 "Integrating accounting standards with the world")
The Securities and Exchange Board of India had allowed companies to extend the deadline for reporting the numbers under the new accounting standards, and over 600 companies with net worth of over Rs 500 crore reported Ind-AS results for the June 2016 quarter and restated their June 2015 quarter to make them Ind-AS compliant.
This universe of companies excludes banks, insurance and financial services companies which will transition to Ind-AS in 2018-19 (with comparatives for 2017-18).
The overall impact of the transition from previous Generally Accepted Accounting Principles (GAAP) to Ind-AS on the 600-plus companies is a reduction of the June 2015 (base quarter) net profit by Rs 1,079 crore.
Within sectors, manufacturing was the most impacted and saw a reduction of its June 2015 net profit to the extent of Rs 1,220 crore. "In absolute terms, manufacturing sector is the worst hit, with an average adverse impact of 11 per cent on their net profit. Within the manufacturing sector, the impact on iron and steel companies forms approximately 75 per cent of the total impact," says Siddharth Talwar, partner, Grant Thornton India LLP. Textiles is the next sector in manufacturing to be impacted, he added.
Higher provisions towards doubtful debts or provisions for expected credit losses impacted earnings of engineering, procurement and construction majors such as Larsen & Toubro meaningfully (Rs 109 crore).
On the other hand, the implementation of Ind-AS norms boosted the June 2015 quarter's earnings of telecom and power companies. While for telecom companies, the increase in their base quarter earnings was aided by high deferred tax credits, in case of power companies, the earnings went up from gains due to valuation of financial instruments on a fair value basis.
On the sales front, grossing up of excise duty led to an increase in revenues of most companies as earlier excise duty was reduced from the revenues. However, to enable like-to-like comparison, most analysts adjusted the impact of Ind-AS on a company's financials.
The transition led to confusion as companies have only disclosed the headline adjustments made due to Ind-AS adoption instead of reporting detailed schedules and notes explaining the changes. A lot of these details would be disclosed when companies report their balance sheets. Disclosure of balance sheets will also unravel the adjustments made to the reserves due to this transition, which will put up a clearer picture. Thus, the impact of this transition is likely to continue in the coming quarters as well, believe analysts.
Ravi Muthukrishnan, senior vice-president and co-head research, ICICI Securities, says, "The coming quarters will see some additional impact as companies that have only published standalone numbers will report consolidated results in FY17 results."
This transition will also have a bearing on valuation ratios such as price-earnings, price-book value, amongst others as Ind-AS affects many line items in both profit and loss as well as the balance sheet. Analysts and investors should thus adopt a prudent approach while analysing these return ratios going forward.
Moving to Ind-AS, however, will help investors and analysts to better understand the financial performance of a company and lead to better corporate governance. The new norms are based on the concept of "fair value" which is another positive factor. In its report, Grant Thornton says, "Globalisation has broken all boundaries for investments and investors. Therefore, there is a need for uniform globally accepted set of accounting standards to facilitate comparison."
Overall, though the transition from the existing accounting standards to Ind-AS norms will result in higher volatility in the medium term, it will improve disclosure standards across corporate India and bring them at par with the global peers.