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Some companies will benefit by adopting Ind AS, but it will reduce their comparability with global peers, says Charanjit Attra

IFRS: Carve-outs and

their ImpactA carve out essentially means that certain requirements of an accounting standard under IFRS will not be adopted

India has proposed a set of 13 carve outs or divergences from the International Financial Re-porting Standards (IFRS). A carve out essentially means that certain

requirements of an accounting stan-dard under IFRS will not be adopted. The demand for universal account-ing language has been continuously increasing to facilitate comparability and transparency in financial state-ments. However, by introducing the carve outs in the IFRS, the ICAI has raised questions on whether the Indian Accounting Standards (Ind AS - the name used by the ICAI for IFRS standards with carve outs) will bring about comparability of financial statements of Indian companies with their international peers. Also, it is nt certain whether the carve outs will benefit Indian corporates.

This article summarises the impact of carve outs as proposed by the ICAI, and notified by the Ministry of Com-pany Affairs (MCA), on industries, applicability, and disadvantages to Indian companies.

The following paragraph discusses the differences between Ind AS and IFRS.

iFRS vs ind aSIFRS – the international standards

that have been issued by the Interna-tional Accounting Standards Board (IASB), which also includes interpreta-tions of the International Accounting Standards (IAS), IFRS Interpretations’ Committee (IFRIC) and Standing In-terpretations’ Committee (SIC).

Ind AS – the converged accounting standards which are in line with IFRS as issued by the IASB but subject to certain carve outs (differences) as noti-

fied by the MCA. Presently, there are 35 converged accounting standards with 13 identified carve outs. The Ind AS will be applicable to the entities in a phased manner at a future date as notified by the MCA.

Indian GAAP – refers to the ac-counting standards that are applicable to companies registered in India and will continue to apply till the MCA notifies for convergence with Ind AS. However, the companies which do not fall in the phases of implementation of

Ind AS will have the option to continue with Indian GAAP.

The following is a brief analysis of the carve outs notified by the MCA and their impact on Indian Industry.

Differences impacting Specific Sectors

IFRIC 12 / SIC 29 (Ind AS 11)Service Concession arrangements

A build operate transfer (BOT) contract or a service concession agree-ment generally involves a government or public sector entity conveying to a private sector entity the right to provide services that gives the public access to major economic and social facilities for a certain period.

IFRS states that in the initial con-struction phase the operator will have to recognise revenue on construction contracts to the extent of the value of the services performed which is the cost of constructing the infrastructure asset with a reasonable margin. The revenue will be accounted by creating a financial asset or an intangible asset.

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India Inc will continue the percentage of completion method followed in the construction industry and hence, this will reduce the comparability with its global peers

Hence the companies will experi-ence an upfront booking of revenue in the initial years of construction.

However, on issuance of Ind AS by the ICAI, the applicability of the above standard has been deferred. The same may be examined and applied with or without modification later.

Impacted Sectors: Infrastructure and Power Sector

The entities which are in the initial stages of construction will have ac-counted for an upfront booking of revenue under IFRS, hence the turn-over ratios will be high. India Inc will continue the percentage of comple-tion method hence this will reduce the comparability with international infrastructure companies.

IFRIC 4 / Ind AS 17Leases

IFRS states that an entity entering into an arrangement comprising a transaction, or a series of related trans-actions, that does not take the legal form of a lease, but conveys a right to use an asset in return for a payment or a series of payments, may be classified as a lease.

The applicability of the above clause has been deferred in Ind AS context. The same may be examined and applied with or without modifica-tions later.

Impacted Sectors: Infrastructure, Power, Manufacturing, and any Capital Intensive Sector

IFRS 6 / Ind AS 106Exploration and evaluation of Min-eral resources

IFRS states that entities shall de-termine (choice is given to the corpo-rates) an accounting policy specifying which expenditures are recognised as exploration and evaluation of assets, and apply the same consistently. Iden-tifying such assets may be associated with finding special mineral resources.

Its applicability has been deferred and is under consideration.

Impacted Sectors: Oil and Natural Gas and Metals and Mining

The comparison of profitability

may not be comparable as the basis of determination of expense and capitalisation may differ with foreign companies adopting IFRS 6.

Ind AS 18 / IFRIC 15Revenue / Agreement for construc-tion of Real Estate

Construction of real estate shall be treated as sale of goods; hence revenue will be recognised when significant risk and rewards have been trans-ferred to the customer.

As per Ind AS carve outs, the revenue from sale of real estate will be based on the percentage of completion method. No specific standard has been notified for recognition of revenue for real estate contracts.

Impacted Sectors: Real Estate sectorAs Indian companies follow the

percentage of completion method, the revenue is booked in a phased manner based on the work completed. Hence Indian companies show sales even in periods before the asset is transferred to the buyer.

Applicability of IFRIC 15 will impact the profitability of Indian companies whose units are yet to be sold. Hence the profitability of Indian companies cannot be compared with foreign players which have adopted IFRIC 15, and foreign investors will not be able to judge the credibility of an Indian real estate company, leading to less capital flows and investment by foreign investors.

IAS 41Agriculture

IFRS states that the measurement of biological assets, that is living animals and plants, are done at fair value and recognising gains and losses in the profit and loss account.

The standard has not been included by ICAI, and will be revised and not issued as it is.

Impacted Sectors: Life Science, Phar-maceuticals, and Agriculture

Ind AS 20Accounting for Government grants and disclosure of Government as-sistance

IFRS states that non-monetary Government grants can be recognised at either fair value or nominal value. Grants related to assets including non-monetary grants can be recognised at fair value in the balance sheet either by the deferred income approach, or reducing the grant from the carrying value of related asset.

However, based on the carve outs proposed in Ind AS, non-monetary government grants will be recognised only at their fair value. Grants related to assets can only be shown as de-ferred income.

Impacted Sectors: All Capital-inten-sive entities

IAS 40 / Ind AS 40Investment Property

IFRS states that investment proper-ties can be measured both by the cost model and the fair value model. How-ever, Ind AS suggests that recognition only by cost model is permissible.

Impacted Sectors: Capital-intensive entities

Differences impacting all Sectors IAS 21 / Ind AS 21The Effects of changes in foreign exchange rates

IFRS requires exchange differences arising on translation of monetary items directly in the profit and loss account. However Ind AS gives an

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The major sectors where carve outs will impact comparability of financial information of companies occupy a major part of the Nifty and the Sensex

option to the Indian corporates to rec-ognise exchange differences on certain long-term monetary items directly in equity and amortised on an appropri-ate basis.

IAS 28 / Ind AS 28Investment in associates

IFRS states that the difference between reporting periods of an as-sociate and the investor should not be more than three months in any case.

Uniform accounting policies should be followed by the investor and the associate in the preparation of financial statements. This will be required for the purpose of applying equity method of accounting in the preparation of investors’ financial statements.

However as per Ind AS, if the situa-tion as stated by IFRS is impracticable to implement the investor may adopt a different policy as the investor may not have control on the workings of the associate.

Difference having no Major impact

IFRS 3 / Ind AS 103Business Combination

IFRS recognises bargain purchase gains arising on business combination in the profit and loss account.

Whereas, Ind AS suggests to recog-nise the same in ‘Other Comprehen-sive Income‘ and accumulate in equity as capital reserve. Where there is clear evidence that business combinations are in the nature of bargain purchase, it will be recognised directly in equity as reserves.

IAS 1 / Ind AS 1Presentation of Financial State-ments

Pertaining to the presentation of financial statements IFRS states the following:l It provides an option either to fol-

low the single statement approach or two statement approach (one displaying the components of profit and loss and the other beginning with profit and loss and displaying components of other comprehen-sive income.

l Statement of changes in equity are to be presented as a separate state-ment.

l Individual entities can follow dif-ferent terminologies for the titles of financial statements

l It permits periodicity presentationl Profit and loss presentation is based

either on nature or their functionOn the other hand, Ind AS follows

only the single statement approach.l Statement of changes in equity are

out on attracting foreign investors due to lack of clarity and comparability of financial statements.

IAS 7 / Ind AS 7Statement of Cash Flows

IFRS gives an option to classify in-terest paid and interest and dividends received as items of operating cash flows. Dividends paid can be shown as an item of operating activity.

Ind AS gives no option to the entities. Interest paid and interest and dividends received are treated as financing and investing activities. Dividend paid is to be classified as a part of financing activity.

IAS 19 (Ind AS 19) Employee benefits

IFRS states that the rates used to discount post-employment benefits is determined only with reference to government bonds where there is no deep market of high quality bonds.

Ind AS suggests that the rate used will be determined with reference to market yield on government bonds.

IFRS gives various options for treatment of actuarial gains and losses for post employment defined benefits.

However, Ind AS states that both post-employment defined benefit plans and other long-term employ-ment benefit plans will be recognised in other comprehensive income which will be immediately recognised in re-tained earnings and will not be reclas-sified to profit and loss in subsequent periods.

ConclusionThe major sectors where carve outs

will impact comparability of financial information occupy a major part of the Nifty and the Sensex.

As it is evident, some compa-nies may be benefited by applying the existing Ind AS, over the IFRS. However, this benefit will result in them not being comparable with their International peers, which will, in turn, impact their fund-raising

abilities.

Charanjit Attra, CFO and Head-SFG, ICICI Securities

Approximate percentage sectors occupy on the Nifty and Sensex

Sector / industry % of Nifty % Sensex

Construction Engineering 8% 3%

Real Estate 4% 3%

automobile 10% 17%

banking 12% 10%

oil & Gas 10% 7%

Metals & Mining 14% 17%

information technology 8% 10%

* The chart is based on list as per 16.12.2011. % are based on no of Cos in the sector

to be shown as a part of the balance sheet.

l Only one terminolo-gy will be used across all entities.

l Periodicity is not per-mitted

l Profit and loss classi-fication will be based only on natureImpact: Compara-

bility of financial state-ments of foreign players will not be possible. Hence India may lose

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