 "Ind-AS will increase accountability of companies, enlighten investors: Keyur Dave & Siddharth Talwar")
In an interview to Business Standard, Siddharth Talwar and Keyur Dave, partners, Grant Thornton India LLP, say that while adoption of Indian Accounting Standards (Ind-AS) may increase the uncertainty of earnings predictability in the short term, it is going to be a tectonic shift in financial reporting and will improve the credence of India among global investors. Excerpts:
When India is trying to attract foreign capital, will adoption of Ind-AS not hamper the process as financials could look stretched under the new norms?
Siddharth Talwar: One of the objectives of adopting the new accounting standards (Ind-AS), which are at par with international standards (IFRS), was to make the financial statements of Indian companies comparable with their global peers. International investors give far more credence to companies whose financial reporting practices are transparent, fair and reflect the underlying substance of commercial transactions. Being based on the "fair value" concept largely, I would convincingly say that Ind-AS will not hamper the capital raising process, rather it will communicate the true value of business to the potential investors.
Ind-AS will increase the earnings volatility. Aren't we making it more difficult for investors?
Talwar: Ind-AS will require many more disclosures than what our stock markets and investors are used to. This is going to be a tectonic shift in Indian financial reporting. Of course, initially the investors may complain of "data overload" but over a period one will realise their importance. Volatility is the result of several aspects, a major one being estimates and judgment made by the management. So far, our accounting norms have mandated limited disclosures on how management makes disclosures and hence the quality of financial statements varies from one company to the other. However, now the companies have to explain each assumption and decision taken to prepare the financial results to their investors. This will make the management far more accountable and bring out the business insights for the investors.
Recognising the fair value of derivatives and other financial instruments under Ind-AS is stricter than the international norms. Do we need this level of micro accounting?
Keyur Dave: Indian corporates have adopted the new global standard on financial instruments (IFRS 9) earlier than their comparable companies internationally. The Institute of Chartered Accountants of India (ICAI) had notified similar standards earlier but those never got effective. On derivatives, ICAI mandated a conservative approach whereby mark-to-market losses were to be accounted for, but gains were ignored. Now, we have a more balanced approach requiring fair valuation of all derivative contracts. On top of this, companies can also do hedge accounting in order to align the accounting with their risk management objectives. Thus, the new norms are far more pragmatic and comprehensive.
Valuation of companies will also undergo some change...
Dave: The transition will definitely affect all key ratios, including P/E or price to book or even some of the liquidity and solvency ratios. For example, a convertible preference share issued by a company which did not affect the profit & loss (P&L) statement so far, may now be accounted for as a liability resulting in certain fair value gains or losses and impact the P&L. Similarly, a company with embedded lease arrangements may see its capital assets going out of the books and instead financial assets getting recorded. This will grossly change the way valuations work. Analysts will need to be extremely cautious while drawing conclusions from the data that they see.
Does it impact SMEs more than large companies?
Talwar: Impact of Ind-AS depends on the nature of industry and more specifically, on the nature of transactions of a company within that industry. For example, a large integrated mining and resources producer of metals reported a positive impact of 0.3 per cent on its net profits whereas one of the largest engineering and construction company reported a negative impact of 19.6 per cent on its net profit for the June 2015 quarter, restated as per Ind-AS. There are certain standards which affect certain specific transactions and if an SME undertakes those transactions, it may be favourably or unfavourably affected.
When India is trying to attract foreign capital, will adoption of Ind-AS not hamper the process as financials could look stretched under the new norms?
Siddharth Talwar: One of the objectives of adopting the new accounting standards (Ind-AS), which are at par with international standards (IFRS), was to make the financial statements of Indian companies comparable with their global peers. International investors give far more credence to companies whose financial reporting practices are transparent, fair and reflect the underlying substance of commercial transactions. Being based on the "fair value" concept largely, I would convincingly say that Ind-AS will not hamper the capital raising process, rather it will communicate the true value of business to the potential investors.
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Talwar: Ind-AS will require many more disclosures than what our stock markets and investors are used to. This is going to be a tectonic shift in Indian financial reporting. Of course, initially the investors may complain of "data overload" but over a period one will realise their importance. Volatility is the result of several aspects, a major one being estimates and judgment made by the management. So far, our accounting norms have mandated limited disclosures on how management makes disclosures and hence the quality of financial statements varies from one company to the other. However, now the companies have to explain each assumption and decision taken to prepare the financial results to their investors. This will make the management far more accountable and bring out the business insights for the investors.
Recognising the fair value of derivatives and other financial instruments under Ind-AS is stricter than the international norms. Do we need this level of micro accounting?
Keyur Dave: Indian corporates have adopted the new global standard on financial instruments (IFRS 9) earlier than their comparable companies internationally. The Institute of Chartered Accountants of India (ICAI) had notified similar standards earlier but those never got effective. On derivatives, ICAI mandated a conservative approach whereby mark-to-market losses were to be accounted for, but gains were ignored. Now, we have a more balanced approach requiring fair valuation of all derivative contracts. On top of this, companies can also do hedge accounting in order to align the accounting with their risk management objectives. Thus, the new norms are far more pragmatic and comprehensive.
Valuation of companies will also undergo some change...
Dave: The transition will definitely affect all key ratios, including P/E or price to book or even some of the liquidity and solvency ratios. For example, a convertible preference share issued by a company which did not affect the profit & loss (P&L) statement so far, may now be accounted for as a liability resulting in certain fair value gains or losses and impact the P&L. Similarly, a company with embedded lease arrangements may see its capital assets going out of the books and instead financial assets getting recorded. This will grossly change the way valuations work. Analysts will need to be extremely cautious while drawing conclusions from the data that they see.
Does it impact SMEs more than large companies?
Talwar: Impact of Ind-AS depends on the nature of industry and more specifically, on the nature of transactions of a company within that industry. For example, a large integrated mining and resources producer of metals reported a positive impact of 0.3 per cent on its net profits whereas one of the largest engineering and construction company reported a negative impact of 19.6 per cent on its net profit for the June 2015 quarter, restated as per Ind-AS. There are certain standards which affect certain specific transactions and if an SME undertakes those transactions, it may be favourably or unfavourably affected.