice would be do not ignore any. One should go through a process of elimination and determine which are relevant and which are not. For example, an agriculture standard may not be relevant for a utility company, but that elimination of applicability or non-applicability of a standard should be based on a deep understanding of the pronouncements and the relevant business transactions.

For corporate tax purposes, the new Income Computation and Disclosure Standards have been notified. One wonders if ‘income’ according to this standards and ‘revenue’ under Ind AS will be at variance with each other.

It is possible, because the ICDS standards revenue recognition is more aligned to the existing Indian GAAP revenue recognition guidance. However, under the new guidelines the new revenue standard is significantly different from the existing standard. Therefore, if the business is absolutely simple, one may expect no change in revenue recognition but any complexity is likely to trigger different revenue recognition criteria under the new Ind AS and ICDS standards.

In what way the accounts of a company following Ind AS will reflect the state of affairs better than the ones following the Indian GAAP?

It is difficult to unilaterally say that one is better than the other. However, the new standards have more guidance, more disclosure requirements to enable shareholders to form a more informed view about the organisation. The extensive use of fair values may reflect more relevant information; however the flip side may be that it may not be as reliable as the historical cost.

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