28% BSE 100 companies take 10% plus hit on net profit
New Delhi, 1 Oct, 2016
New Delhi, 1 Oct 2016: 28% BSE 100 companies experienced more than a 10% impact on their net profit, according to ‘Observations on implementation of Ind AS.’, a study by global professional services organization, EY.
EY conducted a review of the financial results of companies on the BSE top 100 list that were covered in phase 1 of the Ind AS roadmap. The objective of the study was to understand the experience of Indian companies for transition to Ind AS and whether it was similar to that of European companies. Further, the study focused on understanding the impact of Ind AS on Key Performance Indicators (KPIs), the quality of information disclosed in the published financial results and the level of preparedness of companies in their transition to Ind AS.
Most of the impact on net profit might have been neutralized by the exemptions availed by companies. In many cases, the net profit impact may not be significant, but the impact on individual accounting captions may be significant.
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. 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.
Majority of the companies provided only minimum disclosures required in the regulation and did not voluntarily provide additional disclosures to better clarify the transition to Ind AS. Internationally, companies made disclosures in line with IAS 34 Interim Financial Reporting, which is a much detailed disclosure explaining the impact areas of transition to IFRS.
When Europe moved to IFRS in 2005, several companies provided non-GAAP information to explain their performance. The EY’ study did not observe this trend in India. Also, in 2005, an EY study revealed that 80% companies were able to issue their first preliminary result announcements under IFRS within the same time frame as the previous year. In comparison, only 58% of the reviewed Indian companies could do so.
Other key findings-
- 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 recconiliation of these companies reveals that 44% of the companies had an impact of more than 10% on their net worth. Most of the companies did not furnish reclassification adjustments.
- 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.
- 42% companies took more time to file their financial results in the current year than in the previous year.
- 43% companies presented their financial results for June 2015 without subjecting it to an audit/limited review by their statutory auditor.
- 37% companies chose to present only standalone financial statement
- According 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
- Only 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.
- Financial instruments - Ind 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.
- Property, plant and equipment - There 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.
- Share-based payments - Ind 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.
- Business combination/consolidation - Ind 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.”
- Income taxes - The 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.
- Revenue - The 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.
- 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.
Notes to editors
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