Ind-AS
Key Note Address
MAT implications
29 April 2017
Page 1
Key Note Address
Ind AS Implementation: A Giant Leap
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Step in the right direction
Substantial improvement in accounting
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Financial instruments
Business combinations
Service concession arrangements
Enhanced transparency and accountability
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Critical judgements and estimates
Financial risk management
Capital management
Achieving consistency and quality in Ind AS implementation is expected to take
few years.
Page 2
Key Note Address
A roller-coaster ride
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Use of short-cuts
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Finding sweet-spot is not easy
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Use of excel sheets, instead of system driven process
Fixed asset register not updated
Impact on internal financial controls not considered
Companies are working till last minute to finalize accounting policy
choices/ exemptions
Many companies may revisit FTA exemptions/ accounting policy
choices post MAT clarity
All key stakeholders are not aligned!
Page 3
Key Note Address
Picture Abhi Baaki Hai
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Limited disclosures in quarterly results due to exemption/ relaxations
given by SEBI
•
Use of exemptions/ exceptions not disclosed
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Accounting policies, judgments and estimates used are not disclosed
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Equity reconciliation either not given or given with limited disclosures
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Many companies, including many power and infrastructure
companies, have not disclosed consolidated results
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IFRIC 4/ IFRIC 12 impacts not clear as these arrangements are typically
undertaken through SPVs
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Accounting policies/ use of exemptions may change till year-end
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Many companies have not completed audit/ review of comparative
numbers
Page 4
Key Note Address
Ignorance is bliss
Airport company
Aeronautical services (Regulated)
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Flight operation assistance and crew support systems
Safe and secure operation of the Airport
Movement and parking of aircraft and control facilities
Cleaning, heating, lighting and air conditioning of public areas
Customs and immigration halls
Flight information and public-address systems
X-Ray service for carry on and checked-in luggage
VIP / special lounges
Aerodrome control services
Arrivals concourses and meeting areas
Baggage systems including outbound and reclaim
Non-Aeronautical services
(Unregulated)
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Aircraft cleaning services
Duty free sales
Airline Lounges
Hotels and Motels
Car Park rentals
Bank/ ATMs & Telecom
Advertisement
Flight kitchen
Land and space
Ground handling
It is estimated that over the concession period, total non-aeronautical revenue (unregulated) will be
very significant and even greater than the aeronautical revenue (regulated).
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Argument 1: Unregulated activity is purely ancillary because it is supporting the main activity of air travel. SCA
accounting applies.
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Argument 2: Unregulated activity is very important and should not be seen as ancillary and certainly not as “purely
ancillary”. This is because the unregulated activity drives the airport feasibility, and is therefore very important from
the perspective of the public (users), government and the operator. SCA accounting does not apply.
Page 5
Key Note Address
Ignorance is bliss
Independent Directors – Whether KMP!
► Ind AS 24 defines KMP as
“The persons having authority and responsibility for planning, directing
and controlling the activities of the entity directly or indirectly, including
any director (whether executive or otherwise) of that entity.”
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Unlike AS 18 under Indian GAAP, Ind AS 24 does not exclude
non-executive directors from the definition of KMP.
Companies Act, 2013, prescribes very onerous responsibilities
for IDs
Responsibilities include authority and responsibility for
planning, directing and controlling activities of the entity.
Independent directors are KMP under Ind AS 24.
Page 6
Key Note Address
Shifting goal post
Loan processing fee
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Under Indian GAAP, the company has written off entire loan processing fees
in year 1 and capitalized the same to cost of plant
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On transition to Ind AS, the company is using previous GAAP carrying
amount as deemed cost exemption for PPE
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Ind AS 109 requires amortized cost accounting and loan processing fee to be
amortized over loan period
Original ITFG decision (Dated 3 October 2016)
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No adjustment is allowed to carrying amount of PPE
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For applying Ind AS 109 retrospectively, corresponding adjustment should be
made to retained earning.
Revised ITFG decision (Dated 17 April 2017)
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Adjustment to PPE is only consequential and arising due to other transition
requirements of Ind AS 101
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Processing fee should be adjusted to the deemed cost of PPE
Page 7
Key Note Address
Shifting goal post
Government grant
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Under Indian GAAP, the company has netted government grant from the cost
of PPE
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On transition to Ind AS, the company is using previous GAAP carrying
amount as deemed cost exemption for PPE
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Ind AS 20 requires government grant to be treated as deferred income – No
option to reduce from cost of PPE
Original ITFG decision (Dated 3 October 2016)
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No adjustment is allowed to carrying amount of PPE
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For applying Ind AS 20 retrospectively, corresponding adjustment should be
made to retained earning.
Revised ITFG decision (Dated 17 April 2017)
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Adjustment to PPE is only consequential and arising due to other transition
requirements of Ind AS 101
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Deferred grant should be adjusted to the deemed cost of PPE
Page 8
Key Note Address
Shifting goal post
Classification of deposits
Classification of security deposits received by an electricity company from its customers
Original ITFG decision (Dated 3 October 2016)
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No unconditional right to defer refund of deposit for 12 months
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Expectation of the company are not relevant for classification
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The security deposits should be classified as a current liability
Revised Position
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ITFG has withdrawn the above decision on 17 April 2017
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One may argue that electricity and similar companies, e.g., a company providing gas or
water supply, will classify deposits received from the customers as current or non-current
liability based on estimated redemption pattern
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View will apply in limited circumstances such as in monopolistic or oligopolistic situations
where choices available to the consumer to change the service provider are highly limited
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View will not apply by analogy in all cases – e.g. in the case of security deposit received a
consumer goods company from retailers/ distributors – classification would continue to be
current.
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Relevant only for presentation in the balance sheet.
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Recognition and measurement is governed by Ind AS 109. Consequently, no discounting is
required
Page 9
Key Note Address
Shifting goal post
Previous GAAP carrying amount as deemed cost
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A first-time adopter may opt to use previous GAAP carrying amount of
PPE as deemed cost at transition date
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Needs to be applied to all items of PPE – No pick and chose allowed
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In CFS, option need to be applied at group level
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If a company use this option, only adjustment allowed to previous GAAP
carrying value is for decommissioning liabilities. No other adjustment allowed.
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Option can also be used for intangible assets and investment property.
Proposed recent change
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Carrying value can be taken as the deemed cost for ‘a class’ of assets instead
of ‘all’ assets on the transition
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When the company chooses to adopt the carrying value as at the date of
transition to Ind AS deemed cost, consequential changes arising on
application of other Ind AS can be made to the deemed cost of PPE
This may potentially help phase 2 companies with effect from 1 April 2017.
Whether phase 1 companies can also benefit!
Page 10
Key Note Address
Unfinished Agenda
Regulations/ agreements not changed
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Telecom companies are required to pay license fees on their revenue
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As per the Hon’ble Supreme Court judgement, revenue includes
treasury income
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Under Ind AS, income will increase/ change due to:
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Interest unwinding on loan to subsidiary
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Unwinding of financial guarantee obligation
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Fair value measurement of mutual fund investments
Regulators may argue that telecom companies are required to pay
license fee on such income
Page 11
Key Note Address
Unfinished Agenda
Regulations/ agreements not changed
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ABC has taken a long-term loan from bank
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The loan agreement requires ABC to comply with target Debt-equity
ratio at year-end (31 March). Ratio is critical to protect banks’
interest.
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Ratio not met at 31 March
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Current classification applies
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How does one wriggle out of this problem?
Page 12
Key Note Address
MAT on Ind AS compliant
financial statements
Page 13
Key Note Address
Overview of Ind AS transition
Last Indian GAAP financial statements
First Ind AS financial statements
Comparative period
1 April 2015
Date of transition to
Ind AS – Opening
balance sheet
Reporting period
1 April 2016
31 March 2017
Beginning of
the first Ind AS
reporting period
End of the first
Ind AS reporting
period
2015-16 MAT based on Indian GAAP profit
Page 14
Key Note Address
2016-17 MAT based on Ind AS profit
Ind AS impact on P&L
Items
Indian GAAP
Ind AS
Book profit
Service
concession
arrangements
Fixed assets/ Intangible
assets are recorded at
cost (without construction
margin)
Financial
guarantee given by
parent on behalf of
subsidiary
Forex gain/ loss on
long-term foreign
currency
borrowings
No accounting required;
only disclosure
Intangible assets or
annuities are recorded
at fair value of
construction services,
i.e., cost plus
construction margins
Income is recognized
for financial guarantee
given
Higher book profit in initial
years due to recognition
of construction margin
Higher amortization
charge during O&M
period
Higher book profit
No such option for
new borrowings
Higher or lower book
profit depending on
exchange rate movement
Option to capitalize or
defer gains/ losses on
borrowings related to fixed
assets/ other borrowings
(AS 11.46A)
No requirement to identify
Identification of
lease contained in leases contained in
arrangements such purchase/ sale/ service
arrangements. Normal
as power purchase
purchase/ sale/ service
agreement
accounting is applied.
Page 15
If it is finance lease – Higher interest expenses
Lessee will recognize plus depreciation in initial
interest expenses and years
depreciation, instead
of purchase
transaction
Key Note Address
MAT
Ind AS impact on P&L
Items
Indian GAAP
Ind AS
Book profit
Derivative gains/
losses
ICAI announcement – only Both fair value gains
losses are recognised,
and losses are
based on prudence
recognised
principle
Fair value losses will
reduce and Fair value
gains will increase book
profits
Redeemable
preference shares
redeemable at
premium &
considered as
liability under Ind
AS
Premium is charged to
securities premium or RE
Charged to P&L as
interest expense
Book profit would be
lower
Financial liability
measured at
amortized cost
Interest expense
recognition at contracted
rate
Interest is recognized
using EIR
Book profit may be higher
or lower, depending on
specific facts
Page 16
Key Note Address
MAT
MAT on Ind AS compliant financial
statements – OCI items
Page 17
Key Note Address
MAT principles on Ind AS compliant
financial statements
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MAT on Ind AS P&L, despite fair valuation and other significant
changes
No fall back on Indian GAAP P&L
Adjustments specified under the existing section 115JB will continue
to be made to arrive at book profit
OCI items recyclable to P&L are included in book profit, when those
items are recycled as per Ind AS
Page 18
Key Note Address
MAT principles on Ind AS compliant
financial statements
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OCI items that are NOT recycled to P&L are included in book profit
each year (e.g., Remeasurements of defined benefit plans), except :
► Revaluation model for PPE/ intangible assets will be MAT neutral
► Revaluation is to be ignored for computing book profits
► Depreciation is computed ignoring revaluation, based on the
existing requirements of section 115JB
► Amount standing to the credit of revaluation surplus is
included in book profit on retirement/ disposal of the asset
► Gain and losses arising on investments in equity instruments
designated as at FVTOCI will be included in book profit at the
time of realization/ disposal/ transfer
Page 19
Key Note Address
Items adjusted in OCI that will be recycled to
P&L
Item
Items adjusted in OCI that will be
recycled to P&L
MAT consequences
As and when recycled to P&L
Recycling to P&L
Examples
Exchange differences on translation of
foreign operations (foreign branches)
Gains and losses on FVTOCI debt
investments
Cash flow hedge reserve
Page 20
At the time of disposal of foreign
operation
At the time of disposal/ realization/
transfer
At the time the hedged item impacts
P&L
Key Note Address
Items adjusted in OCI that will NOT be
recycled to P&L
Go-forward MAT consequences
Examples
Revaluation surplus on application of
revaluation model on PPE / intangible assets
Remeasurements of defined benefit plans
Gains and losses on FVTOCI equity
instruments (not held for trading)
Gain on bargain purchase
• If there is a clear evidence for underlying
reason of bargain purchase - Recognize
gain in OCI
• No clear evidence – Recognize directly in
capital reserve
Any other item
Page 21
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To be ignored for computation book profits
Depreciation is computed ignoring
revaluation adjustment
 Gain/loss on realization/ disposal/
retirement is computed ignoring revaluation
adjustment
Every year as re-measurements gains and
losses arise
At the time of realization/ disposal/ retirement or
transfer
Year in which gain arises
No impact
Every year as gains and losses arise
Key Note Address
Ind AS Impact on MAT – First time
adoption
Page 22
Key Note Address
MAT on opening Ind AS balance sheet
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Ind AS adjustments in reserves/ other equity are included in book profit equally over 5
years beginning from the year of Ind AS adoption, except:
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OCI items recyclable to P&L are included in book profits, when those are recycled
to P&L
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Adjustments to capital reserve and securities premium are excluded from book
profit
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Revaluation surplus due to use of revaluation model for PPE/Intangibles will be
MAT neutral
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Use of fair value as deemed cost exemption for PPE/ Intangible Asset will be MAT
neutral
Page 23
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To be ignored for computing book profit
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Depreciation is computed ignoring the amount of fair value adjustment
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Gains/ losses on transfer/ realization/ disposal/ retirement are computed
ignoring FV adjustment
Key Note Address
MAT on opening Ind AS balance sheet
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Gains/ losses on investments in equity instruments classified as FVTOCI will
be included in book profit on realization/ disposal/ transfer of investment
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Use of fair value as deemed cost exemption for investments in subsidiaries,
associates and joint ventures will be MAT neutral
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Use of option to make Indian GAAP FCTR ZERO will be MAT neutral
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Gains/ losses to be included in book profit on realization/ disposal/ transfer
of investment
To be included in book profit at the time of disposal of foreign operation
FTA adjustments made at TD (1 April 2015) are trued up for any changes
upto the end of the comparative year, i.e., 31 March 2016
Page 24
Key Note Address
Items adjusted in OCI that will be recycled to
P&L
Items
MAT consequences
Items adjusted in OCI that will be
recycled to profit or loss
As and when recycled to P&L
Examples
Exchange differences on translation of
foreign operations
Recycling to P&L
• Option to make Indian GAAP FCTR
Zero
• At the time of disposal, such FCTR
will be included in book profit
At the time of disposal/ realization/
transfer
At the time the hedged item impacts
P&L
Gains and losses on FVTOCI debt
instrument
Cash flow hedge reserve
Page 25
Key Note Address
Items adjusted in RE/ OCI that will NOT be
recycled to P&L
Examples
Fair value as deemed cost for PPE/

intangible assets OR revaluation surplus
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arising from application of revaluation model
on PPE/Intangibles
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Transition date MAT
To be ignored for computing book profits
Depreciation is computed ignoring the
amount of fair value adjustment
Gain/loss on realization/ disposal/
retirement/ transfer of such assets is
computed ignoring FV adjustment
Adjustments relating to investments in
To be included in book profit at the time of
subsidiaries, joint ventures and associates realization/ disposal/ retirement/ transfer of
recorded at fair value as deemed cost as per investment
Ind AS 101
Gains and losses on FVTOCI equity
instruments
To be included in book profit at the time of
realization/ disposal/ transfer of investment
Any other item, e.g., retrospective
application of items such as financial
guarantee accounting or SCA accounting
Ind AS adjustments at the TD after true up
adjustment during comparative period will be
included in book profit over five financial
years beginning 1 April 2016
Page 26
Key Note Address
Practical examples
Page 27
Key Note Address
Equity investment in subsidiaries, associates
and joint ventures
Indian GAAP
accounting
At cost less
other than
temporary
diminution in
value
Page 28
Ind AS accounting
MAT consequences
• Use FV on TD as deemed cost
• Corresponding impact in RE. However, it
is MAT neutral
At cost less impairment
• Use Indian GAAP carrying amount as
deemed cost
• No transition impact in RE
FVTPL
• Measure investment at fair value on
TD and at each reporting date
• TD impact in RE & YoY impact in
P&L
• TD impact after true up adjustment to be
included in book profit over 5 years
• YoY fair value gains/ losses will have
yearly MAT impact
• Fair value losses may be excluded from
book profit due to section 115JB
FVTOCI
• Measure investment at fair value on
TD and at each reporting date
• Recognise difference in a separate
reserve, say, FVTOCI reserve
• It is MAT neutral on TD and after
• To be Included in book profit only on
realisation/ transfer/ disposal
Key Note Address
Example: Investments measured at FVTPL
Date
1 April 2015
Cost
100
Fair
value
150
Retained
earnings
P&L
50
31 March 2016
170
20
31 March 2017
200
30
31 March 2018
175
(25)
31 March 2019
210
35
MAT impact
INR 70 to be included in MAT over 5
years, i.e., INR 14 per year from 201617 to 2020-21
To be included in MAT computation for
the year
Downward fair valuation to be added
back as per section 115JB. This results
in double whammy for companies.
INR 25 to be offset against downward
valuation disallowed in last year
INR 10 to be included in MAT
computation
Ind AS requires FVTPL accounting for mutual fund investments, equity investments
held for trading and investment in convertible instruments.
It also allows FVTPL accounting for all other equity investments.
Page 29
Key Note Address
Property, plant and equipment
Indian GAAP accounting
Ind AS accounting
At cost less accumulated
At cost less accumulated
depreciation and impairment depreciation and
impairment
MAT consequences
• Use FV on TD as deemed
cost
• Corresponding impact in RE.
However, it is MAT neutral
• Use Indian GAAP carrying
amount as deemed cost
• No transition impact in RE
• Option to revalue Fixed
assets
• No need to update
revaluation regularly
Page 30
• Option for revaluation
model
• Mandated revaluation
for entire class of PPE
• Revaluation to be
updated periodically
(generally, 2-3 years)
Key Note Address
• Difference between deemed
cost and revalued amount on
TD is recognized in
revaluation reserve.
• However, it is MAT neutral
• To be Included in book profit
only on realisation basis
• Above rule equally applies to
Revaluation on an ongoing
basis.
PPE : FV as deemed cost
Date/ yearended
1 April 2015
Cost
100
Fair
value
150
Retained
earnings
P&L
Book
profit
50
Fair valuation of INR 50 is MAT
neutral. It will be considered
only at the time of disposal
31 March 2016
(15)
(10)
31 March 2017
(15)
(10)
31 March 2018
(15)
(10)
(15)
(10)
20
50
31 March 2019
(Sold)
Profit on sale
Page 31
110
MAT impact
Key Note Address
No depreciation is allowed on
fair value portion for
determining book profits.
Fair value portion will be
ignored for determining book
profit on sale of assets. Thus,
gain on sale would be INR 50
(110 - 60).
Redeemable preference shares
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Preference shares – Mandatorily redeemable
Fixed premium payable on redemption
Redemption date post Ind AS
Indian GAAP accounting
Ind AS accounting
MAT consequences
• Preference shares are
classified as equity
• Preference shares are
classified as liability
• Equity is reclassified as
liability.
• Premium paid is treated as
distribution and charged to
RE or securities premium.
Therefore no charge yet.
• Premium is treated as
interest expense and
charged to P&L on an EIR
basis
• Liability increased by
amortization amount upto
the TD with a corresponding
debit to RE
• On TD, measure liability at
amortized cost (i.e., issue
price + accrued interest/
premium using EIR)
Page 32
Key Note Address
• RE impact after true up
adjustment will reduce book
profits over next five years
• On a go forward basis,
interest expenses
recognized in P&L is MAT
deductible
Debentures redeemable at premium
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0% Redeemable Debentures – No annual interest
Redeemable at premium @ 10% p.a.
Indian GAAP accounting
• Classified as liability
• No interest charged to
P&L
• Premium on redemption
will be charged to
securities premium at the
time of redemption
Page 33
Ind AS accounting
• Interest expense using
EIR is recognised in P&L
MAT consequences
• TD impact after true up
adjustment will reduce
book profits over 5 years
• On TD, measure liability at
amortized cost (i.e., issue • On a go forward basis,
price + accrued interest/
interest expenses
premium using EIR)
recognized in P&L is MAT
deductible
• Corresponding adjustment
in RE
Key Note Address
Zero Coupon Optionally convertible
redeemable preference shares
Indian GAAP accounting
Preference shares are
classified as equity
Ind AS accounting
On initial recognition/ date
of issuance, preference
shares will be split into
liability and equity
component
MAT consequences
• Debatable whether equity
component of compound
financial instrument will be
considered for MAT
computation over 5 years.
Interest on liability amount is • Past interest on liability
recognized using EIR
component will be
adjusted to RE and will
Equity component is not
reduce book profits over 5
remeasured
years
• On a go forward basis,
interest expense on
liability component
recognized in P&L is MAT
deductible
Page 34
Key Note Address
Example: OCRPS
Date
1-4-15
Item
Liability
Equity
P&L
RE
Original
amount
60
40
-
Past interest
12
-
-
Total
72
40
-
8
-
(8)
80
40
(8)
2015-16 Interest
Total
2016-17 Interest
10
Page 35
-
Key Note Address
(10)
MAT impact
Debatable whether
equity component
of compound
- financial
instrument will be
considered for
MAT over 5 years.
(12) INR 20 (12+8) TD
impact after true
(12) up to be reduced
from book profit
over 5 years
(12)
Interest charged to
- P&L is MAT
deductible.
Financial guarantee to subsidiary
Parent Accounting
Indian GAAP
No separate accounting – Disclosure as
contingent liability
Ind AS accounting
Debit
Credit
On issue of a new guarantee
Inv. In Sub
75
FG Obligation
75
Period Prior to TD
FG Obligation
P&L
►
►
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Subsidiary financial statements
15
15
Generally, no separate accounting for financial
guarantee since it is integral part of loan.
On a go forward basis, FG obligation released to P&L will result in a higher book profit.
On a go forward basis, any addition to investment in subsidiary of this nature will
reduce the book profits in the year in which the investment is sold
On TD assume company chooses previous GAAP carrying value for investment
Therefore RE will be debited by 75
With respect to FG obligation period expired prior to TD, RE will be credited by 15
Net RE debit 60 will reduce book profits over next 5 years
Page 36
Key Note Address
Interest free loan to subsidiary
Parent accounting
Parent provides 3 year INR 100 interest free loan to subsidiary
Parent accounting
Debit
Credit
Implications
On grant of new loan
Loan to Sub.
70
Investment in sub
30
100
Bank
►
On a go forward basis, interest income
recognized in P&L will result in a higher
book profit
►
Assume company uses previous GAAP
carrying value as deemed cost of
investment
►
RE will be debited by 30 wrt investments,
and credited by 16 wrt loan (interest
income)
►
Net RE Debit Adjustment 14 as at TD
after true up adjustment will reduce book
profits over 5 years
Period prior to TD
Loan to sub
16
16
Interest income
On repayment date
Bank
Loan to Sub.
Page 37
100
100
Key Note Address
Interest free loan from parent:
Subsidiary accounting
Subsidiary accounting
Debit
Credit
On receipt on loan
Bank
100
Loan from Parent
70
Capital contribution
30
Implications
►
Capital contribution (capital reserve) is MAT
neutral
►
RE Adjustment on TD ie RE expense of 16 is
considered over 5 years after true up
adjustment
►
On a go forward basis, interest expense
recognized in P&L will be MAT deductible
Period prior to TD
Interest expense
16
Loan from parent
16
On repayment date
Loan from parent
Bank
Page 38
100
100
Key Note Address
Example: PPA identified as finance lease
(Lessee accounting)
Balance Sheet
(New lease)
Ind AS
Transition date (past leases)
Indian
GAAP
Balance Sheet
Assets
Leasehold Power
Plant
Assets
760
-
Leasehold Power Plant
760
-
RE adjustment
(44)
Finance lease obligation
348
RE Adjustment as at TD after true up adjustment will reduce book profits over 5
years
Page 39
304
Equity and Liabilities
Equity and Liabilities
Finance lease
obligation
Ind AS
Key Note Address
Example: Service concession arrangement
Balance sheet
Ind AS
Indian GAAP
Year
1
2
3
4
Year
5
Depreciation
Net block
Page 40
2
3
4
5
Intangible asset
Fixed asset
Gross block
1
1000
1000
1000
1000
1000
Gross block
-
250
500
750
1000
Depreciation
1000
750
500
250
-
Net block
Key Note Address
1200
1200
1200
1200
1200
-
300
600
900
1200
1200
900
600
300
-
Service Concession Arrangements –
Intangible assets model
Indian GAAP
accounting
Ind AS accounting
MAT consequences
Fixed assets/
Intangible assets
are recorded at cost
(without
construction
margin)
Intangible assets or
annuities are recorded
at fair value of
construction services,
i.e., cost plus
construction margins.
Retrospective application
• RE adjustment at TD after true up adjustment will
increase book profits over 5 years
• If TD is end of year 2, the amount is determined as
below:
Increase in IA at end of year 2 150
True-up amortization for year 3 (50)
Net increase
100
Higher amortization
expense during O&M
period
• On a go forward basis, amount recognized in P&L,
including construction margin/ amortization, will be
subject to MAT.
Prospective application/ use of Indian GAAP carrying
value as deemed cost
• No impact on reserves/ RE at TD
• On a go forward basis, no impact on book profit for
the pre-existing SCAs
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Key Note Address
Thank you
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Key Note Address