Earlier this month, the Ministry of Corporate Affairs came out with a road map for companies to migrate to Indian Accounting Standards (Ind-AS) that is IFRS compliant. Effective from April 1, 2016, companies have the option to voluntarily follow it from the next financial year. Banking and insurance companies and NBFCs have been kept outside its ambit. Pankaj Chadha, partner in a member firm of Ernst & Young Global, explains some key issues around Ind-AS implementation that managements would have to consider
What are the opportunities for corporate India when it migrates to Ind-AS?
Ind-AS focuses on accounting, based on substance of a transaction. The current Indian accounting standards have insufficient, or no clear guidance. For example, under the current Indian GAAP, there is no guidance on the identification of leases contained in sales/purchase or service contracts. Companies typically do not identify leases contained in such arrangements. This creates an opportunity for companies to identify and select accounting that they believe will result in the most appropriate representation of their financial results and position.
Many Indian corporates have a significant overseas presence. Financial reporting to investors and other stakeholders under same accounting standards used by its international peers will increase the company's comparability with its competitors.
For some companies there is a significant opportunity in using the conversion project as a means to drive other areas of change in areas of accounting and financial reporting.
What approach should one follow to manage the Ind-AS implementation process?
Ind-AS conversion project should start with determination of impact arising from application of these standards, not only on financial reporting, but also on overall business. Typically, such impact would be in areas of tax, IT systems, internal controls, training and assessing adequacy of organisation structure.
Solutions have to be designed and developed together with a well-laid down plan for first time implementation. By performing an impact assessment and conducting careful planning at the beginning of the project, it should be possible to determine the major areas relevant to business and from there construct reasonable estimates of the resources required, the time to complete the project, and the related costs that will be incurred. An improperly designed process of conversion could expose the company to potentially significant risk areas which includes:
Missed deadlines in the conversion timetable
Inability of the CEO/CFO to conclude and certify on the effectiveness of the company's internal controls over financial reporting as required under Companies Act 2013 & Clause 49 of the Listing Agreement
How will Ind-AS affect accounting for income tax?
Currently, profit before tax (PBT) in accordance with the Indian GAAP is used to calculate taxable income and tax expense thereon. Countries that have already adopted IFRS are following varying practices.
For instance, there are countries such as the UK, Singapore, New Zealand and Hong Kong, which are using IFRS as a starting point for tax computation, with some adjustments. In France and Germany, tax computation is still based on local GAAP. With Tax Accounting Standards likely to be announced in the ensuing budget, Indian companies would most likely maintain separate set of books for tax purposes. Whilst income taxes could be determined and paid using tax accounting standards, questions relating to determination of MAT, and application of withholding tax provisions would require further clarity.
What are the opportunities for corporate India when it migrates to Ind-AS?
Ind-AS focuses on accounting, based on substance of a transaction. The current Indian accounting standards have insufficient, or no clear guidance. For example, under the current Indian GAAP, there is no guidance on the identification of leases contained in sales/purchase or service contracts. Companies typically do not identify leases contained in such arrangements. This creates an opportunity for companies to identify and select accounting that they believe will result in the most appropriate representation of their financial results and position.
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First-time adoption of Ind-AS provides many voluntary exemptions from full transition, permitting companies to carefully evaluate and apply substance-based accounting.
Many Indian corporates have a significant overseas presence. Financial reporting to investors and other stakeholders under same accounting standards used by its international peers will increase the company's comparability with its competitors.
For some companies there is a significant opportunity in using the conversion project as a means to drive other areas of change in areas of accounting and financial reporting.
What approach should one follow to manage the Ind-AS implementation process?
Ind-AS conversion project should start with determination of impact arising from application of these standards, not only on financial reporting, but also on overall business. Typically, such impact would be in areas of tax, IT systems, internal controls, training and assessing adequacy of organisation structure.
Solutions have to be designed and developed together with a well-laid down plan for first time implementation. By performing an impact assessment and conducting careful planning at the beginning of the project, it should be possible to determine the major areas relevant to business and from there construct reasonable estimates of the resources required, the time to complete the project, and the related costs that will be incurred. An improperly designed process of conversion could expose the company to potentially significant risk areas which includes:
- Accounting and reporting under multiple accounting frameworks during the transition period
- Maintaining accounting policy consistency across the group, including those by subsidiaries who may have already adopted IFRS or their equivalents
How will Ind-AS affect accounting for income tax?
Currently, profit before tax (PBT) in accordance with the Indian GAAP is used to calculate taxable income and tax expense thereon. Countries that have already adopted IFRS are following varying practices.
For instance, there are countries such as the UK, Singapore, New Zealand and Hong Kong, which are using IFRS as a starting point for tax computation, with some adjustments. In France and Germany, tax computation is still based on local GAAP. With Tax Accounting Standards likely to be announced in the ensuing budget, Indian companies would most likely maintain separate set of books for tax purposes. Whilst income taxes could be determined and paid using tax accounting standards, questions relating to determination of MAT, and application of withholding tax provisions would require further clarity.