Offshore drilling service provide Aban Offshore would
have seen its debt to equity ratio deteriorating to 4.12 if the new
accounting standard IND AS was applied on its books in the last
financial. The reported ratio for the year was 3.75 as per the existing
accounting practices.
Last month, the Ministry of Corporate Affairs notified new accounting standards (IND AS) that are
converged with International Financial Reporting Standards (IFRS), which is to be implemented in a phased manner starting 2016-17. This will impact companies' fund raising strategy through instruments such as non convertible preference shares.
“Adoption of Ind AS particularly the new rules around financial instruments is likely to significantly impact reported net worth and results of entities, especially those having complex capital structures,” says Sumit Seth, Partner and IFRS Leader, Price Waterhouse.
Mandatory redeemable preference shares which until now were shown as part of equity will get classified as liability under IND AS. Also the dividend and dividend distribution tax on such capital will get recorded through the income statement as an expense instead of equity.
“It does not stop here and has a cascading effect – companies which are expanding and incurring significant capital expenditure and also have outstanding preference share capital, will now be required to capitalise such dividend cost as borrowing costs,” says Seth.
As per a study of BSE 500 (excluding banks and financial services) there are 27 companies who have issued non-convertible preference shares and will have the impact of the changes under the IND AS. This includes JSW Steel, Wockhardt, Adani Port, United Breweries and Godrej Properties.
“With the use of Ind-AS, the classification of these instruments as debt or liability changes and the key ratios get impacted leading to a more leveraged position of balance sheet. As a result, companies will lose one of the advantages of using preference shares as an instrument for fund raising,” says Sai Venkateshwaran, partner and head, accounting advisory services at KPMG in India.
So until now, classification of debt and equity which was predominantly based on the legal form of the underlying financial instrument will now significantly change going forward under Ind AS. This will also help consider compulsorily convertible debenture as equity. Companies will have to closely look at the substance of the transaction before deciding their funding strategies.
“In my opinion, such positive rationalisation is more beneficial for corporates and reflective of reality in the books of accounts,” says Prabal Banerjee, president-international finance, Essar Services India.
But this may not see preference shares going out of the choice for companies financial strategy. As the tax classification of the preference shares or debt is not changing under Ind AS. ”It is more of an accounting classification and hence companies may not change the strategy to fund someone differently if you are trying to fund a high growth business,” says Sandip Khetan, partner with India member firm of EY Global.
Last month, the Ministry of Corporate Affairs notified new accounting standards (IND AS) that are
converged with International Financial Reporting Standards (IFRS), which is to be implemented in a phased manner starting 2016-17. This will impact companies' fund raising strategy through instruments such as non convertible preference shares.
“Adoption of Ind AS particularly the new rules around financial instruments is likely to significantly impact reported net worth and results of entities, especially those having complex capital structures,” says Sumit Seth, Partner and IFRS Leader, Price Waterhouse.
Mandatory redeemable preference shares which until now were shown as part of equity will get classified as liability under IND AS. Also the dividend and dividend distribution tax on such capital will get recorded through the income statement as an expense instead of equity.
| Debt Equity Ratio | Debt Equity Ratio# | |
| Zee Entertainmen | 0.00 | 2.87 |
| Alok Inds. | 5.80 | 4.79 |
| IL&FS Transport | 4.07 | 4.52 |
| Aban Offshore | 3.75 | 4.12 |
| Future Retail | 1.96 | 1.64 |
| H F C L | 0.58 | 0.85 |
| Marksans Pharma | 1.24 | 1.50 |
| Omaxe | 0.54 | 0.77 |
| Wockhardt | 0.58 | 0.74 |
| KSK Energy Ven. | 5.18 | 5.32 |
| # as Per IND AS | ||
| Filtered fron BSE 500 companies ( Ex Bank & Finance) | ||
| Source Capitaline | ||
| Compiled by BS Research Bureau | ||
“It does not stop here and has a cascading effect – companies which are expanding and incurring significant capital expenditure and also have outstanding preference share capital, will now be required to capitalise such dividend cost as borrowing costs,” says Seth.
As per a study of BSE 500 (excluding banks and financial services) there are 27 companies who have issued non-convertible preference shares and will have the impact of the changes under the IND AS. This includes JSW Steel, Wockhardt, Adani Port, United Breweries and Godrej Properties.
“With the use of Ind-AS, the classification of these instruments as debt or liability changes and the key ratios get impacted leading to a more leveraged position of balance sheet. As a result, companies will lose one of the advantages of using preference shares as an instrument for fund raising,” says Sai Venkateshwaran, partner and head, accounting advisory services at KPMG in India.
So until now, classification of debt and equity which was predominantly based on the legal form of the underlying financial instrument will now significantly change going forward under Ind AS. This will also help consider compulsorily convertible debenture as equity. Companies will have to closely look at the substance of the transaction before deciding their funding strategies.
“In my opinion, such positive rationalisation is more beneficial for corporates and reflective of reality in the books of accounts,” says Prabal Banerjee, president-international finance, Essar Services India.
But this may not see preference shares going out of the choice for companies financial strategy. As the tax classification of the preference shares or debt is not changing under Ind AS. ”It is more of an accounting classification and hence companies may not change the strategy to fund someone differently if you are trying to fund a high growth business,” says Sandip Khetan, partner with India member firm of EY Global.
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