Ind-AS: Credit Neutral for Corporates

India Ratings and Research (Ind-Ra) says that changes in accounting standards under Ind-AS are unlikely to have any impact on the credit quality of Ind-Ra rated large corporates (issuers).

The central government of India notified the Companies (Indian Accounting Standards) Rules, 2015 in February 2015, to achieve convergence of Indian Generally Accepted Accounting Principles (IGAAP) and International Financial Reporting Standards. With the implementation of Ind-AS, it has become mandatory for the specified companies to comply with Ind-AS over FY17-FY18. Ind-AS is based on substance over legal form, fair value and time value of money whereas IGAAP is based on legal form, conservatism, and historical value.

 

As an analytical practice, Ind-Ra focuses more on cash flow in its credit quality assessments than on accrual based numbers. However according to the agency, increased disclosure and transparency could provide early signs of potential pressure in corporates' earnings or cash flow. Ind-AS would also make the financial statements of Indian corporates comparable across geographical markets. This would give a better understanding to global investors about the financial state of Indian corporates, and help Indian corporates raise capital abroad with minimal administrative costs. However, implementing it would be challenging in terms of different legal and regulatory requirements, depth of domestic markets to provide reliable fair values and preparedness of Indian corporates and accounting professionals.

Ind-AS provides for some significant changes in the financial reporting of corporates. Some of these changes are listed below:

a) Revenue recognition

b) Consolidation

c) Property, plant & equipment, intangibles

d) Business combination

e) Disclosure requirement

f) Financial instruments

g) Introduction of 'Other Comprehensive Income' as part of financial statements

h) Employee cost

We have discussed these changes, their impact on financial statements, Ind-Ra's treatment of these changes in credit assessments and the consequent impact, if any, on the credit profile of issuers in our report. Ind-Ra has also analysed Ind-AS compliant financial statements reported by some of the large entities in the following sectors - fast moving consumer goods, information technology, pharma, oil & gas, auto, construction, power and cement.

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