IFRS BY BHEL CIL

The results of the IFRS stress-tests done by CIL and BHEL could encourage the public sector enterprises to do a dry run of IndAS on their financials.

For the second year in succession, the proceeds from disinvestment from public sector enterprises (PSE's) are expected to betray Budget estimates. Against the target of Rs 40,000 crore set for both the years, 2010-11 raked in about 57 per centarget while 2011-12 is expected to be much lower.

Though Maharatna PSEs such as Coal India Limited (CIL) have lit up the bourses and leapfrogged to the top of the market-cap charts, the present gloom over the business landscape is probably forcing the Government to go-slow on speedy privatisation. Over the last two decades, approximately Rs 83,000 crore has been raised by the Government by shedding part if its stake in approximately 49 PSEs. Considering this track record, the targets seem

over-ambitious unless mega-issues such as CIL keep lighting up the bourses. The vision of the Ministry of Disinvestment (MoD) is to promote people's ownership of PSEs through disinvestment of minority stakes. Its three-pronged mission is to list all profitable PSEs, improvement in corporate governance through enhanced transparency and accountability and bringing in market discipline and unlocking their true value.

IndAS in PSEs

PSEs can also unlock the true value of their balance-sheet by opting for IndAS accounting standards which are predominantly based on International Financial Reporting Standards (IFRS). Being by and large manufacturing-centric, major accounting standards such as IndAS 16 and 37 on Property, Plant and Equipment and Provisions, Contingent Liabilities and Contingent Assets respectively could warrant a departure from existing accounting treatment.

CIL weighs option

CIL has hinted that its Balance-Sheet would be lighter on the liabilities side if it opts for for IndAS as the provision for Over-Burden removal reserve of approximately Rs 11,000 crore would no longer be required. In open pit mining operations, it is necessary to remove overburden and other barren waste materials to access ore from which minerals can economically be extracted. Some mining companies expense these production stage stripping costs as incurred, while others defer such stripping costs. The provision was created on the basis of the fixed cost of mining and the expected life-span of a mine. In the initial period, the cost of mining was less, but it gradually increased as mining went deeper. IndAS standards dictate that the mining cost has to be calculated on actuals and no provision for future mining is to be made.

Changes by BHEL

Bharat Heavy Electricals Limited (BHEL) tested its financials under IndAs and made a change in its accounting policy for warranties in respect of construction contracts from 2.5 per cent of the contract value on trial operation to 2.5 per cent of the revenue progressively as and when revenue is recognised. This marked a change from its earlier policy of deferring warranty provision and corresponding revenue till the completion of trial operation. Adopting IndAS 19 in its entirety, the company changed its accounting for leave liability accruals to actuarial valuation basis treating the same as other long-term benefits. Profits were impacted positively as a result of both the above changes in accounting policies.

PSEs with large Property, Plant and Equipment could expect to take the maximum advantage of IndAS 16 which forces entities to depreciate assets component-wise on the basis of their expected useful lives and does not embargo revaluing these Assets as regular intervals. On the flip side, profits could be impacted on adoption of IndAS due to stringent revenue recognition norms and mark-to-market accounting for financial instruments. As a policy, IFRS standard do not encourage parking artificial and non-current obligations as provisions in the financial statements.

In wait mode

In the now-abandoned first phase of transition to IndAS, the criteria was the top listed companies (India and abroad) and companies with a net worth in excess of Rs 1000 crore. For most PSEs that are on the disinvestment radar of the MoD, this amount would be a fraction of their net worth. Though the Securities and Exchange Board of India (SEBI) has the first-mover advantage in encouraging drawing up IFRS-compliant financial statements, PSEs would prefer to wait for a Notification from the Ministry of Corporate Affairs (MCA) to kick-start the process. The results of the IFRS stress-tests done by CIL and BHEL could encourage them to do a dry run of IndAS on their financials in order that they are prepared if and when the d-day is announced. An add-on bonus could be a better premium when they go public.

(The author is a Bangalore-based chartered accountant.)