industry impact ifrs + deloitte

8/8/2019 Industry impact IFRS + Deloitte

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BY

SEKKIZHAR BALASUBRAMANIAN

IFRS and Indian Accounting Standards

–Implications on key sectors



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



3

Retail



4

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.



5

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.



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.



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.



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.



Extractive



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




• 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




• 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



Infrastructure & Real Estate



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



Infrastructure

Accounting implication on business cycles (IFRIC 12)

Asset classification

Revenue recognition

Recognition of obligations during concession period

Comparison with ICAI Draft Guidance note



16

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



17

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



18

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



19

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



20

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.



21

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



22

Real Estate

Financial Instrument

As per IAS 39, embedded derivatives in a contract will have to

be valued separately.



23

Pharmaceuticals



24

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)]



25

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.



26

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 .



27

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.



28

Power & Utility



29

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”)



30

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.



31

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.



32

Technology



33

Technology - Revenue recognition

•Multiple elements arrangements

• Detailed guidance under IFRS ( less compared to US

GAAP)

• More documentation in IFRS

• Upgrade of software, hardware



34

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



35

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



37

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



39

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



40

Telecom



41

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



42

Summary – Revenue Recognition

Technology

High

Pharma

Moderate

Retail

ModerateIFRIC 13

Media

HighSIC 31

Real Estate & Infra

HighIFRIC 12

Extractive

Moderate

Power

Low

Telecom

High



43

Summary – Major Over hauling expenses

Technology

Low

Pharma

High

Retail

Moderate

Media

Low

Real Estate & Infra

High

Extractive

High

Power

High

Telecom

Moderate



44

Summary – Revaluations of PPE

Technology

Low

Pharma

High

Retail

Moderate

Media

Low

Real Estate & Infra

High

Extractive

High

Power

High

Telecom

Low



45

Summary – Componentisation

Technology

Low

Pharma

High

Retail

Moderate

Media

Low

Real Estate & Infra

High

Extractive

High

Power

High

Telecom

Low



47

Summary – Segment

Technology

High

Pharma

High

Retail

High

Media

High

Real Estate & Infra

High

Extractive

High

Power

High

Telecom

High



ThankYou

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