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8/8/2019 Industry impact IFRS + Deloitte
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BY
SEKKIZHAR BALASUBRAMANIAN
IFRS and Indian Accounting Standards
–Implications on key sectors
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Responsibility and obligations
All materials or explanations (not restricted to the following presentationslides) (collectively “Material”) have been and are prepared in general terms only.
The Material is intended as a general guide and shall not be construed as any advice,opinion or recommendation given by presenters or Deloitte Haskins & Sells and anyof its member firms (collectively “DHS”).
In addition, the Material is limited by the time available and by theinformation made available to us. You should not consider the Material as beingcomprehensive as we may not become aware of all facts or information. Accordingly,
DHS is not in a position to and will not make any representation as to the accuracy,completeness or sufficiency of the Material for your purposes.
The application of the content of the Material to specific situations willdepend on the particular situations involved. Professional advice should be soughtbefore the application of the Material to any particular circumstances and the
Materials shall not in any event substitute for such professional advice.You will rely on the contents of the Material at your own risk. While all
reasonable care has been taken in the preparation of the Material, all duties andliabilities (including without limitation, those arising from negligence or otherwise)to all parties including you are specifically disclaimed.
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IFRS and Indian Accounting Standards–
Implications on key sectors
• Retail
• Extractive
• Infrastructure and Real Estate
• Pharmaceuticals
• Power and Utility
• Technology
• Media and Entertainment
• Telecom
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Retail
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Retail
•Business Cycle – Revenue
Industry is marketing its products in different contractual
arrangements like shop-in-shop, franchise, exclusive etc
IAS 18 AS 9
Arrangements require revenue
recognition considerations and gross v/s.net presentation issues. Agent v/s.
principal relation needs analysis
Generally presented on gross basis. No
specific guidance.
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Retail
•Business Cycle – Costs
Cost of refurbishment of stores, pre-opening costs
IFRS I GAAP
The overhaul costs that does not increase
the benefit beyond originally assessed
standard of performance is not
capitalised.
Under existing AS 10 are not capitalised.
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Retail
•Business Cycle – Leases
IAS 17 requires the lease of land and building elements to
be accounted for separately for lease classification unless
immaterial
IAS 17 Lease expense AS 19
The present value of the minimum lease
payments, including lump-sum upfrontpayments is allocated between the land
and building elements in proportion to
their relative fair values at the inception
of lease.
No such allocation is required.
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Retail
•Business Cycle – Property plant and equipments
IFRS requires a component approach for depreciation and
accrual of asset retirement obligations & accrual of asset
retirement obligation
IAS 17 Lease expense AS 19
Different components of the retail store
may be building, flooring, furnishing,
parking lot etc…
No such allocation is required.
Cost of dismantling, removing and
restoring site on which is capitalised
along with the cost of the item at present
value basis.
Undiscounted amount of only
constructive obligation is accrued.
Normally for retail store such costs are
not accrued and are expensed as
relocation costs.
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Retail
•Business Cycle – Accruals / Creditors
IFRIC 13 treats loyalty programs as “multiple element
revenue transactions”. Such programs entity may supply or
third party supplies on redemption of award points.
IFRIC 13 AS 29
Fair value of the consideration receivedor receivable should be allocated
between the award credits granted and
other components of the transaction.
No such allocation is required. Also thereis no specific guidance on accrual of
loyalty programs.
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Extractive
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Extractive – Oil & Gas Companies
• Legal format
NELP licenses – bidding by consortium
Interest in unincorporated joint ventures
Financial records Basic financial records by one of the partner – Operator
Accounting of cash call utlisation
Measurement and recognition by individual partners in
their respective financial statement
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Extractive – Oil & Gas Companies
• Cost related to acquisition exploration and evaluation
Classification into tangible and intangible based on IAS 16 and
IAS 38
Cost or revaluation model
Componentization and major maintenance expense
Successful Efforts Method V/s. Full Cost Method
IFRS 6 allows use of FCM only for exploration and
evaluation after this companies are required to follow SEM
Activities prior to and after exploration and evaluation –
Not covered by IFRS 6
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Extractive – Oil & Gas Companies
• Cost related to acquisition exploration and evaluation
Site restoration
Discounted under IFRS V/s. AS 29 undiscounted, however
capitalised as Producing Property under both GAAP Unwinding costs to Income statement
Exchange loss on restatement of the provision – AS 11 V/s.
Income statement under IFRS
Change in liability is adjusted in producing property
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Infrastructure & Real Estate
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Infrastructure
• Legal format
Public to Private Partnership (PPP) arrangements in the
form of Service Concession Agreements
Build Own &/or Operate Transfer Grantor controls the services from infra assets
Grantor controls residual interest in the infra assets
SPV formed for each project SPV Parent – Financial Service Company or Infrastructure
Construction Company
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Infrastructure
Accounting implication on business cycles (IFRIC 12)
Asset classification
Revenue recognition
Recognition of obligations during concession period
Comparison with ICAI Draft Guidance note
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Infrastructure
Business Cycle – Assets Classification• Fixed assets ? V/s. Construction service receivable exchanged
for Intangible (rights) or Financial Asset
Intangible -
Where SPV receives charges from user of infra assets
Risk on SPV
Financial asset
Where SPV receives fixed sum from grantor
Where grantor assures return on investment by SPV
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Business Cycle - Revenue recognition
Components of the SCA for revenue recognition
Construction Services
Maintenance services
Finance Income – In case of a financial assets
Charges from user of the Infra Asset
Infrastructure
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Business Cycle - Obligations during concession period
Regular maintenance- Accrual basis
Quality / standard as required under service concession
Present value of the obligation – Intangible asset
Allocation from revenue – Financial asset
Infrastructure
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Comparison with ICAI Draft Guidance note
Classification as Financial Asset – AS 30
Discounting of provision for serviceability
Other Challenges
Depreciation of Intangibles under the Companies Act
Taxation
Infrastructure
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Real Estate
IFRIC 15 Agreements for the Construction of Real Estate
(Clarifies revenue recognition on real estate sale contracts)
Divergence in recognition
IAS 18 [Revenue] IAS 11 [Construction contracts]
Revenue is recognised when
the completed real estate is
delivered to the buyers.
Revenue is recognised by
reference to the stage of
completion as construction
progresses.
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Real Estate
Classification of Real Estate Properties
Investment Property
IAS – 40
Property, Plant and
Equipment
IAS-16
Inventory
IAS-2
Would comprise of real
estate held to earnpassive rental income or
capital appreciation, and
generating cash flows
largely independently of
the other assets held bythe entity.
Would comprises
property held by theowner for
use in the production
or supply of goods or
services, or for
administrativepurposes.
Would comprise
property held by a realestate entity for sale in
the ordinary course of
business or in the
process of development
for sale.
Measured at COST or
FAIR VALUE
Measured at COST or
REVALUED AMOUNT
Measured at lower of
COST or NET
REALISABLE VALUE
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Real Estate
Financial Instrument
As per IAS 39, embedded derivatives in a contract will have to
be valued separately.
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Pharmaceuticals
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Pharmaceuticals
Capitalization of internal development costs
Development costs are capitalised as an intangible asset
if all of the IAS 38, para 57 conditions are met.
Management must use its judgment, based on the facts
and circumstances of each project.
A strong indication that an entity has met all of the
above criteria arises when it files its submission to the
regulatory authority for final approval. It is the clearestpoint at which the technical feasibility of completing
the asset is proven [IAS 38R.57(a)]
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Pharmaceuticals
Impairment testing for tangible and intangible assets
- (IAS 36)
Pharmaceutical entities should also consider industry-
specific factors such as the following:
• Patent expiry date;
• Failure of the machinery to meet regulatory
requirements;
• Technical obsolescence of the assets;
• Market entrance of competitive products;
• Relationship with other tangible and intangible assets.
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Pharmaceuticals
Impairment of Goodwill – Indian GAAP v/s IFRS
IAS 36 AS 28
Goodwill and indefinite life
intangible assets are required to
tested for impairment at least on an
annual basis or earlier if there is animpairment indication.
Tested only when there is an
indication that they may be
impaired.
AS 26 requires intangible assets that
are not available for use and
intangible assets that are amortised
over a period exceeding ten years to
be assessed for impairment at least
at each financial year end even if
there is no indication that the asset
is impaired .
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Pharmaceuticals
Special Purpose Entities – SIC 12
Unsecured loans advanced to entities for development of
new active substance.
Such transactions should be evaluated as to whether the
loan agreement conveys control over the entity inaccordance with SIC 12. If so, the entity should be
consolidated in the financial statements of the Company
advancing such loans.
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Power & Utility
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Power & Utility
Property, Plant and Equipment
Componentization
IAS 16 requires the different components of an asset to be
identified and depreciated separately if they have differing
patterns of benefits and are significant relative to the total
cost of the item.
Major Overhaul
Under IFRS, costs related to major inspection and overhaul
are recognized as part of the carrying amount of PP&E if they meet the asset recognition criteria in IAS 16.
Asset Retirement Obligation (“ARO”)
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Power & Utility
Accounting for Regulated Assets and Liabilities
IFRS does not provide specific guidance on regulatory assets and
liabilities or on the recovery of costs and deferral of excess profits
through future increases and decreases in regulated tariffs.
So far, in practice, entities in jurisdictions that have adopted IFRS have
generally not recorded assets and liabilities resulting from regulation as
assets and liabilities under IFRS.
On its December 18, 2008, meeting the IASB agreed unanimously to add
the regulatory asset and liability project to its agenda with a plan to
clearly define the scope of the project to concentrate on common
characteristics of a regulatory scheme that might lend to the recognitionof regulatory assets and liabilities.
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Power & Utility
IFRIC 18 – Transfer of Assets from Customers
The entity must control the asset in order to recognise it.
On initial recognition the asset is measured at its fair value.
Timing of revenue recognition will depend on what theentity has agreed to supply to the customer in exchange.
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Technology
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Technology - Revenue recognition
•Multiple elements arrangements
• Detailed guidance under IFRS ( less compared to US
GAAP)
• More documentation in IFRS
• Upgrade of software, hardware
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Technology - Share Based Payments
• Share Based Payments standard
• No corresponding standard in Indian GAAP compared
to IAS 2
• Only ESOP guidance in India ( SEBI and ICAI)
• Intrinsic Value and Fair Value methods in India while
under IFRS only Fair Value
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Technology - Research and Development
•More detailed in IFRS ( affecting Product development
companies)
• Though Indian GAAP is identical to IFRS, many Tech
companies follow US GAAP
• US GAAP expenses off R&D costs
• Under IFRS, Research costs are expensed off while
Development expenses are allowed to be capitalised
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Technology - Business Implication
• IFRS implementation is Business opportunity for Indian
IT and ITES companies
• Implication of IFRS implementation on existing
Technology platforms
•China, Canada and US are big markets and good
business flow till 2015
• Shared Services of IFRS implementation
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Media and Entertainment
• Intangible Vs Revenue
• Sale of Distribution rights
•Multiple element contracts – Channels, Regions, Web
portals, Merchandise, Music for which detailed guideline
exists under IFRS
•Barter Transactions – SIC 31
•Multiple business model in the industry like Multiplex
operations – Component accounting and leases
standard
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Telecom
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Telecom Industry
•Revenue recognition of Bundle offerings of Telecom
players
• Indefeasible Right of Use (IRU) – Detailed guidelines
under IFRS
•Asset Retirement Obligations (ARO) – Discounting of
provisions under IFRS
•Gross or Net basis – Revenue from Interconnect and
content revenue agreements
•
Implications of Componentisation, Estimate of useful lifeand residual value under IFRS
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Summary – Revenue Recognition
Technology
High
Pharma
Moderate
Retail
ModerateIFRIC 13
Media
HighSIC 31
Real Estate & Infra
HighIFRIC 12
Extractive
Moderate
Power
Low
Telecom
High
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Summary – Major Over hauling expenses
Technology
Low
Pharma
High
Retail
Moderate
Media
Low
Real Estate & Infra
High
Extractive
High
Power
High
Telecom
Moderate
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Summary – Revaluations of PPE
Technology
Low
Pharma
High
Retail
Moderate
Media
Low
Real Estate & Infra
High
Extractive
High
Power
High
Telecom
Low
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Summary – Componentisation
Technology
Low
Pharma
High
Retail
Moderate
Media
Low
Real Estate & Infra
High
Extractive
High
Power
High
Telecom
Low
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Summary – Segment
Technology
High
Pharma
High
Retail
High
Media
High
Real Estate & Infra
High
Extractive
High
Power
High
Telecom
High
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