1. April 23, 2016 Implementation issues on transition to Ind AS Speaker – CA P. R. Ramesh 114

2. 2 Contents Ind AS - Introduction and applicability Pervasive impact of Ind AS Key implementation issues Significant departures from IFRS

3. Ind AS - Introduction and applicability

4. 4 Introduction to Ind AS Set of Accounting Standards converged with IFRS Early adoption of IFRS 9 Financial Instruments Includes “carve-outs” which provides relaxation from specific IFRS requirements Suite of Consolidation/Joint arrangement standards – Ind AS 110, Ind AS 111 & Ind AS 112

5. 5 MCA roadmap to Ind AS for companies other than banks, insurance companies and NBFCs 2015-16 Voluntary Adoption Early Adoption Companies with net worth of Rs.500 crores or more All listed companies not covered above All unlisted companies with net worth of Rs.250 crores or more 2016-17 Phase I 2017-18 Phase II 1.Applies to Holding, subsidiaries, joint ventures and associate companies of above companies. 2.Applicable to both standalone and consolidated FS. 3.FS to be presented with an opening B/s and comparative period.

6. 6 MCA roadmap to Ind AS for banks, insurance companies and NBFCs All Scheduled commercial banks (other than UCBs & RRBs) All India Term-lending Refinancing Institutions All Insurer/ Insurance Companies NBFCs with net worth of Rs. 500 crores or more All listed NBFCs (or in the process of listing) & not covered in Phase I above All unlisted NBFCs with net worth of Rs.250 crores or more but less than Rs. 500 crores 2018-19 Phase I 2019-20 Phase II 1.Voluntary or early adoption is not allowed. 2.Applies to Holding, subsidiaries, joint ventures and associate companies of above companies. 3.Applicable to both standalone and consolidated FS. 4.FS to be presented with an opening B/s and comparative period.

7. Pervasive impact of Ind AS

8. 8 Fundamental changes Recast previously issued financial statements Detailed disclosures Concept of First-time adoption – Unique Substance over form Present value and fair value concepts Estimates and judgements Focus on risks and rewards Over licensed Out of compliance $$ IGAAPInd AS

9. 9 Ind AS – company wide implication Ind AS conversion will need strategic thought leadership. Typically the roadmap will consist of the following elements Indian GAAP Ind AS Controls framework Information technology Risk management objective Contract management Treasury Legal and Regulatory Major acquisition Major ERP or finance transformation project Differences between Indian GAAP and Ind AS Presentation of Ind AS financial statements Access to capital Competitors' actions Level of knowledge Existing and future business

10. Key implementation issues

11. 11 Key implementation issues Implementation challenge Nature of challenges Ind AS compliance is not equal to IFRS compliance Due to the various carve outs adopted under Ind AS from IFRS, Ind AS is not fully compliant to IFRS. Emphasis on substance over form Economic substance is paramount — and often involves considerations beyond accounting. Assessment of contracts that could have leases embedded in them – e.g. take or pay contracts, outsourcing contracts, contract manufacturing. Financial instrumentsShift from rule based and prescriptive accounting as per RBI guidelines to accounting based on judgment under Ind AS 109. Significant impact on capital requirements and operations due to fair value accounting and use of expected credit loss model for impairment. Classification and measurement of financial assets and financial liabilities is complex and requires judgment. Presentation of liabilities versus equity. Instruments such as preference shares, convertible debts, options, etc. require evaluation. Lack of global experience in implementing new standard.

12. 12 Key implementation issues Implementation challenge Nature of challenges Consolidation Moving away from ‘bright lines’ Wide scope including assessment required for special purpose vehicles, CSR entities, ESOP trust, agency relationships, etc. Investment entities are exempt from the consolidation model and therefore carry the investments at fair value. Focus of the control model is on power, variable returns and ability to exercise the power. Significant departure from majority of risk and returns under old model. Joint arrangementsA joint arrangement to be classified as joint venture or joint operations. Joint venture to be accounted using equity method. Will result in reduction of revenues. Joint operations will be proportionately consolidated in the separate financial statements. Wider ramifications include treatment of such operations for taxes including Minimum Alternate Tax. Revenue recognition Multiple elements to be separated based on relative standalone selling prices. Linked transactions to be considered together. Gross v/s net accounting

13. 13 Key implementation issues Implementation challenge Nature of challenges Service concession contracts Applicable for Public to Private service concession arrangements. Accounting will result in derecognition of PP&E and recognition of intangible assets/financial assets Fair value measurements Increased volatility in P&L. Use of unobservable inputs, resulting in significant judgments. Requirement for experienced fair valuation specialist Reliability, accuracy and timeliness for valuing unquoted and untraded instruments. Merger arrangements through court scheme Future arrangements to be Ind AS compliant. Guidance required for grand fathering existing schemes Time value of money New concept. Transcends discounting of provisions, long-term financial assets and financial liabilities. Difference between carrying value and fair value accounted based on substance of the arrangement.

14. 14 Key implementation issues Implementation challenge Nature of challenges Information technology Change in financial systems to accommodate Ind AS. Capturing correct data attributes necessary under Ind AS. Handling of multi-ledger reporting. Preparation of dual financial statements during the transition years. Requirement to develop ready to use analytical tools to help banks transition to Ind AS 109 Quality of data to perform modelling for impairment under expected credit loss model. Requirement to cover all dimensions from strategy to reporting. Requirement to leverage and combine risk modelling, regulatory reporting and financial reporting for banks, NBFCs and insurance companies Governance and controls Determination of appropriate governance model for monitoring Ind AS application. Impact on internal control structure and internal financial controls reporting.

15. 15 Key implementation issues Implementation challenge Nature of challenges Policies and processes Developing and implementing a new set of accounting policies under Ind AS. Leveraging finance operating model to gain efficiency and effectiveness in financial reporting. Impact on projections, forecasts and budgets. Impacts on legal contracts, revenue arrangements, contingent consideration arrangements, bonus plans, debt covenants, and other financing arrangements. Organisation and people Educating and training employees, investors, business partners and other functional areas (e.g., treasury, HR, investor communications, legal, etc.) Impact on compensation arrangements including managerial remuneration. Tax implicationsRequires assessment and evaluation of Tax planning structures. Effective tax rate Advance tax payments Payments under MAT Deferred tax on undistributed earnings of subsidiaries, associates and joint venture

16. 16 Key implementation issues Implementation challenge Nature of challenges Dividend declaration policies Distributable profits in separate financial statements could be significantly impacted due to adoption of Ind AS (e.g. service concession arrangements, joint arrangements, fair values, etc.) Strategic roadmap required to align dividend policies with financial reporting Regulatory – banks, NBFCs and insurance companies Establish links with risk appetite and pricing. Evaluate impact on new products Greater focus on effectiveness of credit processes will be placed on banks, requiring support from clear regulatory guidance.

17. Significant departures from IFRS

18. 18 Significant departures from IFRS Accounting areaSignificant departures First time adoption rules Previous GAAP is defined as Indian GAAP Carrying values of property, plant and equipment, intangible assets and investment property under Indian GAAP allowed to be considered as deemed cost on date of transition. Foreign exchange differences from translation of long-term foreign currency monetary items continues for existing loans on transition date. Business combinationBargain purchase to be accounted in capital reserve instead of P & L. Detailed guidance for business combinations of entities under common control. Lease rentalsEscalation in lease rentals in line with the expected general inflation will not require to be straight lined. Separate financial statements Use of the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements prohibited. Foreign Currency Convertible Bonds (FCCBs) Will be considered as a compound instrument. Equity will not be re- measured after initial recognition. Under IFRS, such instruments would be considered as hybrid instruments requiring separation of embedded derivatives. Investment propertyAlternative measurement at fair values prohibited. Therefore, all investment properties will be measured at cost.

19. Thank You 19