The first phase for Ind AS implementation will soon roll out with quarterly reporting from the first quarter of financial year 2016-17 along with comparative numbers for 2015-16. Despite being so close to the deadline, there are quite a few areas where there is lack of clarity or/and lack of legislation. This article discusses these issues at a very broad level.
Roadmap
One of the key issues with the roadmap is the alignment of implementation dates between NBFC companies and non-NBFC companies. This issue will apply to a consolidated group that has an NBFC company and a non-NBFC company. When a NBFC is below a non- NBFC company, there are several approaches on how the regulators may deal with the issue:
1. Allow the NBFC’s statutory accounts prepared under Indian GAAP to be consolidated without converting to Ind AS
2. The NBFC company prepares separate statutory financial statements under Indian GAAP, but will have to prepare Ind AS numbers for consolidation purposes
3. The NBFC is allowed early conversion to Ind AS, and hence for standalone statutory financial statements as well as consolidation purposes it applies Ind AS
4. The implementation dates for non-NBFC companies are postponed, to align them with the dates when NBFC have to apply Ind AS
When the NBFC is on the top of the structure, the problem is more serious. In this case, the non NBFC companies below the NBFC company may have prepared their financial statements as per Ind AS. For purposes of consolidation by the NBFC the non-NBFC companies beneath will have to continue preparing their accounts under Indian GAAP as well. This problem can be avoided if the NBFC company is exempted from preparing consolidated financial statements, till such time the NBFC is required to prepare Ind AS financial statements.
As can be seen each of the above approaches have their own merits/demerits. The regulators will have to take an appropriate decision after consultations with the affected groups.
The other major challenge with the roadmap is the mandatory application of Ind AS 115 Revenue from Contracts with Customers and Ind AS 109 Financial Instruments. Though the rest of the world will apply these standards much later, Indian companies will have to apply them immediately on Ind AS transition without any fall back to their predecessor standards.
A TRG (Transition Resource Group) has been set up by IASB and FASB to specifically deal with implementation and interpretation issues around IFRS 15 (Ind AS 115). Due to significant implementation issues, the IASB and FAS B are deferring the applicability of IFRS 15 by one year. India is probably the only country that applies Ind AS 115 mandatorily. It is unfortunate that India has to apply Ind AS 115 when the rest of world is still debating on several issues under Ind AS 115. In the authors opinion IAS 18 Revenue/IAS 11 Construction Contracts should apply with a choice to an early adoption Ind AS 115.
In a group that amongst other companies also has an NBFC and a foreign listing; the following situation may develop with respect to Ind AS 109:
1. The NBFC prepares its stand alone accounts under Indian GAAP
2. For India consolidation purposes the NBFC applies Ind AS 109
3. For its global listing purposes the NBFC does not use the option to early apply IFRS 9, but instead applies IAS 39.
NACAS and the ICAI will have to apply their minds on the subject and immediately come out with proper amendments after consulting the affected groups.
Minimum Alternate Tax
MAT is an unfinished legislation vis-a-vis Ind AS. Consider the following:
1. An infrastructure company has to recognise construction revenue upfront, as it is deemed to have exchanged its construction services for an intangible asset, viz., right to collect toll revenue from the public. This will result in recognition of margin and therefore will expose infrastructure companies to a potential MAT liability. This may further impair the ease of doing business in India for infrastructure companies.
2. There is no clarity on what line in the P&L, MAT will apply. This is important under Ind AS because the P&L comprises of two integral parts. The first part is the P&L before comprehensive income. The second part includes other comprehensive income, for example, gain on fair valuation of equity shares, when that option is used.
3. The first time adoption of Ind AS will result in a large number of adjustments which will be recognised in retained earnings. There is no clarity on whether and how MAT will apply to these items.
SEBI regulations
SEBI will have to provide appropriate format under clause 41 for reporting quarterly numbers under Ind AS. In the case of five year restatement for IPO purposes, it should be ideally reduced to three years and those numbers need not be restated to Ind AS, if the roadmap did not apply to the company for the earlier years.
Companies Act
Section 52 of the Companies Act prohibits a specified class of companies from using securities premium account for specified purposes, for example, applying the securities premium to adjust redemption premium on debentures or bonds. It was presumed that when Ind AS is rolled out, the specified class of companies will be notified to be companies that have applied Ind AS. There is no notification yet, from the Ministry of Corporate Affairs.
There is neither clarity nor a change in legislation with respect to distributable profits. Consider an Infrastructure company that recognises huge revenue and margins upfront, thought the cash is received in the form of toll revenue over the next several years. A prudent policy would be not to distribute the accounting profits that will realise over several future years. However, in the absence of legislation this may be difficult to enforce. It is not clear how the first time adoption changes and other comprehensive income (some of which are recycled and others are not recycled to the P&L), will impact distributable profits.
Conclusion
There is very little time, and the government and NACAS should act swiftly to provide the necessary clarifications and make appropriate changes to the legislations. This is imperative for the smooth implementation of Ind AS.
