Ind-AS: Adopting IFRS-converged financials – implications and challenges

Ind AS | India integrating

Contents

India integrating ................................................................................................................... 3

India Inc migrates to global accounting regime ................................................................... 11

Ind-AS: Paradigm shift in financial reporting....................................................................... 14

Transition and first time adoption of Ind-AS ....................................................................... 35

Implications for sectors ...................................................................................................... 39

Banking and financial services ............................................................................................ 40

Telecom .............................................................................................................................. 45

Media ................................................................................................................................. 49

Automobiles ....................................................................................................................... 52

Consumer ........................................................................................................................... 58

Technology ......................................................................................................................... 63

Power ................................................................................................................................. 66

Healthcare .......................................................................................................................... 69

Metals & Mining ................................................................................................................. 73

Oil & Gas ............................................................................................................................. 77

Agriculture .......................................................................................................................... 81

Real Estate .......................................................................................................................... 84

Cement ............................................................................................................................... 86

Capital Goods ..................................................................................................................... 88

Opportunities and key challenges ....................................................................................... 91

Annexure 1: HUL’s draft IGAAP vs Ind-AS ........................................................................... 93

Annexure 2: Companies not following hedge accounting ................................................... 95

Annexure 3: Companies capitalising forex fluctuations....................................................... 96

Annexure 4: Impact of Ind-AS on financials ....................................................................... 97

Investors are advised to refer through important disclosures made at the last page of the Research Report.

March 2016

Motilal Oswal research is available on

www.motilaloswal.com/Institutional-Equities,

Bloomberg, Thomson Reuters, Factset and S&P Capital.

Ind AS | IndiaMarch 2016

Thematic | integrating

Ind-AS

India integrating

Adopting IFRS-converged financials – implications and challenges

India Inc. will adopt IFRS-converged financials (Ind-AS) in a phased manner over FY17-20,

with over 350 companies from the BSE500 migrating from FY17. Ind-AS, based on

‘substance over form’ and ‘fair valuation’, will bring material changes to the operating

metrics and return ratios of companies besides providing more disclosures. While some of

the changes on revenue recognition, fixed assets and business combination will have

sector-wide impact, the impact of changes in financial instruments, employee benefits and

consolidation will be more company-specific. Migration to Ind-AS will have material

implications for Banking, Telecom, Automobiles, Power, Media, IT and Consumer sectors.

Our analysis of BSE200 companies suggests material implications for many companies.

Principle-led differences to adversely impact near-term operating metrics

Ind-AS, based on the principles of “substance over form” and “fair valuation”, differs

materially from IGAAP, which is focused on “legal form” and “conservatism”. There

will be significant differences in the presentation of financials with respect

to revenue recognition, employee benefits, financial instruments, consolidation,

business combination, fixed assets and foreign currency fluctuation among

others. While Ind-AS will bring a more contemporary presentation of financials, it

will adversely impact the operating metrics of India Inc. in the near term.

Impact to be felt across sectors

India integrating

Ind-AS

S.Gupta@MotilalOswal.com

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+91 22 3982 5544

Our analysis of the differences between the two GAAPs suggest material impact on

the operating metrics of (a) BFSI – earlier recognition of NPAs, fair valuation of

ESOPs, deferment in recognition of fee income, and routing actuarial losses/gains

through reserves, (b) Telecom – expensing forex gains/losses on loans and

consolidation of joint ventures, (c) FMCG and IT – fair-valuing ESOPs,

increased amortization post business combinations, and accrual-based recognition

of income on MF, (d) Autos – consolidation of JVs / treasury shares, classification of

take-or-pay contracts as deemed lease, (e) Power – arrangements with

government classified as service concession arrangements, (f) Media – fair-valuing

ESOPs, classifying redeemable preference shares as debt, and (g) All sectors – timing

and quality of revenue recognition.

India Inc. might circumvent few provisions, but earnings to be impacted

Our discussions with various accounting experts suggest that companies might

change arrangements to circumvent the applicability of certain provisions like

deemed lease. Similarly, high dividend paying companies might prefer to declare

high interim dividend, as final dividend declared but pending shareholder approval

will continue to form part of reserves, impacting RoEs. However, we believe these

changes are likely to have an adverse impact on earnings.

Note:

BSE-200 includes

only companies covered in

MOSL universe

March 2016

Ind AS | India integrating

Key implication on sectors

Sector

Banking

Telecom

Media

Automobile

Cons umer

Technology

Power

Healthcare

Metals

Oil & Gas

Real Estate

Agriculture

Cement

Capital Goods

Overall

●●●

●●

●

First-time adoption could trigger clean-up and tax planning

Migrating to Ind-AS will require corporates to prepare an opening balance sheet on

the transition day, recognizing assets and liabilities in accordance with Ind-AS and

adjusting the difference on migration through reserves. This will imply material

change in the net worth of companies. We believe that investors need to be

watchful for the adjustments made – the migration might provide companies a

window to clean up their books. Further, the option to fair-value assets on first-time

adoption might offer MAT-paying companies an opportunity to increase their future

depreciation cost and lower book profits, which forms the basis for MAT payments.

Several challenges remain as we migrate

While India Inc. is set to migrate to the new regime, our discussions with various

experts suggest that challenges remain on (a) varying levels of corporate

preparedness, (b) high dependence on management estimates, which may vary and

lead to incomparable financials within peers, (c) impact of financial covenants on

loans availed, (d) lack of expertise on fair valuation, and (e) continuing anomalies of

including gains/losses on exchange fluctuations relating to intra-group transactions

in consolidated financials.

Impact:

Low

●

Medium

●●

High

●●●

Exhibit 1:

Major changes and their impact on key metrics

Key difference areas

Revenue

Multiple element

recognition

contracts

IGAAP

No specific requirement for

unbundling of services. Entire

revenue recognized upfront.

Ind-AS

Components of sale to be

unbundled and recognized

separately at the time of

performance

On transfer of risk and rewards On transfer of risk and rewards

and control

No specific guidelines. Generally Fee income is recognized over the

recognized on receipt

life of the loan/period of service.

Impact due to transition

Deferral of revenue and earnings

Recognition

Criteria

Fee income on (a)

loans extended ,

and (b) guarantee

services rendered

Service concession

No specific guidelines available Arrangements that satisfy certain

arrangements

under IGAAP for accounting of criteria will be accounted using

(SCA)

these arrangements.

SCA.

Employee

benefits

ESOPs

Deferral of revenue and earnings

Deferral of revenue recognition leading

to impact on margin and earnings

Long term

employee

benefit plans

Consolidation of

Consolidation

entity as subsidiary

Joint venture

Treasury shares

Business

Mergers and

Combination

Acquisitions

Optional to account for ESOP

cost on intrinsic basis or fair

valuation

Gains losses on change in

actuarial assumptions charged

to the income statement

Based on legal ownership

Accounted on proportionate

basis

Not mandatory to consolidate

Mandatory to account for ESOP

cost on fair valuation.

Revenue and profitability of companies

on construction activities will be

advanced. This will be compensated by

lower profits during the operation

phase.

Increase in employee costs.

Gains/losses on change in

Reduction in volatility of income

actuarial assumptions charged to statement.

the reserves.

Based on control

Certain entities may be consolidated/

unconsolidated

Decline in revenues and EBITDA.

However, earnings will be

unaffected.

Adjusted from equity on

consolidation

Decline in revenues and EBITDA.

However, earnings remain unaffected

Increase in EPS, Decline in net worth

and increase in the ROCE/ROE

Appropriate representation of assets/

liabilities. Goodwill will be carried at

much lower value. Depreciation &

Separate guidance for

Mandatory (a) fair valuation of

acquisition of business unit

assets and liabilities acquired on

(under As14) and acquisition of acquisition, (b) recognition of

March 2016

Ind AS | India integrating

Key difference areas

Financial

Instruments

Classification of

financial

instruments

Property

Plant and

Equipment

Others

As per substance of the

Preference dividend on redeemable

instrument - Perpetual Debenture preference shares - Finance cost ;

as Equity; and Redeemable

Interest on perpetual debenture -

preference shares as debt

adjusted in the equity

FCCB

Treated as debt. Premium on Split accounting followed. Interest Increase in finance cost

redemption is either charged to cost on liability portion to be

reserves or forms part of

provided through income

contingent liability

statement

Deep discount

Discount on issue / premium on Discount on issue / premium on Increase in finance cost

bond/ZCB

redemption charged through redemption charged through P&L

reserves

using effective interest rate

method

Investments

Investments classified as (a)

Investments carried at fair value Earnings on investments will smoothen

current: carried at lower of cost with gains in P&L or OCI as per the and be recognized over the holding

or market value, and (b) non- classification (a) HTM, (b) FVOCI, period. Increase in net worth will,

current: carried at cost less any or (c) FVTPL.

however, lead to decline in return

permanent diminution in value

ratios.

of asset

Derivatives

Optional either to follow hedge Derivative instruments are

Reduce volatility in income statements

accounting or MTM losses on required to be fair valued and the of companies currently not following

derivative contracts are charged gains and losses are recognized hedge accounting

through the income statement through the income statement

while the MTM gains are

unless the company adopts hedge

ignored

accounting

Bill discounting

Debtors derecognized and

Debtors are derecognized only if Increase in debt and debtors. Decline

shown as part of contingent

significant control and risk are

in ROCE.

liability even if risk is retained transferred

Loan Provisioning -

NPA recognition as per RBI

NPA recognition as per expected NPA recognition will get proponed

BFSI

guidelines which is more on

credit loss method

lines with the incurred loss

model

Take or pay

Recognized as a purchase

Considered as a deemed lease.

Balance sheet:

higher asset base and

contracts with

transaction.

debt.

P&L:

Higher depreciation and

suppliers

interest payment. EBITDA will improve.

RoCE:

will deteriorate.

Asset retirement

Companies recognize absolute Companies recognize present

Profitability in initial years will decline,

obligation

contractual obligation for ARO value of both contractual and

as base for amortization increases on

as part of asset cost

constructive obligation as part of recognition of constructive obligation.

asset cost.

Intangibles -

Life of intangibles is definite.

Intangibles like

Amortization expenses will reduce

amortization

trademarks/brands can have

indefinite useful life

Revaluation of

Selective revaluation of assets is Does not permit selective

Decline in earnings

assets

permitted. Depreciation on

revaluation of assets. While

revalued asset is charged

revaluation gains are adjusted in

through the reserves

reserves, depreciation on revalued

assets needs to be factored

through the income statement

Forex fluctuations

Optional either to expenses the Exchange fluctuation on

Reduces asset value and earnings

on long-term loans

exchange fluctuation on long

translation or settlement of the

term monetary assets/liabilities foreign currency monetary items

or to capitalize it in the B/S and to be recognized in the income

amortize it over the life of the statement

asset or a specified period.

IGAAP

shares (under AS14).

Assets/Liabilities acquired can

be recognized at book value or

fair market value depending on

methodology used. Goodwill

recognized under AS14 is

amortized while under AS21 is

only tested for impairment

As per legal form :Perpetual

Bonds as Debt ; Redeemable

preference shares as equity

Ind-AS

Impact due to transition

intangibles even when not

amortization cost will vary from

recorded in the books of seller.

current levels.

Excess of consideration paid over

net asset acquired is treated as

goodwill and tested for annual

impairment, while the deficit is

adjusted in reserves

March 2016

Ind AS | India integrating

Key difference areas

Deferred taxes

IGAAP

Ind-AS

Computed using the ‘income

Computed using the ‘balance

statement approach’

sheet approach’

Proposed dividend

Shown as an appropriation of To be shown as an appropriation

profits for the year in which it is of profits post getting declared

declared

and approved

Government grants

Amount collected from

Amount collected from the

- Deferral loans

customer is recognized as a loan customer is recognized as a loan,

on absolute value.

which is carried at the present

value (PV). The difference

between the PV and absolute

value is (a)treated as the finance

cost on one side, and (b) deferred

revenue income on the other

Impact due to transition

Deferred tax recognition may vary

Proposed dividend unless approved

continues to remain as part of reserves

Increase in EBITDA and finance cost,

while earnings may remain

unimpacted

Source: MOSL

Exhibit 2:

Key implications on operating metrics

Key implications

Consolidation of entities

Consolidation

Consolidation of JVs

Treasury shares elimination

Multiple element contracts

Revenue

Recognition

Employee

Benefits

Service concession agreements

Transfer of control

Goss v/s net revenue presentation

Actuarial gain / loss

Fair valuation of ESOPs

Redeemable preference shares / Perpetual

debentures

FCCBs

Financial

Instruments

Deep discount bonds / ZCBs

Investments – FMPs

Investments - Equity / Debt – fair valuation

Derivatives - hedges

Bill discounting

Loan provisioning

Business

Combination

Business combination - FV

Asset retirement obligation

Revaluation of assets

PPE

Intangibles - depreciation

Deemed lease - lessor

Deemed lease – lessee

Exchange fluctuation - on loans

Others

Companies having high dividend payouts

Government grants - deferred loans



Source: MOSL



Revenue



EBITDA



PAT

Net Worth

Debt



ROCE



ROE

March 2016

Ind AS | India integrating

Exhibit 3:

Key implications on major sectors

Key implications

Consolidation

Consolidation of entities

Consolidation of JVs

Treasury share elimination

Revenue

Recognition

Multiple element contracts

Service concession agreements

Fee income on

(a) loans extended, and

(b) guarantee services

Goss v/s net revenue presentation

Actuarial gain / loss

Fair valuation of ESOPs

Redeemable preference shares /

perpetual debentures

Investments - FMPs

Investments - Equity / Debt - fair

valuation

Derivatives - hedges

Deep discount bonds / ZCBs

Bill discounting

Business

Combination

PPE

Loan provisioning (NPA recognition)

Business combination - FV

Asset retirement obligation

Intangibles - depreciation

Deemed lease - lessor

Deemed lease - lessee

Others

Exchange fluctuation - on loans

Companies having high dividend

payouts



Source: MOSL



Automobile



Power

Media



Telecom



FMCG



BFSI



Employee

Benefit

Financial

Instruments



March 2016

Ind AS | India integrating

Exhibit 4:

Material implications for many companies

Company

IndusInd Bank

Remarks

(a)

Fee recognition:

Will get deferred over period of loan / rendering service. IIB's FY15 fee

income stood at 2.3% of average assets.

(b)

NPA recognition:

Likely to be advanced. IIB’s 3QFY16 PCR stood at 34%.

(c)

Fair valuation of ESOPs:

To adversely impact earnings (FY15: 2.2% of PAT).

(a)

Fee recognition:

Will get deferred over period of loan / rendering service. YES’ FY15 fee

income stood at 1.6% of average assets.

(b)

NPA recognition:

Likely to be advanced. YES’ 3QFY16 PCR stood at ~33%.

(c)

Fair valuation of ESOPs:

To adversely impact earnings (FY15: 1.8% of PAT).

(a)

Fee recognition:

Will get deferred over period of loan / rendering service. SBI's FY15 fee

income stood at 0.8% of average assets.

(b)

NPA recognition:

Likely to be advanced. SBI’s 3QFY16 PCR stood at ~27%.

(c)

Actuarial gains/losses:

Will be routed through reserves and not impact earnings (FY15:

Loss of 11.9% of PBT).

(a)

Actuarial gains/losses:

Will be routed through reserves and not impact earnings (FY15:

Gain of 16.5% of PBT).

(b)

NPA recognition:

Likely to be advanced. BoB’s 3QFY16 PCR stood at ~31%.

(c)

Fee recognition:

Will get deferred over period of loan / rendering service. BoB’s FY15 fee

income stood at 0.3% of average assets.

(a)

Fee recognition:

Will get deferred over period of loan / rendering service. PNB's FY15

fee income stood at 0.6% of average assets.

(b)

NPA recognition:

Likely to be advanced. PNB’s 3QFY16 PCR stood at ~16%.

(c)

Actuarial gains/losses:

Will be routed through reserves and not impact earnings (FY15:

Loss of 55.6% of PBT).

(a)

Fee recognition:

Will get deferred over period of loan / rendering service. FY15 fee

income stood at 0.7% of average assets.

(b)

Redemption premium on ZCB:

Will impact earnings (7.8% of FY15 PAT). ZCBs

outstanding as at FY15 stood at INR2.1b.

(c)

Fair valuation of ESOPs:

To adversely impact earnings (FY15: 2% of PAT).

(a)

NPA recognition:

Likely to be advanced. SHTF has NNPA of 4.1% of N/W as at 3QFY16.

(b)

Securitization:

De-recognition of asset to become more stringent, leading to adverse

impact on CAR.

(a)

NPA recognition:

Likely to be advanced. MMFS has NNPA of 14.4% of N/W as at

3QFY16.

(a)

Consolidation of JVs:

Will impact revenue and EBITDA. JVs accounted for 54% of FY15

revenue.

(b)

Asset retirement obligation:

Amortization cost may increase in the initial period on

recognition of additional constructive obligations for decommissioning assets.

(a)

Redeemable preference shares:

Classification as debt will raise FY15 D/E to 0.6x (v/s 0x)

and adversely impact FY15 PAT by 5.7%.

(a)

Exchange fluctuation on long-term monetary items:

To be recognized in income

statement against the current practice of capitalizing to balance sheet. However, the

current practice may continue for existing loans.

(b)

Fair valuation of ESOPs:

To adversely impact earnings (FY15: ~19% of PAT).

(c)

Barter transactions:

Recognition will increase revenue and operating expenditure.

(a)

Consolidation of JVs:

Will impact revenue and EBITDA. JVs accounted for ~44% of FY15

revenue.

(b)

Fair valuation of ESOPs:

To adversely impact earnings (FY15: 6% of PAT).

Yes Bank

SBI

Bank of Baroda

Punjab National Bank

IndiaBulls

Housing Finance*

Shriram Transport

Mahindra Finance

Bharti Infratel

Zee Entertainment

Dish TV

TV18

March 2016

Ind AS | India integrating

Company

Ashok Leyland

Remarks

(a)

Consolidation of JVs:

Will impact revenue and EBITDA, since AL has significant

operations though JVs.

(b)

Revenue recognition:

Likely to be deferred. Revenue from sales, service and warranty to

be separately recognized on performing activities.

PPE:

Deemed lease applicability may impact RoCE. Agreements with ancillaries can

be altered to circumvent applicability, but this might have cost implications.

(a)

Elimination of treasury shares:

Will increase EPS and return ratios. 8.3% of MM's capital

is held as treasury shares.

(b)

Consolidation of entities:

Might vary based on the new definition of control. Could

impact critical operating metrics.

(c)

Revenue recognition:

Likely to be deferred. Revenue from sales, service and warranty to

be separately recognized on performing activities.

(d)

Business combination:

Depreciation costs may rise on recognizing assets at fair value.

(e)

PPE:

Deemed lease applicability may impact RoCE. Agreements with ancillaries can be

altered to circumvent applicability, but this might have cost implications.

(a)

Business combination:

Depreciation costs may rise on recognizing assets at fair value.

(b)

Consolidation of JVs:

Will impact revenue and EBITDA. MSS has significant operations

through JVs.

(a)

Consolidation of JVs:

Will impact revenue and EBITDA. TTMT has significant JVs and step

JVs (Chery generating substantial revenues).

(b)

Revenue recognition:

Unbundling of multiple element arrangements will lead to

deferral of service revenue.

(c)

PPE:

Recognition of assets based on substance (ultimate risk) may lead to assets being

transferred to TTMT’s books. Can be circumvented by altering contracts, but this might

increase operating costs.

(a)

Actuarial gains/losses:

Volatility in employee cost to reduce on actuarial gains/losses

being charged through reserves. Actuarial loss was INR1.1b in FY15.

(b)

Elimination of treasury shares:

Will increase EPS and return ratios. 2.4% of capital is

held as treasury shares.

(c)

PPE:

Applicability of deemed lease might impact RoCE. Agreements with contract

manufacturers can be altered to circumvent applicability, but this might have cost

implications.

(a)

Fair valuation of ESOPs:

To adversely impact earnings (FY15: 5.5% of PAT).

(b)

PPE:

Deemed lease applicability may impact RoCE. Agreements with contract

manufacturers can be altered to circumvent applicability, but this might have cost

implications.

(c)

Financial instruments:

Fair valuation of investments to smoothen earnings and increase

net worth on transition, impacting return ratios. ITC's mutual fund investments stood at

~13% of net worth at the end of FY15.

(a)

Fair valuation of ESOPs:

To adversely impact earnings (FY15: 6.6% of PAT).

(a)

Elimination of treasury shares:

Will increase EPS and return ratios. 9.9% of capital is

held as treasury shares.

(b)

Business combination:

Depreciation costs may rise on recognizing assets at fair value.

(c)

Fair valuation of ESOPs:

Will adversely impact earnings (FY15: 1.5% of PAT).

(a)

Perpetual debentures:

To be classified as shareholders’ funds. Will reduce finance cost;

debt-equity to improve from 0.8x to 0.7x.

(b)

Exchange fluctuation:

To be recognized in income statement against the current

practice of capitalizing to balance sheet. However, the current practice may continue for

existing loans (FY15 capitalization ~INR69b; ~22% of PBT).

(c)

Fair valuation of investments:

To smoothen earnings; RIL has ~20% of its N/W

investments in mutual funds.

Mahindra & Mahindra

Motherson Sumi

Tata Motors

United Spirits

ITC

Jubilant Foodworks

Tech Mahindra

Reliance Industries

March 2016

Ind AS | India integrating

Company

JSW Steel

Remarks

(a)

Exchange fluctuation:

To be recognized in income statement against the current

practice of capitalizing to balance sheet. However, the current practice may continue for

existing loans.

(b)

Redeemable preference shares:

Classification as debt will raise FY15 D/E to 1.7x (v/s

1.6x) and adversely impact FY15 earnings by ~1%.

(a)

Actuarial gains/losses:

Volatility in employee cost to reduce on actuarial gains/losses

being charged through reserves. SAIL's FY15 actuarial loss: 36% of PBT.

(b)

Asset retirement obligation:

Amortization cost may increase in the initial period on

recognition of additional constructive obligations for decommissioning assets.

(a)

Exchange fluctuation:

To be recognized in income statement against the current

practice of capitalizing to balance sheet. However, the current practice may continue for

existing loans. (FY15 capitalization: INR1b; ~27% of PBT).

Source: MOSL

SAIL

Jindal Steel

*Notification for applicability of Ind-AS to HFC’s is yet to be announced

March 2016

Ind AS | India integrating

India Inc migrates to global accounting regime

IFRS the global accounting language



Globally, more than 140 countries follow IFRS (or IFRS converged) financial

statements. Among the large economies, only three – USA, Japan and India – do

not follow IFRS or its converged financials.

Exhibit 6:

IFRS adoption around the world

% of total

31%

14%

23%

26%

100%

116

IFRS required for all or most

public companies

IFRS permitted for all or most

public companies

IFRS required for financial

institutions only

National standards (including in

process of moving to IFRS)

Source: PWC, MOSL

Exhibit 5:

140 countries globally follow IFRS

Region

Europe

Africa

Middle East

Asia and Oceania

America

Total

Number of

jurisdictions

140

Source: PWC, MOSL

India Inc. to adopt IFRS converged financials in phased manner



~350+ BSE-500 companies

will adopt these new

standards effective FY17



India made a commitment towards the convergence of Indian accounting

standards with IFRS at the G20 summit in 2009. In line with this, the Ministry of

Corporate Affairs (MCA) issued a roadmap for the implementation of Indian

Accounting Standards (Ind-AS) converged with International Financial Reporting

Standards (IFRS) beginning April 2011. However, this plan was suspended due to

unresolved tax and other issues.

While presenting the Union Budget 2014–15, the Honorable Minister for

Finance, Corporate Affairs and Information and Broadcasting proposed the

adoption of Ind-AS.

India is set to migrate to Ind-AS (the new accounting norm) in a phased manner,

with ~350+ BSE-500 companies adopting these new standards effective FY17.

Exhibit 7:

Road map for implementation of Ind-AS (Excl. BFSI)

Year of adoption

Comparative year

Companies covered

Listed companies

Unlisted companies

Group companies

Phase I

FY17

FY16

Companies with net worth

> = INR5b

Companies with net worth

> = INR5b

Phase II

FY18

FY17

Voluntary Adoption

FY16 or thereafter

FY15 or thereafter

Companies listed or in the process

of being listed

Any company can voluntarily adopt

Ind-AS

Companies having a net worth

> = INR2.5b

Applicable to holding, subsidiaries, JVs or associates of companies covered

above

Note: Net worth for the above has to be calculated as on 31 March 2014

Source: ICAI, MOSL

March 2016

Ind AS | India integrating

Exhibit 8:

Road map for implementation of Ind-AS by BFSI

Year of Adoption

Comparative year

Companies covered

Banks & Insurance companies

NBFC

Phase I

FY19

FY18

Phase II

FY20

FY19

(i) Listed / in process of being listed - All NBFCs

All Scheduled Banks & Insurance

companies

Companies with Networth >= INR5b

Group companies

(ii) Unlisted - Networth more than INR2.5b but less than

INR5.0b

Applicable to holding, subsidiaries, JVs or associates of companies covered above.

Source: MCA, MOSL

*Notification for applicability of Ind-AS to HFC’s is yet to be announced

Ind-AS is based on the

principles of (a) substance

over form, (b) fair valuation,

and (c) increased

disclosures



The new accounting standards are based on the principles of (a) substance over

form, (b) fair valuation, and (c) increased disclosures will bring more appropriate

presentation of the financial statements. However, they provide a lot of

discretion on the form of management’s estimates.

While India is converging with IFRS and not adopting IFRS, several carve-outs

have been created from IFRS to represent the financials of the companies in the

most apt manner. We summarize these below.

Exhibit 9:

Key carve-outs from IFRS

Mandatory carve-outs

•Law

overrides accounting standard;

however, under M&A, auditors' certificate required

•FCCBs - Embedded derivative to be treated as equity

•Gain

on bargain purchase in M&A

to be recognised in capital reserve

•Loan

with covenant breached

can continue to be non current if repayment is not demanded

•

Long term employee benefit

- GSEC rates to be used for discounting (except for foreign operations)

•

Lease rentals

- No straight-lining for escalation

Optional carve-outs

•Foreign

exchange fluctuations

on long term monetray items existing on first time adoption can continue

to be accounted as per IGAAPs

•Accounting

policies of JVs/ associates

can be different if adoption of parent's policy is impracticable

Source: MOSL

Return ratios and earnings differ under IFRS



Among the large cap companies in India, six report their financials both under

IGAAP and IFRS. A comparison of their FY15 financials under both GAAPs

highlights differences in revenues, EBITDA, PAT, net worth, and borrowings.

However, we note that India is amongst the first countries to early adopt the

new standard on revenue recognition from 1

April 2016, wherein the IFRS

mandates its application from annual periods beginning on or after 1

January

2017.

March 2016

Ind AS | India integrating

Exhibit 10:

Operating metrics varies under different GAAPs

Particulars

Total revenue

EBITDA

EBITDA (%)

PAT

Net Worth

Borrowings

Debt/Equity (x)

IGAAP

2,628

401

15.3%

140

563

736

1.3

Tata Motors

IFRS

2,625

381

14.5%

128

539

725

1.3

Diff.

-5%

-1%

-9%

-4%

-1%

IGAAP

150

25.1%

0.4

Dr. Reddy

IFRS

148

22.6%

111

0.4

Diff.

-1%

-13%

-2%

-5%

11%

IGAAP

737

280

38.0%

(156)

539

778

1.4

Vedanta

IFRS

738

(291)

-39.4%

(128)

1,029

679

0.7

Diff.

-204%

-77%

18%

91%

-13%

-54%

Source: MOSL, SEC filings

Exhibit 11:

Operating metrics varies under different GAAP

Particulars

Total revenue

EBITDA

EBITDA (%)

PAT

Net Worth

Borrowings

Debt/Equity (x)

IGAAP

946

245

25.9%

199

506

0.0

TCS

IFRS

927

247

26.6%

193

584

0.0

Diff.

-2%

-3%

13%

16%

IGAAP

533

149

27.9%

124

507

Infosys

IFRS

533

149

27.9%

122

548

Diff.

-2%

IGAAP

470

103

21.9%

371

0.2

Wipro

IFRS

470

105

22.3%

410

0.2

Diff.

10%

Source: MOSL, SEC filings



Hindustan Unilever (HUVR) recently conducted an analyst conference to

highlight the changes in (a) the opening balance sheet, and (b) earnings for

1QFY16 on adoption of Ind-AS. It’s net worth as at April 1, 2015 and PAT for

1QFY16 are impacted by 65% and 0.8%, respectively on adoption of Ind-AS.

Exhibit 12:

Material Implication on HUL’s Net Worth on transition (INR m)

Particulars

Total revenue

EBITDA

EBITDA (%)

PAT

Net Worth*

Reclassified IGAAP

82,137.4

19,785.4

24.1%

10591.4

37,247.8

Ind-AS

85,570.0

19,928.9

23.3%

10680.3

61,564.4

Diff

-1%

65%

* Draft Ind-AS Balance Sheet as on April 1, 2015



Source: Company, MOSL

Refer

Annexure 1

for detailed draft financial of HUL

In the following sections, we discuss the significant differences between the two

GAAPs, implications of transition and first-time adoption, and sector-wise

implications on adopting Ind-AS.

March 2016

Ind AS | India integrating

Ind-AS: Paradigm shift in financial reporting

Significant changes under the new standards



Our analysis highlights that significant differences lie in revenue recognition,

consolidation, financial instruments, employee benefits, business combinations,

property, plant and equipment, among others.

We believe that generally amongst this Revenue recognition, Business

combination and PPE will have a sectorial level impact while Financial

Instruments, Employee benefit cost and consolidation will have a more

company specific impact. We will now discuss each of these in detail :-

Exhibit 13:

Key differences between the two GAAPs

Source: MOSL

Consolidation: Based on new definition of control

Consolidated financials

mandatory if an entity has

one or more JV or associate

or subsidiary.



IGAAPs require the preparation of financial statements only when a company

has one or more subsidiaries. However, Ind-AS requires consolidated financials

to be prepared even when an entity has one or more joint ventures or

associates and no subsidiaries.

Further, Ind-AS differs materially from IGAAPs in preparation of consolidated

financial statements. The differences are primarily on account of three reasons.

March 2016

Ind AS | India integrating

Exhibit 14:

Consolidation under Ind AS may be materially different

What will be consolidated ?

Change in definition of control

Way in which to be consolidated?

Equity method v/s propotionate consolidation

Gain/losses recognition?

Implication on dilution of stake in subsidiary

Source: MOSL

Entities consolidated as

subsidiary under Ind-AS

may significantly vary from

that in IGAAP



Derecognition of treasury

shares will lead to a

reduction in the net worth

and increase in reported

EPS

Change in definition of control to determine subsidiaries:

Under the present

IGAAP, consolidation of an entity as subsidiary is based on (a) share of equity

held (over 50%), or (b) composition of board of directors. However, Ind-AS,

based on substance over form, broadens the definition to identify control and

includes (a) veto rights with minority shareholders, (b) potential voting rights, (c)

de-facto control, and (d) structured entities to identify subsidiaries. Thus, the

universe of entities that get consolidated under Ind AS and IGAAP may vary

significantly.

The change in definition of control leads to improved transparency, better

governance and appropriate presentation of financial statements, as:



Crossholdings created by certain companies to circumvent the definition of

subsidiary will now need to be consolidated.



Company having de-facto control over another company has to be

consolidated, irrespective of stake. This will be disadvantageous for

companies lacking transparency in reporting.



In case of an SPV, where there is a private equity or strategic investor

involved and has a say in the operations of the SPV, it may be concluded

that control over the SPV is shared. Therefore, the assets and liabilities of

that SPV may/may not be consolidated in the company's balance sheet.

This, in our opinion, will impact conglomerates, and companies in the

infrastructure and real estate sectors.

Treasury shares to be derecognized:

Ind AS does not recognize treasury shares

as financial assets and requires the same to be adjusted to the equity. Further,

no gains / losses are recognized on the purchase, sale, issue or cancellation of

the treasury shares. This will lead to a reduction in the net worth of companies

on the one hand and increase in reported EPS on the other.

Exhibit 15:

EPS rise on de-recognition of treasury shares

Company

M&M

Tech M

United Spirits

% Impact on N/W

-5.6%

-9.9%

-2.4%

EPS under IGAAP

53.1

27.5

EPS under Ind-AS

58.4

30.7

Source: Company Annual Report, MOSL

March 2016

Ind AS | India integrating

Equity method of

consolidating JV will lead to

material changes in revenue

and EBITDA while, PAT may

remain un-impacted.



Equity method v/s proportionate consolidation for joint ventures:

Ind AS

requires joint ventures to be consolidated using the equity method (as currently

done for associates) as against proportionate consolidation currently prescribed

by the IGAAPs.

This will bring in material changes in operating metrics like revenue/ EBITDA for

entities that operate through JVs. Valuations of companies currently valued on

EV/EBITDA basis may be impacted.

NCC

L&T

Tata Steel

SAIL

M&M

Asian Paints

Bharti Infratel

TV 18

Idea Cellular

ONGC

Cadila

Source: Company Annual Report, MOSL

Exhibit 16:

Companies having material operations through JVs

Bosch

Tata Motors

Cummins India

Motherson Sumi

Ashok Leyland

TCS



Gains/ Loss on partial stake

sale in a subsidiary without

loss of control is not

recognized

Implication of stake sale in subsidiary:

Ind-AS considers all providers of equity

capital as the entity’s shareholders, even if they are not shareholders in the

parent company. Accordingly, in case of change in the parent’s ownership

interest in a subsidiary without loss of control, the gain/loss on such transaction

is not recognized as profit or loss – it is considered as an equity transaction.

However, when the sale/disposal transaction results in a loss of control in the

investee subsidiary, the gain/loss is recognized in P&L, including the gain/loss

resulting from re-measurement of the retained interest, if any in that subsidiary.

Under IGAAP, gain/loss on sale/disposal of any interest in the subsidiary is

recognized in the income statement. This could result in a significant difference

in reported earnings of the entity on partial stake sale in a subsidiary.

March 2016

Ind AS | India integrating

Timing and nature of revenue recognition may vary

Difference in principles

leads to change in timing

and nature of revenue

recognition



The principles of revenue recognition under IGAAP and Ind-AS vary significantly.

While IGAAP follows a simplistic approach of transfer of risk and reward for a

definitive consideration with certainty of collection, the Ind-AS prescribes a

more comprehensive approach, which in addition to the above, includes (a)

transfer of control, and (b) fair valuation.

Exhibit 18:

Ind-AS: Additional criteria on transfer of control

and fair valuation

(a)

(b)

•Identify contract with c/m

•Identify separate performance obligation in

contract

•Determine the transaction price

•Allocate transaction price to separate performance

obligation

•Recognise revenue when the entity satisfies the

performance obligation

Source: MOSL

Exhibit 17:

IGAAP: Simple principles for revenue recognition

•Transfer of significant risk and rewards

(a)

•Certainty of consideration amount

(b)

(c)

(d)

(e)

Source: MOSL



•Certainty on collection of consideration

(c)

This difference in principles will lead to a variance in timing, extent and

presentation of revenue recognition under Ind AS v/s the current IGAAPs. The

instances of variances in revenue recognition can be broadly summarized under

the following seven categories.

Exhibit 19:

Revenue recognition under Ind-AS will vary under seven key categories

Multiple element contract

Service concession arrangements

Revenue recognition on transfer of control

Customer loyalty programmes

Extended credit

Discounts / incentive schemes and Right to return

Gross v/s net presentation

Source: MOSL

March 2016

Ind AS | India integrating

Recognition of revenues

and earnings may defer

under multiple element

contracts



Multiple element contracts:

Multiple element contracts are composite

contracts of related activities that (a) can be executed independently, and (b)

consideration is separately determined. Ind AS provides that that the related

revenues in multiple element contracts (like free warranty and service offered

along with sale of vehicle) should be unbundled and recognized separately at

the time of actual rendering of service. This is in divergence to the current GAAP

practice, where the entire revenue is recognized upfront.

This, in our view, will lead to a variation in the timing of recognition of revenues

and earnings for sectors like Autos, Media, Capital Goods, Telecom, etc.

Service concession arrangements:

In India, to promote private participation in

the development of public infrastructure, contracts are being awarded on a

build operate and transfer (BOT) basis, commonly known as service concession

arrangements (SCA).

The current IGAAPs do not provide any comprehensive guidelines on accounting

of SCA. Under IGAAP, companies currently recognize the asset constructed as a

fixed asset and depreciate it over the concession period, and recognize (a)

annuity payments received from the government, or (b) toll collection from

users as revenue. Operating and maintenance expenses are charged to income

statements as and when incurred.

However, under Ind AS, the entity will recognize revenue by splitting the

activities separately for (a) construction of assets, and (b) operation and

maintenance of assets.

For construction of the asset, the entity will determine the fair value of the

asset. Revenue and profitability during the construction phase will be

recognized on a POCM basis over the period of construction.

For operation and maintenance of the asset, the accounting treatment will vary

depending on whether the project is awarded on an annuity basis or on the

basis of rights for collecting toll revenues from users over a finite period.

Under annuity contracts, the entity recognizes a financial asset, while in the

latter, an intangible asset is recognized. At the time of revenue recognition on

construction activity the entity recognizes (a) financial asset – in case of annuity

projects, or (b) Intangibles in case of toll collection method. Accounting for both

is explained by an example below.



Accounting under annuity method

ABC Limited enters into a BOT agreement with NHAI to build a 100km

highway, against which ABC will receive fixed revenue (annuity) of INR5.4b

per year (of which INR0.4b can be ascribed towards operations and

managements) from NHAI for the next five years irrespective of the

vehicular traffic on the constructed highway. ABC is likely to incur total cost

of INR10b. Operation and maintenance (O&M) expense would be INR0.2b.

(Assumptions - Tax: 0%, IRR: ~17%, fair value of construction service after

first year: INR16b.)



Under SCA, revenues and

earnings on construction

and operating and

maintenance will be

recognized separately



March 2016

Ind AS | India integrating

Exhibit 20:

IGAAP: Fixed assets recognized during construction period at cost (INR b)

Particulars

Income statement

Annuity + O&M received

Operating cost

Depreciation

Profit

Balance Sheet

Fixed Assets

Reserves

Cash/(Borrowings)

Cash inflow/(outflow)

2016

10.0

(10.0)

2017

5.4

(0.2)

(2.0)

3.2

8.0

3.2

(4.8)

5.2

2018

5.4

(0.2)

(2.0)

3.2

6.0

6.4

0.4

5.2

2019

5.4

(0.2)

(2.0)

3.2

4.0

9.6

5.6

5.2

2020

5.4

(0.2)

(2.0)

3.2

2.0

12.8

10.8

5.2

2021

5.4

(0.2)

(2.0)

3.2

16.0

5.2

Total

27.0

(1.0)

(10.0)

16.0

Source: MOSL

Exhibit 21:

Ind-AS: Financial assets recognized during construction period at fair value (INR b)

Particulars

Income statement

Revenue

Interest income

Total income

Road construction cost

O&M cost

Profit

Annuity received from NHAI

Balance Sheet

Receivables from NHAI

Reserves

Cash/(Borrowings)

Cash inflow/(outflow)

2016

16.0

(10.0)

6.0

16.0

6.0

(10.0)

2017

0.4

2.7

3.1

(0.2)

2.9

5.0

12.8

8.9

5.7

5.2

2018

0.4

2.3

2.7

(0.2)

2.5

5.0

9.6

11.4

1.8

5.2

2019

0.4

1.9

2.3

(0.2)

2.1

5.0

6.4

13.5

7.1

5.2

2020

0.4

1.3

1.7

(0.2)

1.5

5.0

3.2

15.1

11.9

5.2

2021

0.4

0.7

1.1

(0.2)

0.9

5.0

16.0

5.2

Total

18.0

9.0

27.0

(10.0)

(1.0)

16.0

25.0

16.0

Source: MOSL



Accounting under right of toll collection

In the above illustration, if ABC had agreed to collect revenue in the form of

toll collection (assumed INR5.4b per year), there would be no guarantee of

minimum payment from NHAI and the revenue would be subject to

minimum variation in connection with vehicular traffic. In the books of ABC,

the receivables would be recognized as an intangible asset – “toll collection

rights” and would be amortized over the period of ‘right to collect toll’ on

the road.

Exhibit 22:

Ind-AS: Intangible assets recognized during construction period at fair value (INR b)

Particulars

Income statement

Revenue

Toll collected

Total income

Road construction cost

O&M cost

Amortization

Profit

Balance Sheet

Toll Collection Rights

Reserves

Cash/(Borrowings)

Cash inflow/(outflow)

2016

16.0

(10.0)

6.0

16.0

6.0

(10.0)

2017

2018

2019

2020

2021

Total

16.0

27.0

43.0

(10.0)

(1.0)

(16.0)

16.0

5.4

(0.2)

(3.2)

2.0

12.8

8.0

(4.8)

5.2

5.4

(0.2)

(3.2)

2.0

9.6

10.0

0.4

5.2

5.4

(0.2)

(3.2)

2.0

6.4

12.0

5.6

5.2

5.4

(0.2)

(3.2)

2.0

3.2

14.0

10.8

5.2

5.4

(0.2)

(3.2)

2.0

16.0

5.2

16.0

Source: MOSL

March 2016

Ind AS | India integrating



Upfront fee is recognized

over the period of

rendering service, leading

to satisfaction of

performance obligation



Under Ind-As, sales

incentives, discounts,

rebates will be netted off

from revenue



Revenue recognized on transfer of control:

Ind AS mandates revenue

recognition on satisfaction of performance obligation, which includes not only

transfer of significant risk and reward, but also the transfer of control. This will

lead to Change in timing of revenue and cost recognition of real estate

companies depending on the terms of the contracts as against the current

guidance on revenue recognition prescribes revenue recognition on POCM basis

subject to achievement of stringent threshold criteria.

Non-refundable upfront fees:

In certain contracts, companies charge a non-

refundable upfront fee at the commencement of the contract, wherein the fee

relates to an activity that the entity is required to undertake at or near contract

inception. The current IGAAPs do not prescribe any specific guidance on this.

Consequently, accounting of companies varies. However, under Ind-AS, to

assess the performance obligation, the entity needs to assess whether the fee

relates to transfer of a promised good or service. If the performance obligation

criteria in such a case are not met, the entity is required to defer the revenue

recognition of upfront fee and recognize it over the period of rendering service

or on delivery of goods, leading to satisfaction of performance obligation.

This would have an impact on companies in the BFSI and vacation ownership,

sectors.

Variable consideration – Discount/incentive schemes and right to return:

Companies may enter into contracts for sale of goods / rendering of services,

where the consideration is variable and dependent on certain future events.

These include contracts eligible for volume discounts, sales incentives, refund

rights rebates, penalties, sales returns, etc. The current IGAAPs do not provide

any specific guidance on the accounting of such contracts. Consequently, most

companies recognize the entire revenues upfront and recognize the expenses as

and when the contingency is resolved. However, under Ind-AS, the company

needs to estimate and provide for the variability in consideration at the

inception of the contract. This would imply:



All sales incentives, discounts, rebates (including cash discount) will be

netted off from revenue. This will lead to a decline in reported revenues of

the companies, which will be compensated by increase in EBITDA margins.

This will have an impact on sectors like Autos, Consumer, etc.



Timing of revenue recognition will have to factor in several aspects like right

of return, dispatch v/s delivery, etc. This will have an impact on companies

in Consumer and Pharmaceuticals sectors.

Customer loyalty programs:

Currently, there is no specific guideline for

accounting of loyalty or reward points offered by various companies.

Consequently, companies follow diverse practices of recognizing the entire sales

consideration upfront and either (a) expensing the cost of reward / loyalty

points when redeemed, or (b) estimating and recognizing a provision for this

periodically. However, Ind AS requires estimation and carving out of the fair

value of the reward/loyalty points from the initial sales consideration. The

revenue so estimated is deferred and recognized on redemption of such loyalty/

reward points.

This will have an impact on the revenue recognition of companies in Retail,

Airlines, Banking, and Hospitality sectors.

March 2016

Ind AS | India integrating



Extended credit:

Since Ind-AS is based on the fair value approach, it factors in

time value of money. It requires the revenues on sales made with a deferred

payment consideration to be recognized at fair value. The difference between

the fair value and total consideration is recognized as interest income over the

tenure of the receipt of the deferred consideration.

Gross v/s net presentation:

Revenue under Ind AS is to be recognized at gross

value of excise duty, considering the excise component as part of expenses

under “materials consumed”. This will have a material impact on the

presentation of revenue and costs of all manufacturing companies.

Exhibit 23:

Excise duty as a % of revenue

United Spirits

United Breweries

ITC

Castrol

Ramco Cement

Rel Com

Ambuja Cement

Ultratech

SAIL

ACC

Shree Cement

Supreme Ind

Grasim

Source: Capital Line, MOSL

Employee cost may vary on fair valuation



Employee costs under Ind-AS may vary from IGAAPs primarily on account of two

counts (a) share-based payments, and (b) long-term employee benefits.

Exhibit 24:

Employee cost recognition varies under Ind-AS

Share based payments

•Fair valuation of ESOPs

•ESOPs granted by the parent

Long term employee benefits

•Actuarial loss/ gain

Source: MOSL



Fair valuation of ESOPs to raise employee costs:

Employee stock options

(ESOPs) will be mandatorily accounted using the “fair value” approach in place

of the current options of using intrinsic value or fair value approach.

This will primarily have an impact on companies in the BFSI, Pharmaceuticals, IT,

and Consumer sectors, which offer significant ESOPs, generally accounted using

intrinsic approach.

March 2016

Ind AS | India integrating

Exhibit 25:

Fair valuation of ESOPs adversely impact FY15earnings

•CRISIL

•HDFC Bank

•INFO EDGE

•TV18

•ITC

•Oracle

•Indiabulls Real Estate

•ICICI Bank

•Lupin

•IDEA

•Biocon

•Tech M

11%

Dish TV impact of 19% on PBT on account of lower profit base. Source: Company Annual Report, MOSL



Actuarial gains/losses on

long term employee

defined benefit plan to be

adjusted through reserves

ESOPs to subsidiaries employee in Parent companies to impact employee cost

of subsidiaries:

Many companies (usually MNCs) offer ESOPs to the senior

management of their subsidiaries. Under the current practice, cost of ESOPs

skirts the income statement of the subsidiary while it is recognized in the books

of the parent company. However, Ind-As requires the cost of ESOPs given by the

parent company to be recognized in the books of the parent. This we believe

will impact the earnings of the subsidiaries which are separately listed.

Reduction in P&L volatility on actuarial losses:

Ind AS mandates the actuarial

gains and losses on post-employment benefit plans and other long-term

employment plans to be adjusted through other comprehensive income. This is

in variance with the current practice under IGAAPs, where they are charged

through the income statement. We believe that this will lead to a reduction in

the volatility of employee cost charged to the income statement.

Exhibit 26:

Actuarial losses adversely impacted earnings in FY15

Company

SAIL

Federal Bank

United Breweries

OIL

Tata Power

GlaxoSmith C H L

Gillette India

Nestle India

BPCL

ICICI Bank

ONGC

NTPC

Coal India

Bank of Baroda

Gains/(losses) as % of PBT

-36%

-7%

-6%

-5%

-4%

-3%

-2%

17%

Source: Company Annual Report, MOSL

March 2016

Ind AS | India integrating

Financial instruments: Classification and measurement undergoes change



Financial instruments are contracts that give rise to both (a) a financial asset on

one entity, and (b) a financial liability or equity instruments of another entity.

There exist significant differences in the treatment of financial instruments

between Ind AS and IGAAP at various stages, which can be summarized as

below:

Exhibit 27:

Accounting differences at all stages of financial instruments under both GAAPs

Classification

Measurement and impairment

Derecognition

Source: MOSL



Considering preference

dividend on NCPS as finance

cost will adversely impact

reported earnings

Classification of financial instruments change as substance gains importance

over legal form:

Ind AS prescribes that financial instruments should be classified

in accordance with the substance of the contractual agreement, rather than its

legal form (as is the current practice). This may lead to reclassification of

financial instruments.



Non-convertible preference shares (NCPS) to be classified as debt

and the

corresponding cost to be recognized as finance cost. This will lead to (a)

decline in the earnings of companies having preferential shares, as the

preferential dividend paid as an appropriation of profit will now be classified

as finance cost, and (b) increase in the debt-equity.

Exhibit 28:

Earnings decline considering NCPS as debt

Company

Zee Entertainment

JSW Steel

Note: Only companies with significant impacts are highlighted

% impact on PAT

-5.7%

-0.2%

Source: Company, MOSL



Perpetual debentures / compulsorily convertible debentures

to be

classified as equity with finance cost accounted in statement of equity.



Embedded derivatives to be accounted separately

if the economic

characteristics of the derivative are not closely related to the economic

characteristics of host contracts. This will particularly apply to optionally

convertible instruments, where the derivatives would be recognized

separately and the instrument (debt) would be accounted separately.

Fair valuation principle to impact measurement of financial instruments

IGAAP follows conservatism principle and recognizes the financial instruments at

historical costs while the Ind-AS following fair valuation principle measures financial

instruments using the time value of money. This will lead to material difference in

the measurement and impairment of financial instrument under the two GAAPs

March 2016

Ind AS | India integrating

Measurement/impairment of financial instruments

•

Investments

• Equity: Fair valued with gains either in P&L or OCI

• Debt : Carried at amortized cost or fair valued with gains

either in P&L or in OCI

•

Derivatives :

Fair valued with MTM in P&L or treated as per

hedge accounting

•

Loans and receivables :

Impairment as per expected credit

loss model



Net worth boost on Fair Value of investments:

Ind-AS requires recognition of

financial investments at fair value. This is in divergence with the current

practice, where investments are classified as current and long term. Current

investments are valued at cost or market price, whichever is lower and long-

term investments are carried at cost less permanent diminution in the value of

investment. Fair valuation of investments is likely to boost the net worth of

companies and adversely impact return ratios. Investments can be categorized

as (a) debt, or (b) equity.

Exhibit 29:

Fair Value based measurement & recognition of Investments in Ind-AS

Classification

Instrument type

Amortized cost

Debt

FVTOCI (Debt )

Debt

FVTPL

All (Debt, Equity,

Derivative)

Fair Value

Charged to P&L

FVTOCI(Equity)

Equity

Fair Value

Added to initial

recognition

amount

Transferred to OCI

Balance sheet Measurement

Transaction Cost - Initial recognition

Transaction cost - Subsequent accounting

Amortized cost

Added to initial

recognition amount

Amortized through

P&L using EIR*

P&L

Fair Value

Added to initial

recognition amount

Trf to OCI and

amortized in P&L

using EIR*

OCI

P&L using EIR*

P&L

Gain/ Loss and

Amount parked in

OCI are transferred

to P&L

Recognition on fair value (Gain/ Loss)

Interest and Dividend

Impairment losses

Forex Gain / Loss

Gain / Loss on sale or de-recognition

P&L

OCI

Dividend in P&L

OCI

OCI recycling is

not allowed

Source: MOSL



Fair valuation of debt instrument to smoothen earnings:

Ind-AS requires the

fair valuation of debt instrument at the time of preparation of financial

statements. The debt instruments are classified into three categories

(depending on the business model test), which will determine the accounting for

difference in the fair value since the last measurement:

(a) Solely for the purpose of principal and interest (SPPI): Here, the financial

instruments are a carried at amortized cost and the gains are recognized in

the income statement.

March 2016

Ind AS | India integrating



(b) Either SPPI or sale: Here, the instruments are fair valued and MTM is

recognized through other comprehensive income (OCI). The gains so

accumulated are transferred to the P&L on sale/ maturity of the instrument.

through the income statement.

This, in our view, will lead to a significant smoothening of profit recognition of

instruments like FMPs, where entire gains are currently recognized on maturity.

Exhibit 30:

Companies with significant investments in Mutual Fund Units (% of net worth)

More Than 50%

Tata Communication

Bajaj auto

26-50%

Just Dial

Vedanta

MCX

Maruti

Info Edge

Idea

Voltas

Emami

Bharti Infra

20-25%

CRISIL

Britania

Asian paints

Eicher

Thermax

AIA Engg

Indiabulls Housing Fin

Hero Moto Corp

MphasiS

Tata Motors

Grasim Inds

Indian hotels

Dr Reddy's Labs

MRF

Divi's Lab.

Mindtree

Ambuja Cem.

UltraTech Cem

Reliance Inds.

Source: Capital Line, MOSL



Equity instruments fair valuation to boost net worth:

Equity instruments under

Ind AS are required to be fair valued, with change in fair valuation adjusted in

OCI or P&L. The MTM changes on fair valuation are charged to OCI, if (a) the

instrument is classified as not held for trading and, (b) the company has

exercised an option for accumulating the fair valuation changes through OCI. In

all other cases, the change in fair valuation is adjusted through the P&L. We

highlight that equity investments are in subsidiaries, JVs and associates, which

as per the option provided under Ind-AS, can be carried at cost or accounted at

fair value with MTM gains / losses adjusted through OCI while preparing the

standalone financial statements.

Derivatives – fair valuation will lead to low volatility in income statement:

Under Ind-AS, all derivative instruments are required to be fair valued and the

gains and losses are recognized through the income statement unless the

company adopts hedge accounting. This is in variance with the current

accounting practice wherein companies are either required to follow hedge

accounting (AS30) or only the MTM losses on derivative contracts are charged

through the income statement while the MTM gains are ignored. This will

reduce volatility in income statements of companies currently not following

hedge accounting, as the MTM gains will be recognized, offsetting the adverse

impact of the underlying.



March 2016

Ind AS | India integrating



Refer

Annexure 2

for companies currently not following hedge accounting

Early recognition of impairment losses on loans extended using expected

credit loss model:

Ind-AS prescribes the recognition of impairment losses using

the ‘expected credit losses’ (ECL) model. Our discussions with experts suggest

that this will lead to earlier recognition of impairment loss vis-à-vis the incurred

loss model traditionally used. The ECL model contains a ‘three stage’ approach

based on the change in credit quality of financial assets since initial recognition:



Stage 1:

Includes financial instruments that have not had significant increase

in credit risk since initial recognition or those having low credit risk on the

reporting date. For these assets, 12-month expected credit losses (resulting

from default events possible within 12 months) are recognized and interest

revenue is calculated on the gross carrying amount of the asset.



Stage 2:

Includes financial instruments that have had a significant increase

in credit risk since initial recognition but where there is no objective

evidence of impairment. For these assets, lifetime ECLs are recognized, but

interest revenue is still calculated on the gross carrying amount of the asset.

Expected credit losses are the weighted average credit losses with the

probability of default (PD) as the weight.



Stage 3:

Includes financial assets where there is objective evidence of

impairment on the reporting date. For these assets, lifetime ECLs are

recognized and interest revenue is calculated on the net carrying amount

(that is, net of credit allowance).

Further, for trade receivables, Ind-AS mandates the use of lifetime ECL

model.

This in our view will adversely impact the BFSI sector where the credit loss

provisioning will get preponed.

Ind-AS will lead to early

recognition of NPA

provisioning



Business combination: Fair valuation mandatory



IGAAPs currently provide for separate guidance on (a) acquisition of business

unit or group of assets (under AS14), and (b) acquisition of shares of company

(under AS21). Ind AS, on the other hand, prescribes a consistent guidance for

accounting of all business combinations. Further, accounting for business

combinations under Ind AS significantly varies with the current IGAAPs primarily

on four counts:

March 2016

Ind AS | India integrating

Exhibit 31:

Business combination: Differs under Ind-AS and IGAAPs

Transaction costs

Goodwill on

acqusition

Recognition of

assets/liabilities

acquired

Recognition of

additional

intangibles

Source: MOSL

Exhibit 32:

Business combination: Differs under Ind-AS and IGAAPs

Accounting standard

Method of accounting

Applicability

Recognition of assets /

liabilities

intangible recognition

(other than in Books )

Consideration paid - Net

assets recognized

Goodwill treatment

Overall amortization /

depreciation cost

Transaction cost

Pooling of Interest

IGAAP

AS14

Purchase

AS21

Consolidation

Acquisition of shares in a

company

Ind-AS

Ind-AS103

Business combination

Acquisition of any business

Acquisition of business unit /

Acquisition of business

group of assets + satisfying

unit / group of assets

requisite condition

Book value

Adjusted in reserves

Low

Capitalized

Optional - Book value or

Book value

fair value

Rarely as no guidance

available

Goodwill

Amortized over 5 years

High

Capitalized

Goodwill on consolidation

Tested for impairment

Low

Capitalized

Fair value

Mandatory - at fair value

Goodwill

Tested for impairment

Medium

Expensed

Source: MOSL



Mandatory fair valuation of assets/liabilities acquired:

Ind AS requires

mandatory use of fair value approach (except in acquisition of companies under

the common control) for recognition of assets/ liabilities acquired under M&A

transactions.

However, under IGAAP, M&A transactions using AS14 are accounted either

using (a) pooling of interest method (when some conditions are satisfied) using

book value and no recognition of goodwill, or (b) by purchase method, wherein

the company has an option to recognize assets/liabilities either at book value or

fair value. While, under AS21 the net assets are recorded at book value while

the difference between book value and consideration paid is recorded as

goodwill on consolidation.

Recognition of intangibles acquired:

Ind AS prescribes guidance for

identification and recognition of intangible assets such as brands, trademarks,

customer relationships, etc, which are not provided by the current IGAAPs.

Consequently, companies will be required to recognize and disclose the

valuation of intangibles acquired on acquisition.

March 2016

Ind AS | India integrating

Case study:

In FY09, when Tata Motors acquired JLR, it recognized brand value

and trade (intangibles) of INR51.6b, with indefinite life under its IFRS financials.

However, it did not recognize such intangibles under IGAAP financials.



Higher amortization costs

expected for companies are

growing via inorganic

acquisitions.



Amortization charge to increase on lower recognition of goodwill:

Currently, IGAAPs mandate the goodwill recognized under acquisitions (AS14)to

be amortized over a period of five years unless a higher tenure can be justified;

while, goodwill on consolidation under AS21 is only tested for impairment.

Consequently, under the current practice corporates prefer to structure M&A

deal as acquisition of company under AS21. Ind-AS, on the other hand requires

goodwill to be only tested annually for impairment.

Ind As on the other hand only requires the goodwill to be annually checked for

impairment. However, since the goodwill recognized under Ind AS is generally

lower than that recognized under consolidation (AS21) the amortization charge

(primarily due to fair valuation of assets). This, in our view, may lead to an

overall increase in amortization/depreciation charge for the companies.

Expensing transaction cost of M&A:

Cost incurred on mergers and

amalgamation is required to be charged through income statement under Ind-

AS against the current practice of capitalizing it.

These changes will particularly impact sectors like Pharmaceuticals, IT,

Automobiles and Consumer, where companies are growing via inorganic

acquisitions.

Property, plant and equipment, intangibles: Material changes here!



Accounting of property, plant and equipment under Ind AS has various

departures from the current IGAAPs. These differences will impact not only the

net worth of companies but also the quantum and quality of earnings. The

differences are primarily on account of (a) capitalization of expenses, (b)

depreciation / amortization of the asset, and (c) lease accounting.

Exhibit 33:

Areas on differences in PPE under the GAAPs

Capitalisation of expenses

•Exchange fluctuation

•Borrowing cost

•Asset Retirement obligation

•Revalued assets

•Intangibles

Depreciation & Amortisation

Lease accounting

•Deemed Lease

Source: MOSL



No capitalization of exchange fluctuation:

Following the amendments made in

AS11, several companies have opted to capitalize the exchange fluctuation on

long-term monetary assets/liabilities either in (a) the value of assets, or (b)

foreign currency monetary item translation difference account (FCMITDA),

which is then amortized through the income statement either over the life of

March 2016

Ind AS | India integrating



the loan/asset or till FY20, whichever is earlier. Ind AS requires the exchange

fluctuation to be expensed and does not permit capitalization except as an

adjustment in the borrowing cost.

However, transition provision permits the companies currently following

amended AS11 to continue the capitalization on existing loans.

This is likely to affect companies in the Automobiles, Telecom and Metals sector

which currently rely of forex borrowing and capitalize exchange fluctuation in

the balance sheet.

Refer

Annexure 3

for list of companies following amended AS11

Capitalization of borrowing cost may increase:

Currently, several companies

capitalize borrowing costs of specific loans, but exclude borrowing costs on

many general borrowings (for example, working capital loans). Under Ind-AS, in

the absence of sufficient specific borrowings, all general borrowings need to be

considered for the purpose of capitalization. Our discussions with various

experts indicate that this would result in additional amounts being capitalized.

This, in our view, will impact sectors like Telecom, Metals & Mining and Power

which have high assets under capitalization.

Capitalization of asset retirement obligation may increase:

Asset retirement

obligations (AROs) should factor both constructive and contractual obligations

on present value basis against the erstwhile practice of IGAAPs, where the AROs

are factored only for constructive obligations. This would negatively impact the

profitability of companies, as they would be required to make higher

provisioning on account of constructive obligations partially mitigated by

discounting of obligations to present value.

This, in our view, will impact sectors like Metals, Telecom, Power and Oil & Gas.

Depreciation of revalued assets to impact earnings:

Ind AS does not permit

selective revaluation of assets but prescribes for the entire class of assets.

Further, while revaluation gains are adjusted in reserves, depreciation on

revalued assets needs to be factored through the income statement as against

the current IGAAP practice of charging through revaluation reserves. We do not

expect companies to opt revaluation of assets under Ind-AS.

Amortization costs to be lower on intangibles with indefinite life:

Under Ind-

AS,

intangibles

like trademarks/brands can have indefinite useful life and may

not be amortized but need to be periodically tested for impairment. This is in

variance with the current IGAAPs, where the intangibles are generally amortized

over a period not exceeding ten years. We believe that this may lead to lower

amortization of intangibles for companies, and hence, lead to higher earnings.

This may impact companies in the Pharmaceuticals, Consumer and Agriculture

sector, where acquisitions may lead to recognition of brands and trademarks,

which may have indefinite useful life.



Depreciation on revalued

assets needs to be factored

through the income

statement



Exhibit 34:

Companies with significant intangibles currently amortized

Company

Torrent Pharma.

Pfizer

% of FY15 Net Worth

71%

17%

Source: Capital Line, MOSL

March 2016

Ind AS | India integrating



Deemed lease may have material impact on debt and return profile of

corporates:

While Ind-AS and IGAAP are consistent in accounting of lease, they

differ significantly in identifying transactions that need to be classified as lease.

Ind-AS is based on ‘substance over form’ and looks beyond the legal form (as

used by IGAAP) to identify arrangements that are in the nature of lease.

Ind-AS prescribes the fulfillment of the following conditions for any transaction

to be classified as a deemed lease:



Requires the use of specific asset, and



Convey to the counterparty right to use the asset while it takes significant

proportion of the output/utility of the asset as evidenced by any of the

following:

(i) The purchaser has the right or ability to operate the asset or direct

others to operate the asset in the manner it determines, or

(ii) The purchaser has the right and the ability to control the physical access

to the underlying asset, or

(iii) The price that the purchaser pays for the output is neither contractually

fixed per unit nor is the current market price per unit.

The arrangements that may fall under the scope of deemed lease will include (a)

outsourcing arrangements, (b) take-or-pay contracts, (c) arrangements in the

Telecom industry, in which the supplier of network capacity enters into contract

to provide purchasers with the right to capacity, etc.

Under deemed lease, the assets so determined to qualify for deemed lease will

be transferred from the books of the seller of goods to the books of the

purchaser of goods at fair value. Further, the payments received from the

purchaser of goods will be accounted for as (a) payments towards operations for

manufacturing of goods/services, and (b) payments towards financial lease,

which will be further broken down as (i) repayment of financial liability, and (ii)

payment of interest.

Exhibit 36:

Books of seller – Ind-AS

Revenue

recognition

•Profit on sale of assets

•Operations and maintenance

•Interest on Financial lease

•Operations and maintence

costs

•Repayment of financial lease

Exhibit 35:

Books of seller – IGAAPs

Revenue

recognition

•Sale of goods

Payment Received

•Recognised towards receipt

from debtors

Payments received

Assets

•Tangibles assets-

depreciated periodically

Source: MOSL

Assets

•Financial assets - Receivable

from financial lease

Source: MOSL

March 2016

Ind AS | India integrating

Exhibit 37:

Books of purchaser - IGAAPs

Asset

•No assets

Exhibit 38:

Books of purchaser – Ind-AS

Assets

•Tangiable assets

Liabilities

•No liabilites

Liabilities

•Lease obligation

•Depeciation of intangibles

•Operating/ Mfg cost

•Lease rentals

•Operating and Mfg costs

Source: MOSL

Expenses

•Purchase price of goods

Expenses

Payments

•Purchase of goods

Source: MOSL



Payments



Example: XYZ Limited (power producer) enters into an agreement in 2016 with

ABC Limited (power purchaser) to sell all the units of power produced at a

specified plant at a rate of INR500m p.a (of which INR100m is towards annual

operating expenses) for four years. Further, the construction of plant will cost

INR1,000m and operating cost of power generation and other operating

expenses are INR60m per year.

Assumptions – interest rate: 10%, depreciation method: straight line, Fair Value

of assets: INR1268m.

Exhibit 39:

Allocation of lease payments (INR m)

Year

2016

2017

2018

2019

2020

Opening

balance

1,268

994

694

364

Total payment

(Int. + Principal)

400

Interest

126

100

Principal

274

300

330

364

Closing balance

1,268

994

694

364

Source: MOSL

Exhibit 40:

Financials of ABC Limited (Lessee; INR m)

Particulars

Income Statement

Operating expense

Depreciation

Interest

Net income/(loss)

Balance Sheet

Fixed assets (gross)

Accumulated depreciation

Fixed assets (net)

Lease obligation

Cash flow from financing activities

2016

100

317

126

(543)

1,268

317

951

994

(500)

2017

100

317

100

(517)

1,268

634

694

(500)

2018

100

317

(487)

1,268

951

317

364

(500)

2019

100

317

(453)

1,268

(500)

(2,000)

Source: MOSL

Total

400

1,268

332

(2,000)

March 2016

Ind AS | India integrating

Exhibit 41:

Financials of XYZ Limited (Lessor; INR m)

Particulars

Income Statement

Income from operating activities

Interest income

Gain on sale of asset

Operating expense

Net income /(loss)

Balance Sheet

Lease receivable

Cash flow

Cash flow from operations

Cash flow from investing activities

Total cash flow

2016

100

126

268

(60)

434

994

440

(1,000)

(560)

2017

100

(60)

140

694

440

2018

100

(60)

110

364

440

2019

100

(60)

440

1,760

(1,000)

760

Source: MOSL

Total

400

332

268

(240)

760

Will era of high RoCE be behind for few sectors impacted by deemed lease?

Companies may redraft

arrangements to

circumvent deemed lease

provision. However,

sourcing cost may rise.



Automobiles, Pharmaceuticals, Consumer, and Power Purchasers enjoyed high

RoCE, as they operated with asset-light models, where manufacturing was

outsourced, with take-or-pay contracts. With the introduction of Ind-AS, such

contracts may qualify for deemed lease. This will entail recognition of additional

tangible assets and financial liabilities in the books of the purchaser, adversely

impacting return ratios.

While the companies in these sectors will try to modify agreements to skirt the

definition of deemed lease, we believe that (a) this might be difficult, where the

government is a counterparty, and (b) even when the arrangements are entered

into with other companies, there might be an increase in cost implications, as

demand risk will legally shift to the seller under the new arrangements.

Other differences



Foreign exchange fluctuations

–

Ind-AS requires the exchange fluctuation on

translation or settlement of the foreign currency monetary items to be

recognized in the income statement. However, in the current IGAAPs, an option

has been provided to companies to capitalize the exchange fluctuation on long

term monetary assets to the carrying cost of fixed assets / reserves as the case

may be and amortize it over the life of the asset or a specified period.

It may, however, be read along with the carve-outs proposed, where the

companies have been given an option to continue their existing accounting

policy of long term monetary asset/liability that existed on the date of migration

(end of FY16 for Phase I companies).

Deferred taxation –

Under Ind AS, deferred taxes are computed using balance

sheet approach for temporary differences between the carrying amount of an

asset or liability in the statement of financial position and its tax base. Under

IGAAP, taxes are computed using profit/loss statement approach for timing

differences in respect of recognition of items of profit or loss for the purposes of

financial reporting and for income taxes.

This will lead to recognition of (a) deferred tax on unrealized inter-company

profit eliminated on consolidation, and (b) deferred tax on undistributed profits

of subsidiaries and associates.

March 2016

Ind AS | India integrating



Proposed dividend –

Under the current practice, the liability for dividend

payments is recognized in the period in which it is declared. However, under Ind

AS, it is recognized when approved by the shareholders. This, in our view, will

have a positive impact on the net worth of entities paying high dividends on the

one hand, while it dampens return ratios on the other.

Government grants

–

Ind AS prescribes for accounting for government grants as

follows, which is different from the current IGAAPs:

(a) Below market rate loan:

Benefit of government loans with below market

rate of interest should be accounted for as government grant, measured as

the difference between the initial carrying amount of the loan and fair value

of the loan on initial recognition. The value of this benefit is then recognized

on a systematic basis over the periods in which the entity recognizes as

expenses the related costs for which the grants are intended to

compensate. Under the current IGAAPs, no benefits are separately

recognized.

(b) Grants of non-monetary assets:

Benefit of government grants of non-

monetary assets have to be accounted at fair value. Under the current

practice, the same is recorded at acquisition cost.

These are to be treated as deferred income,

which is recognized in the income statement on a systematic basis over the

useful life of the asset. This is in variance with the current practice, wherein

the grants value is reduced from the carrying value of the asset.

(d) Grants in the nature of promoters’ contribution:

Under Ind AS, these are

recognized as income over the period on a systematic basis to match the

related cost that it intends to compensate. Under IGAAPs, it is recognized as

part of capital reversal.

Barter transactions –

When goods or services are exchanged for obligations of

similar value other than money, the exchange is regarded as barter. Currently,

there is no specific guidance under IGAAP to record barter transactions.

However, under Ind AS, such transactions are to be recorded at fair value

adjusted by any sum or cash transferred. This will lead to higher recognition of

revenues and operating expenditure while earnings remain un-impacted.

Extraordinary items

–

Disclosure of items as extraordinary items, either on the

face of profit/loss statement or in notes is prohibited under Ind AS. However, to

provide investors with greater clarity on the recurring nature of

incomes/expenses, the management at its own discretion can exhibit such

extraordinary items in Management Discussion & Analysis in the annual report.

Extensive disclosure requirements – a boon for investors

Ind-AS comes with a lot of additional disclosures in line with global standards. Not

only will this help enhance transparency but will also provide vital information to

various stakeholders.



Segmental disclosures made more robust:

Ind-AS requires segmental

information to be provided on how the chief operating decision-maker (CODM)

evaluates financial information for allocating resources and assessing

performance. This may require certain companies to change segment

disclosures consistent with the internal reporting.

March 2016

Ind AS | India integrating



Related party definition broadened:

The definition of what constitutes a

“related party” has been broadened under Ind-AS to include increased number

of relationships. Post-employment benefits too have been included as benefits

to employees.

Detailed disclosures on management estimates:

Ind-AS requires a company to

disclose the judgments and estimates that the management has made in the

process of applying the company’s accounting policies and that have significant

effect on the amounts recognized in the financial statements.

Risk assumptions to be spelt out:

Ind-AS also requires disclosure of key

assumptions about the future that can result in a situation of risk, which may

require adjustments to carrying amount of assets and liabilities (within the next

financial year).

Focus on detailed discourse on capital management:

Currently, there are no

disclosure requirements with regards to capital management. However, Ind-AS

requires disclosures that would enable users of the financial statements to

evaluate the company’s objectives, policies and processes for managing capital.

EPS:

IGAAP mandates disclosure of standalone EPS (earnings per share).

However, Ind-AS mandates EPS disclosure of consolidated profits too.

Reconciliation of Income taxes to be made available:

Ind-AS will also require

extensive disclosures in the area of income taxes. This includes a reconciliation

of effective tax expense with the actual tax expense, deferred tax assets not

recognized on losses, movement in deferred tax assets and liabilities balances,

etc.

Contingent Assets

to be disclosed along with contingent liability.

Transition disclosures:

Extensive disclosures are required to explain the

transition to the shareholders for every change in estimate, accounting policy,

reclassification or recognition/de-recognition of assets and liabilities, qualitative

description of factors that constitute goodwill, and pro-forma revenues and

profit and loss of the combined company as if the acquisition was done at the

beginning of the reporting period.

Reconciliation of Networth:

The first time adopter needs to provide a

reconciliation statement of impact of adopting Ind-AS on



Equity – as at the transition date and at the end of comparable year, and



Profits – of the comparative period.

March 2016

Ind AS | India integrating

Transition and first time adoption of Ind-AS

Road map for first time adoption



Transitioning to Ind-AS will be a mammoth task, as it will require companies to

(a) Prepare an opening balance sheet using Ind-AS principles,

(b) Prepare a comparative financial statement using Ind-AS, and

time adoption

For an entity transiting to Ind-AS from FY17, the timelines will be as follows:

Exhibit 42:

Timelines for preparation of financials under Ind-AS in Phase I

Source: MOSL

Preparing an opening balance sheet



An entity is required to make the opening Ind-AS balance sheet on the date of

transition as an initiating measure to adopt Ind-AS. The entity shall follow the

following process for preparation of first time balance sheet; the difference

arising shall be adjusted through reserves.

March 2016

Ind AS | India integrating

Exhibit 43:

Process of preparing an opening balance sheet

Recognize all assets and liabilities whose recognition is required by Ind-AS

Not recognize items as assets or liabilities if Ind-AS does not permit such recognition

Reclassify items recognized in accordance with previous GAAP as one type of asset, liability or component of

equity, but are a different type of asset, liability or component of equity in accordance with Ind-AS

Apply Ind-AS in measuring all recognized assets and liabilities

Source: MOSL



Ind-AS provides certain exemptions from retrospective applicability of

provisions for preparation of opening balance sheet. While some of these are

mandatory, others are optional. The significant exemptions are illustrated

below:

Exhibit 44:

Exemptions on first time adoption

* Management estimates

* De-recognition of financials

assets & liabilities

* Hedge accounting

* Non-controlling interest

* Classification & measurement

of financial assets

* Embedded derivatives

* Impairment of financial assets

* Property, plant, equipment,

intangibles

* Long term foreign currency

monetary items

* Non-current assets held for sale

& discounted operations

* Service concession

agreements

* Business combination

Source: MOSL

Mandatory exemptions



Management estimates:

Estimates made by the management under IGAAP

should not be changed by using subsequent information at the Ind-AS transition

date (i.e. not to use any hindsight). These estimates should be changed only if

there is an error, or the estimates were not required under IGAAP but are now

required under Ind-AS.

De-recognition of financial asset / liability:

If non-derivative financial assets or

non-derivative financial liabilities are de-recognized in accordance with previous

GAAP as a result of a transaction that occurred before the date of transition to

Ind-AS, the entity shall not recognize those assets and liabilities in accordance

with Ind-AS unless they qualify for recognition as a result of a later transaction

or event.

Hedge accounting:

All derivatives are required to be carried at fair value

through profit and loss account unless they meet the hedge accounting

March 2016

Ind AS | India integrating



requirements under Ind-AS. Retrospectively designating derivatives and

qualifying instruments as hedges is not permitted.

Non-controlling interest:

Ind-AS provides that on transition the non-controlling

interest (NCI) cannot have a deficit balance unless it pertains to a business

combination considered retrospectively while applying first time adoption.

Classification and measurement of financial assets:

The classification and

measurement of financial assets will be made considering whether the

conditions specified under the standard are met based on facts and

circumstances existing at the date of Ind-AS transition.

Impairment of financial assets:

The transition provision provides operational

simplification to apply for impairment requirement. On first time adoption, it is

required to approximate the credit risk on initial recognition of financial

instrument. The entity will use this credit risk so determined at the date of

transition for determining whether a 12-month ECL or a lifetime ECL should be

used. If the entity is unable to determine whether there is increase in significant

credit risk, then lifetime ECL is used.

Optional exemptions

MAT paying may fair Value

assets on first time

adoption to benefit from

lower tax outflow



Companies permitted to

account for fluctuation on

existing loans as per their

current policy. However, on

new loans forex losses are

charged to P&L.



Property, plant and equipment:

Entities have been given an additional option to

use IGAAP carrying values of PPE and intangibles as on the transition date as

deemed cost under Ind-AS. Further, for lease arrangements, transitional relief

has been given to use transition date facts and circumstances to assess the

classification of each element as a financial or an operating lease.

We believe MAT-paying companies might opt to fair value the PPE at first time

adoption, as the upward revaluation of assets will lead to higher depreciation

and lower book profits. This in turn will lead to lower outflow of MAT.

Foreign exchange difference on long-term monetary items:

Entities under

IGAAP had a one-time option to capitalize exchange fluctuation on long term

monetary items to the carrying cost of fixed assets or to reserves and then

depreciate / amortize over a period of time as specified or charge it to income

statement. Under the transition provision, an exemption has been provided to

account for the exchange fluctuations on long term monetary assets/liabilities

that existed till the date of migration (FY16-end for Phase I) to account for

exchange differences arising from translation of long-term foreign currency

monetary items recognized in the financial statements as per previous GAAP.

However, the exchange difference on long-term monetary items accounted for

the first time after implementation of Ind-AS has to be routed through income

statement only.

Non-current assets held for sale; discontinued operations:

On first-time

adoption, an entity can measure such assets at the lower of carrying value and

fair value less cost to sell (at the date of transition) and recognize the difference

directly in retained earnings.

Service concession agreement:

Ind-AS provides optional relief from

retrospective application of the policy adopted for amortization of intangible

assets arising from service concession arrangements related to toll roads

recognized in the financial statements in previous financial reporting period as

per IGAAP.

March 2016

Ind AS | India integrating



Business combination:

A company has the following three options in relation to

the business combination transactions before the transition date:

Exhibit 45:

Options to account for business combinations

Restate all past business combinations done after a fix date, prior to

transition date, or

Not to restate business combinations before the transition date, or

Restate all past business combinations before the transition date

Source: MOSL

Comparative financials



After transition to Ind-AS, companies are required to present comparative

information as previously reported under IGAAP. Hence, three Balance sheets

would be presented at the end of the first year of transition.

Opening balance sheet

under Ind-AS

3 Balance sheets to

be presented

IGAAP reclassified balance

sheet for the comparative

period

Period-end balance sheet

under Ind-AS

Source: MOSL

Exhibit 46:

Three balance sheets to be prepared on first time presentation

Disclosure requirements



Extensive disclosures are required to explain the transition to the shareholders

for every change in estimate, accounting policy, reclassification or

recognition/de-recognition of assets and liabilities.

Further, companies are required to present the profit and loss account, cash

flow statement and notes to accounts for the current transition period under

Ind-AS and comparatives as previously reported under IGAAP reclassified in

prescribed Ind-AS format.

First time adoption may facilitate cleaning up of balance sheet for a few



We believe that the first time adoption of Ind-AS will lead to material changes in

the net worth of entities, as assets and liabilities will be reassessed for

recognition and measured as per Ind-AS with the differences being adjusted

directly in the reserves. We believe that this may be used by companies for

cleaning up the balance sheet.

March 2016

Ind AS | India integrating

Implications for sectors

As India Inc. transitions to Ind-AS, it is likely to witness many changes in financial

reporting. While it is difficult to quantify the impact or even gauge its direction in

several instances in the absence of adequate disclosures, we have tried to identify

the BSE200 companies likely to be impacted materially. We have classified the

impact in three categories (high, medium and low) based on the FY15 financials

reported by the respective companies.

Exhibit 47:

Implication of Ind-AS on various sectors

Sector

Overall

Revenue

Recognition

Financial

Instruments

Employee

benefit

Consolidation

PPE

Business

Combination

Others

Banking

Telecom

Media

Automobile

Cons umer

Technology

Power

Healthcare

Metals

Oil & Gas

Real Estate

Agriculture

Cement

Capital

Goods

●●●

●●

●

●●

●

●●●

●●

●

●●

●

Source: MOSL

●

●●

●

●●●

●

●●

●

●●●

●

●●

●

●●

●

●●

●

●●

●

Impact: Low

●l

Medium

●●l

High

●●●

Our analysis of the differences between the two GAAPs suggests material impact on

the operating metrics of:

(a)

BFSI

– earlier recognition of NPAs, fair valuation of ESOPs, deferment in

recognition of fee income, and routing actuarial losses/gains through reserves,

(b)

Telecom

– expensing forex gains/losses on loans and consolidation of joint

ventures,

(c)

FMCG and IT

– fair-valuing ESOPs, increased amortization post business

combinations and accrual-based recognition of income on MF,

(d)

Auto

– consolidation of JVs / treasury shares, classification of take-or-pay

contracts as deemed lease,

(e)

Power

– arrangements with government classified as service concession

arrangements,

(f)

Media

– fair-valuing ESOPs, classifying redeemable preference shares as debt,

and

(g)

All sectors

– timing and quality of revenue recognition.

We now discuss the sector-wise implications of migration to Ind-AS and highlight

the companies we believe will be materially impacted.

March 2016

Ind AS | India integrating

Banking and financial services

Exhibit 48:

Snapshot

Area

Revenue Recognition

Fee income on (a) loans

extended , and (b)

guarantee services

rendered

Investment income

IGAAP

IND AS

Impact due to Ind-AS



No specific guidelines.

Generally recognized on

receipt

Instruments classified as (a)

HTM: carried at amortized

cost ; (b) AFS/ HFT: with

MTM losses in P&L and gains

being ignored till realized



Fee income is recognized

over the life of the

loan/period of service.

Instruments classified as (a)

HTM: carried at amortized

cost; (b) FVTOCI: With MTM

gains / Losses in reserve and

(c ) FVTPL: with MTM gains /

losses in P&L.



Deferral of revenue

recognition leading to impact

on margin and earnings.

This will lead to a reduction

in the volatility of treasury

income reported by the

banks and will also lead to an

increase in the net worth (in

a falling rate scenario) with

consequent decline in ROE's

NPA recognition will get

proponed



Financial instruments

NPA recognition



NPA recognition as per RBI

guidelines which is more on

lines with the incurred loss

model

Discount on issue / premium

on redemption charged

through reserves

Preference dividend is shown

as appropriation to profits



NPA recognition as per

expected credit loss method



Borrowing cost on deep

discount bond/ redemption

premium payable on

maturity

Preference dividend on

redeemable preference

Employee benefits

ESOPs



Charged through Income

statement on EIM method

Redeemable Preference

shares are treated as debt

while preference dividend as

finance cost

Mandatory to account for

ESOPs cost on fair valuation

Gains/ losses on change in

actuarial assumptions

charged to the reserves



Decrease in NII



Decrease in NII



Long term employee

benefit plans

Optional to account for ESOP

cost on intrinsic basis or fair

valuation

Gains/ losses on change in

actuarial assumptions

charged to the income

statement

No specific guidelines.

Companies follow different

approaches. However,

generally recognized on

accrual basis



Increase in the employee

costs.

Reduction in volatility of

Income statement.

Others

Loan origination expenses



Transaction costs on loan

origination expenses is

amortized over the life of the

loan.



Deferral of cost recognition

Source: MOSL

Notification for applicability of

Ind-AS to HFC’s is yet to be

announced



We highlight below the principles that may affect BFSI companies due to the

transition to Ind-AS. We believe the impact of these provisions will be felt across

the sector and that it is difficult to detail the impact on individual companies

due to limited public information on Ind-AS implementation.

Revenue recognition



Fee income on

loans

and guarantees to be deferred:

Banks derive significant

proportion of their earnings through fees. In the absence specific guidelines,

different banks follow different methods to recognize fee income. Ind-AS

requires fee income (a) on guarantees to be recognized over the period

rendering of service, and (b) on loan origination to be recognized over the

March 2016

Ind AS | India integrating



Deferral of fee income to

impact private sector banks



tenure of the loan on the basis of effective interest yield method. This will lead

to a time deferment in recognition of revenues. Further, loan origination costs

(DSA payments), which are charged to income statement on actuarial basis, will

be amortized over the life of the loan.

Private

sector

banks

derive higher proportion of their profitability through fee

income than state-owned banks. The impact of deferment of fee income will be

higher on private sector banks. Further, the impact will be offset by

amortization of loan origination expenses (higher in retail loans), which are

currently being expensed.

Among private sector banks HDFC bank, Axis bank, Kotak Mahindra bank and

ICICI bank have higher exposure to retail loans.

HDFC Bank

derives most of its

fee income from liabilities and has significant DSA payouts on retail loans. We

believe it will be positively impacted.

Axis Bank

currently recognizes fee income

on guarantees over the tenure; hence, it will see minimal impact. Other private

sector banks have fee income of 1.3-2.3% of average assets. They are likely to be

impacted on deferral of fee income, though the impact is difficult to ascertain

due to limited disclosures on the composition of fee income.

NBFCs are usually more focused on retail loans and have high loan originating

expenses, which partially offset fee income. For Bajaj Finance, the average

tenure of the loan is low – deferment of fee income may not have a material

impact. Among the HFCs, the impact on IndiaBulls Housing Finance might be

higher, given its higher exposure to corporate loans.

Private sector banks derive substantial portion

Exhibit 49:

Private banks derive significant proportion of income from fees (% of avg

assets)

2.3%

Private Banks derive

significant portion of their

income via fees

1.6% 1.4%

1.4% 1.3%

1.2%

0.8% 0.7% 0.7%

0.6%

0.4% 0.4% 0.4% 0.4% 0.3%

Exhibit 50:

Fee income for NBFCs relatively low

0.8%

0.7%

0.4%

0.2%

0.1%

0.0%

Source: Company Annual Report, MOSL

March 2016

Ind AS | India integrating



Volatility in recognition of

investment income to

increase



Higher

volatility

in recognition of investment income:

Banks have investments

in government bonds and treasury notes. Treasury incomes for banks have been

lumpy, primarily due to AFS and HFT investments, wherein MTM losses are

charged to the income statement while gains are ignored until realized. Recoup

of only provisions (MTM for price going above cost does not take place in a

falling interest rate scenario) happens. However, Ind-AS requires all investments

(excluding HTM) to be marked to market at the end of each financial period,

with gains / losses being recognized in the income statement / OCI as per the

classification. We believe this will increase the volatility in recognition of

treasury income and net worth.

Currently, private sector banks hold investment books with lower time duration.

They will face limited volatility in income and reserves on interest rate changes.

State-owned banks’ investment books are of higher duration; they will face

higher volatility in treasury income and reserves.

Financial instruments



NPA recognition – more judgmental and likely to happen earlier:

Currently,

banks follow the incurred credit loss method for NPA recognition, in line with

RBI guidelines. They make (a) general provisions on their entire loan portfolio at

rates specified by the RBI from time to time, and (b) specific provisions on the

basis of days overdue. Under Ind-AS, loan loss provisioning will be in the form of

expected credit loss method, which is more stringent than the incurred credit

loss method. Under the new norms, provisioning will not just be based on

predetermined rates. Banks will be required to evaluate all significant exposures

individually and all smaller exposures collectively to determine the change in

risk profile and evaluate the need for and quantum of impairment.

It is difficult to quantify the increase in provisions due to migration to the

expected credit loss model, as a lot is left to management discretion.

Directionally, companies with lower PCR (on overall stress loans) will suffer

higher adverse impact than peers.

Among other NBFCs, companies in different asset financing follow different

norms for recognizing NPAs. Directionally, companies with high NNPA as % of

net worth – Mahindra finance, Shriram Transport, REC, PFC – will be impacted

more.

State-owned banks have a

relatively lower PCR

Exhibit 51:

PCR lower for state-owned banks

64%

55%

34% 34%

31% 31% 31% 33%

21%

16% 17% 18%

24% 25% 27%

Source: Company, MOSL

March 2016

Ind AS | India integrating

Exhibit 52:

NBFCs: NNPA as a % of net worth

14.4%

5.9%

2.9%

3.9%

4.1%

BAF

POWF

RECL

SHTF

MMFS

Source: Company, MOSL



NII to be impacted on factoring discount on issue / redemption premium

payable as interest cost:

Few NBFCs issue deep discount / low coupon bonds

redeemable at a premium. Currently, the discount and redemption premium are

charged directly through reserves. Ind-AS requires the discount/ premium

payable on such bonds to be charged off as an interest cost, impacting NII.

Exhibit 53:

NBFCs: Interest cost on ZCCB to impact earnings

Company

HDFC

Indiabulls Housing Finance

Dewan Housing Finance

ZCCBs (INR m)

6440

2100

3118.9

PAT Impact

3.4%

7.8%

5.8%

Source: Company, MOSL



NII lower on classifying redeemable preference shares as debt:

Few NBFCs

issue redeemable preference shares (banks do not issue these any longer),

which are currently treated as AT1 for banks and T2 capital for NBFCs. The

redemption premium payable is treated as an appropriation to profit. However,

Ind-AS requires classification of such preference shares as debt and the dividend

payable as finance cost. This will lead to higher interest cost and lower NII.

Employee benefits



Fair valuation of ESOPs to impact earnings:

Most private sector banks grant

ESOPs to employees. Generally, companies have opted to account for ESOP cost

using intrinsic cost method. Ind-AS requires mandatory use of fair valuation

method, which is likely to increase employee cost.

Exhibit 54:

Fair valuation of ESOPs to impact earnings

Companies

HDFC bank

Federal Bank

ICICI Bank

Indusind Bank

Yes Bank

% of PAT

8.9

2.5

2.2

1.8

Company Annual Report, MOSL

March 2016

Ind AS | India integrating



Actuarial loss-led volatility in employee cost to reduce:

State-owned banks

have significant long-term employee benefit schemes. Currently, the actuarial

losses/gains on these schemes are charged through the income statement,

which leads to volatility in earnings. Ind-AS requires the actuarial losses to be

charged to reserves and will help to contain the volatility in earnings.

% of PBT Loss/(gain)

56%

12%

-17%

25%

35%

14%

23%

Company Annual Report, MOSL

Exhibit 55:

Defined benefit plan to be routed through reserves

Companies

Punjab National Bank

State bank of India

Federal Bank

ICICI Bank

Bank of Baroda

IDBI

Union Bank

Bank of India

Oriental Bank

Rating: Major impact due to NPA recognition and fee income

Revenue

Recognition

Financial

Instruments

Employee

benefit

expenses

Companies

Overall

HDFC Bank

Axis Bank

ICICI Bank

Indusind bank

Yes bank

Kotak Mahindra Bank

Federal Bank

State Bank of India

Bank of Baroda

Punjab National Bank

IDBI Bank

Canara Bank

Union Bank

Bank of India

Oriental Bank

HDFC

Bajaj Finance

Indiabulls housing finance

LIC Housing Finance

Power Finance Corporation

Rural Elec Corporation

Shriram Transport

Mahindra finance

Gruh finance

Dewan Housing Finance

●●

●●●

●●

●●●

●●

●●●

●

●●●

●

●●●

●

●●

●●●

●●

●●●

●●

●●●

●

●●●

●

●●

●

●●

●

●●●

●●

●●●

●●

●●●

●●

●●●

●

●●●

●

●●●

●

Impact:

Low

●

Medium

●●

High

●●●

* For the purpose of our analysis we have considered the standalone financials of all banks (except SBI)

March 2016

Source: MOSL

Ind AS | India integrating

Telecom

Exhibit 56:

Snapshot

Area

Consolidation

Joint venture

IGAAP

Ind-AS

Impact due to Ind-AS



Consolidation on proportion-

nate basis.



Consolidated as per

equity method.



Decline in revenues and EBITDA.

However, earnings remain

unaffected. Also, leverage profile of

companies may change.

Reduces asset value and earnings

Others

Capitalization of exchange

fluctuation

Property, plant & equipment

Asset retirement

obligation (ARO)



Can be capitalized to value of

asset

Companies recognize absolute

contractual obligation for ARO

as part of asset cost.



To be charged to income



statement

Companies recognize

present value of both

contractual and

constructive obligation

as part of asset cost.



Profitability in initial years will

decline, as base for amortization

increases on recognition of

constructive obligation. However,

this will be partially compensated,

as obligations are recognized at

present value rather than absolute

value.

Increase in employee costs.

Employee benefits

ESOPs



Option to account for ESOP

cost on intrinsic basis or fair

valuation.

No specific requirement on

unbundling of services.



Mandatory to account

for ESOP cost on fair

valuation.

Composite sale of

handsets, sim-card,

packages, etc to be

unbundled and

recognized separately.

Prescribes specific

guidance to recognize

the transactions at fair

value.



Revenue recognition

Multiple element contracts



Revenue recognition may get

deferred.

Infrastructure sharing

agreements

(barter transactions)

Financial Instruments

Derivatives



In the absence of specific

guidelines, companies

generally do not record these

in the financial statements.



Revenue and operational

expenditure will be higher.

However, it will have no impact on

earnings.

Reduce volatility in income

statements of companies currently

not following hedge accounting



Optional either to follow hedge



accounting or MTM losses on

derivative contracts are

charged through the income

statement while the MTM

gains are ignored

Derivative instruments



are required to be fair

valued and the gains and

losses are recognized

through the income

statement unless the

company adopts hedge

accounting

Source: MOSL

Consolidation



JV consolidation under new norms to impact operating earnings:

Bharti Airtel,

Idea Cellular, Bharti Infratel and Vodafone have a JV (Indus Towers), which

contributes substantial revenues to the consolidated financials of these

companies. Ind-AS requires JVs to be consolidated by equity method (as

currently done for associates) as against the IGAAP-prescribed proportionate

consolidation. This will bring material changes in operating metrics like revenue

/ EBITDA and debt profile, while earnings may remain unimpacted. However, as

March 2016

Ind AS | India integrating

Bharti Airtel consolidates JVs using equity method, no impact is expected on its

financials.

Exhibit 57:

Significant operation from JV’s

Particulars

Bharti Infratel

Idea Cellular

% of Revenue

54%

% of EBITDA

52%

10%

Source: Company Annual Report, MOSL

Others: Foreign exchange fluctuation



RCom & Idea Celluar

currently follow amended

AS11, likely to see impact

on earnings



Exchange fluctuation on long-term monetary assets/liabilities to impact

earnings:

Oil companies have exposure to long-term foreign currency monetary

items. Ind-AS requires the exchange fluctuation on translation or settlement of

the foreign currency monetary items to be recognized in the income statement.

The current IGAAPs, however, provide an option to capitalize the exchange

fluctuation to the carrying cost of fixed assets / reserves as the case may be and

amortize it over the life of the asset or the specified period. This change will

increase the volatility of earnings of companies currently following the option of

capitalizing exchange fluctuation. It may, however, be noted that under the

optional exception provided on first-time adoption, the companies are

permitted to continue their existing accounting policy of long-term monetary

assets/liabilities.

Expensing foreign exchange fluctuation recognized through income statement

would adversely impacted FY15 PBT of (a) RCom (FY15: ~69%) (b) Idea Cellular

(~2%).

Property, plant and equipment



Recognition of constructive Asset retirement obligations (ARO) to impact

earnings:

Telecom companies have asset retirement obligations (AROs) for the

infrastructure they lay for rendering services. They usually account for the

contractual obligation for the AROs either by (a) charging it on recurring basis to

the income statement, or (b) capitalizing the end obligation to the value of asset

and amortizing it over the period. However, Ind-AS requires companies to

capitalize both “constructive” and “contractual” obligations on present value

basis and then amortize it over the life of the asset. In our view, this will

negatively impact the profitability of companies in the telecom sector in the

initial part due to high amortization on recognition of constructive obligation.

However, it will be partially mitigated by discounting of obligation to present

value.

Overall, we expect this to have a low impact on the sector. The impact on Bharti

Infratel, which has significant revenue from infrastructure lay-down business, is

likely to be higher.

Exhibit 58:

Companies having significant infrastructure rental revenue

Particulars

Bharti Infratel

Idea Cellular

FY15

61%

Source: Company Annual Report, MOSL

March 2016

Ind AS | India integrating

Employee benefits



Fair Valuation of ESOPs to impact earnings:

Few telecom companies offer

ESOPs, which are accounted using the intrinsic value method. Ind-AS will require

fair valuation of ESOPs, which may lead to higher employee costs.

Idea Cellular’s PAT to be adversely impacted by 1.7% for FY15.

Revenue recognition



Revenue recognition on “Multiple element contracts” to be deferred:

Telecom

companies sometimes enter into sales arrangements wherein a sim card,

voice/data packages, and value-added services (VAS) are sold with the handsets.

Under the current practice, the companies recognize the entire revenues

upfront and do not ascribe any revenues towards the services that will be

rendered subsequently. Ind-AS requires the revenues to be unbundled and

recognized separately – revenue from sale of handset to be recognized on date

of sale and revenues on services to be systematically distributed over the period

of rendering the services. In India, the practice of selling composite deals is low,

and hence, this change is likely to have low impact on the companies.

Mandatory revenue & cost recognition for infrastructure sharing agreements:

Many telecom companies enter into infrastructure sharing agreements on

barter basis, where services are provided on reciprocal basis and no cash

transactions are involved. Under the current practice, in the absence of any

specific guidance, the companies generally do not record such transactions.

However, Ind-AS mandates the recognition of such transactions. This will lead to

higher recognition of revenue and operational expenditure, though earnings

may remain unchanged.

Financial instruments



Earnings volatility to reduce for companies not following hedge accounting:

Indian telecom companies have significant exposure to foreign currency

borrowings. To hedge the exchange fluctuation risk, they enter into various

derivative contracts. Under Ind-AS, all derivative instruments are required to be

fair valued and the gains and losses are recognized through the income

statement unless the company adopts hedge accounting. Under the current

accounting practice, companies are either required to follow hedge accounting

(AS 30) or only the MTM losses on derivative contracts are charged through the

income statement (while the MTM gains are ignored). This change will reduce

the volatility in the income statement of companies currently not following

hedge accounting. Idea does not follow hedge accounting and has derivatives

outstanding of INR35.8b (16% of FY15 Networth).

March 2016

Ind AS | India integrating

Rating: Consolidation likely to have significant impact on Telecom companies

Revenue

Recognition

Company

Overall

Financial

Instruments

Employee

cost

Consolidation

PPE

Others

●●●

●

Impact:

Low

●

Medium

●●

High

●●●



Bharti Infratel

Idea Cellular

Reliance

Communication

Tata Communication

●●●

●●

●

●●●

●●

●

●●

●●●

Source: MOSL

Bharti Airtel

presently reports consolidated financial statements in accordance

with IFRS. Hence, we believe the transition to Ind-AS will not have any

meaningful impact on its financials.

March 2016

Ind AS | India integrating

Media

Exhibit 59:

Snapshot

Area

Financial instruments

Derivatives

IGAAP

Ind-AS

Impact due to Ind-AS

Reduce volatility in income

statements of companies

currently not following hedge

accounting

Increase in finance cost leading

to decline in reported EPS.

Debt/Equity to rise.

Increase in the employee costs.



Optional either to follow hedge

accounting or MTM losses on

derivative contracts are charged

through the income statement

while the MTM gains are ignored

Forms part of share holders’

funds.



Derivative instruments are required



to be fair valued and the gains and

losses are recognized through the

income statement unless the

company adopts hedge accounting

Classified as debt. Dividend on

preference shares is treated as a

finance cost.

Mandatory to account for ESOP

cost on fair valuation.

To be charged to income

statement

Consolidated as per equity

method

Redeemable

preference shares

Employee benefits

ESOPs

Others

Exchange fluctuation

Consolidation

Joint venture



Option to account for ESOP cost

on intrinsic basis or fair valuation.

Can be capitalized to value

of asset

Consolidated on proportionate

basis



Reduces asset value and

earnings

Decline in revenues and

EBITDA. However, earnings

remain unaffected. Also,

leverage profile of companies

may change

Deferment of revenue.

Revenue recognition

Bonus/free advertising

slots



Entire revenues are recognized on

initial broadcast. No separate

revenues booked for bonus/free

slots.

Not recorded.



Revenue to be apportioned

between initial and bonus/free

slots and recognized separately

on broadcast.

Revenues and costs recognized at

fair value.



Barter transactions



Revenue and operational

expenditure to be higher.

However, earnings not

impacted.

Source: MOSL

Financial instruments



Zee’s D/E to rise from 0x to

0.6x on classification of

redeemable pref shares as

debt



Finance cost to increase on classification of redeemable preference shares as

debt:

Under Ind-AS, preference shares (redeemable and non-convertible) are to

be classified as debt. This reclassification also leads to preference dividend

(which is currently shown as appropriation to profit) being expensed as finance

cost. This will lead to a decline in reported EPS on the one side and increase in

debt/equity on the other.

Zee Entertainment had INR20.2b of 6% redeemable preference shares

outstanding as at FY15 end. Expensing the preference dividend as finance cost

would lead to a 5.7% decline in FY15 earnings. Debt/Equity will increase from 0x

to 0.6x. The adjusted FY15 RoE increases to 23.5% v/s 17.6%.

Employee benefits



Fair valuation of ESOPs to impact earnings:

Some media companies have

granted ESOPs. Generally, they have opted to account for ESOP cost using

intrinsic cost method. Ind-AS requires mandatory use of the fair valuation

method, which is likely to increase employee cost. We believe this is likely to

March 2016

Ind AS | India integrating

have a negative impact on the earnings of Dish TV and TV18. However, we note

that the impact on Dish TV appears significant, since the company has recently

turned profitable with low PAT. The impact on its EBITDA is -0.1%.

Exhibit 60:

Impact on earnings upon fair valuation of ESOPs

Particulars

Dish TV

TV18 Broadcast

% impact on PAT

-19%

-6%

Source: Company Annual Report , MOSL

Others: Foreign exchange fluctuation



Exchange fluctuation on long-term monetary assets/liabilities to impact

earnings:

Media companies have exposure to long-term foreign currency

monetary items. Ind-AS requires the exchange fluctuation on translation or

settlement of the foreign currency monetary items to be recognized in the

income statement. The current IGAAPs, however, provide an option to capitalize

the exchange fluctuation to the carrying cost of fixed assets / reserves as the

case may be and amortize it over the life of the asset or the specified period.

This change will increase the volatility of earnings of companies currently

following the option of capitalizing exchange fluctuation. It may, however, be

noted that under the optional exception provided on first-time adoption, the

companies are permitted to continue their existing accounting policy of long-

term monetary assets/liabilities.

Dish TV has opted to follow amended AS 11, wherein it capitalizes the exchange

fluctuation on long-term monetary assets/ liabilities in the value of assets. Ind-

AS requires the exchange fluctuation to be expensed. During FY15, it capitalized

foreign exchange loss of INR4.1b to the value of assets.

Consolidation



JV consolidation under new norms to impact operating earnings:

Ind-AS requires JVs to be consolidated by equity method (as currently done for

associates) as against the IGAAP-prescribed proportionate consolidation. This

will bring material changes in operating metrics like revenue / EBITDA and debt

profile, while earnings may remain unchanged.

TV18 has 9 JVs, which together contribute 44% of its total consolidated revenue.

Revenue recognition



Revenue recognition for bonus/free slots may lead to deferment:

Several

broadcasters guarantee minimum viewership to their customers while selling

adverting slots. For shortfalls in agreed conditions, customers are compensated

with bonus/free slots. Currently, the entire revenue is booked at the time of

initial advertisement broadcast. However, under Ind-AS, revenue (and cost if

any) need to be split between initial and bonus slots and recognized over the

period of broadcast. This may lead to deferment in revenue recognition.

However, we believe this will have an insignificant impact for Zee

Entertainment, Sun TV and TV18.

Revenues and costs

to increase for pay TV broadcasters and distributors:

Pay

TV distributors and broadcasters enter into barter arrangements. Broadcasters

March 2016

Ind AS | India integrating

offer free placement and advertisement services in lieu of lower content cost.

Under the current IGAAPs, such transactions are recorded on net basis. Ind-AS,

however, mandates recognition of such transactions on gross basis. This will

lead to an increase in the revenue and operational expenditure for both parties.

However, there will be no impact on earnings.

Rating: Employee benefit & financial instruments to have impact on Entertainment companies

Revenue

Recognition

Company

Overall

Financial

Instruments

Employee

Benefit

Consolidation

Others

Zee Entertainment

Dish TV

TV18 Broadcast

●●●

●

●●●

●

●●●

Source: MOSL

●●●

Impact:

Low

●

Medium

●●

High

●●●

March 2016

Ind-AS | India integrating

Automobiles

Exhibit 61:

Snapshot

Area

Consolidation

Entities to be

consolidated

Joint venture

IGAAP

IND AS

Impact due to Ind AS



Based on legal

ownership

Accounted on Proportionate

basis

Not consolidated



Based on control

Accounted on equity method



Certain entities may be

consolidated/ unconsolidated

Decline in revenues and EBITDA.

However, earnings remain

unaffected

Increase in EPS, Decline in net

worth and increase in the

ROCE/ROE

OEM:

Asset base will reduce,

operating expenses will increase

on fair valuing goods purchased

which will be offset by recognizing

revenues from lease rentals.

OEM: Balance sheet:

Higher asset

base and debt.

P&L:

Higher

depreciation and interest

payment and lower component

cost. EBITDA will improve while

ROCE will deteriorate

Auto Ancillary:

Lower operating

income , and higher interest

income

Earnings on investments will

smoothen and recognized over

the holding period. Increase in net

worth will however lead to decline

in the return ratios

Reduce volatility in income

statements of companies

currently not following hedge

accounting

Treasury Shares

Adjusted from equity on

consolidation

PPE

Assets given to auto

ancillaries



No guidance available and

hence not accounted.



Considered as a deemed sale.



Take or pay contracts

with ancillaries



Recognized as a sales/

purchase transaction



Considered as a deemed lease



Financial Instruments

Investments



Investment classified between

(a) current : carried at lower of

cost or market value and (b)

non-current: Carried at cost

less any permanent diminution

in value of asset



Investments carried at fair value

with gains in P&L or OCI as per

the classification (a) HTM,

(b)FVOCI or (c) FVTPL



Derivatives



Optional either to follow hedge



accounting or MTM losses on

derivative contracts are

charged through the income

statement while the MTM gains

are ignored

Debtors derecognised and

shown as part of contingent

liability if risk is retained

Derivative instruments are



required to be fair valued and the

gains and losses are recognized

through the income statement

unless the company adopts hedge

accounting

Debtors are derecognised only if

significant control and risk are

transferred

Mandatory (a) fair valuation of

assets and liabilities acquired on

acquisition, (b) recognition of

intangibles even when not

recorded in the books of seller.

Excess of consideration paid over

net asset acquired is treated as

goodwill and tested for annual

impairment, while the deficit is

adjusted in reserves

Receivable discounting



Increase in debt and debtors.

Decline in ROCE.

Business Combination

Mergers and Acquisitions



Separate guidance for



acquisition of business unit

(under As14) and acquisition of

shares (under AS14).

Assets/Liabilities acquired can

be recognized at book value or

fair market value depending on

methodology used. Goodwill

recognized under AS14 is

amortized while under AS21 is

only tested for impairment

Can be capitalized to value of

asset



Appropriate representation of

assets/ liabilities. Goodwill will be

carried at lower value.

Depreciation & amortization cost

will vary from current levels.

Others

Capitalization of exchange

fluctuation



To be charged to income

statement



Reduces asset value and earnings

March 2016

Ind AS | India integrating

Area

IGAAP

IND AS

Revenue Recognition

Sale of vehicle along with



No specific requirement for



Revenue for sale of vehicle,

free service and

unbundling of services. Entire

services, warranties etc to be

warranties

revenue recognized upfront.

unbundled and recognized

separately at the time of

performance

Discounts/ incentives



Expensed in P&L account



Revenues recognized net of

incentives/ discounts

Impact due to Ind AS



Deferral of revenue and earnings



Reduction in revenue, increase in

operating margins while earnings

remain un-impacted

Consolidation



Consolidation of JVs to have limited impact:

Some Auto companies operate

through joint ventures (JVs). Ind-AS requires the JVs to be consolidated by using

equity method (as currently done for associates) against the IGAAP-prescribed

proportionate consolidation. This will impact operating metrics like revenue /

EBITDA while earnings remain un-impacted.

Companies having substantial

JVs:

Ashok Leyland, Motherson Sumi, Tata

Motors, M&M, Bosch

Treasury share elimination to boost EPS and return ratios:

Ind-AS does not

recognize treasury shares as financial assets and requires their adjustment from

equity. Further, no gains / losses are recognized on the purchase, sale, issue or

cancellation of treasury shares. This will lead to a reduction in net worth on the

one hand and increase in reported EPS on the other.

M&M

has 8.3% of shares held by M&M Benefit Trust. Under Ind-AS, its EPS will

increase and net worth will reduce, resulting in a boost to return ratios.

Exhibit 63:

…Net worth decline will boost ROE’s (FY15)

Particulars

EPS

Reported net Worth

Less: Carrying value of M&M Benefit trust

53.1

Adjusted Net Worth

INR m

258,564

-14,598

243,966

Source: Company Annual Report, MOSL

5.6%



Exhibit 62:

EPS increases on treasury share elimination…

Particulars

Shares held as at FY15

Less: Shares in ESOP Trust

Reported Number of Shares

Less:

M&M Benefit trust

Less:

Employee Welfare Trust

Adjusted Shareholding and EPS

No of shares

('000)

621,092

-29,700

591,392

-51,835

-2,031

537,526

58.4

Source: Company Annual Report, MOSL



Entities consolidated under Ind-AS may vary:

Conglomerates usually have

complex organization structures. With the change in the definition of control to

determine subsidiaries under Ind AS the universe on entities getting

consolidated may vary significantly then under the IGAAP. This may bring

changes in the critical operating metrics for the company.

Companies to be impacted:

M&M

March 2016

Ind AS | India integrating

Plant, property and equipment



Take or pay contracts with auto ancillaries may qualify as deemed lease:

OEMs

and auto ancillaries enter into long-term take-or-pay contracts for supply of

components, usually covering the life of the plants. Under Ind-AS, such contracts

that fulfill certain criteria might qualify as deemed lease (refer

page 28 for

details).

Consequently, there will be downward pressure on OEMs’ RoCE due to

recognition of additional assets. We believe OEMs have significant bargaining

power and will try to modify agreements to skirt the definition of deemed lease.

However, there may be cost implications, as under the new arrangements,

demand risk will legally shift to the auto ancillaries.

We believe amongst the automobile sector such arrangements are more

prevalent in four wheelers. Consequently, on a relative basis Maruti will have

higher impact.

Free transfer of PPE by OEM to ancillary treated as deemed sale:

OEMs

generally transfer assets (molds, dies, etc used to manufacture components) to

suppliers without consideration. In return, they receive auto components at

concessional rates. Under Ind-AS, such transactions will fall under the category

of barter

(refer page 28 for details).

This will lead to higher revenues for OEMs

in the year of sale of PPE (property, plant and equipment) and higher

component cost and lower depreciation in subsequent years. For auto

ancillaries, it will lead to recognition of PPE at fair value, with corresponding

notional debt in the year of transfer, with higher (a) revenue from sale of

component, (b) interest cost, and (c) depreciation in the subsequent years.



Financial instruments



Fair valuation

of investments to smoothen earnings while RoEs decline:

Being

cash rich, auto companies deploy money in investments. As explained on

page

23, Ind-AS

requires recognition of all investments at fair value, with MTM gains

recognized in P&L or OCI as per the classification. In the current practice, gains

are only booked when realized. We believe that this will lead to smoothening of

earnings for the companies over the medium term while return ratios will be

adversely impacted on transition.

Exhibit 64:

Smoothening of earning for companies with higher Mutual fund exposure, FY15

Particulars

Bajaj Auto

Maruti Suzuki

Eicher Motors

Hero Motocorp

Bosch

MRF

Bharat Forge

M&M

% of NW

Source: Capital line, MOSL

Offloading of discounted

receivable not permitted



Receivables may remain in books even after discounting:

Several Auto

companies use discounting / factoring arrangements for receivables. Under

IGAAPs, receivables post discounting/ factoring are de-recognized and form part

of contingent liabilities. However, de-recognition norms of financial assets under

Ind-AS are stringent

(refer page 23 for details).

This may lead to some of the

March 2016

Ind AS | India integrating

debtors factoring arrangements where risk and rewards or control are retained

not to qualify for de-recognition. Consequently, companies will continue to

recognize debtors in their books while the money received from the banks will

be treated as debt. This might lead to increase in capital employed and debtor

days, impacting RoCE.

Exhibit 65:

Receivable discounting to impact ROCE, working capital cycle

Particulars

Bharat Forge

TVS Motor Co.

Tata Motors

Eicher Motors

% of Net Worth

25%

11.3%

1.3%

1.1%

Source: Capital line, MOSL



Earnings volatility to reduce for companies not following hedge accounting:

hedge exchange fluctuation risk, companies enter into various derivatives

contracts. Under Ind-AS, all derivative instruments are required to be fair valued

and the gains and losses are recognized through the income statement unless

the company adopts hedge accounting. This is in variance with the current

accounting practice, where the companies are either required to follow hedge

accounting (AS 30) or only the MTM losses on derivative contracts are charged

through the income statement while the MTM gains are ignored. This change

will reduce volatility in the income statements of companies currently not

following hedge accounting

Companies to be

impacted: MRF

Business combination



In the recent past, we have seen Indian automobile companies adopting the

inorganic route to accelerate their growth. We believe that the following

companies have been acquisitive in the recent past: Motherson Sumi, Apollo

tyres, Bharat Forge, M&M.

Others: Foreign exchange fluctuation



Exchange fluctuation on long-term monetary assets/ liabilities to impact

earnings:

Automobile companies have exposure to long-term foreign currency

monetary items. Ind-AS requires the exchange fluctuation on translation or

settlement of the foreign currency monetary items to be recognized in the

income statement. This is in variance with the current IGAAPs, which provide an

option to the companies either (a) expense (b) capitalize, the exchange

fluctuation to the carrying cost of fixed assets / reserves as the case may be and

amortize it over the life of the asset or specified period. This will lead to increase

in volatility of earnings of companies that currently capitalize the exchange

fluctuation. It should, however, be noted that under the optional exception

provided on first-time adoption, the companies are permitted to continue their

existing accounting policy for exchange fluctuation on long-term monetary

asset/ liability that existed on the date of migration.

Companies currently following amended AS 11:

Tata Motors, M&M, Hero

Moto, Bharat Forge.

March 2016

Ind AS | India integrating

Revenue recognition



Revenue recognition to be deferred:

Auto companies usually bundle

arrangements such as service support, maintenance, warranty, insurance, etc

with vehicle sales. IGAAPs permit these to be recognized at the time of initial

sale of vehicle. However, Ind-AS requires unbundling of these multiple element

arrangements and recognizing revenues of each activity separately. This will

lead to deferral – service revenue will be recognized over the period of

rendering the service. We believe the impact of this on OEMs will be low.

Revenue representation on gross basis to optically impact margins:

Currently,

companies report revenues net of indirect tax levies. Ind-AS will require

reporting of revenue on gross basis, with indirect tax being recognized as an

expense. This will lead to an optical reduction in operating margins while

absolute EBITDA remains un-impacted.

Exhibit 66:

Impact due to presentation change of excise

Company

MRF

Maruti Suzuki

Exide Inds.

Apollo Tyres

TVS Motor Co.

Eicher Motors

Hero Motocorp

Ashok Leyland

M&M

Bajaj Auto

Bharat Forge

Motherson Sumi

Tata Motors

10%

Excise (% sales)

Impact on sales

11%

10%

Source: Capital line, MOSL



Netting incentives / discounts from revenue to optically boost margins:

Automobile companies offer discounts and incentives to their dealers on

achieving certain targets. Ind-AS requires such revenues to be recognized and

reported net of these discounts and incentives instead of the current practice of

showing these as expenses. This will lead to lower revenue and higher operating

margins while absolute EBITDA remains unaltered.

March 2016

Ind AS | India integrating

Rating: Ind-AS likely to have a significant impact on Auto sector

Revenue

Recognition

Companies

Overall

Financial

Instruments

Consolidation

Business

Combination

PPE

Others

Amara Raja Batt.

Apollo Tyres

Ashok Leyland

Bajaj Auto

Bharat Forge

Bosch

Eicher Motors

Exide Inds.

Hero Motocorp

M&M

Maruti Suzuki

Motherson Sumi

MRF

Tata Motors

TVS Motor Co.

●

●●●

●●

●●●

●●

●

●●

●●●

●●

●●●

●●

●●●

●●

●

●●

●●●

●●

●

●●

●

●●

●

Source: MOSL

●

●●

●●●

●

●●●

●

●●

●

●●●

●

Impact:

Low

●

Medium

●●

High

●●●

March 2016

Ind AS | India integrating

Consumer

Exhibit 67:

Snapshot

Area

Financial instruments

Investments

IGAAP

Ind-AS

Investments carried at fair

value with gains in P&L or OCI

as per the classification (a)

HTM, (b) FVOCI, or (c) FVTPL.

Impact due to Ind-AS



Investments classified as (a)



current: carried at lower of cost

or market value, and (b) non-

current:

carried at cost less any

permanent diminution in value

of asset.

Recognized as Debt

Premium on redemption is

either charged to reserves or

forms part of contingent

liability

Debtors derecognized and

shown as part of contingent

liability if risk is retained

Not consolidated.



Earnings on investments will

smoothen and be recognized

over the holding period.

Increase in net worth will,

however, lead to decline in

return ratios.

FCCB



Split accounting followed.



Increase in finance cost

Interest cost on liability portion

to be provided through income

statement

Debtors are derecognized only

if significant control and risk

are transferred

Adjusted from equity on

consolidation.

Discounting of receivables



Increase in debt and debtors.

Decline in ROCE.

Increase in EPS, decline in net

worth, and increase in

RoCE/RoE.

Increase in employee costs.

Treasury shares

Employee benefits

ESOPs



PPE

Take or pay contracts with

suppliers

Optional to account for ESOP

cost on intrinsic basis or fair

valuation.

Recognized as a purchase

transaction.



Mandatory to account for

ESOP cost on fair valuation.



Considered as a deemed lease

on satisfaction of few

conditions.



Balance sheet:

higher asset

base and debt.

P&L:

Lower RM input cost

Higher depreciation & interest

payment. EBITDA will improve.

RoCE will deteriorate.

Appropriate representation of

assets/ liabilities. Goodwill will

be carried at lower value.

Depreciation & amortization

cost will vary from current

levels.

Business combination

Mergers and Acquisitions



Separate guidance for



acquisition of business unit

(under As14) and acquisition

of shares (under AS14).

Assets/Liabilities acquired can

be recognized at book value

or fair market value

depending on methodology

used. Goodwill recognized

under AS14 is amortized while

under AS21 is only tested for

impairment

Consolidated on proportionate

basis

Not consolidated.

Mandatory (a) fair valuation of



assets and liabilities acquired

on acquisition, (b) recognition

of intangibles even when not

recorded in the books of seller.

Excess of consideration paid

over net asset acquired is

treated as goodwill and tested

for annual impairment, while

the deficit is adjusted in

reserves

Consolidation

Joint venture



Consolidated as per equity

method.

Adjusted from equity on

consolidation.



Treasury shares

Decline in revenue and EBITDA.

However, earnings remain

unaffected.

Increase in EPS, decline in net

worth, and increase in

RoCE/RoE.

Reduction in revenue, increase

in operating margins. Earnings

to remain unimpacted.

Source: MOSL

Revenue recognition

Discounts / incentives



Expensed in P&L account.



Revenues recognized net of

incentives / discounts.



March 2016

Ind AS | India integrating

Financial instruments



Fair valuation of investments to smoothen earnings while RoEs decline:

Consumer companies deploy money in investments. As explained on

page 23,

Ind-AS

requires all investments to be recognized at fair value, with MTM gains

recognized in P&L or OCI as per the classification. Under the current practice,

gains are only booked when realized. We believe that this will lead to

smoothening of earnings for the companies over the medium term while the

return ratios will be adversely impacted on transition.

Exhibit 68:

High exposure to Mutual Fund will boost

Companies

Emami

Britannia Inds.

Asian Paints

Pidilite Inds.

Marico

ITC

Jubilant Food.

Kansai Nerolac

Berger Paints

% of net Worth

40%

39%

31%

15%

13%

12%

11%

Source: Capital Line, MOSL



Discounting of receivables:

Several consumer companies use discounting/

factoring arrangements for receivables. Under IGAAPs, receivables post

discounting/ factoring are de-recognized and form part of contingent liabilities.

However, de-recognition norms of financial assets under Ind-AS are quite

stringent (refer page 23 for details). This may lead to some of the debtors

factoring arrangements where risk and rewards or control are retained may not

qualify for de-recognition. Consequently, the companies will continue to

recognize debtors in their books while the money received from banks will be

treated as debt. This may lead to increase in capital employed and debtor days,

adversely impacting RoCEs. Bills discounted by

United Spirits

stood at

4.5%

FY15 net worth.

Employee benefit



Fair valuation of ESOPs to impact earnings:

Some consumer companies grant

ESOPs to employees. Generally, companies have opted to account for ESOP cost

using intrinsic cost method. Ind-AS mandates the use of fair valuation method,

which is likely to increase employee cost.

Impact on companies: Jubilant Food (6.6% of FY15 PAT), ITC (5.5% of FY15 PAT)

and GCPL (1.3% of FY15 PAT).

March 2016

Ind AS | India integrating

Property, plant and equipment



Deemed Leases to put pressure on return ratios or margins? :

Contract

manufacturing is common practice, where consumer companies outsource part

of their product manufacturing to vendors. Under Ind-AS, such arrangement

could fall under the definition of deemed lease subject to fulfillment of certain

condition

(refer page 28 for details).

This may put pressure on return ratios of

consumer companies due to recognition of additional assets. We believe that

consumer companies will try to modify agreements to skirt the definition of

deemed lease. However, there may be cost implications, as under the new

arrangements, the demand risk will legally shift to the vendors.

We believe amongst BSE 200 companies, Nestle, Britannia, United Spirits and

United Breweries have material outsourcing arrangements and hence may be

impacted more versus the peers

Exhibit 69:

Fair valuation of ESOPs to impact earnings

Company

Jubilant Food

ITC

Godrej Consumer

% of FY15 PAT

6.6

5.5

1.3

Source: Company Annual Report , MOSL



Actuarial loss-led volatility in employee cost to reduce:

Some consumer

companies offer long-term employee benefit schemes. Currently, the actuarial

losses/gains on these schemes are charged through the income statement,

which leads to volatility in earnings. Ind-AS requires the actuarial losses/gains to

be charged to reserves and will help to contain the volatility.

Exhibit 70:

Actuarial loss impacted earnings in FY15

Company

United Breweries

GlaxoSmith C H L

Gillette India

Nestle India

Titan Company

P & G Hygiene

United Spirits

*Note: Actuarial loss of INR1.1b

% of FY15 PBT

6.2

3.2

3.1

1.5

1.4

NM*

Source Company Annual Report , MOSL

Business combination



We believe that the following companies have been acquisitive in the recent

past: GCPL, Dabur.

March 2016

Ind AS | India integrating

Consolidation



JV consolidation will have limited impact:

Companies in the consumer space

have small operations through JVs. Ind-AS requires the JVs to be consolidated by

using equity method (as currently done for associates) as against the IGAAP-

prescribed proportionate consolidation. This will impact operating metrics like

revenue / EBITDA, while earnings will remain unchanged.

Asian Paints

derives

4.4% of its revenues from JVs.

Treasury share elimination to boost EPS and return ratios:

IND As does not

recognize treasury shares as financial assets and hence requires their adjusted

from equity. Further, no gains / losses are recognized on the purchase, sale,

issue or cancellation of the treasury shares. This will lead to a reduction in the

Net worth of companies on one hand and increase in the reported EPS on the

other.

United spirits

has 2.4% of shares held by benefit trust resulting in an increase in

EPS and reduction of Net worth resulting in a boost to return ratios.

Exhibit 71:

Treasury share elimination will put pressure on Net worth & boost ROE’s (FY15)

Particulars

Reported net Worth

Less: Carrying value benefit trust

Adjusted Net Worth

INR m

6,595

(1,238)

5,357

Source: Company annual Report, MOSL

18.8%

Revenue recognition



Netting incentives / discounts from revenue to optically boost margins:

Consumer companies offer discounts and incentives schemes. Ind-AS requires

the revenues to be recognized and reported net of these discounts and

incentives instead of the current practice of showing these as expenses. This

change will lead to lower revenue and higher operating margins, while absolute

EBITDA remains unaltered.

However, grossing up of excise will put pressure on margins:

Consumer

companies (especially cigarettes and alcoholic beverages) pay significant

amount of excise duty. Ind-AS requires presenting sales at gross value and

expensing excise duty as an operating cost. This will lead to an increase in

revenues and decline in operating margins, while operating profits remain

unimpacted.

Exhibit 72:

Gross-up of excise duty to optically put pressure on margins (FY15)

Company

United Spirits

United Breweries

ITC

Excise (% of sales)

58.3%

43.1%

26.9%

Source: Capital line, MOSL

March 2016

Ind AS | India integrating

Rating: Impact on consumers due to employee benefit expense recognition

Financial

Instruments

Companies

Overall

Consolidation

Business

Combination

Employee benefit

expenses

PPE

Hind. Unilever

Nestle India

Dabur India

Godrej Consumer

Britannia Inds.

Marico

GlaxoSmith C H L

Emami

ColgatePalm.

P & G Hygiene

Gillette India

Asian Paints

Berger Paints

United Spirits

United Breweries

ITC

Titan Company

Pidilite Inds.

Jubilant Food.

Tata Global

●

●●

●

●●

●

●●

●

●●

●

●●●

●

●●●

●

●●●

●

●●

●

●●

●●●

●

●●

●

●●

●

●●

●

●●

●

●●

●

●●

●

●●

●

Impact:

Low

●

Medium

●●

High

●●●

Source: MOSL

March 2016

Ind AS | India integrating

Technology

Exhibit 73:

Snapshot

Area

Financial instruments

Investments

IGAAP

Ind-AS

Impact due to Ind-AS



Investments classified as (a)

current: carried at lower of cost

or market value, and (b) non-

current: carried at cost less

permanent diminution in value

of asset.



Investments carried at fair value

with gains in P&L or OCI as per

the classification (a) HTM, (b)

FVOCI or (c) FVTPL.



Earnings on investments will

smoothen and be recognized

over the holding period.

Increase in net worth will,

however, lead to decline in

return ratios.

Reduce volatility in income

statements of companies

currently not following hedge

accounting

Derivatives



Optional either to follow hedge



accounting or MTM losses on

derivative contracts are charged

through the income statement

while the MTM gains are ignored

Derivative instruments are



required to be fair valued and the

gains and losses are recognized

through the income statement

unless the company adopts hedge

accounting

Consolidation using equity

method.

Adjusted from equity on

consolidation

Consolidation

Joint Venture



Consolidation on proportionate

basis.

Not consolidated



Revenues and EBITDA will

decline. However, earnings will

be unaffected.

Increase in EPS, Decline in net

worth and increase in the

ROCE/ROE

Impact on migration to Ind AS

Appropriate representation of

assets/ liabilities. Goodwill will

be carried at much lower value.

Depreciation & amortization

cost will vary from current

levels.

Treasury Shares

Business combination

Mergers and Acquisitions



Separate guidance for



acquisition of business unit

(under As14) and acquisition of

shares (under AS14).

Assets/Liabilities acquired can be

recognized at book value or fair

market value depending on

methodology used. Goodwill

recognized under AS14 is

amortized while under AS21 is

only tested for impairment

Optional to account for ESOP

cost on intrinsic basis or fair

valuation.

Mandatory (a) fair valuation of

assets and liabilities acquired on

acquisition, (b) recognition of

intangibles even when not

recorded in the books of seller.

Excess of consideration paid over

net asset acquired is treated as

goodwill and tested for annual

impairment, while the deficit is

adjusted in reserves



Employee benefits

ESOPs



Mandatory to account for ESOP

cost on fair valuation.

Gains/losses on change in

actuarial assumptions charged to

the reserves.



Increase in employee costs.

Long term employee

benefit plans

Gains losses on change in



actuarial assumptions charged to

the income statement.

Reduction in volatility of

income statement.

Source: MOSL

Financial instruments



Fair valuation of

investments

to smoothen earnings while RoEs decline:

Being

cash rich, IT companies deploy money in investments. As explained

on page 23,

Ind-AS requires all investments to be recognized at fair value, with MTM gains

recognized in P&L or OCI as per the classification. In the current practice, gains

are only booked when realized. We believe this will lead to smoothening of

earnings over the medium term while the return ratios will be adversely

impacted on transition.

March 2016

Ind AS | India integrating

Exhibit 74:

High exposure to Mutual Fund will boost Net Worth on transition (FY15)

Particulars

MphasiS

Mindtree

Hexaware Tech.

% of net Worth

26%

23%

14%

Source: Capital line, MOSL



Reduced volatility

for companies not

following hedge

accounting



Earnings volatility to reduce for companies not following hedge accounting:

Indian IT companies have significant exposure to foreign exchange receivable

from exports. To hedge the exchange fluctuation risk, they enter into various

derivatives contracts. Under Ind-AS, all derivative instruments are required to be

fair valued and the gains/losses are recognized through the income statement

unless the company adopts hedge accounting. Under the current accounting

practice, companies are required to either follow hedge accounting (AS 30) or

only the MTM losses on derivative contracts are charged through the income

statement while the MTM gains are ignored. This change will reduce volatility in

the income statements of companies currently not following hedge accounting.

Companies not following hedge accounting:

Oracle, Tata Elxsi

Consolidation



JV consolidation will have limited impact:

Some IT companies have small

operations through joint ventures (JVs). Ind-AS requires the JVs to be

consolidated by using equity method (as currently done for associates) as

against the IGAAP-prescribed proportionate consolidation. This will impact

operating metrics like revenue / EBITDA, while earnings will be unaffected.

Companies operating though JVs: TCS

(3% of revenue).

Treasury share elimination to boost EPS and return ratios:

Ind AS does not

recognize treasury shares as financial assets and hence requires their adjusted

from equity. Further, no gains/losses are recognized on the purchase, sale, issue

or cancellation of the treasury shares. This will lead to a reduction in the Net

Worth of companies on one hand and increase in the reported EPS on the other.

TechM

has 9.9% of shares held by benefit trust resulting in an increase in EPS

and reduction of Net Worth which will boost return ratios.

Exhibit 76:

…Net worth decline will boost ROE’s (FY15)

Particulars

INR m

Reported net Worth

122,486

Less: Carrying value of Benefit trust

12,071

9.9%

Adjusted Net Worth

110,415

Source: Company Annual Report, MOSL



Exhibit 75:

EPS increases on treasury share elimination…

Particulars

Reported Number of Shares

Less: Shares in TML Benefit trust

Adjusted Shareholding and EPS

No of shares

('000)

960,827

(96,000)

864,827

EPS

27.5

30.7

Business combination



In the recent past, we have seen Indian IT companies adopting the inorganic

route to accelerate their growth. We believe that the amortization cost under

IND AS will rise for more acquisitive companies

refer page 26

for details.

last year:

Infosys, Wipro, TechM

and

Mindtree

have done four acquisitions

each.

March 2016

Ind AS | India integrating

Employee benefits



Fair valuation of ESOPs to impact earnings:

Some IT companies in India grant

ESOPs to their employees. Generally, the companies have opted to account for

ESOPs using intrinsic cost method. Ind-AS requires mandatory use of fair

valuation method, which is likely to increase employee cost.

Impact on companies: Oracle

(5.4% of FY15 PAT);

TechM

(1.5% of FY15 PAT)

Reduced volatility in earnings on change in actuarial assumption

Currently,

the actuarial losses/gains on these long term employee benefit scheme are

charged through the income statement which leads to volatility in the earnings.

Ind-AS, requires the actuarial gain/loss to be charged to the reserves. This will

help to contain the volatility in the earnings.

Actuarial loss of

Tata Elxsi

was 1.5% of FY15 PBT.



Rating: Acquisitive nature of IT companies may be the major area impacted by Ind-AS

Financial

Instruments

Companies

Overall

Consolidation

Business

Combination

Employee benefit

expenses

TCS

Infosys

Wipro

Tech Mahindra

Oracle Fin.Serv.

Mindtree

MphasiS

Hexaware Tech.

Tata Elxsi

●

●●●

●●

●

●●

●

●●●

●

●●●

●

Source: MOSL

Impact:

Low

●

Medium

●●

High

●●●

March 2016

Ind AS | India integrating

Power

Exhibit 77:

Snapshot

Area

Revenue recognition

BOT arrangements

IGAAP

Ind-AS

Impact due to Ind-AS



No specific guidelines

available under IGAAP for

accounting of these

arrangements.



Arrangements that satisfy

certain criteria will be

accounted using service

concession arrangements.



Revenue and profitability of

companies on construction

activities will be advanced.

This will be compensated by

lower profits during the

operation phase.

Earnings on investments

will smoothen and be

recognized over the holding

period. Increase in net

worth will, however, lead to

decline in return ratios.

Reduction in volatility of

income statement.

Financial instruments

Investments



Investments classified as (a)

current: carried at lower of

cost or market value, and

(b) non-current: carried at

cost less any permanent

diminution in value of asset.

Gains/losses on change in

actuarial assumptions

charged to income

statement.

Treated as sales/service

contracts.



Investments carried at fair

value, with gains in P&L or

OCI as per the classification

(a) HTM, (b) FVOCI, or (c)

FVTPL.



Employee cost

Long-term employee benefit

plans



Gains/losses on change in

actuarial assumptions

charged to the reserves.



PPE

PPA arrangements



Arrangements satisfying

certain criteria will qualify

as deemed lease.



For power producers, it will

lead to a declining trend in

profits. For power

purchasers, it will lead to an

increasing trend in profits.

RoCEs for power purchasers

will decline initially due to

recognition of power assets.

Profitability in the initial

years will decline, as the

base for amortization

increases on recognition of

constructive obligation.

However, this will be

partially compensated on

recognizing the obligation

at present value rather than

absolute value.

Source: MOSL

Decommissioning costs



Recognizes absolute

contractual obligation for

decommissioning as a part

of asset cost.



Recognizes present value of

both contractual and

constructive obligations as

part of asset cost.



Revenue recognition



Revenue and earnings to be advanced on BOT arrangements:

Under Ind-AS,

certain BOT projects awarded can qualify for accounting under service

concession arrangements if they meet certain conditions (Refer

page 17 for

details).

Under the service concession arrangements, revenue and profitability

on the construction of the asset will be recognized upfront during the

construction phase, which will be compensated by lower profitability during the

operation and maintenance phase.

March 2016

Ind AS | India integrating

Property, plant and equipment



PPA arrangements may get accounted as deemed lease:

Under Ind-AS, the PPA

arrangements that fulfill certain criteria will be treated as finance lease

(Refer

page 28 for details).

Consequently, for power producers, fixed assets will be de-

recognized from the books, with the recognition of the financial assets at fair

value. The power producers will earn interest on financial assets and revenue

from operation and maintenance of plants. Profitability and return ratios will be

on a declining trend. However, for power purchasers, the asset will be

recognized with a corresponding financial liability. The earnings for the power

purchasers will be on an increasing trend. However, return ratios will be

subdued due to recognition of the asset.

In absence of adequate details on PPA’s it is difficult for us to highlight which

PPA’s may qualify for SCA or deemed lease. However, directionally we believe it

will have a higher impact on companies which have higher capacities signed

towards PPA’s.

Exhibit 78:

Power companies with significant PPA’s

Companies

NTPC

Power Grid Corp

NHPC Ltd

Tata Power Co.

JSW Energy

CESC

% of capacity

100%

>50%

100%

Source: Company, MOSL



Profitability to be impacted on recognition of constructive decommissioning

cost:

Power projects usually have decommissioning cost, attributable at the

time of abandonment of the project. Ind-AS requires constructive liability in

addition to contractual liability (as required currently) for decommissioning of

the asset to be factored in the cost of the asset and depreciated over its

estimated life. In the initial stage of the project, this is likely to increase

depreciation cost and consequently be an earnings dampener. However, this

will partially be compensated on recognition of the liability at present value

rather than absolute value.

NTPC, Tata Power and JSW Energy have captive mines. However, the impact on

their financials would be low.

Financial instruments



Fair valuation of investments to smoothen earnings while RoEs decline:

Power

companies deploy money in investments. As explained on

page 23, Ind-AS

requires all investments to be recognized at fair value, with MTM gains

recognized in P&L or OCI as per the classification. Under the current practice,

the gains are only booked when realized. We believe that this will lead to

smoothening of earnings over the medium term while the return ratios will be

adversely impacted on transition.

March 2016

Ind AS | India integrating

Exhibit 79:

Companies with significant investment in Mutual Fund

Companies

JSW Energy

% of Net Worth

18%

Source: Capital Line, MOSL

Employee benefits



Actuarial loss-led volatility in employee cost to reduce:

Public sector

undertakings have significant long-term employee benefit schemes. Currently,

the actuarial losses/gains on these schemes are charged through the income

statement, which leads to volatility in earnings. Ind-AS requires actuarial losses

to be charged to reserves and will help contain the volatility in earnings.

% of PBT

Source: Company Annual Report, MOSL

Exhibit 80:

Actuarial loss in few power companies

Companies

Tata Power

NTPC

Others



Exchange fluctuation on long-term monetary assets / liabilities to impact

earnings:

Power companies have exposure to long-term foreign currency

monetary items. Ind-AS requires the exchange fluctuation on translation or

settlement of the foreign currency monetary items to be recognized in the

income statement. This is in variance with the current IGAAPs, which provide an

option to capitalize the exchange fluctuation to the carrying cost of fixed assets

/ reserves as the case may be and amortize it over the life of the asset or

specified period. This will lead to increase in volatility of earnings of companies

that currently capitalize the exchange fluctuation. It should, however, be noted

that under the optional exception provided on first-time adoption, the

companies are permitted to continue their existing accounting policy of long-

term monetary asset/ liability.

Companies currently following amended AS 11:

Power Grid

Rating agreements to have significant impact on power companies: Service concession agreements to

have significant impact on power companies

Revenue

Recognition

Financial

Instruments

Employee benefit

expenses

PPE

Others

Companies

Overall

NTPC

Power Grid

NHPC

Tata Power

JSW Energy

CESC

●●

●

●●

●

Source: MOSL

Impact:

Low

●

Medium

●●

High

●●●

March 2016

Ind AS | India integrating

Healthcare

Exhibit 81:

Snapshot

Area

PPE

Intangibles

Outsourcing arrangements

Financial instruments

Investments

IGAAP

Ind-AS

Impact due to Ind-AS



Life of intangibles is definite

No guidance



Life of intang ibles can be

indefinite.



Amortization expenses will be

lower.

Put pressure on return ratios

Considered as a deemed lease.



Investments classified as (a)

current: carried at lower of

cost or market value, and (b)

non-current: carried at cost

less any permanent

diminution in value of asset.

Optional either to follow

hedge accounting or MTM

losses on derivative contracts

are charged through the

income statement while the

MTM gains are ignored

Debtors derecognised and

shown as part of contingent

liability if risk is retained

Forms part of share holders’

funds.

Investments carried at fair



value, with gains in P&L or OCI

as per the classification (a)

HTM, (b) FVOCI, or (c) FVTPL.

Earnings on investments will

smoothen and be recognized

over the holding period.

Increase in net worth will,

however, leads to decline in

return ratios.

Reduce volatility in income

statements of companies

currently not following hedge

accounting

Derivatives



Derivative instruments are

required to be fair valued and

the gains and losses are

recognized through the

income statement unless the

company adopts hedge

accounting



Receivable discounting



Debtors are derecognised only



if significant control and risk

are transferred

Classified as debt. Dividend on



preference shares is treated as

a finance cost.

To be charged to income

statement

Mandatory to account for

ESOP cost on fair valuation.

Increase in debt and debtors.

Decline in ROCE.

Increase in finance cost

leading to decline in reported

EPS. Debt/Equity to rise.

Reduces asset value and

earnings

Increase in employee costs.

Redeemable preference shares

Others

Capitalization of exchange

fluctuation

Employee benefits

ESOPs



Can be capitalized to value of

asset

Optional to account for ESOP

cost on intrinsic basis or fair

valuation.



Consolidation

Joint venture



Consolidated on proportionate



basis.

Consolidated using equity

method.



Business combination

Mergers and Acquisitions

Decline in revenue and

EBITDA. However, earnings

remain unaffected.

Appropriate representation of

assets/ liabilities. Goodwill will

be carried at lower value.

Depreciation & amortization

cost will vary from current

levels.



Separate guidance for



acquisition of business unit

(under As14) and acquisition

of shares (under AS14).

Assets/Liabilities acquired can

be recognized at book value or

fair market value depending

on methodology used.

Goodwill recognized under

AS14 is amortized while under

AS21 is only tested for

impairment

Mandatory (a) fair valuation



of assets and liabilities

acquired on acquisition, (b)

recognition of intangibles even

when not recorded in the

books of seller. Excess of

consideration paid over net

asset acquired is treated as

goodwill and tested for annual

impairment, while the deficit

is adjusted in reserves

Source: MOSL

March 2016

Ind AS | India integrating

Property, plant and equipment



Deemed Leases to put pressure on return ratios or margins? :

Contract

manufacturing is a common practice in the pharmaceuticals industry. MNCs like

GSK

and

Pfizer

outsource part of their Indian drug manufacturing to CRAMs

companies like

Divi’s Lab

and

Biocon.

Under Ind-AS, such arrangements could

fall under the definition of deemed lease, subject to fulfillment of certain

conditions

(refer page 28 for details).

This may put pressure on the return ratios

of the MNCs due to recognition of additional assets and financial liabilities.

Pharma companies could try to modify agreements to skirt the definition of

deemed lease. However, there may be cost implications.

Increased life of intangibles to boost profits:

Pharma companies have

significant intangible assets (excluding goodwill), primarily comprising of Brands,

Patents trademarks etc. Under the current rebuttable presumption, these are

amortized over a period not exceeding 10 years. However, under Ind-AS, there

is no such rebuttable presumption and intangibles are permitted to have an

indefinite economic life. We believe this will result in lower amortization

expenses.

% of Net Worth

71%

17%

Source: Capital Line, MOSL

Exhibit 82:

High intangibles may lead to lower amortization

Company

Torrent Pharma.

Pfizer

Aurobindo Pharma

Strides Shasun

Financial instruments



Fair valuation of investments to smoothen earnings while RoEs decline

Being cash rich, pharma companies deploy money in investments. As explained

page 23, Ind-AS

requires all investments to be recognized at fair value, with

MTM gains recognized in P&L or OCI as per the classification. Under the current

practice, gains are only booked when realized. We believe this change will

smoothen earnings for the companies over the medium term while the return

ratios will be adversely impacted on transition.

Exhibit 83:

Significant investment in Mutual fund units

Companies

Strides Shasun

Dr Reddy's Labs

Divi's Lab.

Lupin

Torrent Pharma.

% of NW

38%

21%

19%

11%

Source: Capital line, MOSL



Earnings volatility to reduce for companies not following hedge accounting:

Indian pharma companies have significant exposure to foreign exchange

receivable from exports. To hedge exchange fluctuation risk, they enter into

various derivatives contracts. Under Ind-AS, all derivative instruments are

required to be fair valued and the gains and losses are recognized through the

income statement unless the company adopts hedge accounting. This is in

variance with the current accounting practice, where the companies are either

required to follow hedge accounting (AS 30) or only the MTM losses on

March 2016

Ind AS | India integrating

Reduced volatility for

companies not following

hedge accounting



derivative contracts are charged through the income statement while the MTM

gains are ignored. This change will reduce volatility in the income statements of

companies currently not following hedge accounting.

Companies to be impacted:

Sun Pharma, Cipla, Piramal Enterprise, Biocon,

Jubiliant Life.

Discounting of receivables:

Some pharma companies use discounting/ factoring

arrangements for receivables. Under IGAAPs, receivables post discounting/

factoring are de-recognized and form part of contingent liabilities. However, de-

recognition norms of financial assets under Ind-AS are quite stringent

(refer

page 23 for details).

This may lead to some of the debtors factoring

arrangements where risk and rewards or control are retained may not qualify

for de-recognition. Consequently, the companies will continue to recognize

debtors in their books while the money received from the banks will be treated

as debt. This might lead to increase in capital employed and debtor days,

adversely impacting RoCEs.

Impact on companies:

IPCA Labs discounted receivables of 8% of net worth

during FY15.

Dividend on redeemable preference shares to impact earnings:

Under Ind-AS,

preference shares (redeemable and non-convertible) are to be classified as debt

in place of equity. This re-classification will lead to preference dividend

(currently shown as appropriation from profit) being expensed as finance cost,

in turn leading to a decline in reported EPS and an increase in debt/equity.

Impact on company:

Wockhardt has INR2.38b of 0.01% Non-Convertible

Cumulative Redeemable Preference Shares outstanding, redeemable at a

premium of 20% along with cumulative dividend in FY19. Premium on these

preference shares will have to be expensed in the P&L at FV over the term of the

preference share Shares

Exchange fluctuation on long-term monetary assets/ liabilities to impact

earnings:

Pharma companies have exposure to long-term foreign currency