IND-AS: Presentation & Disclosure Requirements!

Most Indian companies transitioning to Ind-AS, would be focusing on getting the Ind-AS numbers right. While this ought to be the primary priority, one should not underestimate the presentation and disclosure requirements, which are equally challenging and requires lot of time and efforts. Ind-AS, like IFRS, includes a number of additional presentation and disclosure requirements, and the compliance with some of these may be challenging. The 2014 Indian GAAP financial statements of a leading Indian automotive group was 40 pages, while it’s IFRS financial statements ran into 88 pages.  In this article we look at some of the key disclosure requirements.First Time Adoption Ind-AS financial statements are presented in accordance with the presentation and disclosure requirements in all the Ind-AS standards. In addition, the financial statements should also comply with the requirements of Schedule III of the Companies Act, 2013. An entity’s first Ind-AS financial statements should include at least three balance sheets, two statements of profit and loss, two statements of cash flows and two statements of changes in equity and related notes. A first-time adopter should explain how the transition from Indian GAAP to Ind-AS affected its reported financial position, financial performance and cash flows. These disclosures are intended to help users understand the effect and implications of the transition to Ind-AS. The following table gives a list of the statements and reconciliations required in first Ind AS financial statements.   RevenueInd-AS 115 Revenue from Contracts with Customers contains extensive qualitative and quantitative disclosures about its contracts with customers, including more disaggregated information about revenue and more information about its performance obligations remaining at the reporting date. This is much more information than is currently required under Indian GAAP.For example, one of the requirements is to disclose the disaggregation of revenue into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, and includes examples of such categories. A company is also required to disclose the relationship between disaggregated revenue and segment disclosures. In determining these categories, an entity considers how revenue is disaggregated, in:

• disclosures presented outside of the financial statements – e.g., earnings releases, MD&A, or analyst presentations;
• information reviewed by the chief operating decision maker for evaluating the financial performance of operating segments; and
• other information similar to (a) and (b) that is used by the entity or users of the entity’s financial statements to evaluate performance or make resource allocation decisions.

These categories can be on the basis, such as, geography, contract duration, market type of customer, type of good or service, timing of transfer of good or service and sales channel.
Another example of new disclosures under Ind-AS 115 is that of information about performance obligations. This would include information such as:

• when the company typically satisfies performance obligations, for e.g., on shipment, on delivery, as services are rendered, or on completion of service;
• significant payment terms, for e.g., if the contracts have significant financing component or variable consideration;
• nature of the goods or services that it has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (if the entity is acting as an agent);
• obligations for returns, refunds, and other similar obligations;
• types of warranties and related obligations; and
• the transaction price allocated to unsatisfied performance obligations (or partially unsatisfied) at the reporting date. A quantitative (using time bands) or a qualitative explanation of when the company expects that amount to be recognized as revenue is also required to be provided.

Sensitivity AnalysisInd-AS requires detailed disclosures relating to risk management, including sensitivity analysis.For example, Ind-AS 19 requires a sensitivity analysis for each significant actuarial assumption as of the end of the reporting period, showing how the defined benefit obligation would have been affected by changes in the relevant actuarial assumption that were reasonably possible at that date.Another example: Ind-AS 36 Impairment of Assets requires an entity to make additional quantitative sensitivity analyses disclosures if a ”reasonably possible change in a key assumption” could reduce the recoverable amount to equal to the carrying amount, i.e., to erode all headroom. The entity must disclose the headroom and the value assigned to the key assumption and the amount by which that value must change. If, for example, budgeted earnings before interest, tax, depreciation and amortisation (EBITDA) is a key assumption, the carrying amount would be equal to the recoverable amount if EBITDA decreased from 11% to 8% of total revenue and this is a reasonably possible change, then these values must be disclosed.

There are similar requirements for financial instruments where sensitivity of profit or loss for each type of market risk (for eg, risks arising on account of foreign currency exposure, interest rate movement exposure and commodity market movement exposure) is required to be disclosed.

Fair Value DisclosuresIt is well known that Ind-AS lays down greater emphasis on fair value for measurement for assets and liabilities. It also requires greater fair value disclosures even if the underlying assets/ liabilities are otherwise measured at cost.

• Ind-AS 107 Financial Instruments: Disclosures requires extensive fair value disclosures for all financial assets and liabilities, including those measured at amortised cost
• Ind-AS 40 Investment Property requires fair value of investment property to be disclosed.
• For property, plant and equipment carried at cost, Ind-AS 16 Property, Plant and Equipment encourages but does not require fair value disclosures
• Ind AS 113 Fair Value Measurement requires comprehensive disclosures for assets and liabilities which are measured at fair value and also for items which are not measured at fair value but otherwise require fair value disclosures.

Judgments And Sources Of Estimation UncertaintyInd-AS 1 requires the following new disclosures, including:

• Management judgments in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements, e.g., functional currency determination, identification of operating and finance leases and the control assessment over the structured entity.
• Key assumptions concerning the future that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities in future, e.g., assumptions used for impairment testing or provision
• Information that enables users of its financial statements to evaluate the entity’s objectives, policies and processes for managing capital. it requires both qualitative and quantitative disclosures about the management of capital, with the aim of enabling users of the financial statements to understand and evaluate an entity’s objectives, policies and processes for managing capital.

Segment ReportingInd-AS 108 Operating Segment requires that the amount of each segment item reported is the measure reported to the chief operating decision maker (CODM) in internal management reports, even if this information is not prepared in accordance with the Ind-AS accounting policies of the entity. Ind-AS introduces a ‘management approach’ to identifying and measuring the financial performance of an entity’s operating segments. Segment information provided in financial statements is based on the information used internally by management. This means that:

• the manner companies identify segments and measure and present segmental information could potentially change;
• segment information may not be measured in accordance with Ind-AS, companies are required to reconcile segment financial information to those in the profit or loss and balance sheet; and
• companies will no longer need to maintain two sets of information for internal and external reporting.

Ind-AS 108 would align the identification and reporting of operating segments with internal management reporting. Segment reporting under Ind-AS attempts to highlight the information and measures that management believes are important and are used to make key decisions. It is also intended to provide a better link between the financial statements and the information reported in management commentaries such as Management Discussion and Analysis.In addition to disclosing segment information derived from the formats and measurements presented to the chief operating decision maker, Ind-AS 108 requires certain entity-wide disclosures about products and services, geographical areas and major customers. For example, following disclosures would be required:

• Revenues from external customers for each product and service, or each group of similar products and services.
• Extent of reliance on major customers, including details if any customer’s revenue is greater than 10% of the entity’s revenue.
• Revenues from external customers attributed to the entity’s country of domicile and attributed to all foreign countries from which the entity derives revenues.
• Revenues from external customers attributed to an individual foreign country, if material.
• Non-current assets (other than financial instruments, deferred tax assets and post-employment benefit assets) located in the entity’s country of domicile and in all foreign countries in which the entity holds assets.

OthersNearly each Ind-AS contains additional disclosures as compared with the existing Indian GAAP, which are likely to impact, depending on the entity’s peculiar circumstances. For example, disclosures required under Ind-AS 103 Business Combinations are likely to pose challenges for entities that have undertaken transactions.

In addition, Indian regulators are expected to prescribe additional presentation and disclosure requirements. For example, the ICAI has already issued an Exposure Draft of the Ind AS-compliant Schedule III to the Companies Act, 2013, for companies other than NBFCs, to be followed in the Ind-AS regime. In addition, Indian entities will be required to give Indian GAAP number reconciliation with Ind-AS comparatives in the first year of adoption. Considering significant differences in presentation and disclosure requirements of the Indian GAAP and Ind-AS, this is expected to be highly challenging.

Final WordsIt is clear that the application of Ind-AS will require Indian companies to make significant additional disclosures. Additional disclosures under Ind-AS, such as those on financial risks & sensitivity analyses, future revenue, management approach based segmental disclosures and accounting estimation uncertainties, would make the financial statements more transparent. This would be useful to stakeholders, analysts, regulators and the general inventor community. This may potentially have an impact on a company’s valuation.To ensure compliance with these requirements, management should identify “data gaps” early on so that any information that needs to be captured can be captured and recorded for all periods required to be converted. Companies will need to assess whether their current systems and processes are capable of capturing, tracking, aggregating, and reporting information to meet the disclosure requirements of the new standard. For many, this may require significant changes to existing data-gathering processes, IT systems, and internal controls.Directors are required to report on internal financial controls of the company under the Companies Act, 2013. Companies need to consider the internal controls necessary to ensure the completeness and accuracy of the new disclosures – especially if the required data was not previously collected, or was collected for purposes other than financial reporting.