How Indian Companies Will Benefit From New Accounting Standards
After the implementation of new Indian Accounting Standard (Ind-AS), TATA Steel, Maruti Suzuki, Ultra Tech, BPCL, and Coal India may report 3-12% increase in earnings. However, on the contrary, earnings of ITC, Lupin, Bharti Infratel, and Arvind may fall by 4-10%. Whereas the new standards will be adopted by the companies each with the net worth of Rs 500 crore or more in FY17.
The considerable impact of the transition would be observed in the computation of revenue, net profit, operating profit and net worth of the listed companies. The sectors that are likely to be impacted most include telecoms, metals, oil & gas and real estate. As per the estimates are drawn by the analyst, it is most likely that the overall EBITDA may drop by 2-3% while the revenues will increase by 4-5% by the introduction of new norms. In order to comply with new norms, the publicly-listed companies have been given additional one month by Sebi to declare the results for the June and September quarters.
The New Standards
“Every country stipulates a method for companies to report financial data based on rules called accounting standards.” India has so far has been following Indian Generally Acceptable Accounting Principle (IGAAP). However, it will be following Ind-AS from FY17, whose principles are closely based on international accounting system called IFRS. This will bring Indian companies at par with their international counterparts.
Fundamental difference between existing and new standards
“The new accounting standards recognize substance over form and importance of the fair value to compute financial statements” This implies that just complying with legal provisions will not suffice as accurate reporting will gain importance over it which should reflect the most current picture of financials.
Impact on companies
It will impact the way the key financials such as revenue, net profit, book value, operating profit, goodwill, and return on equity will be computed. For instance, under the existing rules, in order to calculate sales excise duty is deducted from it. However, as per the new norms, excise duty will be treated as a tax on manufacturing activity. Therefore, it should be a part of revenue. This will increase the revenue of companies but depress operating margin. However, EPS will remain unchanged.