Closing the GAAP

On February 16, 2015, the ministry of corporate affairs notified the Indian version of international financial reporting standards (IFRS), to be referred as Ind AS. These set of accounting and reporting standards is required to be applied by prescribed class f companies effective April 1, 2016, with a mandatory comparative period for the year ended March 31, 2016. So, essentially covered companies will be required to transition to Ind AS as on April 1, 2015 itself.

The MCA has notified a phased approach to transition to Ind AS by companies in India. Accordingly, a company with a net worth in excess of ₹500 crore will be required to be covered in phase 1 and for companies which are not covered above and have issued securities which are either listed on any stock exchange or having a net worth in excess of ₹250 crore are required to transition to Ind AS effective April 1, 2017. The holding, subsidiary, joint venture and associate company of such a company is also covered as part of the transition plan to Ind AS.

Revenue is the most important element in any company financial statements and that is likely to be impacted significantly under Ind AS 115. If a contract contains multiple deliverables, then each such deliverable needs to be evaluated and could impact the timing and amount of revenue to be recognised in any particular financial reporting period. Further, any variability in the contract either in the form of discount, incentives and bonuses needs to be evaluated.

Indian companies are historically used to capitalising any foreign exchange fluctuation which may not be possible under Ind AS 16. However, the transition rules provide some relief to companies which have historically capitalised such expenditures.

Accounting for fixed assets will require increased scrutiny of expenses to determine if such expenses are revenue or capital in nature. Further, it will require appropriate evaluation of useful life to determine the period over which the asset needs to be depreciated.

The model of consolidation under Ind AS 110 is linked to the assessment of control which is in contrast to either control or voting interest model under Accounting Standard (AS) 21. Further, the definition of control is very different compared to control over the composition of board of directors. The accounting analysis may not change significantly for a company which has a simple holding-subsidiary structure. However, this may impact significantly wherever we have any third-party investor in the subsidiary company, or if the company currently does not have the majority shareholding but exercises controls over a majority of the activities of the company.

Conclusions could be different in the following cases: If third-party investor has participative or veto rights in the subsidiary company; if the investor has any warrants or preference shares which are readily convertible into equity shares, then such instruments also need to be considered to assess control; and if the shareholding of the company is widely dispersed such that one significant shareholder even though not the majority owners can exercise significant control.

The accounting for business combination will change fundamentally under Ind AS 103. Ind AS 103 will require identification of intangible assets, recognition of tangible assets, liabilities and contingent liabilities at fair value. Many companies historically have used share based payments as a form of rewarding performance by employees. The Ind AS 102 now requires all share based payment arrangements to be accounted for at fair value. This could result into significant costs in the financial statements of several companies.

Accounting for income taxes including deferred taxes will change significantly under Ind AS compared to the existing practice. The government is likely to notify another set of accounting standards which will provide the framework around computation of taxable income and as a result of that, deferred tax accounting may significantly be impacted.

Ind AS will impact every aspect of financial statement of such companies which are required to implement and transition to Ind AS in near term. Significant effort will be required in training employees across levels. In addition, changes in chart of accounts and features like multi GAAP reporting need to be enabled.

The writer is with EY in India