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IFRS and Indian Accounting Standards – Implications on key sectors
• Infrastructure and Real Estate • Pharmaceuticals
• Power and Utility
• Technology • Media and Entertainment • Telecom
• Business Cycle – Revenue
Industry is marketing its products in different contractual arrangements like shop-in-shop, franchise, exclusive etc
IAS 18 AS 9
Arrangements require revenue recognition considerations and gross v/s. net presentation issues. Agent v/s. principal relation needs analysis
Generally presented on gross basis. No specific guidance.
5 .Retail • Business Cycle – Costs Cost of refurbishment of stores. the benefit beyond originally assessed standard of performance is not capitalised. pre-opening costs IFRS I GAAP The overhaul costs that does not increase Under existing AS 10 are not capitalised.
AS 19 No such allocation is required. 6 .Retail • Business Cycle – Leases IAS 17 requires the lease of land and building elements to be accounted for separately for lease classification unless immaterial IAS 17 Lease expense The present value of the minimum lease payments. including lump-sum upfront payments is allocated between the land and building elements in proportion to their relative fair values at the inception of lease.
flooring. Normally for retail store such costs are not accrued and are expensed as relocation costs.Retail • Business Cycle – Property plant and equipments IFRS requires a component approach for depreciation and accrual of asset retirement obligations & accrual of asset retirement obligation IAS 17 Lease expense Different components of the retail store may be building. 7 . furnishing. AS 19 No such allocation is required. parking lot etc… Cost of dismantling. Undiscounted amount of only constructive obligation is accrued. removing and restoring site on which is capitalised along with the cost of the item at present value basis.
Such programs entity may supply or third party supplies on redemption of award points. IFRIC 13 Fair value of the consideration received or receivable should be allocated between the award credits granted and other components of the transaction. AS 29 No such allocation is required. Also there is no specific guidance on accrual of loyalty programs.Retail • Business Cycle – Accruals / Creditors IFRIC 13 treats loyalty programs as “multiple element revenue transactions”. 8 .
Extractive 9 .
Extractive – Oil & Gas Companies • Legal format NELP licenses – bidding by consortium Interest in unincorporated joint ventures Financial records Basic financial records by one of the partner – Operator Accounting of cash call utlisation Measurement and recognition by individual partners in their respective financial statement 10 .
Extractive – Oil & Gas Companies • Cost related to acquisition exploration and evaluation Classification into tangible and intangible based on IAS 16 and IAS 38 Cost or revaluation model Componentization and major maintenance expense Successful Efforts Method V/s. Full Cost Method IFRS 6 allows use of FCM only for exploration and evaluation after this companies are required to follow SEM Activities prior to and after exploration and evaluation – Not covered by IFRS 6 11 .
AS 29 undiscounted.Extractive – Oil & Gas Companies • Cost related to acquisition exploration and evaluation Site restoration Discounted under IFRS V/s. however capitalised as Producing Property under both GAAP Unwinding costs to Income statement Exchange loss on restatement of the provision – AS 11 V/s. Income statement under IFRS Change in liability is adjusted in producing property 12 .
Infrastructure & Real Estate 13 .
Infrastructure • Legal format Public to Private Partnership (PPP) arrangements in the form of Service Concession Agreements Build Own &/or Operate Transfer Grantor controls the services from infra assets Grantor controls residual interest in the infra assets SPV formed for each project SPV Parent – Financial Service Company or Infrastructure Construction Company 14 .
Infrastructure Accounting implication on business cycles (IFRIC 12) Asset classification Revenue recognition Recognition of obligations during concession period Comparison with ICAI Draft Guidance note 15 .
Infrastructure Business Cycle – Assets Classification • Fixed assets ? V/s. Construction service receivable exchanged for Intangible (rights) or Financial Asset Intangible Where SPV receives charges from user of infra assets Risk on SPV Financial asset Where SPV receives fixed sum from grantor Where grantor assures return on investment by SPV 16 .
Revenue recognition Components of the SCA for revenue recognition Construction Services Maintenance services Finance Income – In case of a financial assets Charges from user of the Infra Asset 17 .Infrastructure Business Cycle .
Obligations during concession period Regular maintenance.Infrastructure Business Cycle .Accrual basis Quality / standard as required under service concession Present value of the obligation – Intangible asset Allocation from revenue – Financial asset 18 .
Infrastructure Comparison with ICAI Draft Guidance note Classification as Financial Asset – AS 30 Discounting of provision for serviceability Other Challenges Depreciation of Intangibles under the Companies Act Taxation 19 .
Real Estate IFRIC 15 Agreements for the Construction of Real Estate (Clarifies revenue recognition on real estate sale contracts) Divergence in recognition IAS 18 [Revenue] Revenue is recognised when the completed real estate is delivered to the buyers. 20 . IAS 11 [Construction contracts] Revenue is recognised by reference to the stage of completion as construction progresses.
or for administrative purposes. Plant and Equipment IAS-16 Would comprises property held by the owner for use in the production or supply of goods or services. and generating cash flows largely independently of the other assets held by the entity. Measured at COST or REVALUED AMOUNT Inventory IAS-2 Would comprise property held by a real estate entity for sale in the ordinary course of business or in the process of development for sale. Measured at lower of COST or NET REALISABLE VALUE 21 . Measured at COST or FAIR VALUE Property.Real Estate Classification of Real Estate Properties Investment Property IAS – 40 Would comprise of real estate held to earn passive rental income or capital appreciation.
Real Estate Financial Instrument As per IAS 39. embedded derivatives in a contract will have to be valued separately. 22 .
Pharmaceuticals 23 .
It is the clearest point at which the technical feasibility of completing the asset is proven [IAS 38R.Pharmaceuticals Capitalization of internal development costs Development costs are capitalised as an intangible asset if all of the IAS 38. Management must use its judgment.57(a)] 24 . based on the facts and circumstances of each project. A strong indication that an entity has met all of the above criteria arises when it files its submission to the regulatory authority for final approval. para 57 conditions are met.
• Market entrance of competitive products.(IAS 36) Pharmaceutical entities should also consider industryspecific factors such as the following: • Patent expiry date. • Technical obsolescence of the assets. 25 .Pharmaceuticals Impairment testing for tangible and intangible assets . • Failure of the machinery to meet regulatory requirements. • Relationship with other tangible and intangible assets.
26 . AS 26 requires intangible assets that are not available for use and intangible assets that are amortised over a period exceeding ten years to be assessed for impairment at least at each financial year end even if there is no indication that the asset is impaired .Pharmaceuticals Impairment of Goodwill – Indian GAAP v/s IFRS IAS 36 Goodwill and indefinite life intangible assets are required to tested for impairment at least on an annual basis or earlier if there is an impairment indication. AS 28 Tested only when there is an indication that they may be impaired.
If so. Such transactions should be evaluated as to whether the loan agreement conveys control over the entity in accordance with SIC 12. 27 . the entity should be consolidated in the financial statements of the Company advancing such loans.Pharmaceuticals Special Purpose Entities – SIC 12 Unsecured loans advanced to entities for development of new active substance.
Power & Utility 28 .
Plant and Equipment Componentization IAS 16 requires the different components of an asset to be identified and depreciated separately if they have differing patterns of benefits and are significant relative to the total cost of the item. Asset Retirement Obligation (“ARO”) 29 .Power & Utility Property. Major Overhaul Under IFRS. costs related to major inspection and overhaul are recognized as part of the carrying amount of PP&E if they meet the asset recognition criteria in IAS 16.
On its December 18. So far. 2008. in practice. 30 . meeting the IASB agreed unanimously to add the regulatory asset and liability project to its agenda with a plan to clearly define the scope of the project to concentrate on common characteristics of a regulatory scheme that might lend to the recognition of regulatory assets and liabilities.Power & Utility Accounting for Regulated Assets and Liabilities IFRS does not provide specific guidance on regulatory assets and liabilities or on the recovery of costs and deferral of excess profits through future increases and decreases in regulated tariffs. entities in jurisdictions that have adopted IFRS have generally not recorded assets and liabilities resulting from regulation as assets and liabilities under IFRS.
Power & Utility IFRIC 18 – Transfer of Assets from Customers The entity must control the asset in order to recognise it. On initial recognition the asset is measured at its fair value. Timing of revenue recognition will depend on what the entity has agreed to supply to the customer in exchange. 31 .
Technology 32 .
Revenue recognition • Multiple elements arrangements • Detailed guidance under IFRS ( less compared to US GAAP) • More documentation in IFRS • Upgrade of software. hardware 33 .Technology .
Technology .Share Based Payments • Share Based Payments standard • No corresponding standard in Indian GAAP compared to IAS 2 • Only ESOP guidance in India ( SEBI and ICAI) • Intrinsic Value and Fair Value methods in India while under IFRS only Fair Value 34 .
many Tech companies follow US GAAP • US GAAP expenses off R&D costs • Under IFRS.Research and Development • More detailed in IFRS ( affecting Product development companies) • Though Indian GAAP is identical to IFRS. Research costs are expensed off while Development expenses are allowed to be capitalised 35 .Technology .
Technology .Other accounting matters • Determining whether an agreement contains a Lease ( IFRIC 4) – Impact on long term Shared Services agreements • Differences in Impairment standards between IFRS and US GAAP • Implication of new AS 30 which is identical to IFRS • Reversal of Inventory write -downs 36 .
Technology .Business Implication • IFRS implementation is Business opportunity for Indian IT and ITES companies • Implication of IFRS implementation on existing Technology platforms • China. Canada and US are big markets and good business flow till 2015 • Shared Services of IFRS implementation 37 .
Media and Entertainment 38 .
Music for which detailed guideline exists under IFRS • Barter Transactions – SIC 31 • Multiple business model in the industry like Multiplex operations – Component accounting and leases standard 39 . Web portals. Merchandise.Media and Entertainment • Intangible Vs Revenue • Sale of Distribution rights • Multiple element contracts – Channels. Regions.
Telecom 40 .
Telecom Industry • Revenue recognition of Bundle offerings of Telecom players • Indefeasible Right of Use (IRU) – Detailed guidelines under IFRS • Asset Retirement Obligations (ARO) – Discounting of provisions under IFRS • Gross or Net basis – Revenue from Interconnect and content revenue agreements • Implications of Componentisation. Estimate of useful life and residual value under IFRS 41 .
Summary – Revenue Recognition Technology High Pharma Moderate Retail Moderate IFRIC 13 Media Real Estate & Infra Extractive High SIC 31 High IFRIC 12 Moderate Power Low Telecom High 42 .
Summary – Major Over hauling expenses Technology Low Pharma High Retail Moderate Media Real Estate & Infra Extractive Low High High Power High Telecom Moderate 43 .
Summary – Revaluations of PPE Technology Low Pharma High Retail Moderate Media Real Estate & Infra Extractive Low High High Power High Telecom Low 44 .
Summary – Componentisation Technology Low Pharma High Retail Moderate Media Real Estate & Infra Extractive Low High High Power High Telecom Low 45 .
Summary – Provisions (Discounting) Technology Low Pharma Moderate Retail Low Media Real Estate & Infra Extractive Low High High Power High Telecom Moderate 46 .
Summary – Segment Technology High Pharma High Retail High Media Real Estate & Infra Extractive High High High Power High Telecom High 47 .
Summary Key considerations for Industries • Impact on P&L and Net worth • Market valuation • Global image • More business • True picture 48 .
Thank You 49 .
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