IFRS, GST, DTC — India Inc has an alphabet soup of laws coming

With the monetary policy announced on Tuesday — RBI hiked the repo rate by 25 basis points and reverse repo rate by 50 — corporate India’s cost of capital will increase. But that is not the only issue that India Inc has to face.

Several other changes are headed their way — the goods & services tax and the direct taxes code, for example — and everything’s coming at the same time. So here’s what corporate boardrooms will discuss in the next 12 months.

Crunch another way 

One major change that companies are bracing up for is the change in accounting norms.

The Indian general accepted accounting practices (GAAP) will be converged into the International Financial Reporting Standards (IFRS). What exactly will this mean? “After IFRS comes into effect from April 2011, you are going to prepare your charts in a different language. Under IFRS, the way you account for a number of areas will change, which is going to see changes from the revenue perspective,” says Shrenik Baid, executive director-global capital markets group at Price Waterhouse.

The changes that IFRS will bring about are significant. Dolphy
D’Souza, partner and national leader, IFRS, at Ernst & Young,
says, “Companies may be startled when they see the changes in
their financial statements post the IFRS implementation. They don’t have a very clear idea of the challenges as of now.”
“Employee stock option plans (Esops) under Indian GAAP are not being charged to the income statement, but under IFRS, they need to be, which may be accounting unfriendly,” D’Souza says. “But they should not get worried on the impact of conversion of IFRS. It is not affecting your business models, your revenues or your valuations.”

And companies have only recently gotten clarity about the issue. “Clarity has come into IFRS compliance only in last few weeks. We have seen the exposure draft and the government has clarified as to who is involved in what phase,” says Nicolas Ribollet, national IFRS leader for Mazars India. He says the switch to IFRS may impact the classification of debt and equity.

Q1 of FY2012 is going to tax the accounts. “In the first quarter next year, companies will have a challenging time as they will be closing the March 2011 quarter in Indian GAAP and then the next quarter’s opening balance sheet has to be under IFRS,” says Baid.

And is India Inc prepared for the switch? Not all are, say the experts. “Though companies have started training their staff, many are yet to have a dry run,” says Baid.

Certain sectors especially, have a long way to go. “Banks and insurance companies still have to test the IFRS implication as they have not fully evaluated the same. None of them have really examined what it would do to their financials. Whether RBI is going to change the standards or will ask them to adopt them same remains a question mark,” says D’Souza.

According to Baid, “Also there is some level of audit that is needed as auditors have to confirm that these numbers will not change. It may be embarrassing for companies to say that my first quarter numbers too have changed. If Sebi says it has to be consolidated, then it would be a tough task.”

Even as the deadline nears, India Inc is short of clarifications. “Accounting for tax purposes is where a major grey area still lies. “It (tax accounting) is still a big question mark. There is no communication from CBDT. So if you have business wherein you get revenues in functional currency such as US dollars and only make a presentation in rupees, it is to be seen whether the income-tax is ready to accept this change,” says Baid.

“The present guidelines allow companies to give prior year numbers under Indian GAAP. However, further clarity would be required on the format of presentation of prior year numbers, especially in case of items like preference dividend, which would form a part of appropriations in the prior year but a part of the profit and loss account in the current year,” says Charanjit Attra, chief financial officer and head-structured finance group at ICICI Securities.

However, tax changes may not happen soon. “As far as tax is concerned, it will continue to be on Indian GAAP. Tax to be charged on the basis of IFRS, is not going to happen in 2011-12 as there are many Indian companies that will still be complying with Indian GAAP. For the first few years, taxation will be on the Indian GAAP and they may finally converge. Certainly, this will mean double work for companies as they will have to maintain Indian GAAP accounts for taxation, while IFRS accounts separately. It is a challenge,” says D’Souza.

India Inc needs to start making certain changes now, say the experts. “For instance, the key performance indicators of sales people as used today would probably change as there may be deferral of revenue. So, if they have done their sales bit, but their bonuses, etc, depends on the revenue, which will change because of IFRS compliance, then companies need to evaluate that and communicate the same to employees so that there is no crisis when the numbers change,” says Baid.

More hiring

The upshot of this transition means expansion in a company’s accounting team.
“Most companies would need new resources as there are around 2,000 disclosure requirements under IFRS. Mid-sized companies may need at least 2-3 additional people considering that existing people work the same hours. Big companies of the size of Bharti or Reliance or L&T may need 8-10 more people. Right now, most of them are using consultants. But you can’t have consultants on a long-term basis,” says D’Souza.

As the deadline draws closer, the need for resources is high. “Normally, for the last two years of accounting, there is a lot of work. This involves not just the finance and accounting team, but also treasury, audit and IT people, people at the audit committee, top level executives need to know what is going on,” says Ribollet of Mazars.

And the talent, like all resources, may be limited. “What you need is people who know how do you apply the standards, how to interpret them. Only a limited number of people understand this,” Ribollet says.

Charge of the tax brigade

Companies could also face outgos that earlier never existed. For example, the government is looking at implementing the goods and service tax by April 2011.

Business houses need to evaluate the impact of GST too, says Suresh Surana, founder of consultancy RSM Astute Group. “The implications in respect of various exemptions, etc, provided under central excise, VAT, etc, and how it would get addressed under GST may need to be examined by businesses to conclude on their respective competitiveness. Further, the rate of 16% for services is higher than the present rate of 10.3% and the rate earlier envisaged,” he says.

His solution is a phased rollout. “Gradually moving from different rates for essential goods, other goods and for services to a single rate over a period of three years from will prepare the trade, industry and consumers for adopting a single rate and also smoothen the impact of any price changes in the market place.”
Then there’s the direct taxes code, which too is likely to be implemented by April 2011, and which will ring in its own set of changes — taxation rate of minimum alternate tax, for example, could change.

Too much too soon

“The problem is that everything is going to be initiated by April 2011. IFRS, DTC and GST have different implementation challenges, the implementation of all of these at the same time may be a bit tough for some of the corporates,” says Attra of ICICI Securities.

Baid of Price Waterhouse says, “Every thing is changing at the same time and so there will be lots of challenges for the finance team. There is IFRS, GST and direct taxes code. It is to be seen how people will cope up.”

Under GST, you have to change the systems to ensure appropriate invoicing as it is not going to be the normal sales tax, he says.
So, will the the compliance deadline be altered? “A lot of questions have been asked by many companies, but it looks unlikely that the deadline will change,” says Baid.