On April 1, 2016, many Indian companies began phasing out older accounting standards known as Indian Generally Applied Accounting Principles (GAAP) in favour of Indian Accounting Standards (Ind AS), which are more closely aligned with International Financial Reporting Standards.
The move is meant to make global comparisons easier and improve transparency and disclosures, thereby boosting the overall quality of financial reporting in India and painting a more accurate economic picture.
Corporate India’s transition to Ind AS has been staggered - in the first year, only listed and unlisted companies with a net worth of more than Rs 500 crore were required to adopt Ind AS. Starting April 1, 2017, all other listed companies and unlisted firms with a net worth of more than Rs 250 crore had to migrate. Adoption is voluntary for all other companies outside those categories.
Chartered accountants say Ind AS may give the illusion of greater profitability for some companies and sectors while having the reverse effect on others.
Under the new accounting norms, the telecom sector expects significant reporting adjustments regarding reported net worth, revenue recognition, taxes, financial instruments, business combination and consolidation.
A KPMG report found that, after adopting Ind AS, the telecom industry made downward adjustments to net profit of more than Rs 592 crore, based on results declared as of August 31, 2016.
The introduction of Ind AS will impact each sector’s operating metrics differently. Here’s a look at the accounting standards most affected in the telecom industry:
Revenue recognition principles
Telecom firms have multiple streams of revenue from multiple goods and services. Under Indian GAAP, revenue from postpaid service is recognised on an accrual basis over the period in which the service was consumed, while prepaid revenue is recognised as soon as a plan is purchased.
Under Ind AS, an entity can combine more goods and services for accounting purposes than it did in the past, but the revenue earned in each transaction must be split up for multiple elements using fair value principles.
As the telecom industry involves contracts, there may be additional revenue attribution arising from these performance obligations and companies will have to disclose any uncertainty around revenue and cash flows from contracts with customers.
The capital intensive telecom sector in particular could be vulnerable to more writedowns on account of investments made to increase market share that may take time to realise.
Fair valuation of financial instruments
One major difference between Indian GAAP and Ind AS is the latter’s emphasis on fair value accounting.
Under Indian GAAP, companies follow a historical cost based approach. However, under Ind AS, fair value accounting has to be adopted, specifically for assets and liabilities. Since most telecom companies have huge debt from heavy investments in wireless infrastructure and spectrum auctions, restating balance sheets at fair value will affect these liabilities.
Consolidation of joint ventures
Several telecom players have banded together to provide shared infrastructure such as towers. This contributes revenue to some of the companies and will have to be accounted for under changes in consolidation of revenues from joint ventures.
As per the latest legal news in India, after a merger between Idea Cellular Ltd. and Vodafone Group Plc’s India unit on the cards, consolidation means some assets, such as licenses, may also have to be written down.
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