International accounting standards are finally here

Real estate sector gets some relief, infra not so lucky

By EY
Updated: Apr 13, 2016 08:46:22 AM UTC
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The ministry of corporate affairs (MCA) had notified the India transition plan to Indian version of International financial reporting standards (IFRS) in the form of Ind AS (Indian Accounting Standards) early last year. Since then, several regulatory steps were being taken to operationalise them. One of the last hurdles in the implementation was the notification of the Ind AS standards on revenue recognition and amendment to the transition standard Ind AS 101.

The MCA has finally notified the Ind AS 11 on construction contracts and Ind AS 18 on revenue recognition, but they have also deferred its application.

A key carve-out for the real estate sector Ind AS 11 and Ind AS 18 are different in many ways with the existing accounting practice on revenue recognition as followed by several companies. Some of the most important differences are around multiple element arrangements (in which multiple services/products are being offered to the customers under one contract or multiple contracts executed at or about the same time), service concession arrangements (normally involves all public private partnerships projects), timing of recognition and disclosure of incentives (discounts) offered to customers.

The MCA has offered relief to companies in the real estate sector and they will continue to account for the projects based on the guidance note issued by the Institute of Chartered Accountants in India (ICAI) in relation to real estate for revenue recognition. However the revenue recognition practice for the sector needs to be aligned to reflect the impact of multiple element arrangements, deferred payment projects, guaranteed return, assured buy back related commitments and many other arrangements with specific nuances can have significant accounting impact.

No relief for infra sector
Infrastructure companies in India were looking for certain relief/relaxation from the application of accounting guidance under Ind AS in relation to service concession arrangement and certain other type of contracts, which need to be accounted for as a lease contract even though the contract arrangement is in the nature of supply of goods or rendering of services.

Essentially all the public private partnership (PPP) arrangement or exclusive service or supply arrangement is likely to be significantly impacted by the new accounting requirements. This will significantly change the recognition, measurement and disclosure aspects of revenue recognition for such arrangement.

For example, if a company is building certain road assets on which assured revenue commitment is made by the government/grantor, then in such cases, under existing Indian GAAP, the amount of money which is received/committed from the grantor is recorded as revenue over the period of such commitment. Under Ind AS, such commitments are likely to be accounted for as financial assets/accounts receivable and revenue for such projects will be recorded during the construction period itself. Conversely, if the operator has to recover the toll charges from the users of the assets, then the company may end up recording revenue twice: One towards building the assets and then subsequently for recovery of such revenue from the users of the assets. This is likely to impact accounting for many existing and future projects.

Applicability to NBFCs
The MCA has also notified that Ind AS will be applicable to Non-Banking Financial Companies (NBFCs) from the financial year beginning April 1, 2018, with comparatives to be presented for the year ended March 31, 2018. Through this notification, they have also clarified the definition of NBFC and in effect it will cover all companies as defined under the RBI act 1934.

Several such NBFCs are currently held directly by a company, which is not an NBFC. Several such companies do own subsidiaries which are not NBFCs on an individual status basis.  An issue was raised about the accounting standard framework to be used by such companies to enable the preparation of consolidated financial statement by such groups.

This notification also clarifies that such consolidated financial statements need to be prepared as per the applicable framework to that NBFC and all down below companies should additionally provide applicable accounting information as per existing Indian GAAP to enable such consolidation.

For example, Company “X” is required to prepare Ind AS financial statements for the year ended March 31, 2017, and it has a 100 percent owned subsidiary “Y”, which is a NBFC. Then, for its standalone financial statements, NBFC will continue to maintain its books of accounts as per Indian GAAP whereas to enable X to prepare its consolidated financial statements, Y will be required to prepare group reporting information as per Ind AS for the year ended March 31, 2017 itself. Essentially, this will require such companies to have multiple GAAP reporting capability.

Next steps
Companies who are covered in phase 1 are required to take stock of their preparation towards transition to Ind AS including building multi GAAP capability. Companies may need to reassess the accounting implications due to above specified change. Additionally, companies that are listed with stock exchange need to ensure that all of this is being achieved in a timely manner so that they release the information about the financial performance of quarter ended June 30th, as per Ind AS.

- By Sandip Khetan, Partner in an India member firm of EY Global

The thoughts and opinions shared here are of the author.

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