Highlights of the recent MCA Press Releases (dated January 22, March 31 and May 4, 2010)
Certain clarifications on IFRS roadmap issued by the MCA
Companies preparing opening balance sheet as at 1st April, 2011 in accordance with the IFRS-converged accounting standards will show previous year’s figures as per non-converged accounting standards. However, an option is given to add an additional column and present comparatives using IFRS-converged accounting standards. In such case, the opening balance sheet shall be prepared as at 1st April, 2010.
Companies covered in Phase II and III, have an option to early application of IFRS-converged accounting standards only for the financial year commencing on 1st April, 2011 or thereafter.
Cut off date to ascertain the application of IFRS-converged accounting standards
For Banks and NBFCs – Balance Sheet as at 31st March, 2011 or the first Balance Sheet for accounting period which ends after that date.
For other companies - Balance Sheet as at 31st March, 2009 or the first Balance Sheet for accounting period which ends after that date.
Net worth is defined as Share Capital plus Reserve less Revaluation Reserve, Miscellaneous Expenditure and Debit Balance of the Profit and Loss Account. It is to be calculated on the basis of standalone audited balance sheet of the company.
There has been no announcement regarding (i) quarterly reporting under the IFRS-converged accounting standards and (ii) adoption of “IFRS for SMEs” in India.
The MCA press releases have brought some clarity to Indian companies but more clarifications around the applicability and transition provisions are required.
With IFRS set to become the future Indian GAAP and IFRS being a moving target, Indian companies should actively monitor and participate in the IASB’s standard setting process.
See the next tab for PwC’s noted FAQ’s.
The Indian Accounting Standards
1. What will be the 2 separate sets of notified accounting standards under Section 211(3C)?
Section 211(3C) will include 2 separate sets of accounting standards:
2. What is status of the IFRS-converged accounting standards?
The press release states that the converged version of Indian accounting standards will be submitted by the Accounting Standards Board (ASB) of ICAI to NACAS from time to time which will then be submitted to the Ministry. Currently exposure drafts of some IFRS-converged accounting standards have been issued by the ASB of ICAI which can be accessed at http://www.icai.org/post.html?post_id=410 . For differences between Exposure Drafts issued by ICAI and IFRS , refer PwC publication "Comparison of Exposure Drafts issued by the ICAI and IFRS issued by the IASB".
3. Which standards will apply to companies (not preparing opening balance sheet as at April 1, 2011), from 1st April, 2011 till the date of mandatory or voluntary adoption of the IFRS-converged accounting standards by them?
The existing Indian Accounting Standards as notified under Companies (Accounting Standards) Rules, 2006 will continue to apply to these companies, until the date when the IFRS-converged accounting standards become applicable or is early adopted.
4. Where a company is currently already preparing financial statements in accordance with IFRS as issued by the International Accounting Standards Board (IASB), will such financial statements be considered acceptable?
In our view since the standards are going to be converged and not adopted in India, such financial statements may not be acceptable for compliance with Section 211(3C) of the Companies Act.
5. How should net-worth be computed?
Net-worth will be calculated as:
Less: Revaluation Reserve
Debit Balance of the P&L Account
6. As at what date should the net-worth be computed (herein after referred as the cutoff date)?
- For Companies other than insurance companies, banks and non banking finance companies (NBFCs):
Net worth will be calculated as per the audited balance sheet of the company as at 31st March 2009 or the first balance sheet for accounting periods which end after that date.
- For banks and non banking finance companies (NBFCs):
Net worth will be calculated as per the audited balance sheet of the company as at 31st March 2011 or the first balance sheet for accounting periods which end after that date.
7. Should net-worth be computed based on the standalone financial statements or consolidated financial statements?
The press release has clarified that the net-worth should be computed based on the company’s standalone accounts.
8. Whether determination of net-worth is a one-time exercise or should be determined at the beginning of each year with effect from April 1, 2011?
The press release has clarified that the net-worth assessment is a one-time assessment based on the financial statements as at the cutoff date (Refer FAQ 6 for cutoff date). Subsequent increase /decrease in net worth is not be considered for applicability criteria of IFRS-converged accounting standards.
Accordingly, for companies other than insurance companies, banks and NBFCs, net-worth criteria will be applied as follows:
On similar lines, net-worth criteria is to be applied to urban co-operative banks and NBFCs.
9. How net worth will be calculated for newly incorporated entities?
It has been clarified that for companies which are not in existence as on March 31, 2009 (or March 31, 2011) as the case may be, net-worth will be calculated on the basis of the first balance sheet ending after that date. Also, the press release does not envisage the applicability for a new company whose networth may increase above Rs. 500 crores or may get listed subsequent to its first balance sheet date.
10. Where the audit report includes qualifications, should the impact of qualifications be considered in computing net-worth?
Though not addressed by the press release, in our view it would be appropriate to adjust the net-worth for the impact of qualifications, if any.
Other Applicability Issues
11. What will be the applicability date if the company has a year-end other than March 31?
It is specified that where the accounting year ends on a date other than March 31, the conversion of the opening balance sheet will be made to the first balance sheet which is made on a date after March 31. For example, a company which has an October 31 year end, which falls under phase I, will need to convert its opening balance sheet as at November 1, 2011.
12. For phase-I criteria, as at what date should the BSE -30 and NSE-50 companies be considered for phase-I?
The date of assessment of eligibility has been clarified as March 31, 2009 or first balance sheet for accounting periods which end after that date.
13. What is the first reporting date for Phase I companies?
Reporting date for companies with a March 31 year-end would be March 31, 2012. For a company with any other year end, say for October or December year end, it would be October 31, 2012 or December 31, 2012 respectively.
14. Whether listing on a stock exchange outside India include GDRs, FCCBs and /or other debt securities?
Yes, it is clearly specified in the press release as ‘shares and other securities’, which indicates that even debt securities should be considered for evaluating this criteria.
15. What will be the requirements with respect to financial statements of subsidiaries, joint ventures and associates?
As per the press release, a subsidiary/ joint venture/ associate would prepare is standalone financial statements using the existing Indian Accounting Standards till such time that the IFRS-converged accounting standards become independently applicable to the entity. Further, the press release also states that such subsidiaries, joint ventures or associate companies have the option for early adoption of IFRS-converged accounting standards.
16. Is early adoption of IFRS-converged accounting standards allowed? If yes, by whom?
It is clarified that companies which are covered in the Phase II and III for application of IFRS-converged accounting standards will have an option for application of IFRS-converged accounting standards only for the financial year commencing on April 1, 2011 or thereafter.
17. Can a company discontinue applying the IFRS-converged accounting standards based on reassessment of eligibility criteria on a later date?
It has been clarified that once a company starts following the IFRS-converged accounting standards on the basis of the eligibility criteria, it will be required to follow such accounting standards for all the subsequent financial statements even if any of the eligibility criteria does not subsequently apply to it.
18. For companies under each of the phases, will there be a requirement to present comparative information as per the IFRS-converged accounting standards (Eg., Phase I companies – previous year comparatives for the year ended March 31, 2012 which is March 31, 2011)?
The press release specifies that the Phase I companies should convert their opening balance sheet as at 1st April, 2011. It has been further clarified that these companies should show previous years’ figures as per the existing Indian accounting standards (i.e. non-converged accounting standards).
However, these companies have been given an option to add an additional column to indicate what these figures could have been if the IFRS-converged accounting standards had been applied in that previous year. In such case the opening balance sheet date for the Phase I companies will be 1st April 2010.
19. Will alternative formats be prescribed under Schedule VI to the Companies Act or any other relevant statute which currently prescribes the format of financial statements (eg., for electricity companies) ?
The press dated January 12, 2010 specified that the revised Schedule VI according to the IFRS-converged accounting standards will be submitted by the NACAS to the Ministry by January 31, 2010. We expect that the Schedule VI will then include 2 separate sets of format – the existing one to be used by companies following the existing Indian Accounting Standards and a new one to be used by companies following the IFRS-converged accounting standards. Similar changes to other regulations which prescribe financial reporting formats can be expected from the relevant governing authority.
20. Will the tax authorities take cognizance of financial statements prepared as per IFRS-converged accounting standards for the purposes of filing tax returns?
While the press release does not talk about the consequential impact on taxation laws, it is expected that there will be guidelines / changes in law which will provide clarity on this aspect. Further, assuming that the regulators will take some time to give cognizance to the Indian accounting standards converged with IFRS under the tax laws, companies may need to maintain parallel set of records to determine taxable income / book profits as per the current tax laws. Further it can also be expected that in case of Minimum Alternative Tax (MAT), the law may require certain additional adjustments say on account of fair value gains or losses, etc.
21. Will SEBI allow filing of financial statements prepared as per the IFRS-converged accounting standards?
SEBI vide its Circular CIR/CFD/DIL/1/2010 dated April 05, 2010, has made amendments to the Equity Listing Agreements. On account of this amendment, clause 41(I)(g) now provides an option to companies with subsidiaries, to submit its consolidated financial results, as per IFRS issued by the IASB. However, it is expected that SEBI will allow filing of financial statements prepared using IFRS-converged accounting standards. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1288173684283.pdf
22. Will the interim financial statements be prepared under the IFRS-converged accounting standards, when the company falls under a specific phase?
This has not been specifically clarified, however, we expect where a company falls under phase-I and has a March 31 year end, it would have to prepare its interim financial statements as at June 30, 2011 in accordance with IFRS-converged accounting standards.
23. If yes, under which standards will the comparative quarter be presented?
Assuming SEBI takes cognizance of the proposed requirements under the Companies Act that there is no requirement to present comparatives for the first annual financial statements as per IFRS-converged accounting standards, it would be appropriate to assume that this would hold good for the interim financial statements as well. Accordingly, the comparatives would be as per the interim financial statements prepared in accordance with the existing Indian Accounting Standards.
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In India, when businesses were simple, accounting standards were simple. Today, businesses have become complex and India needs comprehensive accounting standards. Move towards IFRS is an attempt to bridge this gap. This move would lead to certain fundamental changes and would impact businesses at large. Companies will have to examine the implication of this move on their performance and business.
It is important to note that conversion to IFRS will require the retroactive restatement of certain historical periods presented within a company's first set of IFRS based financial statements. Those restated periods could show a host of changes to a company's key metrics, bottom-line performance and financial position.
Implication of change in accounting would have a direct implication on the way businesses are run. For example, it could affect credit rating, debt covenants, dividend distribution, employee KPI and bonuses, managerial remunerations, financial-product's design, taxes, exit clause of your investors, contingent consideration (on acquisition).
IFRS may not bring significant accounting changes to all companies. The impact of the move could be quite significant for certain companies with complex transactions. The impacts of change to IFRS need careful analysis. Prior to embracing full-fledged conversion, a preliminary study would help you (1) assess the level of complexities and challenges, and (2) prepare and plan for effective and efficient conversion exercise.
We believe as a result of all of these developments that companies should consider the following:
Given the strategic and business issues related to IFRS, as well as the investment of time necessary to transition a company to a new accounting language, IFRS should remain an area of focus for most companies.
Accounting and reporting
Systems and controls
We have a proven track record in helping companies around the world successfully complete the transition to IFRS. Our industry-focused teams are ready to help you solve the accounting, systems and process issues surrounding complex IFRS conversions. Our team includes individuals who have helped previous adopters and who can offer you the full benefit of our experience.
Contact us to find find out how PwC can help you make the transition to IFRS.