CFOs lose sleep over year-end compliance blues

Corporate India is adapting to the new accounting standard, preparing for the new GST regime

For Sanjeev Kumar, group CFO, Interglobe Enterprises, last 12 to 18 months have been tough. Kumar and his team of finance professionals had to go through each and every contract the aviation-travel-hospitality major had entered into as the group went about the exercise of making its reporting of financial statements compatible with the Indian accounting standard, Ind-AS. “There was a lot to see afresh,” says Kumar, referring to the financial numbers. He was addressing a group of 100-odd finance professionals who had gathered to brainstorm the challenges that the fraternity faces while gearing up for financial year closure on March 31. 

“This has been a super busy year for finance professionals,” says Vanita Bansal, India Tax Director, United Technologies. Corporate India has been going through the paces adapting systems and processes to the new accounting standard, preparing for transition to indirect tax regime under Goods & Services Tax that is slated to kick in from July 1, factoring in tax implications arising from Income Computation and Disclosure Standards (ICDS), and getting used to a new set of external and internal auditors as part of mandatory audit rotation, among others. “One has to work on all these, over and above meeting day-to-day business exigencies,” says Bansal. Accordingly, compliance costs, including attendant manpower expenses, have already gone up by around 10% in the last 12 month or so, say some finance heads. 

Although most large and mid-sized companies have migrated to the new accounting standard over the last one year, there are still issues around fair valuation of assets and financial instruments. Experts point out that the use of fair values for measurement of certain assets and liabilities is bringing in volatility in financial statements. “Companies are at a very crucial stage in relation to matters related to implementation of Ind-AS. Balance sheet of several companies are going to get impacted based on the decisions they take in relation to transition matters,” says Sandip Khetan, partner in an Indian member firm of EY Global.

Some companies are seeing additional capital assets and related liabilities come on to their books, which previously were being routed as operating expenses. Many companies have used the transition provisions to write down some assets, while writing up assets such as land. All these may lead to significant changes in the balance sheet. “Industry is still to get used to the level of financial disclosure that is required under Ind-AS,” noted an auditor from one of the Big Four advisory firms. 

The transition to GST is another thing that is keeping many finance teams in large and mid-sized businesses on their toes. While the delay in announcing the final tax rates is keeping most businesses in a tizzy, there are several question marks on their preparedness as well.  “There are challenges over readiness of the IT and the accounting systems to deal with the change,” says Khetan. Experts point out that in many companies, some of the data required for GST compliance are not currently captured by their IT and MIS systems. “Dealing with legacy issues under the new regime is a concern,” points out TES Varadhan, group CFO at CK Birla Group. 

When it comes to tax planning for the current and the next financial year, corporate India’s hopes were dashed with government ruling out any further deferment in application of ICDS – a set of standards that will change the way companies calculate their income in India for tax purpose. This comes into effect from April 2017. Last week, the income-tax department issued a set of 25 Frequently Asked Questions to address corporate India’s concerns over its implementation.

“Companies are re-visiting their policy choices on transition to Ind-AS with a view to minimising the tax liability and related cash outflows both in the year of transition and in the coming years,” according to Sai Venkateshwaran, partner and head - accounting advisory services, KPMG in India.

While it is mandatory for companies of certain size to change external auditors on a rotation basis, the same rules do not apply for internal auditors. However, several companies are using this as an opportunity to re-visit both, say experts. Many are dealing with the new changes in financial and tax reporting standards, together with a change of auditors. “Companies are involving their incoming auditors in the change process. It allows both the companies and the auditors to leave behind any legacy issues and make a fresh start under the new standards with a new auditor,” says Venkateshwaran. But, for the finance department, this means additional work. Finance head of a Rs 4,600 crore-textile to chemical manufacturing group with 11 plants across the country, says he had to deploy one extra person in each of the facilities to take care of the fresh compliance requirements in the GST regime.