Pad up for a long results season

Companies have begun reaching out analysts to explain impact of Ind-AS implementation

Analysts and investors are gearing up for a longish results season as corporate India migrates to the Indian Accounting Standards (Ind-AS) regime. They are also bracing themselves for potential surprises in the numbers as methodologies and accounting treatments are likely to change for several large companies.

Ind-AS is applicable from April 2016 for all companies with net worth of over Rs 500 crore, from April 2017 for companies with net worth of over Rs 250 crore and from April 2018 for all banks, non-banking financial companies and insurance companies.

Around 1,000-odd companies - including about 400 listed entities - are expected get impacted by change this year alone. Companies that will have to change their accounting methods significantly are likely to push their announcements with the Securities and Exchange Board of India (Sebi) allowing an extra month. Some of them have already reached out to analysts to communicate the possible impact on the numbers.

Accordingly, the results for the quarter ending June 30 and September 30 may be submitted by September 14 and December 14, respectively. This gives companies, many of which have already announced board meetings to consider Q1 results an additional one-month window to declare results in the new format.

Motilal Oswal, chairman of the eponymous brokerage firm said, the move to international standards is a positive development. "We have been preparing for this for over a year. Investors need to keep track of the analyst reports to understand the changes."

Analyst reports have already started talking about impact of the changes. For example, in a report released last week, Axis capital analysts Bhavin Vithlani and Puneet Garg talked about the conference call they had with the management of engineering major Larsen & Toubro.

Giving a "Hold" recommendation for the stock with a target price of Rs 1,614, Vithlani and Garg noted the key takeways from the call as follows" (1) Consolidation criteria has been changed from rule-based to principle-based i.e. control criteria. Consequently, a few subsidiaries will not be consolidated line-by-line under Ind-AS; (2) Company would need to make provisions for credit and delay risk for its receivables; and (3) gain on stake sale of subsidiaries would not be routed through P&L and would be directly credited to reserves in consolidated financials."

Major impact for L&T would be on the base values for FY16 revenue and Ebitda margin due to consolidation of subsidiaries as JV as per Ind-AS and provisions for expected credit losses, the Axis report added.

Different companies are likely to be hit differently. A recent report by Kotak Institutional equities on Mindtree consulting talked about earnings cut, which was driven by "amortization charge on intangibles associated with shift to Ind-AS."

ROADBLOCKS
Some of the key issues different sectors are facing

Manufacturing

• Accounting of “take or pay” with vendors could upset the debt-equity ratio computations
• Many companies recognise revenue upon despatch. But new standards require recognition of revenue only when there is no continuing managerial involvement

Power & infra

• Accounting for contracts awarded on BOOT or BOT basis popularly called “service concession arrangements”, will undergo a significant change

Companies funded by PEs

• Complex instruments such as zero coupon convertible debentures and redeemable preference shares will be accounted based on their form and not on substance. This will result in volatility in the profit & loss account

"Apart from sectoral impacts, there are certain practical challenges in Ind-AS implementation that may result in companies applying various judgments, adopting accounting policy choices and, in many cases, using convenient methodology to quantify impact on their Ind-AS financial statements," said Siddharth Talwar, partner, Grant Thornton India LLP.

Some key problem areas include legacy data, such as old land lease contracts, arriving at fair valuation for historical dates and incompatible IT systems.

Anjali Aggarwal, partner, Corporate Professionals said in these circumstances, the extension of the will help companies overcome the teething troubles associated with the implementation of Ind-AS."

Since, the results for Q1 are already under process and many companies have already announced their Board Meetings to consider the results for Q1, the Circular has been promulgated at a very apt time," Aggarwal said, adding, "The Circular also provides a relief from undergoing limited review or audit of the corresponding Ind AS compliant figures of the respective previous periods."

Oswal did not see any major impact on the broader markets as a result of these changes and extension in the results season.