Professional Documents
Culture Documents
On 5 April 2010, SEBI issued a circular on amendments to the Equity Listing Agreement. One of the key amendments relates to insertion of clause 41 (I) (g), which provides an option for listed entities to submit their consolidated financial results either in accordance with the accounting standards specified in Section 211 (3C) of the Companies Act, 1956 or in accordance with IFRS as issued by the International Accounting Standards Board (IASB). The clause also provides that entities shall provide a reconciliation of significant differences between the figures as per IFRS and figures as per the notified accounting standards. Submission of standalone financial results to the stock exchanges shall continue to be in accordance with the Indian GAAP requirements. As per the same the Indian IT companies had to transition to IFRS by w.e.f April 1 2011 (i.e . April 1 2011 to March 31 2012 is the first reporting period and March 31 2012 would be reporting date). However, Convergence to IFRS is not merely changing from one set of accounting policies to another. The preparations for convergence to IFRS depends upon the nature of business, volume of operations, countries of operations (domestic and foreign), group structure (subsidiaries, associates, joint ventures), growth strategy (organic or inorganic), level of computerization, technical skill levels of staff members, regulatory concerns (such as tax implications in India in case of Minimum Alternate Tax adjustments) and many other such factors. Considering the above, the convergence process could be long drawn process.
Evaluating IFRS readiness of companies based on the following factors Cost of Implementation Skills and Training Managing Stakeholder expectations and concomitant time constraints
Improvements needed in Indian GAAP Capital Markets have become global A need for uniform financial reporting standard
Methodology
A 30 item survey was prepared based on our understanding of the differences between IFRS and Indian GAAP. The financial statements of IT companies were then downloaded from respective company websites and were perused to evaluate IFRS readiness based on our understanding of the differences. Based on our perusal of the financial statements, we also compared IFRS and Indian GAAP and discussed which of the two is better and why. The Survey was then conducted in IT companies and the results of the same were collated.
We explain the same with the help of an example Tata Consultancy Services (TCS) The same would be analyzed on the basis of the following statements Balance Sheet Income Statement / Statement of changes in comprehensive income Cash Flow Statement Statement of Changes in Equity
1. 2.
3. 4.
Company statements
YES YES YES YES NO NO NO
Mastek
Igate Patni L&T Infotech
NO
NO -
Balance sheet, Statement of Comprehensive Income / Income Statement (Profit and Loss Account), Statement of Changes in Equity (SOCIE), Statement of Cash Flows
Infosys Wipro HCL Tech Mahindra Mphasis Mindtree Mastek Igate Patni L&T Infotech
Balance Sheet
TCS YES
YES YES NO YES NO NO NO NO -
Infosys Wipro HCL Tech Mahindra Mphasis Mindtree Mastek Igate Patni L&T Infotech
Assets
Cost Model and Revaluation Model: An entity shall choose either the cost model or the revaluation model as its accounting policy. All companies have Cost model for Intangible Assets
L&T Infotech
Depreciation
Allocated on a systematic basis to each accounting period during the useful life of the asset as opposed to Depreciation based on the higher estimate of useful life of the asset, or the rates prescribed by Schedule VI of The Companies Act 1956, in I GAAP.
TCS Infosys Wipro HCL Tech Mahindra Mphasis Mindtree Mastek Igate Patni
L&T Infotech
IFRS stipulates that an entity shall assess whether the useful life of an intangible asset is finite or indefinite, as opposed to IGAAP which is strictly 10 years.
Expected Change
No change, however more liberty to companies with respect to asset valuation
L&T Infotech
----
Clear Guidelines for Measurement and Classification. Financial asset is classified in four categories:
TCS Infosys Wipro HCL Tech Mahindra Mphasis Mindtree Mastek Igate Patni
L&T Infotech
----
Clear Guidelines for Measurement and Classification. Financial Liabilities is classified in two categories:
Igate Patni
L&T Infotech
----
Income Statements
Separate statement of comprehensive income is required. In IGAAP, only profit and loss account is prepared. This also contains appropriations below the line, i.e, after determination of PAT
L&T Infotech
Expenses
Expenses classified according to function or by nature as opposed to classification by nature in Indian GAAP
TCS Infosys Wipro HCL Tech Mahindra Mphasis Mindtree Mastek Igate Patni
L&T Infotech
There is no guidance for classifying cash flows arising due to dividend and interest. They may be classified as Operating, Financial or investing activity.
TCS Infosys Wipro HCL Tech Mahindra Mphasis Mindtree Mastek Igate Patni
L&T Infotech
Infosys is compliant with IFRS and has started publishing its financial statements as per IFRS.
Financial statements have been prepared under the historical cost convention on the accrual basis except for certain financial instruments and prepaid gratuity benefits which have been measured at fair values.
The financial statements of the Group companies are consolidated on a line-byline basis and intra-group balances and transactions including unrealized gain / loss from such transactions are eliminated upon consolidation. Non-controlling interests which represent part of the net profit or loss and net assets of subsidiaries that are not, directly or indirectly, owned or controlled by the company, are excluded. The preparation of the financial statements in conformity with IFRS requires management to make estimates, judgments and assumptions. These estimates, judgments and assumptions affect the application of accounting policies and the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the period.
As required by IFRS, Critical accounting estimates involving complex and subjective judgments and the use of assumptions in these financial statements have been disclosed in financial reports of Infosys in Note 1.5. Infosys gives the statement of changes in equity which is a requirement for IFRS reporting. Infosys does not take into account the effect of changes in foreign exchange on cash. However, it does handle the same in its Statement of changes in equity. Infosys follows Indirect method of calculating cash flows from operating activities which is a practice recommended both by IFRS. Available for sale financial assets have been quoted separately as required by IFRS. Revenue from sales has not been recognized separately as required by IFRS. The company is currently evaluating the requirements of IFRS 9, and has not yet determined the impact on the consolidated financial statements. The effective date for IFRS 10, IFRS 11 and IFRS 12 is annual periods beginning on or after January 1, 2013 with early adoption permitted. As mentioned in the notes to the financial statements: We will be adopting the above standards effective 1st April, 2013. The company is currently evaluating the requirements of IFRS 10, IFRS 11 and IFRS 12, and has not yet determined the impact on the consolidated financial statements. The company is currently evaluating the requirements of IFRS 13, and has not yet determined the impact on the consolidated financial statements.
Defines "discontinued operation". Hence difference in timing of classification of operation as opposed to discontinuing operation in Indian GAAP.
Expenses classified according to function or by nature as opposed to classification by nature in Indian GAAP.
Specific guidance on off-setting of assets and liabilities prescribed in Schedule VI to the Companies Act 1956, Banking Regulation Act for Banks etc. : current and non-current written separately
Overdraft can be included as cash Basis of measurement of property, plant and equipment is either cost or revalue amount Revaluation of intangibles traded in active market permitted
Only profit and loss account is prepared. This also contains appropriations below the line, i.e, after determination of PAT Provides that goodwill arising on amalgamation in the nature of purchase is amortised over a period of 5 years. Financial enterprise: Interest paid and received classified as operating activities; dividend paid classified as financing activities.2. For other enterprises: interest and dividend recd. As investing activities. Interest and dividend paid as financing activities. Depreciation is based on the higher estimate of useful life of the asset, or the rates prescribed by Schedule VI of The Companies Act 1956. Extraordinary items are disclosed separately. Included in the determination of net P an L.
HCL Analysis
Items/ policies complying with IFRS
Goodwill recorded to the extent that the cost of acquisition, comprising purchase consideration and transaction costs, exceeds the book value of net assets in each acquired company. The goodwill arising on consolidation is not amortized but tested for impairment on a periodic basis. Current investments taken at lower of cost and net realizable value Equity classification: Equity attributable to HCL and non-controlling interests are separately mentioned
HCL Analysis
Items/ policies differing from IFRS
Long term investments carried at cost Statement of Changes in equity: Not given Cost of revenue and gross profit: Not mentioned Expenditure: All types of expenditure -operating and other- mentioned under a single head Net current asset(off-setting): The current liabilities are deducted from the current assets to give net current assets
Wipro Analysis
Key differences in IFRS and I-GAAP statements
Provides its financial statements in compliance with both IFRS and I-GAAP. Net current asset(off-setting): All assets and liabilities are written separately and no off-setting is done in case of IFRS balance sheet. In case of I-GAAP based balance sheet the current liabilities are deducted from the current assets to give net current assets.
Statement of Changes in equity: Included in statements complying with IFRS. In these statements, net income and other comprehensive income are given. Equity attributable to Wipro and non-controlling interests are mentioned separately
Cost of revenue: This item gives us variable cost and is mentioned in IFRS statements Gross profit: Mentioned in IFRS statements: Calculated after deducting cost of revenues from revenue. Revenue means revenue from operating activities
Mindtree Analysis
Items following Indian GAAP
Expenses are classified by nature only and not by function.
Extraordinary items are disclosed separately. Included in the determination of net P an L. Financial enterprise: Interest paid and received classified as operating activities; dividend paid classified as financing activities.2. For other enterprises: interest and dividend recd. As investing activities. Interest and dividend paid as financing activities. Book overdraft included as cash. Only indirect method is prescribed for listed companies and direct method is prescribed for insurance companies No guideline to add Cost of major overhauls in case of property, plant and equipment to asset cost
Revaluation of intangibles traded in active market permitted Depreciation is based on the higher estimate of useful life of the asset, or the rates prescribed by Schedule VI of The Companies Act 1956 Provides that goodwill arising on amalgamation in the nature of purchase is amortised over a period of 5 years.
Mphasis Analysis
Finally, it can be concluded that however, the reporting standards used are in accordance with IGAAP, there is marginal difference in the cash flow statements and the P&L Accounts as compared to IFRS.
It must be stressed that significant changes have to be made in the Balance sheet structure and few accounts, which may lead to changes in the account balances and final statements.
Goodwill recorded in the consolidated financial statement has not been amortized but evaluated for impairment Specific guidance on off-setting of assets and liabilities prescribed in Schedule VI to the Companies Act 1956, Banking Regulation Act for Banks etc. : current and non-current written separately
Interest and dividend are recorded under operating income Net income adjusted for extraordinary items Given under net current assets. Functional currency is the currency of the primary economic environment in which the entity operates. Functional and presentation currencies may be different. Interest is recognised on a time proportion basis taking into account the amount outstanding and the rate applicable
Mastek Analysis
Mastek follows IGAAP. A substantial part of fixed assets has not been disposed of by the Company during the 2011. The provisions of any special statute applicable to chit fund / nidhi / mutual benefit fund/societies are not applicable to the Company. Impairment of Goodwill is provided according IFRS standard. Cash flow statement has been prepared under the Indirect Method. Assets acquired on lease - ` 48.77 being a non-cash transaction has not been considered in cash flow statement. Cash and cash equivalents includes ` 52.14 Lakhs restricted on account of unpaid dividend.
TCS, Infosys, Wipro have implemented IFRS in their Financial statements for the 2010-11 financial year. HCl, Tech-Mahindra, Mphasis, Mindtree, Mastek are on road to implementation although they presently follow IGAAP. Only one of the companies studied, viz, iGate-Patni, shows credible differences in the Cash flow statements, and P&L account statements which lead us to conclude that positive strides have to be taken Most of the companies that have not formally adopted IFRS are in a position to do so, because their accounting policies are in line with IFRS.
Bibliography
KPMG India IFRS Monitor Issue 2, April 2010 IFRS Readiness Business Today May 17 2009 NEW JERSEY CPA JANUARY-FEBRUARY 2009 http://www.iasplus.com/index.htm http://www.infosys.com/investors/pages/index.aspx http://www.tcs.com/investors/Pages/default.aspx http://www.ifrs.org/Home.htm http://www.bdoindia.co.in/ Article of IFRS in Economic Times dated 17 August, 2009 http://www.jeffersonwellsinternational.com/PR/2008/IFRSCalculator HelpsCompanies.pdf http://www.ifrs.org/NR/rdonlyres/E6CFBA23-71CF-410B-8C35445BA17C2A6A/0/IFRSTaxonomy2011Guide20110325.pdf
Industry Contacts
Infosys - Avishek Lath L&T Infotech Sushma Rajgopalan For all other companies we contacted their investor relations teams
Thank You