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Press Release
August 29, 2016 | Mumbai
Ind AS to induce volatility in financial statements
Cash flows, economic risks unchanged; no major rating/criteria change foreseen: CRISIL
Listed entities under the Phase I adoption of Ind AS (excluding those from financial sector)1, have started reporting their Q1 FY 17 financials in line with the revised accounting standards. CRISIL has analysed the impact of these revised standards on the financials of its rated companies.
Says Pawan Agrawal, Chief Analytical Officer, CRISIL Ratings, “Ind AS is expected to bring financial statements closer to economic reality and align them with global standards. As a result, we expect reported financial statements to undergo significant changes, especially on net worth, profitability, and revenue. The impact will be greater on those in sectors such as capital goods, infrastructure, retail, IT services and auto ancillaries. Further, fluctuations in profitability will increase on an ongoing basis.”
One time changes in profitability would be primarily on account of reclassification of actuarial gains/losses, and amortisation of goodwill. The recognition of valuation losses/gains through profit and loss will be the primary driver of ongoing volatility in financial statements. However, the valuation losses/gains are fair valuation changes and do not have an impact on cash flows until realised.
The changes in reported net worth will largely be a one-off stemming from changes in the treatment of fair valuation and deferred tax due to the transition to Ind AS.
Reported revenues of companies might undergo significant change primarily on account of consolidation guidelines.
The June quarter results of a sample of 80 CRISIL-rated companies indicates that for nearly a third of them, the difference in reported profit in comparison to Indian GAAP was in excess of 5%.
Says Somasekhar Vemuri, Senior Director, CRISIL Ratings, “Ind AS does not fundamentally alter the underlying economic risks and cash flow-generation ability of companies. CRISIL’s criteria has always focused on cash flows when assessing the ability of companies to fulfil their repayment obligations.
And in doing so, we have always made adequate analytical adjustments to reported financial numbers.
Hence, even though Ind AS-based financials could see significant changes, they are unlikely to have a meaningful impact on CRISIL’s rating criteria and outstanding ratings.”
Ind AS also enhances disclosure standards and improves investor confidence around the reported numbers.
CRISIL believes changes in revenue recognition norms and fair valuation principles will result in better quality of information being made available to investors. Disclosures will improve because of detailed information on customer concentration, segmental reporting in line with internal classification, and sensitivity of profitability to forex, interest cost and commodity prices.
While the adoption of Ind AS in a phase-wise manner is the better approach, CRISIL believes bringing more companies -- especially the unlisted ones with a networth less than Rs 250 crore2 -- under this system is crucial as it will make financial statements comparable across companies irrespective of size, and facilitate greater access to funding from global investors.
CRISIL has also released an Article “Ind AS Impact”3 that highlights impact of the revised accounting standards on CRISIL rated companies and criteria.
1 FY 2018-19 will be the first year of Ind AS adoption for financial sector entities under Phase I of Ind AS
2 Under Phase I, listed and unlisted companies with a networth of Rs 500 crore will have to implement Ind AS. Under Phase II, companies with a networth of Rs 250 crore will have to do so.
3The article is also available on our website www.crisil.com
2 For further information contact:
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