22 July 2010

Cos lining up offers may have to clarify IFRS valuation changes

Four PSUs also eyeing public issues.


There can be no assurance that our adoption of IFRS will not adversely affect our reported results of operations or financial condition, and any failure to successfully adopt IFRS by April 2011 could have a material adverse effect on our stock price. — Engineers India prospectus



Jayanta Mallick

Kolkata, July 21

Large public sector companies that are offering shares before April 1 may have to take a stand on issues related to transition to the International Financial Regulation Standards (IFRS).

These companies, which are filing draft red herring prospectus (DRHP), cannot avoid referring to the transition. They have to explain the likely impact the change in accounting system will have on valuations.

The transition to IFRS is likely to happen from April 1 next year.

Engineers India, Hindustan Copper, Coal India and SAIL are planning IPOs before April 1 next year.

Engineers India, which has already filed its DRHP, explained its position vis-à-vis the transition in the document. Hindustan Copper told Business Line that it would also do the same.

No legal requirement

Coal India and SAIL are expected to talk about the issues related to the transition in their respective DRHPs, to be filed before April 1 next year.

Mr Jamil Khatri, Head of Accounting Advisory Services, KPMG in India, said: "Companies that file a DRHP prior to April 1, 2011, would need to determine the date from which IFRS will be applicable for them. If a company files a DRHP prior to April 1, 2011, and expects to transition to IFRS from April 1, 2011, it would have to consider the need to present investors with IFRS compliant numbers for historical periods included in the DRHP.

"While this is not a legal requirement, investor interest would be best served if their investment decisions are based on numbers computed on a basis that the company will use going forward."

Hindustan Copper Ltd, which is preparing a DRHP for its share offer, is transitioning into IFRS next fiscal.

It's Chairman and Managing Director, Mr Shakeel Ahmed, said that the company's DRHP would deal with IFRS related issues and would provide clarifications in the context of the transition.

Engineers India has considered the transition as a risk factor. It said in the DRHP: "Significant differences exist between Indian Generally Accepted Accounting Practices (GAAP) and other accounting principles, such US GAAP and IFRS, which may be material to investors' assessment of our financial condition and results of operations."

Interestingly, Indian GAAP does not have a concept of restatement of comparatives except in case of special-purpose financial statements prepared for a public offer of securities.

Engineers India said that it had not determined the impact IFRS adoption would have on the company's financial reporting.

"There can be no assurance that our adoption of IFRS will not adversely affect our reported results of operations or financial condition, and any failure to successfully adopt IFRS by April 2011 could have a material adverse effect on our stock price," it said.

In the first phase, Sensex and Nifty companies, entities with net worth over Rs 1,000 crore and local companies whose shares are listed abroad are required to be IFRS compliant from the next financial year.

The companies, which are not issuing shares, would have enough time for handling this changeover issues as the converged standards are only applicable to annual consolidated results.

Financial year

Mr Jagannadham Thunuguntla, Equity Head of SMC Capital Ltd, said the companies that follow the April-March financial year would need to effect the transition for the first time in the annual consolidated result of 2011-12. Those companies that begin financial year other than in April will have more time.

According to experts, IFRS will impact revenues, earnings, book values and debt. Investors need to think through the issue of comparability between peer companies and look for off-balance sheet elements in the standalone statement

"Many investors may have applied global benchmark PE multiples to previous earnings computed as per Indian GAAP. In such cases, it may be logical to apply the global benchmark multiples to comparable earnings computed under IFRS," added Mr Khatri of KPMG.

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