Ambit Strategy Thematic AreyoureadyforIndAS 20oct2015

STRATEGY
October 2015
A P
A
IG
Consolidation
A S
D-
IN
Revenue Recognition
Financial Instruments
Are you ready for Ind AS?

Analysts:
Nitin Bhasin
nitinbhasin@ambitcapital.com
Tel: +91 22 3043 3241
Karan Khanna
karankhanna@ambitcapital.com
Tel: +91 22 3043 3251
Strategy
CONTENTS
Strategy: Are you ready for Ind AS?...3
Executive summary.4
Glossary of the key terms used in the note ..6
Ind AS: An introduction.7
The global experience on transition to IFRS...10
Is India Inc prepared? .12
Ind AS vs IGAAP: Key differences .14
- Consolidation (Ind AS 110). 17
- Financial instruments (Ind AS 109)19
- Revenue recognition (Ind AS 11 and Ind AS 18) 22
- Employee benefits and share-based payments (Ind AS 19 and 102) 23
- Business combinations (Ind AS 103). 25
- Other key areas. 26
A comparison of the IGAAP and IFRS accounts.28
Investment implications ..32
Appendix 1: Key carve-outs between IFRS and Ind-AS 36
October 20, 2015 Ambit Capital Pvt. Ltd. Page 2

Strategy
THEMATIC ACCOUNTING October 20, 2015
Are you ready for Ind AS? Case studies featured in this note:
In less than six months from now, more than 500 listed Indian companies Zee Entertainment: Adverse impact
(comprising ~75% of the total market capitalisation) are set to adopt Ind on Zees reported profitability,
AS (Indian Accounting Standards substantially converged with the IFRS). leverage and interest coverage
Our discussions with experts suggest that consolidation, financial profiles due to reclassification of
instruments, revenue recognition, ESOPs accounting and business preferred equity as debt
acquisitions are some key areas where Ind AS significantly differs from
the current IGAAP. Further, complex structures as well as complex Tech Mahindra: Adverse impact on
transactions are some of the key areas to watch out for; a quick mapping Tech Mahindras profitability upon
of the Nifty sectors/stocks suggests that Pharma, Tech and fair value accounting for ESOPs
Conglomerates accounts will be the most impacted. instead of intrinsic value method
Making accounts more comparable to global standards
Nestl: Implications on Nestls
According to a global survey, ~116 of the 140 major economies globally have
profitability from routing actuarial
already adopted IFRS. A uniform set of accounts globally would enable an
gains or losses through the reserves
international investor to make better and more informed decisions. Thus, given
instead of P&L account
the need for a set of accounting standards that are both globally acceptable and
easily understandable, in February 2014 the MCA notified 39 Ind AS for
Tata Motors, Wipro and Dr.
adoption by Indian companies, wherein companies (excluding the financial
Reddys: Reconciling their IFRS
services) with net worth more than `5bn will adopt IFRS from April 2016. profits with their IGAAP profits (with
The global experience on transition to IFRS has been fairly pleasant detailed explanations behind the
Global experience of transition to IFRS has been fairly pleasant with the potential divergence); reported RoCEs are 0.3-
benefits stemming from adopting IFRS far outweighing the costs. In case of the 2.2 percentage points lower in IFRS
EU, the recommendations issued by the CESR (which required companies to start
making disclosures in their books two years in advance) partly enabled this Balmer Lawrie: Several key
smooth transition. Moreover, companies that pro-actively communicated major performance measures would be
changes with investors saw less volatility in mcap. affected as we move to equity
India Inc however does not seem to be too prepared method of accounting for JVs under
Unfortunately, unlike the EU, regulators in India have not issued detailed Ind AS
recommendations for Indian companies to help them with a smooth transition.
Further, even our discussions with experts and company managements suggest MNCs: The profits of certain MNCs
that not many corporates are well prepared to deal with the complexities and might be adversely impacted as they
many have not even internally transitioned. start reflecting the costs of stock
options granted to the local
Key areas to watch out for management by the global parent
Consolidation, financial instruments, revenue recognition, ESOPs and
business acquisitions are some of the key areas where Ind AS significantly Companies following the ICAI
differs from IGAAP. Further, complex transactions and complex structures are Circular on accounting for
some of the key areas that experts believe might be adversely impacted the most. derivatives:
A quick analysis of the IGAAP and IFRS accounts for companies reporting both Volatility in their P&L accounts will
suggests major differences on account of forex transactions, provisioning of reduce, as both MTM gains as well as
debtors and deferred taxation. We expect significant variations in accounts of losses will have to be accounted for
companies that have multiple/complex business arrangements/entities.
The roadmap for implementation of Ind AS
THIS NOTE CANNOT BE USED BY THE MEDIA
In d A S im p le m e n ta t io n IN ANY SHAPE OR FORM WITHOUT PRIOR
CONSENT FROM AMBIT CAPITAL.
0 1 .0 4 .2 0 1 5 0 1 .0 4 .2 0 1 6 0 1 .0 4 .2 0 1 7
V o lu n t a r y a d o p t io n L is t e d a n d u n lis t e d c o s . A ll o t h e r lis t e d c o s ;
w it h s t a n d a lo n e n e t u n lis t e d c o s . w it h
w o r th g re a te r th a n Rs 5 s t a n d a lo n e n e tw o r t h Analyst Details
b n a s o n 3 1 .0 3 .1 4 g rea ter th a n R s 2 .5 b n
a s o n 3 1 .0 3 . 1 4 Nitin Bhasin
+91 22 3043 3241
H o ld in g , s u b s id ia r ie s , nitinbhasin@ambitcapital.com,
a s s o c ia t e s a n d J/ V s o f
th e se co s . Karan Khanna
C o m p a r a t iv e s t o b e +91 22 3043 3251
p r o v id e d f o r t h e p r e v . y r .
karankhanna@ambitcapital.com
Source: MCA Notification, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Strategy
Executive summary
The following table summarises the key differences between IGAAP and Ind AS:
Exhibit 1: Key differences between the current IGAAP and the proposed Ind AS
Accounting treatment prescribed:
Key areas Areas of difference
Under IGAAP? Under Ind AS?
Much more subjective in nature; for example,
Defined rules such as consolidation required if
concept of 'de facto' control introduced that would
Definition of 'control' majority shareholding or control over composition
require consolidation even without majority
of BoD
shareholding
In rare circumstances, two entities might be
Number of entities that can required to consolidate one entity; one by virtue of
Cannot be more than one
Consolidation consolidate majority shareholding and the other by virtue of
control over composition of the BoD
Gains or losses resulting
Will be accounted for as an equity transaction;
from change in Will be routed through the P&L account
unless it results in reclassification of the entity
shareholding
JVs are accounted for using the proportionate JVs will have to be accounted for using the equity
Accounting for JVs
consolidation method method
Current investments-> lower of cost or fair value;
All investments will have to be initially recognised
Accounting for investments Non-current investments-> cost less any
at their fair values
permanent diminution in value of the investment
Ind AS specifically requires to go beyond the legal
form and instead look at the underlying substance
Accounting for financial Current IGAAP focuses more on the legal form of
of the instrument; so for example, redeemable
Financial instruments liabilities the instrument
preference shares will now be treated as part of
'debt' instead of 'equity'
Currently there is no mandatory standard under Ind
Both gains as well as losses will have to be
AS. Consequently, companies can either choose to
Accounting for derivatives reflected; volatility reduced if hedge accounting is
follow the ICAI Circular or follow hedge accounting
followed
as per AS-30
Revenues from rendering of Both 'proportionate completion' method as well as
Only 'percentage completion' method is permitted
services 'completed services contract' method are permitted
Expenses that are directly
Currently shown as an adjustment to costs Will be shown as an adjustment to revenues
Revenue recognition linked to sales
Related revenues should be deferred and
Multiple component
No clear guidance recognised as revenues over the relevant service
contracts
period
Routed through the Statement of Other
Actuarial gains or losses Routed through the P&L a/c Comprehensive Income; thus reducing the
volatility in the P&L a/c
Employee benefits and Both 'intrinsic value' method as well as 'fair value'
Accounting for ESOPs Only 'fair value' method is permitted
share-based payments method are permitted
Ind AS necessarily requires the cost of such options
Stock options given by Currently it is not mandatory to account for these
to be accounted for in the books of the local
global parent stock options in the books of the local subsidiary
subsidiary
Looks at the underlying substance of the
Acquisition accounting Currently driven by the legal form of the transaction
transaction
Difference between the consideration paid and the
Difference between the consideration paid and the FV of net assets acquired is first apportioned to a
Goodwill
Business combinations BV of net assets acquired is shown as goodwill number of intangibles; and the balance is shown
as goodwill; as a result, goodwill will shrink in size
Ind AS does not stipulate amortisation of goodwill;
Goodwill arising on amalgamation should be
Impairment of goodwill however goodwill needs to be annually tested for
amortised over a period of five years
impairment
Recommends but does not require component
Component accounting Ind AS mandates component accounting
accounting
Does not require the entire class of F/As to be
Revaluation of F/As revalued; consequently only a single asset can be Requires the entire class of F/As to be revalued
revalued
Fixed Assets Change in depreciation Treated as a change in accounting policy; hence Treated as a change in accounting estimate; hence
method requires a retrospective adjustment requires prospective adjustment only
Land & Building to be bifurcated into that used for
Current IGAAP provides limited guidance on Business (classified as PPE) and that used for
Investment Property
accounting for Investment Property earning rentals and/or capital appreciation (Invt.
Property)
Under Ind AS, entities would be required to report
Currently there are two primary ways of reporting
their segmental results in the same way in which
Segmental reporting segmental reporting: Operating segment and
they use it for their internal reporting to the
Geographical segment
CODM
Entities have the option to capitalise it in the cost of Post transition date, FX fluctuations will have to be
FX fluctuations
Other key areas the asset routed through the P&L a/c
Deferred taxes are recognised based on timing Deferred taxes are recognised based on temporary
Deferred taxes difference between accounting income and tax difference between BV of assets as per the books
income of accounts and as per the tax accounts
Shown as an appropriation of profits for the year to Shown as an appropriation of profits for the year
Proposed dividend
which it pertains in which it is declared
Source: Ambit Capital research

Strategy
Basis the key differences between IGAAP and Ind AS highlighted in Exhibit 1 above,
the exhibit below shows some of the key Nifty companies to watch out for (please
turn to page 32 for more information on the subject).
Exhibit 2: Ind AS impact - Key Nifty companies to watch out for

Ticker Name GICS Sector Key impact
Classification of redeemable preferred equity as debt would impact several
Zee Entertainment
Z IN Consumer Discretionary key performance measures such as reported net worth, leverage profile and
Enterprises
interest coverage ratio.
Tech Mahindra has issued significant stock options to its employees. Currently
the cost of such stock options is accounted for using the intrinsic value
TECHM IN Tech Mahindra Ltd Information Technology method. Going forward, as the fair value method becomes mandatory, the
cost of such stock options would likely be higher, thus impacting several key
performance measures such as reported margins and reported PAT.
Currently, one of Idea's JVs with Vodafone and Bharti Airtel (i.e. the Indus
operations) is accounted for using the proportionate consolidation method
Telecommunication (with Idea consolidating 16% of the operations). Going forward, however, as
IDEA IN Idea Cellular Ltd
Services equity method of accounting becomes mandatory for accounting for JVs,
whilst the net results/net assets would remain the same, the gross
results/gross assets would certainly vary.
With actuarial gains or losses with respect to defined benefit obligations
being routed through the Other Comprehensive Income instead of the P&L
COAL IN Coal India Ltd Energy
account, Coal India might see a reduced volatility in its P&L account under Ind
AS.
Unlike its previous policy where only MTM losses were recorded whilst MTM
TPWR IN Tata Power Co Ltd Utilities gains were ignored (w.r.t. Derivative contracts), Tata Power will now have to
record both MTM gains as well as MTM losses.
ONGC has several JVs that will be accounted for using the equity method
going forward. Further, with actuarial gains or losses with respect to defined
benefit obligations being routed through the Other Comprehensive Income
instead of the P&L account, ONGC might see reduced volatility in its P&L
ONGC IN Oil & Natural Gas Corp Ltd Energy
account under Ind AS. Furthermore, unlike its previous policy where only
MTM losses were recorded whilst MTM gains were ignored (w.r.t. Derivative
contracts), ONGC will now have to record both MTM gains as well as MTM
losses.
The Pharma sector looks particularly exposed to the intricacies arising on Ind-
AS implementation, owing to extensive use of ESOPs (which is mainly
Pharma Companies
accounted for at intrinsic value), tendency to grow inorganically through
business acquisitions and complex structures in several cases.
Given that complex business transactions as well as complex structures are
some of the key areas that will be adversely impacted, M&M, Reliance Inds
Conglomerates
and L&T are three major conglomerates from the Nifty Index that could
possibly see significant impact to their books as we move to Ind-AS.

Strategy
Glossary of the key terms used in the note

Here are some of the key terms that have been used in this report:
Ind AS: Indian Accounting Standards substantially converged with the
International Financial Reporting Standards
IFRS: International Financial Reporting Standards
ICAI: Institute of Chartered Accountants of India
MCA: Ministry of Corporate Affairs
IASB: International Accounting Standards Board
GAAP: Generally Accepted Accounting Principles
IGAAP: Indian Generally Accepted Account Principles (i.e. the accounting
standards that are currently in force in India)
NACAS: National Advisory Committee on Accounting Standards
CII: Confederation of Indian Industry
FICCI: Federation of Indian Chambers of Commerce and Industry
Assocham: The Associated Chambers of Commerce of India
GICS: Global Industry Classification Standard
Chinese ASBEs: Chinese Accounting Standards for Business Enterprises
SOCPA: Saudi Organisation for Certified Public Accountants
CESR: Committee of European Securities Regulator
FCCBs: Foreign Currency Convertible Bonds
CODM: Chief Operating Decision Maker
FCMITDA: Foreign Currency Monetary Item Translation Difference Account

Strategy
Ind AS: An introduction

Indian accounting standards are set for a complete financial overhaul. In less than six >500 listed companies comprising
months from now, our back of the envelope calculation suggests more than 500 ~75% of the total mcap are set to
listed companies (comprising ~75% of the total market capitalisation) and ~350 adopt Ind AS beginning with next
unlisted companies are set to adopt Ind AS, i.e. the Indian accounting standards year
substantially converged with the International Financial Reporting Standards (IFRS).
What is Ind AS?
Given the changing business dynamics, the current IGAAP (i.e. the accounting
standards currently followed by Indian entities) are outdated (with the last set of
accounting standards being issued around 15 years back) and do not reflect the
economic realities of the business.
As a result, the governing bodies in India (namely ICAI and the MCA) realised the Ind AS are the Indian accounting
need for a major reset to the Indian reporting landscape. Ind AS, thus, are the Indian standards substantially converged
accounting standards issued by the ICAI substantially converged with IFRS. with IFRS
Unlike several economies of the world that have adopted IFRS (which would mean
applying the IFRS principles as is without any modifications), India has chosen to use
a different path by converging with IFRS through the issuance of the new Ind AS. This
would mean that the Ind AS issued by the ICAI are not entirely the same as the IFRS
issued by the IASB, as there are certain carve outs (for more details on these carve-
outs refer to Appendix 1 on page 36).
Simply put, here are the three key areas where Ind AS is conceptually different from
the current IGAAP:
Substance over form: Ind AS are driven more by the underlying substance of Three key areas where Ind AS is
the transaction rather than merely by its legal form; conceptually different from IGAAP:
Fair valuation: Under Ind AS, there is an increased focus on fair valuation - Substance over form;
concepts, thus reflecting the economic realities of the business; and - Increased use of fair valuation
concepts; and
Increased transparency and disclosures: Finally, Ind AS requires extensive
use of estimates, judgments and disclosures; thereby helping the readers of the - Increased transparency and
financial statements better understand the state of affairs of the business. disclosures
The need for Ind ASIGAAP not comparable to most accounts globally
According to a September 2015 survey conducted by the International Accounting Given 116 of the 140 major
Standards Board (IASB), the governing body for the implementation of IFRS, globally economies globally have already
116 of the 140 major economies have already adopted IFRS for reporting purposes. moved to IFRS
In addition to this, another 14 countries (including India) permit but do not
necessarily require IFRS for reporting purposes.
Even from an international investors point of view, both from a comparability as well
as understandability perspective, uniform sets of accounts globally would enable the
investor to make better and more informed decisions.
Thus, given the need for a set of accounting standards that are both globally
acceptable as well as easily understandable for an international investor, the Ministry in February 2015, the MCA
of Corporate Affairs (MCA) came out with a Notification in February 2015, notifying notified 39 Ind AS for adoption by
39 Ind AS for adoption by Indian companies. Indian companies

Strategy
The roadmap for implementation

Exhibit 3: The roadmap for Ind AS implementation
Ind AS implementation
01.04.2015 01.04.2016 01.04.2017
Voluntary adoption Listed and unlisted companies with All the remaining listed companies,
standalone net worth greater than Rs and unlisted companies with
5 bn as on 31.03.14 standalone networth greater than Rs
2.5 bn as on 31.03.14
Holding, subsidiaries, associates

and joint ventures of these
companies
Comparatives to be provided for the

previous year
Source: MCA Notification, Ambit Capital research
According to the MCA Notification, the roadmap for Ind AS implementation is as

follows:
Voluntary adoption: Any company might voluntarily choose to adopt Ind AS
for reporting purposes for any accounting period beginning on or after 1st April
2015;
Phase 1: Listed and unlisted companies with standalone net worth greater than ` Listed companies with standalone
5bn as on 31st March 2014 (or the first audited financial statements after that) net worth of >` 5bn are set to
would be required to adopt Ind AS for any accounting period beginning on or adopt Ind AS starting from next
after 1st April 2016; and year
Phase 2: All the remaining listed companies and unlisted companies with
standalone net worth greater than `2.5bn as on 31st March 2014 (or the first
audited financial statements after that) would be required to adopt Ind AS for
any accounting period beginning on or after 1st April 2017.
Further, once an entity adopts Ind AS (either voluntarily or mandatorily), going
forward it will have to mandatorily report under Ind AS for all the financial periods.
Furthermore, according to the MCA Notification, even the holding companies,
subsidiaries, associates as well as joint ventures of the above companies would be
required to adopt Ind AS.
The MCA Notification, however, specifically exempts banks, NBFCs and insurance Banks, NBFCs and Insurance
companies from adoption of Ind AS. Consequently, they shall continue to report companies however have been
under the relevant statutes as applicable. specifically exempted from this
Notification
(Note, however, that through its fourth bi-monthly monetary policy statement on 29th
September 2015, the RBI has recommended to the MCA, a roadmap for
implementation of Ind AS by banks and NBFCs starting from FY19.)

Strategy
Sectoral mix resulting from the implementation roadmap

The sectoral mix resulting from the implementation roadmap discussed above has
been reproduced in Exhibits 4 and 5 below.
A look at the sectoral mix (basis GICS Sector classification) suggests that a number of
Materials, Industrials and Consumer Discretionary stocks shall be covered under the
provisions of Ind AS, starting from the next financial year (refer to Exhibit 4 below).
In market-cap terms, however, the Technology sector will see the maximum
representation followed by the Energy and Consumer Discretionary sectors. This
suggests that several large companies belonging to these sectors will be required to
move to Ind AS next year (see Exhibit 5 below).
Exhibit 4: A number of Materials, Industrials and Consumer Exhibit 5: In mcap terms, the Technology Sector has the
Discretionary stocks shall be covered under Phase 1 maximum representation followed by Energy and
Consumer Discretionary
% firms getting covered under Phase 1 Mcap representation in Phase 1

Technology,
17%
Materials,
Others, 23% 23% Others, 32%
Energy, 14%
Health Care,
7% Industrials,
23%
Technology,
Industrials,
7% Cons. Disc.,
12%
Cons. Disc., Cons. 13%
16% Staples, 12%
Source: Bloomberg, Capitaline, Ambit Capital research. Note: This exhibit is Source: Bloomberg, Capitaline, Ambit Capital research. Note: This exhibit is
for illustrative purposes only. Others denotes Consumer Staples, Financials for illustrative purposes only. Others denotes Health Care, Materials,
(i.e. Real Estate), Utilities, Energy and Telecom Services. Utilities, Telecom Services and Financials (i.e. Real Estate).
Thus, as can be seen from the exhibits above, barring Financials, companies
representing all the major sectors of the economy will have to mandatorily adopt Ind Barring Financials, companies
AS for reporting purposes starting next year. But how prepared are these companies belonging to all the major sectors
to deal with the intricacies arising from the implementation of Ind AS? Before we of the economy are set to move to
move on to answering that, lets first take a look at how the global experience has Ind AS next year
been in terms of the transition to IFRS.

Strategy
The global experience on transition to IFRS

From our discussions in the previous section we note that globally around 116 of the
140 major economies have already adopted IFRS for reporting purposes. In this
section of the report, we shall see how the global experience in terms of transition to
IFRS has been.
The status of IFRS implementation across the globe
The status of IFRS implementation in case of the top-25 markets globally has been
reproduced in Exhibit 6 below.
Exhibit 6: The status of IFRS implementation in case of the top-25 markets globally
If IFRS is required, If IFRS is not required,
Country Is IFRS required? Comments (if any)
year of transition? is IFRS permitted?
USA No N/A No -
China has adopted national accounting standards that are
substantially converged with IFRS (Chinese Accounting Standards
China No N/A No for Business Enterprises-ASBEs). In addition to this, a number of
Chinese companies already report under IFRS by virtue of their
dual listings on Chinese and Hong Kong stock exchanges.
Voluntary application of IFRS for companies that meet certain
Japan No N/A Yes
criteria has been permitted since March 2010.
Hong Kong Yes 2005 N/A -
UK Yes 2005 N/A -
France Yes 2005 N/A -
Germany Yes 2005 N/A -
Canada Yes 2011 N/A -
Switzerland No N/A Yes Switzerland has already adopted IFRS for some companies.
India is set to adopt Ind AS, Indian accounting standards that are
India No N/A Yes
substantially converged with IFRS beginning with next year.
South Korea Yes 2011 N/A -
Australia Yes 2005 N/A -
Unlisted companies, credit co-operatives, credit card companies
Taiwan Yes 2013 N/A
and insurance intermediaries were covered w.e.f. 2015.
Spain Yes 2005 N/A -
Sweden Yes 2005 N/A -
Italy Yes 2005 N/A -
Brazil Yes 2010 N/A -
Currently, the Saudi Arabian central bank requires banks and
insurance companies in Saudi Arabia to report under IFRS.
Saudi Arabia Yes 2017* N/A
SOCPA standards apply to all other companies, listed and
unlisted.
Singapore started the process of aligning SFRS closely with IFRS
Singapore Yes 2018 N/A
in 2002.
South Africa Yes 2005 N/A -
Russia Yes 2012 N/A -
Mexico has adopted IFRS for all listed companies other than
Mexico Yes 2012 N/A
financial institutions and insurance companies.
Netherlands Yes 2005 N/A -
Denmark Yes 2005 N/A -
Belgium Yes 2005 N/A -
Source: Bloomberg, IFRS website, Ambit Capital research. Note: *listed entities would be required to adopt in 2017; unlisted in 2018.
An interesting observation from Exhibit 6 above is that the top-three markets globally, Whilst US, China and Japan have
i.e. US, China and Japan, have not adopted IFRS. not moved to IFRS
Our discussion with IFRS experts in India suggests that the US GAAP (i.e. the
Generally Accepted Accounting Principles for US listed companies) is generally
considered to be far more sophisticated and more stringent than the IFRS. As a result,
the US neither requires nor permits its listed companies to adopt IFRS.

Strategy
Further, whilst China too does not require (or permit) Chinese listed companies to
report under IFRS, note that the Chinese Accounting Standards for Business
Enterprises (ASBEs) have already substantially converged with IFRS. In addition to this,
a number of Chinese companies already report under IFRS, by virtue of their dual
listings on the Chinese and the Hong Kong stock exchanges (Hong Kong mandatorily
requires listed companies to report using IFRS).
Also, whilst Japan too does not require IFRS, it has allowed voluntary application of
IFRS for companies that meet certain criteria since March 2010. Further, our
discussion with experts suggests ~50% of the overall market capitalisation of the
Tokyo Stock Exchange is set to adopt IFRS in the coming years.
However, a look at the status of IFRS implementation suggests that almost all the nearly all the remaining major
other major global markets either mandatorily require or voluntarily permit global markets have already
companies to adopt IFRS. adopted IFRS
The EUs experience on transition to IFRS

Further, one common theme that arises from Exhibit 6 above is that barring
Switzerland, all other major European nations have adopted IFRS since 2005. This is
pursuant to the resolution passed by the European Parliament in March 2002,
requiring all listed EU companies to prepare consolidated financial statements for
accounting periods beginning on or after 1st January 2005, in accordance with IFRS.
In that context, the experience of the European Union nations from the EUs experience to transition to
implementation of IFRS is worth highlighting. Not only has it been extensively IFRS has been extensively
researched, it is also fairly well documented. researched
Whilst it is difficult to generalise the impact on various sectors arising from the
implementation of IFRS, a few key trends are worth highlighting:
The 2005 IFRS implementation had been a resounding success overall:
According to a September 2006 survey conducted by E&Y on the observations on
the implementation of IFRS, the 2005 implementation of IFRS across EU was a
resounding success overall, with companies being successfully able to address the
challenges posed by the IFRS implementation.
The benefits outweighed the cost: Another study (click here) conducted by the
ICAEW suggests that the benefits arising from IFRS implementation (in terms of
transparency, better accounting quality, greater comparability, etc) significantly
outweighed the costs associated with it.
Markets reacted favourably to the adoption of IFRS in Europe: A
September 2008 Harvard Business School research paper suggests that the
market reaction to the adoption of IFRS in Europe was quite favourable, with a
positive reaction to events that increased the likelihood of IFRS adoption (and a
negative reaction to events that decreased the likelihood of IFRS adoption).
Lower volatility in share prices of companies that had better informed
their investors: Finally, and more importantly, yet another research paper points
out that companies that had informed their investors well in advance about the
impact of IFRS saw limited volatility in their share prices on the day of the results.
In contrast, firms that had failed to inform their investors about the impact of IFRS
on their accounts saw greater volatility in their share prices on the day of
reporting the results.
Is India prepared for IFRS/Ind AS?

From the above discussions it is clear that the European experience from transition to and the overall experience on
IFRS has been fairly pleasant. Whilst it did pose several challenges for corporates as transition to IFRS has been fairly
well as investors alike, at the broader level, the European Union did transition to IFRS pleasant
quite smoothly.
In the next section, however, we shall see how prepared is India Inc to deal with the
complexities arising out of Ind AS implementation.

Strategy
Is India Inc prepared?

In the previous section of the report, we highlighted that out of the ~5,000 listed
companies in India, the accounts of more than 500 major corporates are set for a
complete financial overhaul as we move to Ind AS next year. Further, barring
Financial Services, every single sector will be required to mandatorily adopt Ind AS for
reporting purposes.
Given that ~75% of the market (in market-cap terms) is set to move to Ind AS with 1QFY17 results will have to be
effect from 1st April 2016, this would mean that even in the 1QFY17 results, reported under Ind AS along with
companies would have to report under Ind AS. Further, the comparable for the comparable for 4QFY16 and
previous quarter (i.e. 4QFY16) as well as comparable for the same quarter in the 1QFY16
previous year (i.e. 1QFY16) will have to be provided under Ind AS.
Against this backdrop, the obvious question that arises next is how prepared is India
Inc to deal with the complexities arising from the implementation of Ind AS.
Our discussions with experts and company managements
To understand the implications of Ind AS on listed Indian companies, we interviewed
two prominent IFRS experts in India, both with nearly two decades of experience in
providing assurance and advisory services to several Indian and multinational
companies.
In addition to this, we also spoke to several management teams to understand their We spoke with several IFRS experts
preparedness to deal with the changes proposed to be brought in by Ind AS. and company managements
The key takeaways from our discussions with these experts and the company
managements have been summarised below:
Overall, the preparedness of India Inc to deal with Ind AS seems to be much
better now than in 2011 when Ind AS was first sought to be implemented.
Given the complexities involved, relatively smaller companies with lesser-known
auditors are likely to face difficulties in implementing Ind AS. Our back-of-the-
envelope calculation reveals that out of the ~500 listed companies that are set to
adopt Ind AS starting from next year, ~230 companies have relatively lesser-
known auditors (who do not audit the books of more than 2-3 companies that
are set to adopt Ind AS starting from next year).
Further, the experts are of the view that whilst notifying the Ind AS solves only
one part of the problem, the bigger challenge lies in implementation. According
to one of the experts, whilst we might move to Ind AS in 2016, it might take a few
years to reach a point where the Ind AS principles are applied consistently across
companies.
Whilst one of the experts was of the view that a number of listed companies have
already started assessing the impact of Ind AS on their financials, the other expert
had a different view on this. According to him, India Inc does not seem prepared
to deal with the complexities of Ind AS. In addition to this, out of the top-100
companies, he believes only 5-10 companies may be reporting under Ind AS for
internal purposes.
Finally, we also spoke to several management teams to understand how they
would see their accounts change under Ind AS. Our discussion with most of these
company managements, however, suggests that they are still trying to assess the
impact of Ind AS on their financials. As a result, most of these management
teams were not in a position to comment on the impact.
The EUs transition to IFRS was fairly smooth, due to CESR recommendations
From our previous discussions, we note that the European Unions transition to IFRS
was fairly smooth.
The recommendations issued by the Committee of European Securities Regulator Whilst the CESR recommendations
(CESR) in October 2002 (click here) partly enabled this smooth transition to IFRS for helped EU companies with smooth
the EU listed companies. transition to IFRS

Strategy
The said recommendations encouraged listed companies to:

Discuss their plans and degree of achievement in their move towards IFRS in their
2003 financial statements;
Quantify the impact of change to IFRS on its 2004 financials in its 2004 financial
statements in a sufficiently reliable manner;
Start applying IAS 34 on Interim Financial Reporting, or if this is not possible, at
least the IFRS recognition and measurement principles, in their 2005 interim
financial statements; and
Finally, present the first complete set of financial statements under IFRS in the
2005 financial statements.
In India, however, no such recommendations have been issued

Unfortunately, unlike the EU, where the CESR had issued detailed guidelines for listed the regulators in India have not
companies to help them with a smooth transition to IFRS, the governing bodies in issued any such detailed guidelines
India (for example the ICAI, MCA, etc) have not issued any such recommendations.
Our view on India Incs preparedness

Vis--vis 2011 when Ind AS was first set to be implemented, India Inc clearly seems Overall, whilst India Inc seems to
much more prepared now to deal with the complexities arising out of Ind AS be in a better position to deal with
implementation. Ind AS now vs in 2011, a lot still
needs to be done to enable smooth
That said, a lot still needs to be done to enable smooth transition to Ind AS, as many
transition
companies have not even internally transitioned to Ind AS.
Unlike the EU, where the regulator had issued fairly detailed guidelines to enable EU
listed companies transit smoothly to IFRS, the governing bodies in India (namely the
MCA and the ICAI) have not mandated Indian companies to make specific disclosures
during the transition period.
As we shall see in the next section, there are multiple areas in which Ind AS
significantly differs from IGAAP. We thus believe companies should start discussing
the impact of Ind AS on their books in their communications with investors and the
analyst community to ensure limited volatility in their share prices on the day the
results are presented for the first time under Ind AS.

Strategy
Ind AS vs IGAAP: Key differences

In this section of the note we shall delve into the key areas where Ind AS is
significantly different from the current IGAAP.
At the broader level, our discussion with experts suggests that companies engaging in Complex business transactions as
complex transactions as well as complex group structures are likely to be impacted well as complex group structures
the most. According to one of the IFRS experts we interviewed, In case of simple are likely to be impacted the most
businesses, compliance with IGAAP would be as good as compliance with Ind AS.
Consequently, out of the ~5,000 listed companies in India, experts believe that only
500-1,000 companies will see some major impact in their books.
Further, whilst there are multiple areas where the Ind AS would significantly differ Whilst there are multiple areas
from the current accounting standards, our discussion with experts suggests the where Ind AS is significantly
following are the key areas that will likely be impacted the most: different from the current IGAAP
Consolidation
The definition of control shall become much more subjective in nature; for
example, the concept of de-facto control has been introduced which would
require consolidation even without majority shareholding.
Not more than one entity can consolidate another entity under the new rules. For
example, under IGAAP, in rare circumstances, two entities could consolidate
another entity, one by virtue of majority shareholding, and the other by virtue of
control over the composition of BoD. Unlike IGAAP, however, under Ind AS, only
one entity will be able to consolidate another entity.
Gains or losses resulting from change in shareholding will be recorded as an
equity transaction unless it results in reclassification of the other entity; for
example, reclassification of an entity from Subsidiary to an Associate or vice
versa.
Accounting for joint ventures seems likely to change as we move from the
proportionate consolidation method to the equity method of accounting.
Minority interest will now be recorded at fair value instead of book value.
Accounting for Consolidation
Financial instruments and Financial instruments are the
two key areas that experts had
Accounting for investments seems likely to change with increased use of fair
highlighted
valuation concepts; for example, current investments will now be carried at fair
value unlike in IGAAP where they were carried at lower of cost or fair value.
Similarly, accounting for financial liabilities seems likely to go beyond the mere
legal form of the instrument; for example, redeemable preference shares will now
be considered as part of debt instead of equity (and the resultant dividends and
dividend distribution tax will be treated as part of borrowing costs instead of a
below-the-line appropriation of profits).
Accounting for derivatives too shall change materially as both MTM gains and
losses will have to be recorded in the P&L account (unless hedge accounting is
followed).
Revenue recognition
Only percentage completion method would be permitted for recognising
revenues from rendering of services.
Several expenses linked to sales that were shown as costs earlier will now be
shown as an adjustment to revenues; for example, volume discounts,
chargebacks, etc.
Ind AS has fairly detailed guidance with respect to multiple component contracts
(i.e. contracts that involve sale of goods along with provisioning of services).

Strategy
Employee benefits and share-based payments

Actuarial gains or losses will be routed through the Statement of Other
Comprehensive Income instead of the P&L account, thus reducing the volatility in
the P&L account.
Accounting for ESOPs will radically change as we move to the fair value method
of accounting (instead of the intrinsic value method currently followed by a
number of entities).
Stock options given by the global parent to the local senior management will now as also Revenue Recognition,
have to be reflected in the books of the local subsidiary. accounting for ESOPs and
Business combinations
Business combinations
Acquisition accounting will now undergo a change with purchase method being
the only method permitted in majority of the cases.
A host of intangible assets will now get recorded as also the contingent liabilities
of the acquiree.
Goodwill shall shrink in size and will now have to be annually tested for
impairment.
Effective date becomes much more important as opposed to the appointed date.
Other key areas

Accounting for fixed assets will drastically change as Ind AS mandates
significant changes such as use of component accounting, revaluation of an
entire class of assets, change in depreciation method being treated as a change
in accounting estimate and comprehensive guidance on Investment Property.
Segmental reporting will become much more challenging but comprehensive
going forward, with entities now being required to report segmental results in the
same manner in which they would use it for internal reporting purposes to the
Chief Operating Decision Maker.
Accounting for F/As, segmental
FX fluctuations on long-term loans taken after the transition date would be
reporting, treatment of FX
routed through the P&L account instead of capitalising in the cost of assets.
fluctuations, deferred taxes and
Deferred taxes would be computed using the balance sheet approach instead proposed dividend are other key
of the income statement approach going forward. areas that will witness significant
changes
Proposed dividend will be shown as an appropriation of profits for the year in
which it is declared, as opposed to an appropriation of profits for the year to
which it pertains earlier.

Strategy
The following table summarises the key differences between IGAAP and Ind AS.
Exhibit 7: Key differences between the current IGAAP and the proposed Ind AS
Key areas Areas of difference
Under IGAAP? Under Ind AS?
Much more subjective in nature; for example,
Defined rules such as consolidation required if
concept of 'de facto' control introduced that would
Definition of 'control' majority shareholding or control over composition of
require consolidation even without majority
BoD
shareholding
In rare circumstances, two entities might be required
Number of entities that can to consolidate one entity; one by virtue of majority
Consolidation Cannot be more than one
consolidate shareholding and the other by virtue of control over
composition of the BoD
Gains or losses resulting from Will be accounted for as an equity transaction; unless
Will be routed through the P&L account
change in shareholding it results in reclassification of the entity
JVs are accounted for using the proportionate JVs will have to be accounted for using the equity
Accounting for JVs
consolidation method method
Current investments-> lower of cost or fair value;
All investments will have to be initially recognised at
Accounting for investments Non-current investments-> cost less any permanent
their fair values
diminution in value of the investment
Ind AS specifically requires to go beyond the legal
form and instead look at the underlying substance of
Accounting for financial Current IGAAP focuses more on the legal form of the
Financial the instrument; so for example, redeemable
liabilities instrument
instruments preference shares will now be treated as part of
'debt' instead of 'equity'
Currently there is no mandatory standard under Ind
AS; consequently, companies can either choose to Both gains as well as losses will have to be reflected;
Accounting for derivatives
follow the ICAI Circular or follow hedge accounting as volatility reduced if hedge accounting is followed
per AS-30
Revenues from rendering of Both 'proportionate completion' method as well as
Only 'percentage completion' method is permitted
services 'completed services contract' method are permitted
Revenue Expenses that are directly
Currently shown as an adjustment to costs Will be shown as an adjustment to revenues
recognition linked to sales
Related revenues should be deferred and recognised
Multiple component contracts No clear guidance
as revenues over the relevant service period
Routed through the Statement of Other
Actuarial gains or losses Routed through the P&L account Comprehensive Income; thus reducing the volatility
in the P&L account
Employee benefits
Both 'intrinsic value' method as well as 'fair value'
and share-based Accounting for ESOPs Only 'fair value' method is permitted
method are permitted
payments
Ind AS necessarily requires the cost of such options
Stock options given by global Currently it isn't mandatory to account for these stock
to be accounted for in the books of the local
parent options in the books of the local subsidiary
subsidiary
Acquisition accounting Currently driven by the legal form of the transaction Looks at the underlying substance of the transaction
Difference between the consideration paid and the
Difference between the consideration paid and the BV FV of net assets acquired is first apportioned to a
Business Goodwill
of net assets acquired is shown as goodwill number of intangibles; and the balance is shown as
combinations Goodwill; as a result, goodwill will shrink in size
Ind AS does not stipulate amortisation of goodwill;
Goodwill arising on amalgamation should be
Impairment of goodwill however, goodwill needs to be annually tested for
amortised over a period of five years
impairment
Recommends but does not require component
Component accounting Ind AS mandates component accounting
accounting
Does not require the entire class of F/As to be
Revaluation of F/As revalued; consequently only a single asset can be Requires the entire class of F/As to be revalued
revalued
Fixed Assets Change in depreciation Treated as a change in accounting policy; hence Treated as a change in accounting estimate; hence
method requires a retrospective adjustment requires prospective adjustment only
Land & Building to be bifurcated into that used for
Current IGAAP provides limited guidance on Business (classified as PPE) and that used for earning
Investment Property
accounting for Investment Property rentals and/or capital appreciation (Investment
Property)
Currently there are two primary ways of reporting Under Ind AS, entities would be required to report
Segmental reporting segmental reporting: Operating segment and their segmental results in the same way in which
Geographical segment they use it for their internal reporting to the CODM
Entities have the option to capitalise it in the cost of Post transition date, FX fluctuations will have to be
FX fluctuations
the asset routed through the P&L account
Other key areas
Deferred taxes are recognised based on temporary
Deferred taxes are recognised based on timing
Deferred taxes difference between BV of assets as per the books of
difference between accounting income and tax income
accounts and as per the tax accounts
Shown as an appropriation of profits for the year to Shown as an appropriation of profits for the year in
Proposed dividend
which it pertains which it is declared
In the subsequent sections, we shall delve deeper into each of the aspects discussed
above. Further, wherever possible, we shall provide live case studies on each of these
aspects to see how applying the Ind AS principles would likely change the accounts
for certain types of companies.

Strategy
Consolidation (Ind AS 110)

Consolidation is one of the key areas where the new Ind AS would be significantly One of the key areas where
different from the current IGAAP. Currently, given the rules-based accounting accounting under Ind AS would
approach that we follow, a number of investments are structured in a manner so that radically change is Consolidation
only those investments are consolidated that an entity would like to consolidate.
However, as we shall see in the subsequent discussions, under the new Ind AS, the
definition of control will significantly change. Consequently, a number of entities
that were kept out of the purview of consolidation might be required to be
consolidated going forward.
Definition of control will now become much more subjective in nature
Under the current IGAAP, if an entity holds more than 50% shareholding in another
entity (or controls the composition of the Board of Directors of the other entity), the
first entity is required to treat the second entity as its subsidiary (and will hence have
to consider the books of accounts of the second entity for the purpose of
consolidation). This is irrespective of the fact whether this entity is actually able to
exercise control over the second entity or not.
Under the new Ind AS, however, the definition of control has become far more Concept of de-facto control has
subjective in nature. Further, the concept of de-facto control has been introduced. been introduced under Ind AS
According to this, if an entity is the single largest shareholder in another entity; and which will require consolidation
the remaining shareholders are fairly well-dispersed; the entity which is the single even without majority
largest shareholder would be required to consolidate the other entity; as long as it is shareholding
the one exercising significant influence or control. Thus, consolidation might be
required even if its shareholding in the other entity is less than 50%. Consequently, a
number of SPVs as well as loss-making entities that were kept out of the books might
be consolidated going forward.
Similarly, an entity might no longer be required to consolidate another entity, if the whilst consolidation might no
minority shareholders have significant veto rights. For example, currently, a lot of longer be needed if minority
insurance companies operate under the 74-26 arrangement, where the Indian shareholders have significant veto
partner holds 74% stake in the insurance company; the balance 26% stake being rights
held by the foreign partner. Whilst under the current IGAAP, a lot of these insurance
companies are treated as a subsidiary of the Indian parent (and are hence
consolidated in the books of the Indian company), a lot of these insurance
subsidiaries might no longer be consolidated going forward if the foreign partner has
significant veto rights.
Further, potential voting rights that are currently exercisable too will have to be
considered whilst determining whether or not to consolidate the other entity.
Not more than one entity can consolidate another entity
Under the current IGAAP, in extremely rare situations, more than one entity can
consolidate another entity by virtue of either majority shareholding or the control over
the composition of the Board of Directors.
In contrast to this, under the new rules, only one entity will be able to consolidate the Not more than one entity will be
other entity. able to consolidate under the new
rules
Gains or losses resulting from change in shareholding will not be routed
through the P&L account unless
Gains or losses arising out of an increase or decrease in shareholding will have to be
accounted for as equity transaction going forward (as opposed to routing it through
the P&L as is done currently).
Lets say for example, an entity holds a 51% stake in another entity. Now, in case of a Gains or losses resulting from
step-up acquisition where the first entity acquires additional stake in the second change in shareholding will have
entity, under the previous IGAAP any gains or losses arising from the additional stake to be accounted for as an equity
purchase would have to be routed through the P&L. transaction unless
However, under the new Ind AS, this will be recorded as an equity transaction (and
will hence not affect the P&L account).

Strategy
Note however that in case of any stake purchase or sale that results in reclassification it results in reclassification of the
of the entity (from a Subsidiary to an Associate or vice versa), the resultant gains or entity from a Subsidiary to an
losses will have to be taken to the P&L account. Further, the residual stake too will Associate or vice versa
have to be valued at the fair value (and the resultant gains or losses will have to be
taken to the P&L account).
Accounting for joint ventures is likely to change
Unlike the previous IGAAP that required the proportionate consolidation method of Accounting for JVs is another area
accounting for joint ventures, the new Ind AS requires the use of equity method of that will see significant changes
accounting for joint ventures. This in turn will appear as a single-line item between
EBITDA and the Net Income. Whilst net results/assets might not be affected, this will
certainly affect the gross results/gross reported assets.
Minority interest will now be recorded at fair value
Finally, non-controlling interest will
Yet another difference between the current IGAAP and Ind AS pertains to the now be shown at its fair value in
presentation of Minority interest in the consolidated financial statements. Whilst the consolidated financial
Minority interest is recorded at the book value in the current IGAAP, under Ind AS statements
non-controlling interest would be recorded at its fair value.
Case study: Balmer Lawrie
A look at Balmer Lawries FY-15 annual report suggests that the company has
entered into several joint ventures. The current IGAAP requires the proportionate
consolidation method with respect to accounting for Joint ventures. Relevant extracts
from Balmer Lawries FY-15 annual report have been presented below.
Exhibit 8: Balmer Lawrie - Relevant extracts from its FY15 annual report
(Figures in ` mn)
FY15 (consol with FY15 (consol with
Particulars
subsidiary) subsidiary & JVs)
Net revenues from operations 27,501 32,583
PAT 1,447 1,521
Source: Annual report, Ambit Capital research
A look at Balmer Lawries FY15 annual report suggests that net revenues are ~18%
higher due to a proportionate consolidation of joint ventures. As discussed earlier,
Ind AS however does not allow the proportionate consolidation method.
Consequently, joint ventures will have to be accounted for using the equity method.
Whilst this might not affect the net results or the net reported assets, this will certainly
affect the gross results/reported assets as well as several key performance measures.
For example, in the above case, whilst Balmer Lawries net results might remain the
same even under Ind-AS, its margins might look artificially bloated (as its top-line
gets reduced with its bottom-line remaining the same).

Strategy
Financial instruments (Ind AS 109)

After consolidation accounting, Accounting for Financial instruments is the next big
area where the accounting prescribed under the new Ind AS significantly differs from
the current accounting practices.
Whilst the corresponding accounting standard under IFRS (i.e. IFRS 9) is set to be
implemented for financial periods beginning on or after 1st January 2018, India is set
to adopt Ind AS 109 along with the other Ind AS starting with next year.
Accounting for investments - Likely to change with increased use of fair
valuation concepts
According to AS-13 on Accounting for Investments, investments can be categorised
into two types: Current investments and non-current investments. Whilst current
investments are carried at lower of cost or fair value, non-current investments are
carried at their cost minus any permanent diminution in the value of the investment.
Ind AS however requires all investments to be initially carried at fair value. Investments will have to be
Subsequently, these investments can either be accounted for at amortised cost or at recorded at fair value which could
fair value. Consequently, unrealised gains arising on account of fair valuation will be result in P&L volatility
reflected in the P&L account and will hence result in undue volatility in the P&L
account (unless the investment belongs to the category of investments that can be
accounted for using FVOCI in which case the gains or losses will get routed through
the Statement of Other Comprehensive Income).
Accounting for financial liabilities - Will likely go beyond the mere legal form
of the instrument
The current IGAAP focuses more on the legal form of the instrument. So, for example,
preferred equity is classified as equity irrespective of whether it is redeemable or
not. Similarly, mandatorily convertible debentures are treated as part of debt even
though they are mandatorily convertible into equity at some point of time.
Unlike the current IGAAP, the Ind AS specifically requires to go beyond the legal form Accounting for financial liabilities
of the transaction and instead look at the underlying substance of the instrument. So, will materially change
for example, redeemable preference shares will now have to be treated as
part of debt instead of equity.
Further, preference dividend (and the resulting dividend distribution tax) will
now be treated as part of the borrowing costs instead of a below-the-line
appropriation of profits earlier.
Furthermore, hybrid instruments such as FCCBs will now have to be split into their
liability and equity components and suitably accounted for.
In addition to this, several items such as premium on redemption of debentures
that were earlier directly knocked off from equity will now have to be routed
through the P&L account.
Yet another possibility pertains to the classification of perpetual bonds (as equity
instead of debt). Consequently, the related interest payments could be classified as a
below-the-line appropriation of profits instead of being treated as part of the
borrowing costs.
All of this would likely change the profitability, net worth, margin and leverage this in turn would change the
profiles of several listed Indian companies. profitability, net worth, margin and
leverage profiles of several listed
Indian companies

Strategy
Accounting for derivatives too shall change materially

Accounting for derivatives is yet another area that will see significant changes under
the new Ind AS. Under the current IGAAP, accounting for derivatives is covered by
AS-30 on Financial Instruments: Recognition and Measurement. As AS-30 is still
recommendatory in nature, with respect to foreign currency derivative contracts,
companies can either choose to adopt hedge accounting as prescribed under AS-30
or follow the ICAI Circular.
According to the ICAI Circular, if an entity does not choose to adopt hedge
accounting, all mark-to-market losses arising on the Balance Sheet date with respect
to all outstanding derivative contracts will have to be provided for while mark-to-
market gains will have to be ignored. In contrast, if an entity chooses to adopt hedge
accounting as enunciated by AS-30, both gains and losses will have to be accounted
for, thus reducing the volatility.
Under the new Ind AS, however, both gains as well as losses will have to be Finally, accounting for derivatives
recorded. Consequently, companies will necessarily have to account for both gains as is another area that will witness a
well as losses on all outstanding derivative contracts (in the reserves if hedge change as both gains as well as
accounting is followed; else reflect it in the P&L account). losses will have to be recorded
Case study: Zee Entertainment

Zee Entertainment is one company that could see a significant impact to its reported
profitability, margin and net worth profiles as we move from IGAAP to Ind AS.
According to the companys FY15 annual report, note that the company has issued `
20,170 mn worth of 6% cumulative redeemable non-convertible preference shares to
its equity shareholders in FY14. Further, the company has also issued ` 22 mn worth
of 6% non-cumulative redeemable non-convertible preference shares pursuant to a
Scheme of Arrangement in FY15.
Relevant information from Zees FY15 annual report has been shown in Exhibit 9
below.
Exhibit 9: Zee Entertainment - Relevant extracts from its FY15 annual report (Figures in ` mn)
Under IGAAP Under Ind AS
Particulars
FY14 FY15 FY14 FY15
Balance sheet impact
Total Debt (incl. pref. share capital under Ind AS a/cs) 29 22 20,199 20,214
Total Equity (excl. pref. share capital under Ind AS a/cs) 47,377 55,498 27,207 35,306
Debt/Equity 0.00 0.00 0.74 0.57
P&L impact
EBIT 13,349 14,143 13,349 14,143
Interest expense (incl. pref. dividend & div. distb. tax under Ind AS a/cs) 158 103 259 1,556
PBT 13,191 14,040 13,090 12,587
Interest coverage ratio 84.5 137.3 51.5 9.1
Source: Annual report, Ambit Capital research, http://goo.gl/XRpUjP
From our discussions above, we note that under Ind AS, redeemable preference
shares will be classified as debt instead of equity. Further, the preference dividend as
well as the relevant dividend distribution tax will be classified as part of borrowing
costs.
In case of Zee, the companys FY15 debt:equity would change from close to zero to
~0.57. Further, its FY15 PBT would be lower by ~10%, as the preference dividend
and the relevant dividend distribution tax are clubbed under borrowing costs.
Furthermore, Zees FY15 interest coverage ratio would slide from ~137.3x under
IGAAP to ~9.1x under Ind AS. Thus, the reported profitability, net worth, leverage
and interest coverage profiles of several large Indian companies with preferred equity
would materially change as we move to Ind AS.

Strategy
Case study: Companies that follow the ICAI Circular on Accounting for
Derivatives
Currently there are several companies that follow the ICAIs Circular on Accounting
for Derivatives. For example, Tata Power and Bharti (in its standalone accounts)
choose to follow the ICAI Circular to account for derivatives that have been entered
into to hedge their risks with respect to foreign currency fluctuations. As a result,
when these contracts are fair valued on the Balance Sheet date, any losses arising on
mark-to-market valuation is recognised in the P&L account. Any gains arising on
mark-to-market valuation however are ignored in accordance with the principle of
prudence.
Recognising mark-to-market losses but ignoring mark-to-market gains however
results in undue volatility in the P&L account.
Under Ind AS, however, both mark-to-market gains as well as losses will have to be
considered. Consequently, both gains as well as losses will have to be accounted for
in the P&L account (unless hedge accounting is followed, in which case it will be taken
to the Hedging Reserve; until the transaction actually takes place).

Strategy
Revenue recognition (Ind AS 11 and Ind AS 18)

Ind AS 115 on Revenue from Contracts with Customers spells significant changes Whilst Ind AS 115 on Revenue
with respect to Revenue Recognition. The corresponding standard under IFRS (IFRS Recognition spells significant
15) was issued by the IASB in May 2014 with an effective date of 1st January 2017. changes,
However, in April 2015, the IASB deferred the effective date for implementation of
the said standard until 1st January 2018.
Whilst India was set to be amongst the first adopters of this standard, several industry
bodies such as CII, FICCI and Assocham made representations to NACAS, asking it to
defer the implementation of the new revenue recognition standard. Consequently in
September 2015, NACAS asked the government to defer the implementation of Ind
AS 115 (http://goo.gl/hHdOwc).
Our discussion with IFRS experts suggests the implementation of Ind AS 115 is likely
to be deferred at least by a couple of years. the implementation of the same
However, even in its current version, the revenue recognition standards under Ind AS is likely to be deferred at least by a
(i.e. Ind AS 11 and Ind AS 18) still spell certain changes as discussed below: couple of years
Revenues from rendering of services-only percentage completion method

would be allowed
Under the previous IGAAP, revenues from rendering of services could either be Under existing IFRS only
recognised using the proportionate completion method or the completed service percentage completion method will
contract method. The Ind AS however does not permit the completed service be allowed for revenue recognition
contract method. Consequently, revenues from rendering of services can only be from rendering of services
recognised using the percentage completion method.
Several adjustments will be presented as an adjustment to revenues as

opposed to costs earlier
Under IGAAP, several expenses that are linked to sales (such as chargebacks, volume
discounts and percentage of commission directly linked to sales) are accounted for
separately as a part of costs in the P&L account.
Going forward, however, these expenses will be netted off from revenues, thus and several expenses that are
resulting in an adjustment to the revenues instead of costs earlier. Consequently, directly linked to sales will be
whilst this might not necessarily impact the bottom-line, it will certainly impact several presented as an adjustment to
key performance measures such as margins (that might appear slightly higher) and revenues
asset turnover ratios (that might appear lower owing to downward adjustments to the
revenue).
Multiple component contracts

With respect to multiple component contracts (i.e. contracts that involve sale of goods Ind AS also has detailed guidance
along with provisioning of services), there is limited guidance under the current w.r.t. multiple component contracts
IGAAP. Ind AS however requires the related revenues to be deferred and recognised
as revenues over the subsequent period (as and when the service is provided).

Strategy
Employee benefits and share-based payments (Ind AS

19 and 102)
With respect to employee benefits and share-based payments, following are the key
areas where the accounting practices are likely to differ under the new Ind AS:
Actuarial gains or losses will no longer be routed through the P&L account,
thus reducing the volatility in the P&L account
The actuarial gains or losses on defined benefit obligations are currently routed Actuarial gains or losses will no
through the P&L account. Consequently, this results in undue volatility in the P&L longer be routed through the P&L
account. account, thus reducing the volatility
in the P&L account
Under the Ind AS, however, all the actuarial gains or losses will be routed through
the Statement of Other Comprehensive Income instead of the P&L account. This in
turn will reduce the volatility in the P&L account.
Note that certain companies with huge pension liabilities have already adopted IFRS
for treatment of actuarial gains or losses. For example, Tata Steel has huge pension
liabilities (primarily resulting from its Corus acquisition). Similarly, Tata Motors and
Hindalco are other Nifty companies with huge pension liabilities (resulting from the
JLR acquisition and Novelis acquisition respectively). Consequently, as we move to Ind
AS, the accounts of these companies would not materially change with respect to this
aspect.
Accounting for ESOPs will radically change as we move to fair value method
of accounting
Accounting for ESOPs is another area where the new AS differs from the current Accounting for ESOPs too will
IGAAP. Under the current IGAAP, companies can choose to either follow the radically change as we move to Ind
intrinsic value method or follow the fair value method to account for ESOPs. AS
In case a company chooses to follow the intrinsic value method, it will also have to
disclose the impact on its profits and EPS if the fair value method had been followed.
Unlike the current IGAAP, Ind AS only permits the fair value method for accounting
for ESOPs. Accounting for ESOPs using the fair value method in turn would result in
a greater charge to the P&L account for companies that were earlier using the
intrinsic value method.
Stock options given by the global parent to the local senior management will
now have to be reflected in the books of the local subsidiary
Currently in case of several MNCs, the local senior management is issued stock
options in the global parent, the cost of which is not reflected in the books of the
local subsidiary.
Going forward, however, the new Ind AS requires the cost of such stock options to be Stock options granted by the global
accounted for in the books of the local subsidiary. This in turn would affect the parent to the local senior
profitability of the local subsidiary in the form of greater charge to the P&L account. management will now have to be
mandatorily recorded in the books
of the subsidiary
Case study: Nestl India
Nestl provides gratuity and defined benefit pension to certain eligible employees.
The actuarial gains or losses arising on these pension liabilities is recognised in full in
its P&L account in the year in which they occur. This is in line with the current IGAAP
that requires actuarial gains or losses to be taken through the P&L account.
Exhibit 10: Nestl India - Impact on its profitability on account of adjustment for
actuarial gains or losses (Figures in ` mn)
Particulars CY13 CY14
Profit before tax as per current IGAAP 16,780 17,744
Adjustment for actuarial losses/(gains) 378 548
Profit before tax as per Ind AS 17,158 18,292
Impact 2% 3%
Source: Annual report, Ambit Capital research

Strategy
Unlike IGAAP, however, under Ind AS, these gains or losses will have to be taken
through the Statement of Other Comprehensive Income. Consequently, in Nestls
case, basis its CY13 and CY14 financials, PBT would likely be higher by ~2-3% as the Nestle could see reduced volatility
company moves to Ind AS. in its P&L account on account of
actuarial gains or losses
Case study: Tech Mahindra

According to Tech Mahindras FY15 annual report, the company measures
compensation costs relating to ESOPs using the intrinsic value method. As a result,
the compensation expense determined under the intrinsic value method that was
charged to the P&L account was `2,268mn.
Note however that Ind AS only permits the fair value method for accounting for
ESOPs.
Consequently, a look at Tech Mahindras FY15 annual report suggests that in case TechMs profits would likely be
the company had followed the fair value method, its standalone and consolidated ~2% lower as we move to fair
PAT would have been lower by `398mn (see Exhibit 11 below). value accounting for ESOPs
Exhibit 11: Tech Mahindra - Impact on its PAT arising from fair value accounting for
ESOPs (Fig in ` mn)
Particulars Stan. Consol.
Profit after Tax 22,562 26,277
(-) Addnl employee compensation cost based on fair value 398 398
Adjusted Profit after Tax 22,164 25,879
Impact -2% -2%
Source: Tech Mahindras FY15 annual report, Ambit Capital research. Note: *As provided by Tech Mahindra in its
FY15 annual report.
Case study: MNCs

Currently, there are several MNCs in India, where the local senior management
receives stock options that are linked to the global parent but not the local MNC. We
had discussed this in greater depth in our 7 August 2015 note: Debunking the MNC
premium where we had built a framework to assess the top-25 MNCs in India on
their corporate governance.
Further, in case of certain MNCs such as Pfizer (India) and Alstom T&D, the cost of
such stock options is borne by the global parent and hence is not accounted for in the
books of the local MNC.
For example, if we look at Pfizers FY15 annual report, the local senior management
has been issued 86,712 stock options by its global parent, i.e. Pfizer Inc. The cost of
such stock options is currently borne by Pfizer Inc and hence Pfizer (India) does not
account for this in its books.
However, as discussed earlier, Ind AS specifically requires the cost of such stock The profits of MNCs such as Pfizer
options to be accounted for in the books of the local subsidiary. Hence, whilst it is (India) and Alstom T&D might be
difficult to quantify the impact, the profits of Pfizer (India) would most likely be adversely impacted as they start
adversely impacted as Ind AS is implemented and as companies such as Pfizer (India) accounting for the cost of ESOPs
start reflecting the costs of such stock options in their books. given by the global parent

Strategy
Business combinations (Ind AS 103)

Acquisition accounting will no longer be driven by its mere form
Under the current IGAAP, acquisition accounting is driven more by the legal form of
the transaction than the underlying substance.
For example, acquisition in the nature of amalgamation is covered under AS-14:
Accounting for Amalgamations and is accounted for using either the pooling of
interests method or the purchase method. Acquisition of assets on the other hand
without acquisition of the legal entity is covered under AS-10: Accounting for Fixed
Assets.
Under the new Ind AS, however, as long as in substance the acquisition results in an Acquisition accounting will now
acquisition of a business, it shall be covered under Ind AS 103 on Business undergo a change
Combinations. Further, purchase method of accounting is the only method
permitted (except for common control transactions where the pooling of interest
method can be used). Consequently, assets and liabilities of the acquiree will have to
be recorded at its fair value on the date of acquisition.
A host of intangible assets will now be recorded as also the contingent

liabilities of the acquiree
Unlike the current IGAAP, where the difference between consideration paid and the Goodwill will shrink in size, as a
value of net assets acquired is treated as part of Goodwill, under the new Ind AS the host of intangibles will now get
difference will have to be suitably apportioned to a number of intangibles such as recorded
brand, customer contracts, dealer networks and technology. Consequently, the
Goodwill will now shrink in size. Contingent liabilities in the books of the acquiree
too will now have to be recorded.
Recognition of a number of intangibles that will have finite lives would result in an
increased charge to the P&L in the form of amortisation expense.
Goodwill to be annually tested for impairment

Whilst the current IGAAP requires goodwill arising on amalgamation to be amortised Also, Goodwill will now have to be
over a period not exceeding five years, the new Ind AS does not stipulate such a annually tested for impairment
requirement. In contrast, under the new Ind AS, goodwill will have to be tested for
impairment on an annual basis.
Effective date becomes much more important as opposed to the appointed

date
With respect to accounting for acquisitions, the current IGAAP laid more emphasis on
the appointed date, i.e. the date mandated by the High Court.
In contrast, the Ind AS lays more emphasis on the effective date of control, i.e. the Finally, Ind AS lays more emphasis
date when an entity is actually able to exercise control over the other entity. on the effective date of control
Impact
In the past, several large Indian conglomerates have shown a tendency to grow
inorganically through multiple acquisitions.
Going forward, given the numerous changes on accounting for business acquisitions Owing to the numerous changes
proposed under Ind AS, a lot of these companies might see significant impact to their under Ind AS, several large Indian
accounts (especially if any of these acquisitions were historically accounted for using conglomerates might see an
the pooling of interests method). impact to their accounts

Strategy
Other key areas

Finally, few of the other key areas where the accounting practices are set to differ
have been highlighted below:
Fixed assets accounting Several changes spanning from depreciation
accounting to revaluation of Fixed assets
With respect to Property, Plant and Equipment, here are the key changes proposed
under Ind AS:
Ind AS mandates component accounting; consequently items of a particular
Fixed Asset that are significant in relation to the total cost of the asset will have to
be depreciated separately. (Note that whilst current IGAAP recommends but does
not require this, the new Companies Act requires component accounting.)
With respect to revaluation of assets, Ind AS requires the entire class of assets Component accounting,
to be revalued. Further, increased charge in the form of depreciation arising on revaluation of the entire class of
account of revaluation will have to be taken through the P&L account (as opposed assets, change in depreciation
to an adjustment against the revaluation reserve earlier). method as a change in accounting
estimate and guidance on
Change in depreciation method will be treated as a change in accounting
Investment Property are some of
estimate as opposed to a change in accounting policy. Consequently, change in
the changes proposed under Ind
the depreciation method will not require a retrospective adjustment as was
AS w.r.t. F/As
previously required.
Current principles provide limited guidance on accounting for investment
property. In practice, property is seldom classified or reported separately as
investment property. Under Ind AS, investment property comprises of land or
building held for earning rentals or for capital appreciation or both. Land and
building used in the production or supply of goods or services, or for
administrative purposes is classified as Property, Plant and Equipment and not
investment property.
Segmental reporting Albeit challenging, shall become much more

comprehensive going forward
Current accounting practices require companies to report their segmental results in
two ways: based on their operating segments as well as based on their geographical
segments.
The new Ind AS however makes segmental reporting far more challenging to say the Segmental reporting shall become
least. As per the new Ind AS, entities would be required to report their segmental more challenging but
results in the same manner in which they use it for their internal reporting to the comprehensive going forward
CODM (i.e. the Chief Operating Decision Maker).
In addition to this, companies will also have to make disclosures in case revenues
from a single customer exceed 10% of overall revenues. This in turn would enable the
readers of the financial statements to have a better understanding of the customer
concentration risks, if any, associated with the company.

Strategy
Foreign currency fluctuations Accounting treatment under Ind AS could

result in increased volatility in the P&L account
With respect to exchange differences arising on long-term foreign currency liabilities,
currently companies have the option to either capitalise it in the cost of the Fixed
assets (in case it pertains to a specific asset) or accumulate it in the FCMITDA (i.e. the
Foreign Currency Monetary Item Translation Account).
The new Ind AS however suggests the following changes:
For long-term foreign currency liabilities existing on the date of transition (i.e. 1st
April 2016 for listed companies with standalone net worth greater than ` 5bn, 1st
April 2017 otherwise), companies can choose to continue using the existing
option of capitalising the FX fluctuations in the cost of the asset.
(Note: The option to capitalise all the forex differences is only available if such an
accounting policy already existed on the date of transition as per the previous
IGAAP.)
For any fresh long-term foreign currency liabilities (post transition), any gains or FX fluctuations would be taken
losses arising due to FX fluctuations will have to be accounted for in the P&L through the P&L account instead of
account. This in turn would increase the volatility in the P&L account. capitalising in the cost of assets
Deferred taxes temporary difference as opposed to timing difference

Under IGAAP, deferred tax is recognised with respect to timing differences, i.e. the
difference between the taxable income and the accounting income that originates in
one period and is capable of reversal in one or more subsequent periods. In effect,
the current IGAAP follows the income statement approach.
In contrast, Ind AS follows the balance sheet approach wherein deferred tax is Deferred taxes would be
recognised with respect to temporary differences between the book value of assets recognised using the balance
and liabilities as per the books of accounts and as per the taxation accounts. sheet approach under Ind AS
In addition to this, the rules pertaining to recognition of deferred tax assets are
relatively less stringent under Ind AS than as per current IGAAP.
Proposed dividend Shown as an appropriation of profits for the year in

which it is declared
Under IGAAP, proposed dividend is shown as an appropriation of profits for the year
to which it pertains.
Proposed dividend will be shown
Unlike IGAAP, however, under Ind AS, proposed dividend will be shown as an as an appropriation of profits for
appropriation of profits for the year in which it is declared. the year in which it is declared
Assessing the impact

From our discussions above we note that there are several key areas in which the
accounting treatment mandated by Ind AS would be significantly different from the
accounting treatment as per the current IGAAP. In order to assess the impact, it thus
becomes worthwhile to compare the accounts of companies that already report under
both IGAAP and IFRS. We explore this aspect in the next section.

Strategy
A comparison of the IGAAP and IFRS

accounts
In order to get an understanding of how different the accounts of India Inc would We identify companies that
look like under Ind AS, we begin by identifying companies that currently report under currently report under both IGAAP
both IGAAP as well as IFRS (in their SEC filings). as well as IFRS
Currently the IGAAP as well as IFRS accounts are available for five large Indian
companies spanning from extremely defensive sectors such as Pharma to global
cyclicals such as Metals & Mining. These are Tata Motors, Infosys, Wipro, Dr. Reddys
Labs and Vedanta.
An analysis of their FY14 and FY15 revenues, net worth, profitability, earnings and
cash flow profiles under both IGAAP as well as IFRS has been presented in Exhibit 12
below.
Exhibit 12: Comparison of IFRS vs IGAAP results Top-five companies
Divergence- FY15 IFRS accounts versus FY15 IGAAP accounts Divergence- FY14 IFRS accounts versus FY14 IGAAP accounts
Company
name Net Net Net Net
Revenue EBIT EPS CFO Revenue EBIT EPS CFO
worth Income worth Income
Tata Motors -5% 0% -10% -8% -9% 4% -4% 1% -4% -7% -8% 3%
Wipro 10% 0% 5% 0% 0% 0% 7% 0% 4% -2% -2% 0%
Dr Reddy's
13% -1% -3% -5% -5% -1% 16% -1% 1% 10% 10% -1%
Labs
Infosys DNA 0% 0% 0% -1% DNA DNA 0% 0% 0% 0% DNA
Vedanta* 4% 0% N/A 18% 18% 8% -4% 10% N/A -75% -76% -43%
Source: SEC filings, Annual reports, Ambit Capital research. Note: DNA indicates Data Not available. N/A indicates Not Applicable. *In its cash flow statement
under IFRS, Vedanta treats interest expense as well as interest and dividend income as part of operating activities. Under IGAAP however, these items are treated
as part of financing and investing activities. Consequently, these items have been suitably adjusted in the IFRS accounts for better comparability with the IGAAP
accounts.
Tata Motors - Divergence at the EBIT level on account of stricter provisioning

for receivables and different FX treatment under IFRS
A look at Tata Motors IFRS and IGAAP suggests that whilst the topline is not In case of Tata Motors, profits are
significantly different under both sets of accounts, profits are ~8-10% lower at the ~8-10% lower under IFRS, thanks
EBIT level as well as the Net Income and EPS level under IFRS. to several policies that are different
under IFRS
Delving further into the reasons behind this difference, we believe the following could
partly explain this:
IFRS has stricter provisioning requirements for receivables. Consequently, the
provisioning for receivables under IFRS is higher by `7,589mn.
Whilst revenues are lower by `2,698mn and cost of sales are higher by
`1,856mn, resulting in lower Gross Profits under IFRS, this is offset by lower
employee costs (~`5,088mn) under IFRS accounts.
Accounting for share of profits/(losses) from associates is different under IGAAP
and IFRS. Consequently, whilst the IGAAP accounts show profits of `134mn for
FY15, under IFRS there are losses of ~`1,748 mn (resulting in a net difference of
`1,883mn).
Finally, accounting for FX fluctuations is another area where Tata Motors follows
different policies under IGAAP and IFRS. Whilst IGAAP permits gains or losses
arising on account of FX fluctuations to be taken to the FCMITDA account, IFRS
has no such provision. Consequently, all the gains or losses on FX fluctuations
have to be taken to the P&L account under IFRS.

Strategy
Wipro - Divergence at the EBIT level on account of classification of FX

fluctuations
Wipros FY14 and FY15 IGAAP and IFRS accounts suggest that whilst the topline as
well as the bottomline are not materially different under both sets of accounts, at the
EBIT level, Wipros EBIT is ~4-5% higher under IFRS vs IGAAP.
Delving further into the reasons behind this higher EBIT under IFRS, we note that
Wipro treats gains or losses arising on account of exchange differences as part of
Other income under IGAAP. Consequently, this does not impact its EBIT under
IGAAP.
In contrast, under IFRS, these exchange differences are treated as part of operating whilst in case of Wipro, EBIT is
activities. As a result, exchange gains in FY14 and FY15 have artificially inflated higher under IFRS due to the
Wipros EBIT under IFRS. presentation of FX gains
Adjusting for these exchange differences, however, Wipros EBIT under IGAAP and
IFRS is broadly the same.
Dr. Reddys - Net income divergence could be explained by higher deferred

tax assets under IFRS
An analysis of Dr. Reddys FY14 and FY15 accounts under IGAAP and IFRS reveals
that whilst the companys revenues and EBIT are not materially different under both
sets of accounts, Dr. Reddys FY14 net income is ~10% higher under IFRS vs IGAAP.
Delving further into the reasons behind this discrepancy, we note that this difference Dr. Reddys net income divergence
is primarily because of lower income tax expense under IFRS. Whilst the current tax could be explained by higher
expense is broadly the same under IGAAP as well as under IFRS, Dr. Reddys deferred deferred tax assets under IFRS
tax expense is materially lower under IFRS (which would mean that deferred tax accounts...
assets are materially higher under IFRS).
A look at the deferred tax policies of Dr. Reddys further reveals that the deferred tax
policies under both IGAAP and IFRS are quite different. As noted earlier, whilst IGAAP
requires the income statement approach to be followed (which would mean that
deferred tax can only be recognised with respect to timing differences), IFRS requires
the balance sheet approach which allows deferred taxes arising on account of
temporary differences to be recognised.
Infosys - No major divergence; Vedanta - Subject to corporate actions

In case of Infosys, across the various measures analysed, the IFRS accounts are not Infosys IGAAP and IFRS accounts
materially different from the IGAAP accounts. Further, whilst there appears significant on the other hand are broadly the
divergence between the IFRS and IGAAP accounts for Vedanta, note that the same
company has seen significant corporate actions over the last few years. As a result,
the IFRS and IGAAP accounts are not strictly comparable for the company.
Cash flows are not materially different

From Exhibit 12 above, note that in case of most of the companies discussed above,
whilst revenues are broadly the same under both IFRS and IGAAP, there are certain
differences either at the EBIT level or at the net income level.
Note however that across the companies analysed, the cash flows are broadly the Across these names, whilst book
same under both the accounts. This would mean that whilst book profits might profits are different under both the
certainly be affected as we transition to Ind AS, cash profits are more likely to broadly set of accounts, cash profits are
remain the same. broadly the same

Strategy
Return ratios however are marginally lower

Across the three companies where the book profits are different under the IFRS
accounts, a look at the return ratios (i.e. RoE and RoCE) suggests that the return
ratios are marginally lower under IFRS (refer to Exhibit 13 below).
Exhibit 13: IFRS v/s IGAAP accounts: RoEs and RoCEs are marginally lower under IFRS
Under IFRS Under IGAAP Deviation (IFRS v/s IGAAP)
Company name RoE post-tax RoCE RoE post-tax RoCE RoE post-tax RoCE
FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15
Tata Motors 26.2% 22.1% 14.6% 12.0% 27.1% 23.0% 15.6% 12.9% -0.9% -0.9% -1.0% -0.9%
Wipro 24.9% 23.0% 18.6% 16.8% 27.1% 25.0% 19.2% 17.2% -2.2% -2.0% -0.6% -0.3%
Dr Reddy's Labs 26.3% 21.9% 17.3% 14.4% 27.6% 26.4% 17.2% 16.6% -1.3% -4.4% 0.0% -2.2%
Source: SEC filings, Annual reports, Ambit Capital research
Other observations
Finally, a detailed analysis of the Notes to accounts under IFRS and IGAAP brings out
the following key observations that are worth highlighting:
Detailed explanations for every line item: IFRS requires detailed explanations Finally, IFRS notes to accounts are
with respect to each of the items appearing in the financial statements. For far more detailed and much more
example, for every class of asset or liability, IFRS requires detailed disclosures comprehensive as compared to
with respect to the accounting treatment adopted for recognising it in the Balance IGAAP accounts
Sheet.
In contrast, a look at the IGAAP accounts for these companies suggests that these
companies merely summarise the accounting treatment within one or two lines,
which is as mandated by the current accounting practices.
Fair valuation assumptions: Given the extensive use of fair valuation concepts
under IFRS, companies reporting under IFRS are required to provide detailed
information about the assumptions used in arriving at the fair value for a
particular financial asset or a financial liability.

Strategy
Summarising our key observations

The key observations from our analysis of the IGAAP and IFRS accounts of companies
that report under both IGAAP as well as IFRS have been summarised below:
Notes to accounts
The notes to accounts under IFRS are much more detailed and far more
comprehensive than under the IGAAP accounts. Not only are entities required to
provide detailed explanations about all the items appearing in the financial
statements, they are also required to disclose the key assumptions used in
arriving at the values for a particular item.
Foreign currency fluctuations

With respect to foreign currency fluctuations, not only are the accounting
treatments different under IGAAP and IFRS, we also notice significant difference
in the presentation of these line items in the income statement.
For example, a look at Tata Motors accounts under IGAAP and IFRS suggests that
whilst IGAAP allows foreign currency fluctuations on long-term monetary items to
be capitalised in the cost of the asset (or taken to the FCMITDA); under IFRS there
is no such provision. Consequently, all the gains or losses have to be necessarily
routed through the P&L account.
Further, a look at Wipros IFRS and IGAAP accounts suggests that the
presentation of foreign currency fluctuations is different under both these sets of
accounts. Whilst foreign currency fluctuations are shown as part of other income
under IGAAP (thus not influencing the EBIT), they are shown as part of operating
activities under IFRS. Consequently, the EBIT appears different under both sets of
accounts.
Deferred taxes
The deferred tax policies are different under IGAAP and IFRS. Whilst IGAAP
recognises deferred taxes based on the timing difference between book income
and taxable income, IFRS recognises deferred taxes based on temporary
differences between book value of assets as per books of accounts and book
value of assets as per tax accounts. As a result, for certain companies such as Dr.
Reddys, whilst profits are similar at the EBIT level, they are different at the net
income level.
Cash profits are not materially different

Given the multiple areas in which IFRS differs from the current IGAAP, book
profits have varied ~0-10% across the companies analysed. Cash profits however
are not materially different under both sets of accounts for these companies.
Return ratios are marginally lower

A look at the return ratio profiles for Tata Motors, Wipro and Dr. Reddys suggests
that the RoEs and RoCEs are marginally lower under IFRS across these
companies. Whilst the RoCEs are ~0.3-2.2% lower across these companies under
IFRS, the RoEs are ~1-4.5% lower.

Strategy
Investment implications
From our previous discussions, we note that whilst revenues and cash flows should
not be materially impacted as we move to Ind AS, book profits would likely be lower
under Ind AS. Further, our discussions with experts suggest that whilst Ind AS should
not drastically change the accounts of India Inc, complex structures as well as
complex transactions would likely be impacted the most.
Focusing solely on the Nifty constituent companies, we will now attempt to highlight We will now attempt to highlight
the sectors as well as companies that might see the maximum impact as we move to Nifty stocks and sectors that could
Ind AS. Given that Ind AS will not apply to banks, financial services and insurance see significant impact to their
companies at least for the next couple of years, we have only looked at the remaining accounts
40 Nifty companies (ex-BFSI).
An analysis of the accounting policies of these companies and our discussion with our
bottom-up analysts regarding the impact on these companies arising on account of
Ind AS implementation has been shown in Exhibit 14 below:
Exhibit 14: Ind AS impact on the Nifty companies
Complex Significant Extensive use of
Extensive use of Tendency for
transactions/Complex actuarial gains derivatives that
ESOPs that are inorganic
Name GICS Sector structures such that or losses from are not accounted Any other comments?
accounted for at growth through
several entities get left pension for using hedge
intrinsic value? acquisitions?
out of consolidation? obligations? accounting?
ACC Ltd Materials No No No No No -
Ambuja
Materials No No No No No -
Cements Ltd
Grasim
Industries Ltd
UltraTech
Cement Ltd
Adani Ports &
Special Economic Industrials No No No No No -
Zone Ltd
Bajaj Auto Consumer
No No No No No -
Ltd Discretionary
Bosch Consumer
No No No No No -
Ltd Discretionary
Hero MotoCorp Consumer
No No No No No -
Ltd Discretionary
Mahindra & Consumer Complex structure; but
Yes No No No No
Mahindra Ltd Discretionary everything is consolidated
Maruti Suzuki Consumer
No No No No No -
India Ltd Discretionary
Already adopted IFRS for
Tata Motors Consumer treatment of pension
No No Yes No No
Ltd Discretionary obligations; also already
reports under IFRS
Bharat Heavy
Industrials No No Yes No No -
Electricals Ltd
NTPC Ltd Utilities No No No No No -
Tata Power follows the ICAI
Circular for accounting for
Tata Power Co Ltd Utilities No No No Yes No derivatives; hence volatility
should go down as we move
to Ind AS
ESOPs accounted for using
Cipla Ltd/India Health Care No Yes No No Yes intrinsic value method;
hence might see an impact
Dr Reddy's
Health Care No Yes No No Yes intrinsic value method;
Laboratories Ltd
Lupin Ltd Health Care Yes Yes No No Yes intrinsic value method;
Sun
Pharmaceutical Health Care Yes No No No Yes Complex structures
Industries Ltd
Volatility in P&L (pertaining
to actuarial gains/losses)
Coal India Ltd Energy No No Yes No No
to Ind AS
Hindalco
Materials No No Yes No No treatment of pension
Industries Ltd
obligations
Tata Steel Ltd Materials No No Yes No No treatment of pension
obligations
Asian Paints Ltd Materials No No No No No -

Strategy
Complex Significant Extensive use of

Extensive use of Tendency for
transactions/Complex actuarial gains derivatives that are
ESOPs that are inorganic
Name GICS Sector structures such that or losses from not accounted for Any other comments?
accounted for at growth through
several entities get left pension using hedge
intrinsic value? acquisitions?
out of consolidation? obligations? accounting?
Hindustan Unilever Consumer
No No No No No -
Ltd Staples
Consumer
ITC Ltd No No No No No -
Staples
Bharat Petroleum
Energy No No No No No -
Corp Ltd
Cairn India follows the ICAI
Cairn India Ltd Energy No No No Yes No derivatives; hence volatility
to Ind AS
GAIL India follows the ICAI
GAIL India Ltd Utilities No No No Yes No derivatives; hence volatility
to Ind AS
ONGC has got several JVs
that will get accounted for
using the equity method
going forward; Volatility in
P&L (pertaining to actuarial
Oil & Natural Gas
Energy Yes No Yes Yes No gains/losses) should go down
Corp Ltd
as we move to Ind AS; ONGC
follows the ICAI Circular for
accounting for derivatives;
hence volatility should go
down as we move to Ind AS
Reliance Inds follows the ICAI
Reliance Industries
Energy Yes No No Yes No derivatives; hence volatility
Ltd
to Ind AS
Vedanta Ltd Materials Already reports under IFRS
HCL Technologies Information
Also reports under US GAAP; street looks at US GAAP numbers
Ltd Technology
Information
Infosys Ltd Already reports under IFRS; street looks at IFRS numbers
Technology
Tata Consultancy Information
Already reports under IFRS in its quarterly results; street looks at IFRS numbers
Services Ltd Technology
Information
Tech Mahindra Ltd No Yes No No No intrinsic value method; hence
Technology
might see an impact
Information
Wipro Ltd Already reports under IFRS; street looks at IFRS numbers
Technology
Larsen & Toubro Ltd Industrials Yes No No No No -
Power Grid Corp of
Utilities No No No No No -
India Ltd
Telecommunicati
Bharti Airtel Ltd Already reports under IFRS in consolidated accounts
on Services
One key area to watch out for
Telecommunicati
Idea Cellular Ltd No No No No No pertains to the accounting for
on Services
its Indus operations.
Zee has issued significant
preferred equity (which would
Zee Entertainment Consumer get classified under Ind AS).
No No No No No
Enterprises Ltd Discretionary This in turn would impact
several key performance
measures.

Strategy
Following are the key points that emerge from Exhibit 14 above:
Pharma sector
Key points pertaining to the Pharma sector have been discussed below:
Extensive use of ESOPs across Pharma companies: Across companies in the
Pharma sector, there is extensive use of stock options to compensate the senior
management. Further, several large Indian Pharma companies (such as Cipla, Dr.
Reddys and Lupin) account for the cost of these options using the intrinsic value
method. As a result, in the changes mandated under Ind AS with respect to
accounting for stock options, the Pharma sector looks particularly exposed.
Tendency to grow inorganically through business acquisitions: Given the
tendency to grow inorganically through multiple business acquisitions, almost all
the Pharma companies might see an impact to their books as well as profits
(given the changes pertaining to accounting for Business combinations).
Magnitude of impact might vary: The magnitude of impact would vary across
companies. For example, companies with complex structures such as Sun Pharma
and Lupin might see a different level of impact as opposed to companies with
relatively less complex structures such as Cipla or Dr. Reddys.
Given the reasons mentioned above, the Pharma sector looks particularly exposed to The Pharma sector looks
the intricacies arising on Ind AS implementation. particularly exposed to the
intricacies arising on Ind AS
implementation
Technology sector
All the Tier-1 IT companies (barring Tech Mahindra) already report under IFRS or US
GAAP. For example, whilst Infosys, Wipro and TCS (in its quarterly results) report
under IFRS, HCL Technologies reports its results under US GAAP. Further, consensus
looks at the IFRS/US GAAP numbers for these companies.
Consequently, these companies should not see any major impact arising due to Ind
AS implementation.
Tech Mahindra, however, neither reports under IFRS nor US GAAP. Further, as
noted earlier, using fair value method of accounting for ESOPs instead of intrinsic
value method might adversely affect its profits after tax by ~2-3%.
Thus, Tech Mahinda amongst the Tier-1 IT companies could see some impact to its Amongst the Tier-1 IT companies,
reported results as we move to Ind AS. TechM could see some impact
Auto and Consumer Staple sectors

Within the Auto and Consumer Staples space, we do not see any major impact
arising on account of the key areas discussed above.
Further, whilst Tata Motors has huge pension liabilities (resulting from its JLR
acquisition), note that Tata Motors has already adopted IFRS for treatment of
actuarial gains or losses on defined pension obligations. Consequently, this does not
affect its P&L account but is directly knocked-off through its Other Comprehensive
Income.
However, several Auto and Consumer Staples companies have these third-party Within the Auto and the Consumer
arrangements where the third-party would solely be manufacturing for these Staples space, several third-party
companies. Consequently, going forward, these companies will have to clearly arrangements will need to be
evaluate if any of these third-party arrangements would need to be consolidated. evaluated to see what requires
Consolidation
Telecom and Media sectors
In case of the Telecom sector, Bharti already reports its consolidated accounts under
IFRS. Consequently, it should not see any major impact to its books due to Ind AS.
Idea however does not report under IFRS currently. Further, whilst Idea does not
have any complex structures currently, one key area that might change under Ind AS
pertains to its Indus operations.

Strategy
Indus is a joint venture between Vodafone, Bharti and Idea (with Ideas share in the Idea could see some impact
entity being 16%). Under the current IGAAP, Idea consolidates Indus operations in its pertaining to its Indus operations
books to the extent of 16% (given the current IGAAP requires proportionate
consolidation). Under Ind AS, however, the results from the Indus operations will
have to be accounted for using the equity method. Consequently, whilst net results
might not change, several key performance measures might appear different under
Ind AS.
In case of the Media sector, Zee Entertainment is the only company belonging to whilst Zee could see some
the Media sector that forms part of the Nifty currently. Whilst Zee might not see a impact, due to classification of its
significant impact to its books based on the discussions above, note that Zee has preferred equity as debt
significant preferred equity (~`20,192mn as of FY15). As this is classified as debt
instead of equity, several key ratios would look different under Ind AS.
Metals & Mining sector

Within the Metals & mining sector, we note that all the three companies, i.e. Coal
India, Tata Steel and Hindalco, have significant defined benefit obligations.
In case of Tata Steel and Hindalco, note that these pension obligations pertain to
their European operations (Corus in case of Tata Steel and Novelis in case of
Hindalco). A look at Tata Steels and Hindalcos FY15 annual report suggests that
both these companies have already adopted IFRS for treatment of actuarial gains or
losses. Consequently, as we move to Ind AS, there will not be any significant changes
to their accounts due to treatment of actuarial gains or losses.
Coal India however might see reduced volatility in its P&L account as we move to Ind Coal India might see reduced
AS. Whilst currently the actuarial gains or losses are reflected in the P&L, going volatility in its P&L pertaining to
forward they will be knocked off from the Other Comprehensive Income (thus treatment of actuarial gains or
reducing the P&L volatility). losses
Conglomerates
Finally, complex business transactions as well as complex structures are other areas
that might be adversely impacted as we move to Ind AS.
In that context, Mahindra & Mahindra, Reliance Inds and Larsen & Toubro are Finally, conglomerates too could
three major conglomerates from the Nifty (ex-BFSI) universe that could possibly see see a significant impact to their
significant impact to their books as we move to Ind AS. books as we move to Ind AS
Our forthcoming research on the subject

In our forthcoming notes on this subject, we shall focus on sector-level implications
arising from the Ind AS implementation.
More specifically, we will discuss how the accounts for a particular sector are likely to
change as we move to Ind AS.

Strategy
Appendix 1: Key carve-outs between IFRS

and Ind-AS
Exhibit 15: Key carve-outs between IFRS and Ind-AS
Areas of difference
Under IFRS? Under Ind AS?
Debt to be classified as 'current' even if lender does not Debt to be classified as 'non-current' if lender chooses
Breach of covenants in long-term
demand repayment of loan as a consequence of the to not demand repayment of loan as a consequence of
arrangements
breach. the breach.
Presentation of income statement
Under IFRS, entities can either follow the single-
and statement of other Ind AS requires the single-statement approach.
statement approach or the two-statement approach.
comprehensive income
Clubbing of expenses in the income Can be clubbed either by 'nature or expense' or by
Can only be clubbed by 'nature of expense'.
statement 'function'.
Interest/dividend income can either be shown as part of
Presentation of interest/dividend 'operating activities' or part of 'investing activities'. Interest/dividend income has to be shown as part of
income as well as interest expense in Similarly, interest expense can either be shown as part 'investing activities' while interest expense has to be
the Cash flow statement of 'operating activities' or be shown as part of 'financing shown as part of 'financing activities'.
activities'.
Discount rate used while calculating Discount rate to be determined by reference to market
Discount rate to be determined by reference to market
the post-employment benefit yields at the end of reporting period on high-quality
yields at end of reporting period on government bonds.
obligations corporate bonds.
Same as IFRS with the option available to continue
Exchange differences w.r.t. long-term Exchange difference to be recognized in the P&L using the option permitted under previous IGAAP (of
foreign currency monetary items account. capitalising it in the cost of asset) for all long-term
monetary items existing on the date of transition.
Classified as equity (if it entitles the holder for fixed no.
Convertible option embedded in an
Treated as a 'derivative liability'. of shares for fixed amount of cash; with exercise price
FCCB
being fixed in any currency).
Not mandatory to disclose EPS in the standalone EPS is required to be disclosed both in the standalone
Disclosure of EPS financial statements if consolidated financials are being financial statements as well as the consolidated
presented. financial statements.
Option to continue using the revenue-based
Revenue based amortization model
Not permitted amortisation model for intangible assets existing on the
for intangible assets
transition date.
Investment property Both cost and fair value models are permitted. Fair value model is not permitted under Ind AS.
Option available to use previous GAAP carrying values
Deemed cost for Property, Plant & No such exemption permitting previous GAAP values as
of Property, Plant & Equipment, Investment Properties
Equipment deemed cost.
and Intangible assets as on the date of transition.
'Pooling of interests' method is required for common
'Pooling of interests' method Not permitted.
control transactions.
Bargain purchase can be recognised in the other
Bargain purchase gain Bargain purchase gain is recognised in the P&L account. comprehensive income or the capital reserve but not
the P&L account.

Strategy
Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 saurabhmukherjea@ambitcapital.com
Research
Analysts Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 nitinbhasin@ambitcapital.com
Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 aadeshmehta@ambitcapital.com
Abhishek Ranganathan, CFA Retail / Mid-caps (022) 30433085 abhishekr@ambitcapital.com
Achint Bhagat, CFA Cement / Roads / Home Building (022) 30433178 achintbhagat@ambitcapital.com
Aditya Bagul Consumer (022) 30433264 adityabagul@ambitcapital.com
Ashvin Shetty, CFA Automobile (022) 30433285 ashvinshetty@ambitcapital.com
Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 bhargavbuddhadev@ambitcapital.com
Deepesh Agarwal Power Utilities / Capital Goods (022) 30433275 deepeshagarwal@ambitcapital.com
Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 gauravmehta@ambitcapital.com
Girisha Saraf Mid-caps / Small-caps (022) 30433211 girishasaraf@ambitcapital.com
Karan Khanna Strategy (022) 30433251 karankhanna@ambitcapital.com
Kushank Poddar Technology (022) 30433203 kushankpoddar@ambitcapital.com
Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 pankajagarwal@ambitcapital.com
Paresh Dave, CFA Healthcare (022) 30433212 pareshdave@ambitcapital.com
Parita Ashar, CFA Metals & Mining (022) 30433223 paritaashar@ambitcapital.com
Prashant Mittal, CFA Derivatives (022) 30433218 prashantmittal@ambitcapital.com
Rakshit Ranjan, CFA Consumer (022) 30433201 rakshitranjan@ambitcapital.com
Ravi Singh Banking / Financial Services (022) 30433181 ravisingh@ambitcapital.com
Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 riteshgupta@ambitcapital.com
Ritesh Vaidya, CFA Consumer (022) 30433246 riteshvaidya@ambitcapital.com
Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 ritikamankar@ambitcapital.com
Ritu Modi Automobile (022) 30433292 ritumodi@ambitcapital.com
Sagar Rastogi Technology (022) 30433291 sagarrastogi@ambitcapital.com
Sumit Shekhar Economy / Strategy (022) 30433229 sumitshekhar@ambitcapital.com
Utsav Mehta, CFA E&C / Industrials (022) 30433209 utsavmehta@ambitcapital.com
Sales
Name Regions Desk-Phone E-mail
Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 sarojini@panmure.com
Dharmen Shah India / Asia (022) 30433289 dharmenshah@ambitcapital.com
Dipti Mehta India / USA (022) 30433053 diptimehta@ambitcapital.com
Hitakshi Mehra India (022) 30433204 hitakshimehra@ambitcapital.com
Krishnan V India / Asia (022) 30433295 krishnanv@ambitcapital.com
Nityam Shah, CFA USA / Europe (022) 30433259 nityamshah@ambitcapital.com
Parees Purohit, CFA UK / USA (022) 30433169 pareespurohit@ambitcapital.com
Praveena Pattabiraman India / Asia (022) 30433268 praveenapattabiraman@ambitcapital.com
Shaleen Silori India (022) 30433256 shaleensilori@ambitcapital.com
Singapore
Pramod Gubbi, CFA Director Singapore +65 8606 6476 pramodgubbi@ambitpte.com
Shashank Abhisheik Singapore +65 6536 1935 shashankabhisheik@ambitpte.com
USA / Canada
Ravilochan Pola - CEO Americas +1(646) 361 3107 ravipola@ambitpte.com
Production
Sajid Merchant Production (022) 30433247 sajidmerchant@ambitcapital.com
Sharoz G Hussain Production (022) 30433183 sharozghussain@ambitcapital.com
Joel Pereira Editor (022) 30433284 joelpereira@ambitcapital.com
Nikhil Pillai Database (022) 30433265 nikhilpillai@ambitcapital.com
E&C = Engineering & Construction

Strategy
Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
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UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
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STRATEGY

Are you ready for Ind AS?

Glossary of the key terms used in the note ..6

Ind AS: An introduction.7

The global experience on transition to IFRS...10

Is India Inc prepared? .12

Ind AS vs IGAAP: Key differences .14

- Consolidation (Ind AS 110). 17

- Financial instruments (Ind AS 109)19

- Revenue recognition (Ind AS 11 and Ind AS 18) 22

- Employee benefits and share-based payments (Ind AS 19 and 102) 23

- Business combinations (Ind AS 103). 25

- Other key areas. 26

A comparison of the IGAAP and IFRS accounts.28

Investment implications ..32

Appendix 1: Key carve-outs between IFRS and Ind-AS 36

October 20, 2015 Ambit Capital Pvt. Ltd. Page 2

THEMATIC ACCOUNTING October 20, 2015

October 20, 2015 Ambit Capital Pvt. Ltd. Page 4

Exhibit 2: Ind AS impact - Key Nifty companies to watch out for

October 20, 2015 Ambit Capital Pvt. Ltd. Page 5

Glossary of the key terms used in the note

October 20, 2015 Ambit Capital Pvt. Ltd. Page 6

Ind AS: An introduction

October 20, 2015 Ambit Capital Pvt. Ltd. Page 7

The roadmap for implementation

01.04.2015 01.04.2016 01.04.2017

Holding, subsidiaries, associates

Comparatives to be provided for the

Source: MCA Notification, Ambit Capital research

According to the MCA Notification, the roadmap for Ind AS implementation is as

October 20, 2015 Ambit Capital Pvt. Ltd. Page 8

Sectoral mix resulting from the implementation roadmap

% firms getting covered under Phase 1 Mcap representation in Phase 1

October 20, 2015 Ambit Capital Pvt. Ltd. Page 9

The global experience on transition to IFRS

October 20, 2015 Ambit Capital Pvt. Ltd. Page 10

The EUs experience on transition to IFRS

Is India prepared for IFRS/Ind AS?

October 20, 2015 Ambit Capital Pvt. Ltd. Page 11

Is India Inc prepared?

October 20, 2015 Ambit Capital Pvt. Ltd. Page 12

The said recommendations encouraged listed companies to:

In India, however, no such recommendations have been issued

Our view on India Incs preparedness

October 20, 2015 Ambit Capital Pvt. Ltd. Page 13

Ind AS vs IGAAP: Key differences

October 20, 2015 Ambit Capital Pvt. Ltd. Page 14

Employee benefits and share-based payments

Other key areas

October 20, 2015 Ambit Capital Pvt. Ltd. Page 15

October 20, 2015 Ambit Capital Pvt. Ltd. Page 16

Consolidation (Ind AS 110)

October 20, 2015 Ambit Capital Pvt. Ltd. Page 17

October 20, 2015 Ambit Capital Pvt. Ltd. Page 18

Financial instruments (Ind AS 109)

October 20, 2015 Ambit Capital Pvt. Ltd. Page 19

Accounting for derivatives too shall change materially

Case study: Zee Entertainment

October 20, 2015 Ambit Capital Pvt. Ltd. Page 20

October 20, 2015 Ambit Capital Pvt. Ltd. Page 21

Revenue recognition (Ind AS 11 and Ind AS 18)

Revenues from rendering of services-only percentage completion method