IndAS – New Accounting Framework

Starting financial year 2017 all companies will be required to transition from the current reporting format for financial results that is based on Generally Accepted Accounting Principles (GAAP) to Indian Accounting Standards Rules, 2015 or IndAS Rules. The new era of Accounting and presentation for corporate entities has been set by Ministry of Corporate Affairs (MCA) by notifying 39 new Indian Accounting Standards (INDAS) vide its notification dated 16th February, 2015.

Applicability of IndAS

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Difference between IndAS and GAAP

The IndAS rules are different from GAAP as they are based on the fair valuation method. In accounting, fair value is a rational estimate of the potential market price of goods, services or assets. It takes into account factors such as acquisition, production and distribution costs.

The new accounting standards based on IndAS are closer to the global standards of reporting financial results and rely on segment revenue, segment assets, segment liabilities and segment results.

As per the Sebi circular, banks and insurance companies will not need to comply with the new accounting norms, and follow the prescriptions of their respective regulators, that is the Reserve Bank of India and Insurance Regulatory and Development Authority of India. Whenever a company gets covered under the roadmap, IndAS becomes mandatory, its holding, subsidiary, associate and joint venture companies will also have to adopt IndAS (irrespective of their net worth).

Financial statements under IndAS

  1. Balance sheet at the end of the period
  2. Statement of profit and loss for the period
  3. Statement of changes in equity for the period
  4. Statement of cash flows for the period
  5. Notes, comprising a summary of significant accounting policies and other explanatory information
  6. Comparative financial information in respect of the preceding period as specified
  7. Balance sheet as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements having an impact on the balance sheet as at the beginning of the preceding period.

Differences between IndAS and IFRS

India has chosen a path of International Financial Reporting Standards (IFRS) convergence rather than adoption. Hence, IndAS are primarily based on the IFRS issued by the International Accounting Standards Board (IASB). There are also certain general differences between IndAS and IFRS, some of which are:

  1. The transitional provisions given in each of the standards under IFRS have not been given in IndAS, since all transitional provisions related to IndAS, wherever considered appropriate, have been included in IndAS 101, First-Time Adoption of Indian Accounting Standards, corresponding to IFRS 1, First-Time Adoption of International Financial Reporting Standards.
  2. Different terminology is used in IndAS when compared to IFRS, e.g. ‘balance sheet’ is used instead of ‘statement of financial position’ and ‘statement of profit and loss’ instead of ‘statement of comprehensive income’.

Advantages of IndAS

Implementation of IndAS will bring radical changes in corporate financial reporting practices in India. It brings new and complex concepts and higher level of transparency. It is expected that the application of IndAS will improve the quality of financial reporting. For most companies, it will lead to better accounting, better investor relations across the world and third, especially for multinational companies, it will be less costly to have one accounting language.

IndAS enables investors to obtain better information about the company, as it mandates the use of recognition and measurement criteria that better reflect the economic reality of companies and requires the management to provide a large amount of information in the notes. Improved quality of financial reporting improves corporate governance because it helps investors, analysts and other stakeholders to better understand the financial position and performance of the company. However, full benefit of IndAS is derived only when companies take a holistic approach and apply IndAS in true spirit.

Application of IndAS involves significant judgment and estimates. Therefore, it provides significant scope for managing earnings and window-dressing. The audit committee will have to be cautious in approving financial statements.

Digital Disruption of Reliance Jio

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It is safe to say that the Indian telecom sector is at least 3 years behind the developed telecom markets of Western Europe and North America which means the technologies and the strategies adopted by the telcos in these developed markets are usually copied or implemented by the telecom players in the emerging markets. Jio is atleast one year ahead of the telcos in India by implementing the technologies /strategies of the telcos in the Western Europe

The Indian telecom market size is expected to touch US$37 billion by 2017 driven strongly by data adoption. Indian telecom market is ruled by three top players Airtel, Vodafone, and Idea which account for a 60% of market share together. The rest of the players like RCom, BSNL, Aircel, Tata Docomo account for almost the rest of the market. Even since the advent of OTT messaging services like WhatsApp, Viber etc. the voice and SMS revenues of the telcos have taken a huge beating. But one thing that has given this sector a growing potential is the data adoption. Data is the driver of the revenue for all the telcos. As we progress further we can see the revenue share of voice dropping and the share of data increasing for the telcos. Reliance Jio’s wants to tap into this huge potential telecom market of India by increasing the data adoption in the country.

The strategy adopted by Jio was mainly based on four pillars: Extensive network coverage, Launch of Content services, Marketing, and Increasing smartphone adoption

Extensive Network coverage:

Reliance has invested INR 1,50,000 Crores in Jio and started services with a 70% coverage of India from day one which is really huge in the telecom sector. Airtel plans to have a 45% coverage by 2020, which clearly gives you an idea about how well Reliance Jio is placed ahead of its competitors in terms of coverage. This extensive coverage of Jio provides un-interrupted 4G services to the customers when moving from one place to another. In terms of coverage, Jio has already reached 18,000 cities and towns, and 200,000 villages. The company plans to expand its coverage to 90% of the population by 2017.

Launch of Content Services:

Content services like Netflix, YouTube, Saavn, Raaga drive the data usage among the users. Jio has launched a range of content services which would drive the data usage among the customers, which in turn will lead to huge data revenues for the telco.

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Its range of digital content apps include JioCinema, JioTV, JioMusic, JioMags, JioXpressNews etc. Jio provides all these services at zero subscription costs. The aim of this is to increase the data consumption of the users and earn revenue. Airtel portfolio of content services only include Wynk Music, Wynk Videos and Wynk games. Idea and Vodafone have also followed suit by launching their own content services. But the range of content that Jio provides access to is far more compared to that of Airtel, Idea or Vodafone.

Marketing:

Jio’s marketing strategy to acquire the customers and increase its markets share was to offer free life time voice calls to customers and provide free access to data services till Dec 31st 2016. Jio has also named Shah Rukh Khan as its brand ambassador.

After the free trial is done Jio’s plans are going to be a bit cheaper than the industry standards which is going to hurt the industry margins as the rest of the players would follow suit. According to Jio’s website the plans offered are as below:

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A plan of INR 129 would provide 300 MB of 4G data on the network and 700 MB on wifi hot-spots that are currently being installed by the company across India.

Increasing Smartphone Penetration:

India’s current smartphone penetration is below 30%. In order to encourage data adoption via smartphones among low end users and the rural population Reliance has launched LYF branded smartphones which are 4G-enabled. Reliance provides these smartphones at really low prices to the customers. This is a strategy followed by telcos in the developed markets such as Western Europe and Northern American markets to increase the penetration of smartphones in the market which would further improve the telcos’ revenues.

Sectoral Impact of Reliance Jio:

Low Margins for Telcos:

Telecom sector is already a low margin sector. For example, even though the EBITDA of margin of Airtel is around 35% the net profit margin is only around 10% due to the higher depreciation costs and the interests these telcos pay on their loans. The pricing war with Jio is going to force the telcos to adopt lower prices which would further hurt their margins.

Consolidation in the sector:

According to a PricewaterhouseCoopers (PwC), the market will settle on five private sector players, and one state-owned one. The Indian telecom sector is about to witness consolidation which means that there are few players which are going to remain in the market with the bigger players acquiring the smaller ones.

The USP of smaller players in this sector is price. Once price becomes no longer their USP, people churn away from them and wouldn’t make sense to fight the battle. They don’t have the capacity in terms of network coverage or the money to increase the coverage, hence they are better acquired by the bigger players. For the bigger players it would be better to acquire the smaller ones to expand their network coverage rather than installing their own equipment. This would also give them the customers of the smaller players.

A consolidated telecom market is inevitable in the near future and would provide better pricing options to the telcos remaining after the consolidation. Some of the mergers which are speculated are Idea and Telenor, RCom and Aircel.

Sources:

http://www.business-standard.com/article/companies/is-more-consolidation-likely-in-telecom-sector-116091500221_1.html
http://www.business-standard.com/article/pf/consolidation-inevitable-in-telecom-sector-116071000589_1.html
http://www.ibef.org/industry/telecommunications.aspx
https://en.wikipedia.org/wiki/Telecommunications_in_India