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Some Open Questions

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With the notification on 20th February, 2015, the Ministry of Corporate Affairs Ministry (MCA) has put to rest the discussion on India’s convergence plan with International Financials Reporting Standards (IFRS). The MCA has issued 39 new Indian accounting standards (Ind-AS) and notified the roadmap for their adoption by companies in India.

In the first phase, the notification requires companies, both listed and unlisted, with a net-worth greater than Rs 500 crore to comply with Ind-AS for accounting periods beginning on or after April 1, 2016 with the comparatives for the period ending on March 31, 2016.

What this means is that, for the financial year FY 16, all companies will continue to report under the current accounting standards. However, when the companies start reporting the results for the quarter beginning from 1 April, 2016 they would be expected to re-state the prior period comparative and present those numbers under Ind-AS as well. Thus, there would be two sets of financial statements prepared for the year FY16 – one under the current Indian GAAP for compliance purposes and under Ind- AS for being presented as comparative.

To facilitate the investors and users of financial statements to fully understand the impact of the transition there are specificdisclosures and guidance included in accounting standard Ind AS 101 – ‘First Time Adoption of Indian Accounting Standards’. Ind- AS 101 provides for some important guidance;
  • It requires that all the adjustments arising from the transition to Ind-AS should be recorded in the reserves of the beginning of the comparative period, also called as the ‘Transition date’ i.e. the net-worth on 1 April, 2015. This is to ensure that the financial results for FY 16 and 17 are prepared and presented on a consistent basis and same set of Ind-AS accounting policies.
  • Ind-AS 101 also requires that detailed quantitative reconciliation to be included in the financial statements for the financial year beginning after 1 April, 2016 to explain the reason for the difference between the net equity as at 1 April, 2015 and 31 March, 2016, prepared under the current Indian GAAP and under Ind-AS.
  • In addition, it also requires reconciliation be provided between the income statement for the year FY 16 to explain the impact of the transition.

While these disclosures will surely help in easy understanding of the impact of the change in the accounting standards, companies would be looking forward for specific clarifications from MCA abd other regulators in the coming months to handle the transition. Some of these would include;
  •  When the cumulative adjustments are made to the reserves as on 1 April, 2015 should these be considered as free reserves or restricted reserves?
  • If financial results for FY 16 were to change materially under Ind-AS, then would that call into question any managerial remuneration, dividend and other such obligations which would have been approved on the basis of the current Indian GAAP?
  • Would the financial results for the year ending FY 16 be re-adopted by the board of directors, audit committee and therefore the shareholders when the results of FY 17 are approved? Then would the Internal Financial Control over these numbers be applicable?
  • When listed companies present their first quarterly results i.e.1  April to 30 June, 2016, typically they present a corresponding previous quarter i.e. 1 April to 30 June 2015; immediate preceding quarter i.e. 1 January to 31 March, 2016 and the most recent annual period i.e. 1 April to 31 March, 2016. Is this proposed to be changed by SEBI? If not, then would it not result in reduced time frame for compliance?

While these clarifications will evolve, companies may want to consider if they would like to early engage with their stake holders. The annual report for the financial year ending March 31, 2015 could be one such ambassador. Is this too close to comfort?

The author Sunder Iyer, is Partner Price Waterhouse & Co

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