Ind-AS Analysis. Power and utilities

Financial reporting in India is all set to take a significant leap with the adoption of Indian Accounting Standards (Ind-AS) that are converged with International Financial Reporting Standards (IFRS).

The adoption of these standards, which are mandatory from next year, will result in a fundamental shift in the financial reporting of power and utilities companies.

Under Ind-AS, accounting for revenue under power purchase — linked to variable factors such as production levels would be impacted, as the timing of recognition of the variable elements or the breakage , may undergo a change. These would impact the revenue recognised in each period, and the net income.

Further, an entity may receive from its customers property, plant and equipment that must be used to connect those customers to a network to supply electricity, gas or water. Under Ind-AS, such transfers may result in the recognition of an asset at its fair value. This would impact both the quantum of revenue recognised as well as the depreciation charge.

Fair value accounting Often these companies also enter into contracts to buy or sell goods in the future. Unless these contracts are entered into and continue to be held for the purpose of receipt or delivery they would be considered financial instruments and subject to fair value accounting. Similarly, derivative contracts entered into, either for hedging or other purposes, would be subject to fair value accounting. In certain situations, power or utility assets may get classified as service concession arrangements — if a government body controls or regulates what services the company must provide, to whom and at what price, and the government body also has a significant residual interest in the infrastructure at the end of the arrangement. In such situations, this asset would now be re-characterised as either an intangible asset or a financial asset, and at a value that represents the cost incurred plus a margin for the construction activity. Apart from the change on the balance sheet, this results in lower profitability during the operational period.

Operating lease In arrangements where the company operates a plant specifically for a customer under a take or pay or similar model, it may be accounted as a finance or operating lease. In addition, funding arrangements using structured instruments could impact the debt-equity classification of instruments and have an impact on finance cost and EPS. Similarly, ownership structures, especially those involving SPVs, could be impacted by the new rules on consolidation.

The writer is Partner and Head, Accounting Advisory Services, KPMG in India

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