Ind-AS Key Note Address MAT implications

1. Ind-AS Key Note Address MAT implications 29 April 2017

2. Ind AS Implementation: A Giant Leap • Step in the right direction • Substantial improvement in accounting • Financial instruments • Business combinations • Service concession arrangements • Enhanced transparency and accountability • Critical judgements and estimates • Financial risk management • Capital management Achieving consistency and quality in Ind AS implementation is expected to take few years.

3. A roller-coaster ride • Use of short-cuts • Use of excel sheets, instead of system driven process • Fixed asset register not updated • Impact on internal financial controls not considered • Finding sweet-spot is not easy • Companies are working till last minute to finalize accounting policy choices/ exemptions • Many companies may revisit FTA exemptions/ accounting policy choices post MAT clarity • All key stakeholders are not aligned!

4. Picture Abhi Baaki Hai • Limited disclosures in quarterly results due to exemption/ relaxations given by SEBI • Use of exemptions/ exceptions not disclosed • Accounting policies, judgments and estimates used are not disclosed • Equity reconciliation either not given or given with limited disclosures • Many companies, including many power and infrastructure companies, have not disclosed consolidated results • IFRIC 4/ IFRIC 12 impacts not clear as these arrangements are typically undertaken through SPVs • Accounting policies/ use of exemptions may change till year-end • Many companies have not completed audit/ review of comparative numbers

5. Ignorance is bliss • Argument 1: Unregulated activity is purely ancillary because it is supporting the main activity of air travel. SCA accounting applies. • Argument 2: Unregulated activity is very important and should not be seen as ancillary and certainly not as “purely ancillary”. This is because the unregulated activity drives the airport feasibility, and is therefore very important from the perspective of the public (users), government and the operator. SCA accounting does not apply.

6. Ignorance is bliss Independent Directors – Whether KMP! • Ind AS 24 defines KMP as “The persons having authority and responsibility for planning, directing and controlling the activities of the entity directly or indirectly, including any director (whether executive or otherwise) of that entity.” • Unlike AS 18 under Indian GAAP, Ind AS 24 does not exclude non-executive directors from the definition of KMP. • Companies Act, 2013, prescribes very onerous responsibilities for IDs • Responsibilities include authority and responsibility for planning, directing and controlling activities of the entity. • Independent directors are KMP under Ind AS 24.

7. Shifting goal postLoan processing fee • Under Indian GAAP, the company has written off entire loan processing fees in year 1 and capitalized the same to cost of plant • On transition to Ind AS, the company is using previous GAAP carrying amount as deemed cost exemption for PPE • Ind AS 109 requires amortized cost accounting and loan processing fee to be amortized over loan period • Original ITFG decision (Dated 3 October 2016) • No adjustment is allowed to carrying amount of PPE • For applying Ind AS 109 retrospectively, corresponding adjustment should be made to retained earning. • Revised ITFG decision (Dated 17 April 2017) • Adjustment to PPE is only consequential and arising due to other transition requirements of Ind AS 101 • Processing fee should be adjusted to the deemed cost of PPE

8. Shifting goal postGovernment grant • Under Indian GAAP, the company has netted government grant from the cost of PPE • On transition to Ind AS, the company is using previous GAAP carrying amount as deemed cost exemption for PPE • Ind AS 20 requires government grant to be treated as deferred income – No option to reduce from cost of PPE • Original ITFG decision (Dated 3 October 2016) • No adjustment is allowed to carrying amount of PPE • For applying Ind AS 20 retrospectively, corresponding adjustment should be made to retained earning. • Revised ITFG decision (Dated 17 April 2017) • Adjustment to PPE is only consequential and arising due to other transition requirements of Ind AS 101 • Deferred grant should be adjusted to the deemed cost of PPE

9. Shifting goal postClassification of deposits Classification of security deposits received by an electricity company from its customers Original ITFG decision (Dated 3 October 2016) • No unconditional right to defer refund of deposit for 12 months • Expectation of the company are not relevant for classification • The security deposits should be classified as a current liability • Revised Position • ITFG has withdrawn the above decision on 17 April 2017 • One may argue that electricity and similar companies, e.g., a company providing gas or water supply, will classify deposits received from the customers as current or non-current liability based on estimated redemption pattern • View will apply in limited circumstances such as in monopolistic or oligopolistic situations where choices available to the consumer to change the service provider are highly limited • View will not apply by analogy in all cases – e.g. in the case of security deposit received a consumer goods company from retailers/ distributors – classification would continue to be current. • Relevant only for presentation in the balance sheet. • Recognition and measurement is governed by Ind AS 109. Consequently, no discounting is required

10. Shifting goal postPrevious GAAP carrying amount as deemed cost • A first-time adopter may opt to use previous GAAP carrying amount of PPE as deemed cost at transition date • Needs to be applied to all items of PPE – No pick and chose allowed • In CFS, option need to be applied at group level • If a company use this option, only adjustment allowed to previous GAAP carrying value is for decommissioning liabilities. No other adjustment allowed. • Option can also be used for intangible assets and investment property. Proposed recent change • Carrying value can be taken as the deemed cost for ‘a class’ of assets instead of ‘all’ assets on the transition • When the company chooses to adopt the carrying value as at the date of transition to Ind AS deemed cost, consequential changes arising on application of other Ind AS can be made to the deemed cost of PPE This may potentially help phase 2 companies with effect from 1 April 2017. Whether phase 1 companies can also benefit!

11. Unfinished AgendaRegulations/ agreements not changed • Telecom companies are required to pay license fees on their revenue • As per the Hon’ble Supreme Court judgement, revenue includes treasury income • Under Ind AS, income will increase/ change due to: • Interest unwinding on loan to subsidiary • Unwinding of financial guarantee obligation • Fair value measurement of mutual fund investments • Regulators may argue that telecom companies are required to pay license fee on such income

12. Unfinished AgendaRegulations/ agreements not changed • ABC has taken a long-term loan from bank • The loan agreement requires ABC to comply with target Debt-equity ratio at year-end (31 March). Ratio is critical to protect banks’ interest. • Ratio not met at 31 March • Current classification applies • How does one wriggle out of this problem?

13. MAT on Ind AS compliant financial statements

14. Overview of Ind AS transition Last Indian GAAP financial statements First Ind AS financial statements Comparative period Reporting period 1 April 2015 31 March 2017 1 April 2016 Beginning of the first Ind AS reporting period End of the first Ind AS reporting period Date of transition to Ind AS – Opening balance sheet 2015-16 MAT based on Indian GAAP profit 2016-17 MAT based on Ind AS profit

15. Ind AS impact on P&L

16. Ind AS impact on P&L

17. MAT on Ind AS compliant financial statements – OCI items

18. MAT principles on Ind AS compliant financial statements • MAT on Ind AS P&L, despite fair valuation and other significant changes • No fall back on Indian GAAP P&L • Adjustments specified under the existing section 115JB will continue to be made to arrive at book profit • OCI items recyclable to P&L are included in book profit, when those items are recycled as per Ind AS

19. MAT principles on Ind AS compliant financial statements • OCI items that are NOT recycled to P&L are included in book profit each year (e.g., Remeasurements of defined benefit plans), except : • Revaluation model for PPE/ intangible assets will be MAT neutral • Revaluation is to be ignored for computing book profits • Depreciation is computed ignoring revaluation, based on the existing requirements of section 115JB • Amount standing to the credit of revaluation surplus is included in book profit on retirement/ disposal of the asset • Gain and losses arising on investments in equity instruments designated as at FVTOCI will be included in book profit at the time of realization/ disposal/ transfer

20. Items adjusted in OCI that will be recycled to P&L

21. Items adjusted in OCI that will NOT be recycled to P&L

22. Ind AS Impact on MAT – First time adoption

23. MAT on opening Ind AS balance sheet • Ind AS adjustments in reserves/ other equity are included in book profit equally over 5 years beginning from the year of Ind AS adoption, except: • OCI items recyclable to P&L are included in book profits, when those are recycled to P&L • Adjustments to capital reserve and securities premium are excluded from book profit • Revaluation surplus due to use of revaluation model for PPE/Intangibles will be MAT neutral • Use of fair value as deemed cost exemption for PPE/ Intangible Asset will be MAT neutral • To be ignored for computing book profit • Depreciation is computed ignoring the amount of fair value adjustment • Gains/ losses on transfer/ realization/ disposal/ retirement are computed ignoring FV adjustment

24. MAT on opening Ind AS balance sheet • Gains/ losses on investments in equity instruments classified as FVTOCI will be included in book profit on realization/ disposal/ transfer of investment • Use of fair value as deemed cost exemption for investments in subsidiaries, associates and joint ventures will be MAT neutral • Gains/ losses to be included in book profit on realization/ disposal/ transfer of investment • Use of option to make Indian GAAP FCTR ZERO will be MAT neutral • To be included in book profit at the time of disposal of foreign operation • FTA adjustments made at TD (1 April 2015) are trued up for any changes upto the end of the comparative year, i.e., 31 March 2016

25. Items adjusted in OCI that will be recycled to P&L

26. Items adjusted in RE/ OCI that will NOT be recycled to P&L

27. Practical examples

28. Equity investment in subsidiaries, associates and joint ventures

29. Example: Investments measured at FVTPL Ind AS requires FVTPL accounting for mutual fund investments, equity investments held for trading and investment in convertible instruments. It also allows FVTPL accounting for all other equity investments.

30. Property, plant and equipment

31. PPE : FV as deemed cost

32. Redeemable preference shares • Preference shares – Mandatorily redeemable • Fixed premium payable on redemption • Redemption date post Ind AS

33. Debentures redeemable at premium • 0% Redeemable Debentures – No annual interest • Redeemable at premium @ 10% p.a.

34. Zero Coupon Optionally convertible redeemable preference shares

35. Example: OCRPS

36. Financial guarantee to subsidiaryParent Accounting • On a go forward basis, FG obligation released to P&L will result in a higher book profit. • On a go forward basis, any addition to investment in subsidiary of this nature will reduce the book profits in the year in which the investment is sold • On TD assume company chooses previous GAAP carrying value for investment • Therefore RE will be debited by 75 • With respect to FG obligation period expired prior to TD, RE will be credited by 15 • Net RE debit 60 will reduce book profits over next 5 years

37. Interest free loan to subsidiaryParent accounting Parent provides 3 year INR 100 interest free loan to subsidiary • Implications • On a go forward basis, interest income recognized in P&L will result in a higher book profit • Assume company uses previous GAAP carrying value as deemed cost of investment • RE will be debited by 30 wrt investments, and credited by 16 wrt loan (interest income) • Net RE Debit Adjustment 14 as at TD after true up adjustment will reduce book profits over 5 years

38. Interest free loan from parent: Subsidiary accounting • Implications • Capital contribution (capital reserve) is MAT neutral • RE Adjustment on TD ie RE expense of 16 is considered over 5 years after true up adjustment • On a go forward basis, interest expense recognized in P&L will be MAT deductible

39. Example: PPA identified as finance lease (Lessee accounting) RE Adjustment as at TD after true up adjustment will reduce book profits over 5 years

40. Example: Service concession arrangement Balance sheet

41. Service Concession Arrangements – Intangible assets model

42. Thank you