Posts tagged IFRS Valuation

BGR Energy: Building the Indian Power Story

Last week I heard a very interesting story which eventually gave me the idea of investing in BGR Energy Systems Ltd. Thought of sharing with you.

Years back when the South African Government opened their country for outsiders to come and do mining for diamonds, entrepreneurs form all over the world rushed to South Africa in the hope of finding diamonds and changing their fortunes. Of them only very few were able to do so and become rich. But there was one African business man who instead of joining this rat race to discover diamond started the business of selling/renting hammers and other mining material whoever was coming to discover diamond. He eventually became a millionaire and one of the most successful entrepreneurs of this Diamond run.

I hope some of you must have realized the point I am trying to put here. In India currently most of the companies are running to set up the power plant to generate power and other half are running to build the great power generating turbines or boilers. But very few are there in the business of building the Balance of Plants (BOP) which accounts for more than 35% of the total money spent in building up a power plant.

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Comparison of IFRS and Indian Accounting Standards

IFRS is a novel way of looking at accounting. IFRS is a “principle-based” standards rather than “rule-based” standard which are currently followed.

Under IFRS there is need to apply professional judgment consistent with intent and spirit of standards.

Various countries have adapted to IFRS in different ways, often embedding local cultures and that is why there are no standard rules; only broad principles which define the outer boundary of accounting.

IFRS fixed assets rules questions valuation on historical cost basis, questions application of uniform rates of depreciation on all components of a fixed asset as also the amortization of intangible assets such as goodwill or patents.

In IFRS off-balance sheet transactions had been made as part of accounts; it brings a whole new meaning to the reported numbers.

It defines control of entities not through percentage of holdings but by the decision-making power inherent in the parent company.

Top management has, thus, to work out new targets of earnings depending on the direction of impact caused by the new accounting principles and recognising the IFRS GAAP differences.

Earnings will no more be a steady figure that can be easily targeted depending as it is not just on sales and expenses but also changes in asset values and the ability to measure those correctly.

To be adequately prepared for IFRS, senior management has to also shape up by analyzing which management models and strategies will work best for their organizations facing a huge level of turbulence and thus should prepare an IFRS roadmap.


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Challenges for implementation of IFRS

Key Practical Challenges for implementation of IFRS in India for Banking Industry

No stable Platform: There are many changes / amendment taking place for most of the standards from International Accounting Standard Board there has been no stable platform ready for banks.

Training: All Stakeholders has to be conversant and shall be able to understand and interpret Financials prepared as per IFRS. Training to personnel in an organization is a most crucial.

Judgment: Banks in India are subject to regulatory guidelines provided by regulator i.e. RBI where as under IFRS in most of the areas management judgment is required in framing accounting policy and procedures.

Fair Value: There is extensive use of fair value under IFRS and for assessment of fair value there is need for specialization which is seldom.

Data Capture: There has been modification in reporting system under IFRS and also there has been changes in recognition criteria and an extensive disclosure requirement will require new data and also extraction of historical data for retrospective application will be difficult.

Consolidation of Accounts: IFRS requires data requirement from subsidiary, joint ventures and associates for consolidation purpose at every reporting date. Also policies and procedures have to be consistent throughout the group.

Author : CA Shalini Tibe

Treatment Of Tangible Assets Under IFRS

Treatment of Property, Plant And Equipment (PPE) under IFRS

First time adoption of IFRS for PPE
An entity can use fair value as deemed cost on First time adoption of IFRS

OR

It has to apply Retrospective application which means recalculate carrying amount of each PPE item according to IFRS since its purchase date including transaction cost, useful life and residual value.

Suggestion
However fair value as deemed cost is more appropriate since there would be practical difficulties for companies to do retrospective application from the date when the asset has been purchased.

Fair value for PPE
Fair value for Land and Buildings is usually determined from market based evidence by appraisal normally undertaken by professionally qualified valuation officers and for other items of PPE their market value is determined by appraisal.

If there is no market-based evidence of fair value because of special nature of asset then it has to be determined on basis of either Income Approach or Depreciated replacement cost approach.

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Fair Value Accounting in IFRS

To what extent fair value accounting holds good for valuation in IFRS

Significant percentage of the balance sheet would be at Fair Value compared to current practice of carrying at historical cost under IFRS.

Use of Fair value:

At present Fair Value is limited to impairment of assets, measurement of retirement benefits and mark to market accounting of derivatives where as under IFRS it extend to Held for Trading  portfolio, Available for Sale, assets/liabilities designated as fair value through More >

Accounting and Business are Interrelated in IFRS

There is a feeling that IFRS – rather than business strategy – might actually be driving changes to corporate behavior. In some cases, it may help companies do things better – such as revisit their derivatives strategies – in other cases, it could be changing the way companies work just to get the desired accounting outcome.

IFRS is a principle based model as compared to rule based I GAAP. IFRS requires extensive use of fair valuations for measurement of assets and liabilities. The objective of IFRS is to set the Balance Sheet right, and hence a significant volatility may come in Profit & Loss statement.

There are three principles laid down in IFRS More >