Decoding Ind-AS impact on India Inc's balance sheet

Adoption of the new accounting standard under the Ind-AS framework had an impact on some of the key financial reporting parameters of corporate India.

A study by Protiviti, a risk-consulting and internal audit firm, of FY17 first-quarter results of around 125 companies shows the manufacturing and information technology sectors had to make the highest number of accounting adjustments under Ind-AS, followed by telecommunications, mining/metals and the energy sectors.

On an average, 50 per cent of the companies have made around 10 adjustments to the reported profit for the quarter ended June 30, 2015. Capital intensive sectors such as telecommunication and the metals/mining and energy industries, contributed around 70 per cent of the total adjustments (in absolute value).

These two sectors include major business groups that have significant global operations with a history of multiple business acquisitions, the study noted. Here are some key sector-specific takeaways:

AUTOMOTIVE

Companies made adjustments to revenue recognition. This was more visible in case of deferment of revenue of future performance obligations, or for recognition of cash/trade discounts

ENERGY, METALS AND MINING

The sector is heavily capital-intensive and exposed to the global commodity/currency markets. Some high-value adjustments arose due to:

• Forex gains and losses, particularly due to change in the functional currency of the company and of its foreign operations
   
• Change in accounting policy, primarily for oil companies with respect to capitalisation of expenditure and depletion of producing assets
   
• Adjustments in fixed assets. Saw capitalisation of new assets as a result of major overhauling costs
   
• Presence of embedded finance lease arrangements. This was more visible for the power companies; Companies that had previously capitalised fixed assets on their balance sheet have de-capitalised these assets, reversed the corresponding depreciation charged and recognised finance lease receivables
   
• Accounting for service concession arrangements by some of the power companies
   
• Restatement of past business combinations, including common control acquisitions

INFORMATION TECHNOLOGY SECTOR

Companies in the sector have made adjustments for share-based payments (SBP). Given that SBP is a common incentive for employees in this sector, multiple companies have made adjustments with respect to expense arising from these payments

MANUFACTURING SECTOR

Sector-specific adjustments made by companies include recognition of embedded lease arrangements. This had an impact on revenue from operations and de-capitalisation of borrowing costs from inventory

TELECOMMUNICATIONS SECTOR

Companies in this sector made significant adjustments with respect to

• Forex gains/losses due to change in the functional currency of company's foreign operations
   
• Restatement of past business combinations, resulting in a significant reversal of goodwill amortisation charge
   
• Discounting of asset retirement obligations previously recognised, resulting in a lower depreciation charge
   
• Adjustments related to service income