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Financial accounting and reporting implications arising out of the proposals made in the Finance Bill 2017February 2017

2 | Financial accounting and reporting implications arising out of the proposals made in the Finance Bill 2017

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We would like to thank the following people for their review and contribution:

• Pankaj Chadha

• Sandip Khetan

• Sanjeev Singhal

• Jigar Parikh

• Vish Dhingra

• Shashi Tadwalkar

• Anand Banka

• Akshat Kedia

3Financial accounting and reporting implications arising out of the proposals made in the Finance Bill 2017 |

A) IntroductionAs per the roadmap issued by the Ministry of Corporate Affairs, Indian companies have commenced their plans to transition to Ind AS. While the implementation of Ind AS introduces several changes over the prevailing Indian GAAP, and involves using new concepts and the use of fair value, treatment of Ind AS adjustments for the calculation of income taxes has been a significant concern for corporate India.

With the introduction of Income Computation and Disclosure Standards (ICDS), it was clear that the normal income tax calculations would continue to have a framework governed by the Income Tax Act, but there was not much clarity on the treatment of Ind AS adjustments, such as fair valuation impacts, impacts of items presented in Other Comprehensive Income (OCI) etc. for the purpose of Minimum Alternate Tax (MAT) calculation.

To address these issues, the Central Board of Direct Taxes (CBDT) constituted a Committee in June 2015 for suggestions on the framework for the computation

The Finance Bill brings clarity on MAT exposure arising on transition to Ind AS

of MAT liability under Section 115JB of the Income Tax Act. The Committee submitted its first interim report on 18 March 2016, second interim report on 5 August 2016 and the final report on 22 December 2016. The Finance Bill 2017 has now rolled out the final norms for MAT calculations for companies presenting their financial statements under Ind AS.

B) Key changes to MAT provisions as per the Finance Bill 2017Clause 47 of the Finance Bill 2017 sets out the rules for the computation of MAT liability for companies applying Ind AS, which are summarized as follows:

1. Calculation of book profit

Profit for the year (before OCI) as per Ind AS will be considered for MAT purposes as the starting point. This net profit would be adjusted as per Explanation 1 to sub-section (2) of Sec 115JB of the Income Tax Act to arrive at the book profit for MAT purpose.


This book profit would be further:

(i) Increased/decreased for items of OCI as below:

Items of OCI that: To be included in book profitWill be reclassified to profit or loss No adjustment

Will not be reclassified to profit or loss

a. Changes in revaluation surplus of property, plant or equipment (PPE) and intangible assets (Ind AS 16 and Ind AS 38)

At the time of realization/disposal/retirement or otherwise transferred

b. Gains and losses from investments in equity instruments designated at fair value through other comprehensive income (Ind AS 109)

At the time of realization/ disposal/ retirement or otherwise transferred

c. Re-measurements of defined benefit plans (Ind AS 19) Every year as re-measurements gains and losses arise

d. Any other item Every year as re-measurements gains and losses arise

(ii) Increased/decreased for amounts debited/credited to the statement of profit and loss on the distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Ind AS 10.

(iii) In the case of a resulting company, where the property and the liabilities of the undertaking or undertakings being received by it are recorded at values different from the values appearing in the books of account of the demerged company immediately before the demerger, any change in

such value should be ignored for the purpose of computation of the book profit of the resulting company

2. MAT on first-time adoption of Ind AS

The book profit of the year of convergence and each of the following four years should be further increased or decreased, as the case may be, by one-fifth of the transition amount. The transition amount would be calculated as an amount adjusted in the other equity (excluding the equity component of compound financial instruments, capital reserve, and securities premium reserve) on the convergence date but not including the following:

Items To be included in book profit

Items adjusted in OCI that will be reclassified to profit or loss No adjustment

Changes in the revaluation surplus of PPE and intangible assets (Ind AS 16 and Ind AS 38)


Gains and losses from investments in equity instruments designated at fair value through other comprehensive income (Ind AS 109)


Adjustments relating to items of PPE and intangible assets recorded at fair value as deemed cost as per Ind AS 101

a. To be ignored for the purposes of computation of book profits.

b. Depreciation should be computed ignoring the amount of adjustment

c. Gain/loss on realization/disposal/retirement of such assets should be computed ignoring the adjustment

Adjustments relating to investments in subsidiaries, joint ventures and associates recorded at fair value as deemed cost as per Ind AS 101

At the time of realization

Adjustments relating to cumulative translation differences of a foreign operation as per Ind AS 101. An entity may elect a choice whereby the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition to Ind AS.

At the time of disposal or otherwise transferred


C) What does it mean for companies?1. Reconsider Ind AS policy choices

While making the policy choices on the adoption of Ind AS, both for the first time adoption exemptions and ongoing accounting policies, an important criteria for companies to make key decisions was the potential impact of MAT arising for each such option.

For example, Ind AS 101 provided the option of considering fair value on the date of transition as deemed cost for PPE and investment in subsidiaries, associates and joint ventures. There are several benefits of using fair value as a deemed cost, such as reflecting the true value of the asset on the balance sheet, de-risking impairment risk for future profit and loss, and improving key performance indicators like return on capital.

However, the biggest disadvantage of not availing this option in case where the fair value was higher than the book value was an apprehension that the gains arising on fair value changes may be included in the computation of book profits for MAT purposes and will result in significant cash outflow to companies. Now that the Finance Bill 2017 has clarified the methodology to calculate MAT liability, companies may want to reconsider their Ind AS policy choices relating to both first time adoption exemptions and ongoing accounting policies to the one that is the most beneficial for them.

It should be noted that companies can also avail different policy choices for standalone and consolidated financial statements.

2. Reassessment of MAT credit

The Finance Bill 2017 has amended Section 115JAA (3A) to allow MAT credit to be carried forward and set off up to 15th Assessment Year instead of 10th Assessment Year as previously allowed. This is particularly beneficial for those companies that may not have been able to set off the entire MAT credit within 10 years. Companies will now reassess their existing MAT receivable assets and may recognize additional assets for MAT credit receivable.

3. Negative goodwill/capital reserve on business combinations

As per Ind AS 103 Business Combinations, in case the fair value of net assets acquired is higher than the fair value of considerations paid, the difference is considered as a bargain purchase gain. Such bargain purchase gain is recognized in OCI on the acquisition date and is accumulated in equity as capital reserve under the head “Items that will not be re-classified to profit or loss.”

As per the Finance Bill 2017, book profits would be increased/decreased by the amounts credited/debited to the OCI under the head “Items that will not be re-classified to profit or loss.” As a result, negative goodwill will be offered for MAT in the year in which the gain is accounted for. Further, MAT on bargain purchase gain and the MAT credit entitlement are recognized in OCI itself.

Also, as per Ind AS 103, if there does not exist clear evidence of the underlying reasons for classifying the business combination as a bargain purchase, the gain should be recognized directly in equity as capital reserve. Since such adjustments are directly

The Finance Bill provides clarity on MAT exposure arising from Ind AS adjustments. This is a welcome step and will encourage companies to avail fair valuation as deemed cost exemption on first-time adoption of Ind AS, as the exposure of MAT has shifted to the year in which the concerned assets are retired, realized or disposed of.


accounted for in equity as capital reserve and not routed through OCI, it is likely that such adjustments will not be included in the MAT calculations as well.

Similarly, adjustments to capital reserve have been excluded from the definition of “transition amount.” As a result, bargain purchase on past business combinations that have been restated as per Ind AS would not be offered for MAT.

4. Deferred tax on “transition amount”

As per the Finance Bill 2017, the book profit for the year of convergence and each of the following four years should be further increased or decreased, as the case may be, by one-fifth of the transition amount.

Transition amount includes the adjustments made to “other equity” on the first day of the first Ind AS reporting period. “Other equity” would include all items of reserves and surplus (excluding the equity component of compound financial instruments, capital reserve and securities premium reserve). For example, if an entity applies Ind AS for the first time for the financial year 2016—17 with comparatives for 2015—16, the transition amount would include adjustments made to “other equity” on 1 April 2016. The intention, it seems, is to include all adjustments (e.g., adjustments on account of decommissioning liabilities, government grants, lease accounting and financial instruments) made in the opening balance sheet as well as the comparative year.

Companies will have to assess whether the increase of book profit due to the addition of the transition amount in the following four years would affect the tax liability. This would be the case especially where companies have been consistently paying taxes as per MAT provisions. If the addition of the transition amount creates additional tax exposure, companies may have to assess whether deferred tax would be accounted for on the said amount at the MAT rate.

Furthermore, for companies that have voluntarily adopted Ind AS from financial year 2015—16, it is not clear whether the book profits would be increased by the transition amount for the balance four years only

or the entire five years, given that the applicability of this clause of the Finance Bill is from financial year 2016—17. Such companies may have to assess the applicability and accordingly account for deferred taxes on the transition amount.

Since the MAT paid would be available for set-off in future, Companies may also account for MAT receivable assets at the same time as they account for deferred taxes on the transition amount. The MAT receivable assets can be created only to the extent that the set-off is probable within the statutory period of 15 years.

5. Proposed dividend

Under Indian GAAP, proposed dividends are recognized as a liability in the period to which they relate irrespective of when they are declared. Under Ind AS, proposed dividend is recognized as a liability in the period in which it is declared by the company (usually when it is approved by the shareholders in the general meeting). Hence, one of the adjustments in the opening balance sheet of most companies is the reversal of proposed dividend liability with corresponding adjustment to retained earnings. It is not clear whether this adjustment will result into any MAT liability. Since it was an item that never impacted book profit earlier, we believe it should not result into any MAT liability. We urge the Government to provide appropriate clarification on this matter.

D) Concluding remarksSince these clauses of the Finance Bill 2017 would be applicable from assessment year 2017—18 or from financial year 2016—17, companies will have to immediately consider the above-mentioned accounting impacts on their financial statements. For companies which are required to report quarterly financial results to the Securities and Exchange Board of India (SEBI), it may have an impact on their results for the quarter/year ended 31 March 2017. Companies may even want to analyze the presentation of MAT expense as well as MAT credit in the financial statements so as to distinguish the MAT relating to earlier years/transition amount from that relating to the current period.


Implications of adoption of Ind AS and related amendments in Budget 2017 on demergers

A) IntroductionDemergers have been an important mode of corporate restructuring / acquisitions, hive-offs of business in India. As corporate structures get more complex, demergers have also evolved from plain simple transactions involving transfer of assets and liabilities for a proportionate share of equity to more complex structures.

Prevailing Indian GAAP does not provide comprehensive guidance on demerger transactions. As a result, in most cases such transactions have been recorded using historical cost principles at transaction value. From a tax perspective, demergers are considered as tax-neutral if the conditions prescribed under Section 2(19AA) of the Income Tax Act, 1961 are met. Among other conditions, the Income Tax Act requires that the assets and liabilities of the erstwhile company are recorded in the demerged company at book values. Thus, provisions of demerger accounting under Indian GAAP and requirements of tax have been largely synchronized, providing efficient, tax-neutral opportunities for corporate actions.

B) Significant changes to accounting for demerger under Ind AS compared with Indian GAAPIntroduction of Ind AS has resulted in significant changes in the accounting and financial reporting of mergers, acquisitions and other similar corporate actions. Ind AS establishes core principles of recognizing merger and acquisition transactions at fair value based on the substance of the transaction rather than the legal form. Ind AS provides comprehensive guidance for all forms of mergers and acquisitions, demergers and group reorganizations.

Ind AS also provides specific guidance on common control business combinations. A common control business combination is a business combination involving entities or businesses in which all the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. Ind AS requires common control business combinations to be recorded using the pooling of interest method at the carrying value of assets and liabilities.

Recent amendments in Companies Act, 2013 require all mergers, acquisitions, demergers and corporate restructuring to be compliant with the applicable accounting standards. As a result, for companies covered


under Ind AS, all corporate actions except common control transactions are likely to be recorded at fair value.

In a demerger, the transferor company transfers its assets and liabilities to another company in consideration for issue of shares to its shareholders. Appendix A of Ind AS 10 prescribes the accounting treatment for the distribution of non-cash assets by a company to its owners, which requires that such transfers other than common control transactions be recorded at the fair value of the net assets transferred. The gain or loss resulting from the difference between the fair value of such net assets and their carrying value is recognized in the statement of profit or loss. While such unrealized profit is not included in the computation of taxable income, it is likely to be included in book profit and thus will result in having a MAT exposure.

Reporting for business combinations under Ind AS at fair value is likely to have significant tax implications. Tax planning strategies for several deals will require reworking and careful reconsideration.

C) Key changes to MAT provisions as per the Finance Bill 2017The Finance Bill 2017 has provided the much-needed relief by providing a clarification that gain or loss from the fair valuation of non-cash assets distributed to their owners will not be considered for the purpose of MAT, thus providing tax neutrality to such transactions.

While the Budget has specifically provided relief from MAT on demergers and distribution of assets to owners, there are several other practical implementation issues that will need to be addressed.

Ind AS mandates the use of the “purchase method of accounting” for mergers that are not group mergers, which means that the acquiring company needs to record the assets and liabilities at fair values. A merger or acquisition that meets all other conditions prescribed under Section 2(19AA) of the Income Tax Act may now have tax exposures because such transactions are recorded at fair value in the books of the acquiring entity, thereby tainting the condition prescribed in Section 2(19AA) of recording net assets at book value of the transferor company.

This is illustrated by the following example:

Company A Ltd. transfers its Division X to an associate Company B Ltd. at book value. Under Indian GAAP, this demerger would have been considered as a tax neutral

demerger. However, if Company A and Company B are reporting under Ind AS, then it may pose the following challenges:

Company A has adopted Ind AS and has recognized certain adjustments such as to record the equity investments at fair value or record security deposits at amortized cost. Such adjustments may taint the tax neutrality conditions prescribed in Section 2(19AA) of the Income Tax Act. For Company B., which is an associate of Company A and has no other group relationship with Company A, this transaction is not under common control. As a result, Company B needs to record the acquisition at fair value. This may also taint the tax neutrality conditions prescribed in Section 2(19AA) of the Income Tax Act.

D) Concluding remarksWe welcome the relief granted in the Finance Bill 2017 addressing the MAT exposure hurdle for demerger transactions. We urge the Government to consider providing a similar relief of disregarding fair valuation adjustment for the purpose of evaluation of the “book value” condition prescribed under Section 2(19AA) of the Income Tax Act.

The Finance Bill has removed a big stumbling block for demergers in the Ind AS regime. Companies will no longer be worried about MAT exposure on account of profit booked on accounting for distribution of non-cash assets to their shareholders. However, we believe the Government should also consider providing the relief that recording of demergers at fair value in accordance with Ind AS should not taint the tax neutrality conditions prescribed under the Income Tax Act.


CBDT had earlier notified ICDS in September 2016. It was expected that ICDS may be deferred. However, in the absence of any announcement for deferral, it seems companies should start gearing up for tax computation using ICDS.

Are you ready for ICDS?

A) Introduction The Central Government notified the Income Computation and Disclosure Standards (ICDS), effective from financial year 2015—16 under Section 145 of the Income Tax Act. ICDS are intended to introduce accounting standards for tax compliance under the income tax laws in India, harmonize the treatment for accounting and tax reporting purposes and deal with the issue of tax impact arising from the introduction of Indian Accounting Standards (Ind AS) in India.

Several concerns were raised by various stakeholders on the implementation of ICDS, which resulted in hardships for the taxpayers and created uncertainty on the tax treatment of several incomes and expenses, including the transitional impact of ICDS. Accordingly, based on the concerns raised and the pending revision of related tax audit forms as per ICDS, the implementation of ICDS was deferred.

The Central Government, vide Notification No. 87/2016 dated 29 September 2016 (Notification), notified 10 amended ICDS that are applicable for the financial year ending 31 March 2017.

B) ICDS applicable from financial year ending 31 March 2017: no deferment relief granted in the BudgetWhile the objective of ICDS was to standardize accounting practices so that taxable income can be computed precisely

and objectively, the provisions of ICDS appear to go beyond this objective and may significantly increase compliance and financial reporting requirements. Hence, several representations were made by the industry demanding the deferral of ICDS.

It seems that the demands made by the industry for the deferral of ICDS have not been considered. ICDS have not been deferred and continue to be applicable from financial year ending 31 March 2017. While the industry will need to start gearing for the adoption of ICDS for the computation of income taxes, there are certain unresolved areas where the Government needs to provide clarity.


No clarity on the applicability of GAAP for tax filings by companies whose statutory year end is other than 31 MarchAnother important area where ICDS and Ind AS require clarity from the Central Government relates to companies having statutory year end other than 31 March. The Companies Act, 2013 requires that the financial year for companies be the year ending 31 March every year. Several multinational companies have aligned their statutory financial year end with their overseas parent companies (e.g., year ended 31 December) after obtaining the necessary approval from the Ministry of Corporate Affairs. However, for tax reporting purposes such companies need to prepare financial statements for the year ended 31 March every year in accordance with Indian GAAP.

Companies covered in Phase 1 of the Ind AS roadmap will present their first Ind AS financial statements for year ending 31 March 2017. Companies with their statutory year end other than 31 March 2017 will prepare their first Ind AS financial statements for the first time for the financial year ending after 31 March 2017. For example, a company with a statutory year end of 31 December will prepare its financial statement for year ended 31 December2017 under Ind AS. However, for the purpose of tax filing, the company will need to prepare financial statements for the year ended 31 March 2017. Currently, there is no clarity regarding the reporting framework to be used by companies for the preparation of financial statements for tax filing purpose. The key question that arises is: Will the financial statements prepared for the year ending 31 March 2017 for tax filing purpose be in accordance with Ind AS? If yes, will companies have a different transition date for such financial statements?

No prescribed ICDS for certain transactions As explained above, the Government has issued only 10 ICDS. There are still many areas for which ICDS have not been issued, such as leasing of assets, employee stock options, financial instrument and service concession arrangements. For these items, it is not clear whether tax computation should be done based on accounting as per the current Indian GAAP or ICDS. The Government should issue clarification to ensure consistent application of accounting principles for the computation of taxable income by all assesses.

C) What does it mean for companies? Transition to ICDS is not only a tax change, but also has other consequential impacts on work streams such as accounting and technology.

Impact on income tax accountingCompanies will need to compute current and deferred tax using ICDS. There are several areas where ICDS have significantly different requirements from those of Ind AS. Summary of key differences between ICDS and Ind AS is set out in Annexure. These differences mainly relate to:

• Mark-to-market losses• Capitalization of asset retirement obligations and

borrowing costs• Treatment of exchange differences relating to foreign

operations• Accounting for government grant relating to assets• Accounting for securities and related interest income

Dual set of accountsAs ICDS are now a certainty, companies will need to be prepared for their implementation. Companies will need to prepare whether they want to compute ICDS adjustments outside the books or want to maintain dual set of accounts — one for statutory accounts and the other based on ICDS. While ICDS does not require companies to maintain a separate set of accounts, the differences between ICDS and Ind AS may force companies to do so. In the absence of separate accounting records, companies will need to prepare onerous set of documentation to compute ICDS adjustments for the preparation of return and get it audited by the tax auditors.

Robust ICDS conversion approachEfforts for transition to ICDS should not be underestimated. Companies should follow a structured conversion approach to ensure that they are geared up for accurate tax liability in accordance with ICDS. The key steps involved for a smooth transition are:

1. Do a detailed GAAP difference exercise between Indian GAAP/Ind AS and ICDS

2. Identify potential tax issues and conduct appropriate tax analysis for firming up the company’s position

3. Create relevant templates for computing revenue and expenses in accordance with ICDS and collating information for disclosures in the tax return

4. Identify the need for keeping a separate set of accounts in ERP; many ERP systems have the functionality to maintain dual set of accounts

5. Conduct detailed training for the tax and finance team on ICDS and Indian GAAP/Ind AS

D) Concluding remarksICDS is now a fait accompli. Companies should prioritize their ICDS conversion efforts and assess their readiness. They need to ensure that the advance tax amount due in March is after considering the ICDS impact to avoid any interest and penalty. The clock has started ticking. Are you ready for ICDS?


Accounting reforms in Indian Railways

A) IntroductionOn 1 February 2017, Shri Arun Jaitley, Hon’ble Minister of Finance and Corporate Affairs, in his Budget speech for financial year 2017—18, highlighted the significance of finance and accounting reforms for Indian Railways by mentioning it among the top four areas of focus for Indian Railways. Shri Arun Jaitley stated that as part of accounting reforms, accrual-based financial statements will be rolled out by Indian Railways by March 2019. This is in line with the discussion at the National Conference on Accounting Reforms in Indian Railways — A Strategic Mission for Sustainable Growth organized by Indian Railways on 20 December 2016, wherein Shri Arun Jaitley and Shri Suresh Prabhakar Prabhu, Hon’ble Union Minister of Railways, spoke about transformative measures that need to be undertaken to make Indian Railways competitive in the future. The measures included the initiative of “Mission Beyond Book Keeping,” focusing on implementing accrual accounting along with performance costing and outcome budgeting.

The Budget announcement on finance and accounting reforms in Indian Railways showcases clear commitment of the Government of India towards transparency in financial reporting. While it aims to implement an improved financial reporting framework for the Government, it also marks the beginning of a game-changing and robust journey of transforming government and public sector accounting in India.


B) Benefits of accounting reforms for Indian RailwaysThe Budget announcement showcases clear commitment of the Government of India toward transparency and improvement of the financial reporting framework for the public sector. This is further evidenced by the initiatives taken by Department of Post, Employees’ Provident Fund Organisation and other government organizations toward the “Accounting Change” agenda to publish accrual-based financial statements for their stakeholders.

Benefits of accounting reforms for Indian Railways• Positive impact on the investment climate due to

increase in the speed of action resulting from better understanding of financial information in India and globally

• Optimal and efficient utilization of public funds as a result of better control and monitoring over resources

• Ethical decision-making as a result of good corporate governance

• Right pricing as a result of determination of full cost of provision of services

• Focus on outcomes rather than outlays would help in achieving sustainability in the long term

• Better asset management, especially fixed assets

• Potential improvement in the quality, speed and scope of planning, forecasting and performance management

• Accounting reforms would bring in policy changes and removal of non-value added activities, thus resulting in improved profitability

• Positive impact on economic growth on account of increased interest from the international investor community, e.g., foreign lenders

• Investors would be in a position of making a better assessment of the financial health of the organization, e.g., lenders would be able to assess its repayment capacity

Accounting reforms should act as an engine of self-sustainable growth by providing timely, high quality and meaningful financial information to various stakeholders through right accounting, right costing and right outcomes.

C) Key area of challenges for effective transition to accrual-based accountingThe International Federation of Accountants (IFAC) recommended that the governments and public sector institutions of the G20 nations should adopt accrual accounting, arguing that it is more capable of monitoring government debt and liabilities in a way that exposes their true economic implications. Our study suggests that in most countries, governments have either already made the transition to accrual accounting or plan to make it in the near future. The Budget announcement for adopting accrual accounting for Indian Railways is a big step taken by the Indian Government in moving toward accrual- based accounting. While the transition holds many benefits, the efforts required will be monumental. Some of key challenges that need to be addressed for effective implementation of an accrual-based accounting system are:

• IT implementation

• Restructuring of the organization and administrative processes to make them IPSAS proof

• Project and change management

• Skills and knowledge transfer

D) Concluding remarksThe Budget announcements on finance and accounting reforms in Indian Railways showcase the Government’s clear commitment toward transparency in financial reporting. While the changes in finance and accounting aim to implement an improved financial reporting framework for the Government, it also marks the beginning of a game-changing and robust journey of transforming government and public sector accounting in India. The Government should start a similar initiative in other sectors such as post and telegraph, and power as well. In fact, in the next five to seven years, the entire government sector should make a transition to accrual accounting.


PSU: Preparing to go public

A) Introduction2016 was one of the best years in recent times for initial public offering (IPO) in India, driven by strong macroeconomics, a pro-business political regime, continuing regulatory reforms and an overall positive investment climate. Indian companies raised more than INR26,500 crore through IPOs in 2016, which is close to the aggregate equity raised over the preceding five years, during 2011—15.

The IPO pipeline for 2017 looks promising with some large companies such as NSE, SBI Life and UTI Mutual Fund, Continental Warehousing and CDSL expected to tap the equity markets. In addition, the Government aims to divest INR 72,500 crores as a part of the 2017 Budget proposal, including the insurance PSU, Railway PSU and other strategic government assets/investments. The 2017 Budget announced divestment in Railway PSUs, including IRCTC, IRFC and IRCON.

B) How should PSU chalk out the roadmap to achieve the ambitious disinvestment target?The Government aims to divest INR72,500 crores in 2017, which will provide an impetus to the capital markets and IPOs, including the insurance PSU, Railway PSUs and other strategic government assets/investments. Although this move will unlock a huge amount of value for the Government, there is also a risk to the overall budget if these aggressive targets are not achieved.

Going public is not going to be simple. IPOs today are more complicated than they have ever been. Today’s transactions are typically about more than raising capital. They can also be about increasing liquidity, enhancing reputation, attracting talent and driving growth. Also, the business expectations and compliance requirements are onerous.


Companies that have completed a successful IPO know that the process of transforming a private enterprise into a public one involves the complete transformation of the organization’s people, processes and culture. This would require several months of planning, organization and teamwork focused on enhancing the processes, governance, internal controls and financial reporting and compliance framework before they are ready to go public.

The following are the key considerations for a successful IPO:

1. Start early

One of the most common mistakes that companies make is to hurry into their IPO journey process just a few months before the IPO. Companies should kick-start the process usually 12 to 24 months prior to going public (e.g., strategic planning, building the right team, and improving financial and accounting systems).

2. IPO planning

Companies should identify the critical factors in achieving a successful IPO. The planning exercise should cover the following aspects:

• Identifying the stock exchange to go for listing

• Developing a comprehensive business plan

• Determining the strategic initiatives that are necessary before the IPO to enhance the value of the company. Identifying financial and non-financial KPIs that matter to investors.

In today’s scenario, this process is relatively simpler for PSU companies. The intention of the Government is clear — they will like to do an IPO in India to enable Indian citizens to participate in the growth potential of these jewels of India. However, PSU management should ensure that they communicate the business plan of the entities effectively. Companies such as IRCON and IRCTC will have relatively lesser risk because of their dependency on Indian Railways, which will always be a national priority. However, PSU management and the Government should consider options such as mergers and acquisitions to see if these measures can enhance the value for the company — e.g., the merger of insurance companies can bring more strength to their balance sheet and improve their solvency ratios. At the same time, it can bring economies of scale.

3. Pre-IPO readiness diagnostics

Companies should run a diagnostic on the various workstreams to find out gaps in the systems and processes that need to be fixed before the IPO process starts, especially MIS, IT and financial reporting systems. This is the most crucial step, as PSUs should be ready to act as public companies. The diagnostic exercise may highlight some important action areas for PSU companies, such as reconstitution of the board of directors and various committees, and the readiness to churn out interim financial information for quarterly reporting and provide data for investors, analysts etc

4. Building the right team

The IPO journey involves various workstreams such as accounting, taxation, legal and investor relations. Companies need to have a good internal team and advisors who can manage these work streams effectively. If companies do not have in-house talents, then they should contemplate either hiring or taking the help of external experts who can hand-hold them through the IPO process.

5. Financial information

Companies planning to go for an IPO need to understand the various kinds of financial information, such as five-year restated financial information, required to be furnished in the prospectus. Current listing regulations require financial information under Ind AS for certain historical years depending on the timing of the IPO. Once listed, companies will need to present their financial information on an ongoing basis under Ind AS. Companies should ramp up their finance team or take expert assistance to churn out such financial information within the IPO timeline.

6. Building business processes and infrastructure

Pre-listed companies need to improve their IT systems, processes, budgeting and forecasting capabilities and segment reporting as well as assess their readiness to comply with the various IPO regulatory requirements. The systems and processes should be strong enough to withstand the rigors and scrutiny of a public listed company after listing as well.


7. Corporate governance

Public companies are subjected to stringent corporate governance requirements to protect shareholders’ interest. Experience suggests that recruiting qualified independent board members and enhancing internal control systems and processes are the most challenging corporate governance issues faced by companies going for an IPO. Companies should institute corporate governance framework and policies much before listing so that they get inculcated in organizations’ DNA by the time they go for listing.

8. Managing investor relations and communications

Investor relations and communication are crucial as shareholders, analysts and the financial press will critically evaluate the company’s prospects and business potential. Many companies hire specialists to manage this function. Together, the company and the investor relation specialist work to sustain the market’s interest in the company.

9. Conducting successful IPO road show

Completion of the road show is the most challenging step in the period between publishing of a company’s IPO prospectus and final closing since the road show will enable company’s management to meet investors especially institutional investors. A good road show is a catalyst for a successful IPO.

C) Concluding remarksIPO will be a key turning point in the life of PSUs aiming to go public. They should not treat an IPO as simply a one-time financial transaction. Intense preparation will be required to achieve this important milestone.


Key differences between Ind AS and ICDS

Annexure

ICDS I: relating to accounting policies• Expected losses or mark-to-market losses will not be

recognized unless permitted by any other ICDS.

• The concept of materiality for the selection of accounting policies is omitted and the concept is not recognized by the income tax laws for the purpose of computation of taxable income.

• Accounting policies will not be changed without a reasonable cause

ICDS II: relating to valuation of inventories• ICDS requires the valuation of inventory of services at cost or

net realizable value, whichever is lower. The cost of services should consist of labor and other costs of personnel directly engaged in providing the service, including supervisory personnel and attributable overheads.

• ICDS permits techniques for the measurement of cost in addition to the first-in-first out (FIFO), weighted average and retail methods.

• To reduce litigation, ICDS specifically incorporates the well-established principle that the value of inventory of a business as on the beginning of a tax year should be the same as the

value of inventory at the end of the immediately preceding tax year. Similarly, the cost of inventory, if any, on the day of commencement of business will be the opening inventory where business has commenced during the relevant tax year.

• A method of valuation of inventory once adopted by a taxpayer in any tax year should not be changed without a reasonable cause.

• Inventory on the date of dissolution of a partnership firm, association of persons and body of individuals should be valued at the net realizable value regardless of whether the business is discontinued or not.

ICDS III: relating to construction contracts• Retention money should be recognized for computing

revenue based on the percentage of completion method.

• re-construction income in the nature of interest, dividend and capital gains should not be reduced from the cost of construction. As per the Committee, such income should be taxed as income in accordance with the applicable provisions of the income tax laws.

• Contract revenue and contract costs from construction contracts that commenced on or after 1 April 2016 should be recognized as per ICDS III.


• Revenue and costs in respect of construction contracts need to be recognized on the percentage of completion method (POCM). However, if during the early stages of a contract the outcome of the contract cannot be estimated reliably, then contract revenue is recognized only to the extent of the costs incurred.

• Ind AS requires that contract costs relating to future activity be recognized as an asset when it is probable that such costs are recoverable. ICDS provides for recognizing such costs as an asset. If such costs are not realizable, then they may be allowed under the provisions of the income tax laws.

• The condition of non-recognition of contract revenues, if it is not possible to reliably measure the outcome of a contract, is not incorporated in ICDS based on the Committee’s recommendation that it is subjective in nature and has resulted in litigation and postponement of tax liability.

• Losses incurred on a contract should be allowed only in proportion to the stage of completion. As per the Committee, future or anticipated losses should not be allowed unless such losses are actually incurred.

• Once a contract crosses 25% of the completion stage, the revenue in respect of such a contract is required to be recognized.

• Contract revenue and contract costs from construction contracts that commenced on or before 31 March 2016 but had not been completed by the said date should be recognized based on the method regularly followed by the taxpayer prior to 31 March 2016.

• Transitional provisions now provide for complete grandfathering in respect of construction contracts that commenced on or before 31 March 2016 but had not completed by the said date.

ICDS IV: relating to revenue recognition• Revenue from service transactions should be recognized by

following the percentage completion method only.

• In case of service contracts with duration of not more than 90 days, amended ICDS IV permits the recognition of revenue when the rendering of services under that contract is completed or substantially completed.

• Transitional provisions require that service contracts that commenced on or before 31 March 2016 but had not completed by the said date be recognized based on the method regularly followed by the taxpayer prior to 31 March 2016.

• Interest income is recognized on a time proportionate basis as compared to the effective interest rate method under Ind AS.

• Interest on refund of any tax, duty or cess should be taxable in the year in which such interest is received.

ICDS V: relating to tangible fixed assets• In case of acquisition of an asset in exchange for another

asset, shares or other securities, the fair value of the tangible fixed asset acquired should be recorded as the actual cost of the asset.

• Income arising on the transfer of a tangible fixed asset should be computed in accordance with the provisions of the income tax laws.

• Also, provisions relating to revaluation of assets are not incorporated in ICDS since, as per the Committee, the income tax laws do not recognize the concept of revaluation of assets.

ICDS VI: relating to the effects of changes in foreign exchange rates

• Initial and subsequent recognition of foreign currency transactions and resultant exchange differences will be subject to specific provisions of the income tax laws and Income Tax Rules, 1962.

• Since mark-to-market gains or losses are unrealized in nature, all gains or losses on forward exchange or similar contracts entered into for trading or speculation contracts should be recognized only on settlement.

• Since the income tax laws do not distinguish between integral and non-integral foreign operations, exchange differences on non-integral foreign operations should also be recognized for the purpose of computation of income.

ICDS VII: relating to government grants• Government grants should be either treated as revenue

receipt or reduced from the cost of fixed assets based on the purpose for which such grant or subsidy is given.

• Recognition of government grants should not be postponed beyond the date of actual receipt.


ICDS VIII: relating to securities • ICDS deals with securities held as stock-in-trade.

• Securities should be valued at the lower of cost or net realizable value (NRV). Comparison of cost and NRV should be done category-wise (and not for each individual security), for which securities should be classified into the following categories: (a) shares, (b) debt securities, (c) convertible securities and (d) any other securities not covered above.

• Unlisted or thinly traded securities should be valued at cost.

• Cost that cannot be ascertained by specific identification should be determined on the basis of the FIFO or weighted average method.

• In case of acquisition of securities in exchange for issue of shares or other securities, the fair value of shares or securities acquired should be recorded as the actual cost of the securities

• In case of acquisition of securities in exchange for another asset, the fair value of the securities acquired should be recorded as the actual cost of the securities.

ICDS IX: relating to borrowing costs• Borrowing costs will not include exchange differences arising

from foreign currency borrowings.

• Capitalization of specific borrowing costs should commence from the date of borrowing.

• A normative proration formula is provided for capitalizing borrowing costs relating to general borrowings. ICDS also provide specific rules for capitalization in respect of (a) assets

acquired and put to use during same tax year and (b) assets awaiting capitalization brought forward from the earlier year and put to use during the relevant tax year.

• Income on temporary investments of borrowed funds cannot be reduced from borrowing costs eligible for capitalization in ICDS.

• Condition of suspension of capitalization during the interruption of active development is removed in ICDS.

ICDS X: relating to provisions, contingent liabilities and contingent assets • A provision can be recognized when it is “reasonably certain”

that an outflow of economic resources will be required to settle an obligation.

• A contingent asset can be recognized when the realization of related income is “reasonably certain.”


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