More disclosures by infrastructure companies in India with the proposed implementation of International Financial Reporting Standard (IFRS) model will help investors to take informed decisions before investing in those companies.
Companies in India,which are now following the generally accepted accounting principle (GAAP), will transit towards IFRS model next fiscal.
“Disclosures for infrastructure companies will rise after implementation of IFRS and that will help investors both in retail and institutional segment to take a more informed view about a company,” Jamin Khatri, executive director, KPMG said.
He, however, said though there would be no fundamental change in the underlying strength of a company due to IFRS, investors would be facilitated with new disclosures.
As per new IFRS model, infrastructure companies will also have to rejig their reporting format.
“While GAAP model takes projects under construction as fixed asset, it will be classified as intangible asset under IFRS model,” A Subbarao, group CFO, GMR Group said.
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He also said that revenue would be recognised for an under-construction public private partnership project in IFRS model, which is not the case in present accounting format.
Though an infrastructure company does not get any revenue during project execution, IFRS model will recognise income flow for under construction project in proportion to completion of the project. This income flow will be notional with futuristic view on return on investment.
Reporting format will also witness change in case of PPP infrastructure projects with build-operate-transfer or build-own-operate-transfer model.
“In case of BOT or BOOT infrastructure model, IFRS will classify the project into two segments such as construction part and maintenance and development part with revenue recognition during construction period,” Khatri said.
He, however, said that those companies with pure engineering, procurement and construction (EPC) contract would see less changes in their present reporting format.
About the present level of preparedness of companies for adoption of IFRS, Khatri said, “There is active consultation in companies for smooth transition to IFRS model. Activity is more in those infrastructure companies which are eying overseas infra projects.”
Due to the proposed changes, net profit and total income of the company may see a dip or rise in the consequent time.
“Net profit and total revenue of infrastructure companies will see a dip or rise in the first few quarters due to change in accounting format and this variation will depend on type of project, percentage of completion of project etc,” Sai Venkateshwaran, partner, Grant Thorton said.
He, however, said that this would stabilise in two-three years.