With the decibel level increasing on the IFRS (International Financial Reporting Standards) front, a natural anxiety among investors is about how the adoption of global norms will impact the different sectors. Thankfully, there are no industry specific standards under IFRS, observes N. Venkatram, IFRS Country Leader, Deloitte Haskins & Sells, Mumbai.
“The effect of adopting IFRS will depend on each individual organisation’s circumstances and business practices. That being said, changing to IFRS may affect certain industries more than others,” he adds, during the course of a recent telephonic interaction with Business Line.
Excerpts from the interview in which Venkat looks at what the new reporting framework may portend for a few sectors.
Technology, media and telecommunications (TMT) sectors.
The impact of IFRS on the TMT sectors, mainly in the area of revenue recognition, is expected to be high.
These industries usually have a high incidence of what is known as bundled transactions or multiple deliverable arrangements. A common example would be in the mobile segment where packages offered to end users include provision of handsets either at a subsidised rate or free of cost, pre-paid minutes, free SMS, discounts, special offers and other incentives.
In these cases it may be necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. The decision to account for a transaction in its entirety or unbundle the product into its individual components can have a significant impact on an operator’s financial statements.
For instance, separating handset revenues from ongoing service may result in increased revenue upfront but there may also be instances where separating a contract into components may defer revenue recognition.
The accounting treatment for indefeasible rights of use (IRU) in the telecom sector will have to be determined by the commercial substance of each individual arrangement. When determining the appropriate accounting for IRUs under IFRS, it will be necessary to first consider whether the arrangement is, or contains, a lease in the light of the provisions of IFRIC 4.
If it is considered a lease, then the appropriate accounting will be determined in accordance with IAS 17. If not considered a lease, it will have to be ascertained whether the arrangement constitutes the sale of goods or the rendering of services. Accordingly the relevant part of IAS 18 will have to be applied to determine the appropriate accounting of revenue.
The media sector could be impacted by the application of SIC-31, Revenue - Barter Transactions Involving Advertising Services, which deals with the circumstances where an entity enters into a barter transaction to provide advertising services in exchange for receiving advertising services from its customer.
Real estate sector.
The realty sector would also be affected due to the provisions of IAS 40 which allow investment property to be measured at cost or using the fair value model with changes in fair value being recognised in profit or loss for the period. Accounting investment properties at fair values can lead to a great deal of volatility in the income statement as well as balance sheet.
Agreements for the construction of real estate take diverse forms – some agreements are for the provision of construction services, others are in substance for the delivery of goods (e.g. housing units) that are not complete at the time of entering into the agreement.
Thus, the percentage of completion method is appropriate for some agreements for the construction of real estate, but for others revenue should be recognised only at the point that the constructed real estate is delivered to the customer.
IFRIC 15 Agreements for the Construction of Real Estate addresses whether an agreement is within the scope of IAS 11 or IAS 18, and when revenue from the construction of real estate should be recognised.
An agreement for the construction of real estate will meet the definition of a construction contract when the buyer is able to specify the major structural elements of the design of the real estate before construction begins; and/or specify major structural changes once construction is in progress.
In contrast, if buyers have only limited ability to influence the design (for example, to select from a range of entity-specified options, or to specify only minor variations to the basic design), the agreement will be for the sale of goods, and be within the scope of IAS 18. Application of IFRIC 15 is expected to have an impact on the timing of revenue recognition for most realty firms.
For infrastructure firms, the application of IFRIC 12, Service Concession Arrangements, could change the way revenues are accounted for. A typical arrangement is a ‘build-operate-transfer’ arrangement where an operator constructs the infrastructure to be used to provide a public service and operates and maintains that infrastructure for a specified period of time. The operator is paid for its services over the period of the arrangement.
The infrastructure within the scope of IFRIC 12 is not recognised as property, plant and equipment of the operator. This is because the operator does not have the right to control the asset, but merely has access to the infrastructure in order to provide the public service in accordance with the terms specified in the contract.
It is also not treated as a lease as the operator does not have the right to control the use of the asset. Instead, the operator’s right to consideration is recorded as a financial asset, an intangible asset or a combination of the two.
The banking industry will also be affected with an impact expected on the capital adequacy ratio. At the highest level, Indian banks, being subject to the RBI’s rules-based accounting would require to move towards principles-based accounting of IFRS.
This distinction may prove more vexing than it initially appears, because most accounting and finance professionals in India have been used to the rules of the RBI. The overriding lesson from their years of study and work is this: If you have an issue, look up to the RBI. On the other hand, IFRS is a far shorter volume of principles-based standards, and consequently requires more judgment than Indian accountants are accustomed to.