WMP Group Assignment

Financial Reporting and Analysis (Term-1)

Sector: Telecom

Company: Bharti Airtel Limited (AIRTEL)

Other Players: Vodafone Idea Limited (formerly known as Idea Cellular)
and Bharat Sanchar Nigam Limited (BSNL)

GROUP MEMBERS
Amrita Singh WMP 15007
Anjanay Tripathi 15008
Bhavya Shukla 15014
Deepak
Karan
Ritu Raj
 Telecom Sector
1. Choice of the industry/ company: India is the world's second-largest
telecommunications market, with around 1.20 billion subscribers as of December
2018. With 70% of the population staying in rural areas and a telecom penetration of
58.45% as of July 2018, the rural market would be a key growth driver in the coming
years. This sector has seen many structural changes since the roll out of JIO in 2016.
There has been closure of small players, merger of idea and Vodafone in to one unit
and loss in the balance sheet of the top player Airtel (before the entry of JIO). The
price war has prompted players to rake up funds and increased the debt/liability of
telecom sector to 79 BN $.
2. Macroeconomics variable: The market structure of this economy used to be
monopolistic in nature back in 1990s when only state operators were in the market.
Market price of carriers were very high and very few customers were there. Then
Government of India opened up this sector and started selling spectrum, as a result
many private operators (both local and global) entered the market. Entry of private
players changed the market structure to perfect competition and lowered the market
price, as a consequence there was a shift of supply curve which prompted customers
to buy more, and this subsequently affected the Demand & Supply, consumer surplus.
In the current scenario this sector has transformed in to one of the perfect examples
of perfect competition, especially after the entry of JIO in the market in 2016.
Although the market was stable, companies were earning economic profits, JIO saw
an opportunity in terms of low bandwidth data market driven by smartphone
penetration in middle class and lower middle class consumer group. Entry of JIO
prompted Reliance Communication to go out of business and IDEA merged with
VODAFONE as their individual assets and balance sheets were not good enough to fight
a price war brought in to the market.
3. Industry Characteristics: There are four major players in the industry AIRTEL, JIO,
IDEA-VODAFONE.
AIRTEL: Bharti Airtel Limited is a leading global telecommunications company with
operations in 16 countries across Asia and Africa. Headquartered in New Delhi, India,
the company ranks amongst the top three mobile service providers globally in terms
of subscribers. In India, the company's product offerings include 2G, 3G and 4G
wireless services, mobile commerce, fixed line services, high speed home broadband,
DTH, enterprise services including national & international long distance services to
carriers. In the rest of the geographies, it offers 2G, 3G, 4G wireless services and
mobile commerce. Bharti Airtel had over 448 million customers across its operations
at the end of September 2018.
BSNL: BSNL is a technology-oriented company and provides all types of telecom
services namely telephone services on wireline, wireless local loop (WLL) and mobile,
broadband, internet, leased circuits and long distance telecom service. The company
has been in the forefront of technology with 100 per cent digital technology switching
network. BSNL’s nation-wide telecommunications network covers all district
headquarters, sub-divisional headquarters, Tehsil headquarters and almost all the
block headquarters.
VODAFONE-IDEA: On 31 August 2018, Vodafone India merged with Idea Cellular, and
was renamed as Vodafone Idea Limited. However, the merged entity continues using
both the Idea and Vodafone brand. Currently, the Vodafone Group holds a 45.1% stake in
the combined entity, the Aditya Birla Group holds 26% and the remaining shares will
be held by the public. Kumar Mangalam Birla heads the merged company as the
Chairman, with Balesh Sharma as the CEO. It is India's largest telecom operator, As of
April 2019, Vodafone Idea has 33.83% market share in India with 393.25 million
subscribers, making it the largest mobile telecommunications network in
India and Third largest mobile telecommunications network in the world. Vodafone
Idea has a broadband network of 340,000 sites, distribution reach of 1.7 million retail
outlets.
Brief about the Industry:
Introduction
India is currently the world’s second-largest telecommunications market with a
subscriber base of 1.20 billion and has registered strong growth in the past decade
and half. The Indian mobile economy is growing rapidly and will contribute
substantially to India’s Gross Domestic Product (GDP), according to report prepared
by GSM Association (GSMA) in collaboration with the Boston Consulting Group (BCG).
As of January 2019, India has witnessed a 165 per cent growth in app downloads in the
past two years.
The liberal and reformist policies of the Government of India have been instrumental
along with strong consumer demand in the rapid growth in the Indian telecom sector.
The government has enabled easy market access to telecom equipment and a fair and
proactive regulatory framework that has ensured availability of telecom services to
consumer at affordable prices. The deregulation of Foreign Direct Investment (FDI)
norms has made the sector one of the fastest growing and a top five employment
opportunity generator in the country.
Market Size
With 560.01 million internet subscribers, as of September 2018, India ranks as the
world’s second largest market in terms of total internet users.
Further, India is also the world’s second largest telecommunications market with
1,197.87 million subscribers, as of December 2018.
Moreover, in 2017, India surpassed USA to become the second largest market in terms
of number of app downloads. The country remained as the world’s fastest growing
market for Google Play downloads in the second and third quarter of 2018.
Over the next five years, rise in mobile-phone penetration and decline in data costs
will add 500 million new internet users in India, creating opportunities for new
businesses.
Investment/Major development
With daily increasing subscriber base, there have been a lot of investments and
developments in the sector. The industry has attracted FDI worth US$ 32.45 billion
during the period April 2000 to December 2018, according to the data released by
Department of Industrial Policy and Promotion (DIPP).
Some of the developments in the recent past are:
 During the first quarter of 2018, India became the world’s fastest-growing
market for mobile applications. The country remained as the world’s fastest
growing market for Google Play downloads in the second and third quarter of
2018.
 Bharti Airtel is planning to launch 6,000 new sites and 2,000 km of optical fiber
in Gujarat in 2018-19.
 The number of mobile wallet transaction increased 5 per cent month-on-month
to 325.28 million in July 2018.
 As of June 2018, BSNL is expected to launch its 5G services by 2020.
 Vodafone India and Idea Cellular have merged into ‘Vodafone Idea’ to become
India’s largest telecom company, as of September 2018.
Government Initiatives
The government has fast-tracked reforms in the telecom sector and continues to be
proactive in providing room for growth for telecom companies. Some of the other
major initiatives taken by the government are as follows:
 The Government of India is soon going to come out with a new National
Telecom Policy 2018 in lieu of rapid technological advancement in the sector
over the past few years. The policy has envisaged attracting investments worth
US$ 100 billion in the sector by 2022.
 The Department of Information Technology intends to set up over 1 million
internet-enabled common service centres across India as per the National e-
Governance Plan.
 FDI cap in the telecom sector has been increased to 100 per cent from 74 per
cent; out of 100 per cent, 49 per cent will be done through automatic route
and the rest will be done through the FIPB approval route.
 FDI of up to 100 per cent is permitted for infrastructure providers offering dark
fibre, electronic mail and voice mail.
 The Government of India has introduced Digital India programme under which
all the sectors such as healthcare, retail, etc. will be connected through
internet

Recent Issues and concerns:

The year 2018 was a tough phase for the Indian telecom industry including
network suppliers and mobile operators due to several factors.
First, India’s mobile phone customer-base touched 1,169.29 million in
September 2018 from 1,167.44 million in December 2017, analysis of TRAI data
indicates.
The addition of 2.15 million in 9-months of the year shows that telecom
operators have also removed their in-active or loss making customers. The
removal of subscribers from mobile network has resulted into complaints from
some of the consumers.
Second, the marginal increase in mobile subscriber base is a bad news for
telecom equipment makers such as Huawei, Nokia, Ericsson, ZTE, Samsung,
Cisco, HPE, Juniper, IBM, among others. Most of the Capex of Airtel, Reliance
Jio, Vodafone Idea and BSNL was marked towards the expansion of mobile data
network across India.
Samsung Electronics and Cisco are expected to have gained from the rapid
expansion of Reliance Jio’s 4G network across the country. Reliance Jio added
92 million subscribers in 9 months to its all-India 4G network. Reliance Jio does
not reveal its annual Capex for rolling out mobile data network.
Third, India could not conduct spectrum auction in 2018. The current indication
is that India will conduct the next round of spectrum auction in 2019-end or
early-2020. India will sell 5G spectrum as well during the next spectrum
auction.
Fourth, Indian telecom operators’ ARPU – an indicator of revenue — continued
to dive despite some operators started tightening their mobile tariffs. Monthly
ARPU fell to Rs 73.34 in June 2018 from Rs 71.62 in March 2018 and Rs 80.77 in
December 2017, according to TRAI.
 The Cost Structure of a Telecom Network
The telecom sector is characterized by very large investment costs. The precise
percentage of total costs attributed to investments depends of course on the
definition of investments and of telecom activities (e.g. whether research,
marketing or similar activities are included). Although some sources claim
investment, and investment-related costs to be as much as 90 percent of the
costs of production, most estimates based on financial data, however, vary
between 60 and 75 percent. Thus, by all measures the telecom sector is
comparatively capital intensive. The remaining share is almost all attributable
to capital expenditures. In telecom and other network based utilities
(electricity, gas and water) wage shares are at about 1/3 (and therefore capital
shares at about 2/3), while all other industry groups are having substantial
higher wage shares. For an assessment of the cost structure’s impact on market
conditions, more than the level of investments in telecom is relevant. The type
of investments is also important. A notable part of the investments are what
economists refer to as “sunk costs”. These are long term investments which
can be used only for specific economic activities. An example is a fixed access
network providing subscribers’ access to the local exchange. This investment
only has value for the supply of telecom services in this particular local area.
Once the investment is made the operator can only exit this particular market
at considerable costs. Other investments have a shorter time horizon and/or
can more easily be applied for other activities. Investments in telecom
networks divide into the following functional elements:
•Terminal equipment
•Access Network 
•Switching
•Transmission/Long line
•Other (buildings etc.)
4. Major Accounting Policies:

On April 1, 2016, many Indian companies began phasing out older accounting
standards known as Indian Generally Applied Accounting Principles (GAAP) in favor of
Indian Accounting Standards (Ind AS), which are more closely aligned with
International Financial Reporting Standards.
The move is meant to make global comparisons easier and improve transparency and
disclosures, thereby boosting the overall quality of financial reporting in India and
painting a more accurate economic picture.
Corporate India’s transition to Ind AS has been staggered – in the first year, only listed
and unlisted companies with a net worth of more than Rs 500 crore were required to
adopt Ind AS. Starting April 1, 2017, all other listed companies and unlisted firms with
a net worth of more than Rs 250 crore had to migrate. Adoption is voluntary for all
other companies outside those categories.
Chartered accountants say Ind AS may give the illusion of greater profitability for
some companies and sectors while having the reverse effect on others.
Under the new accounting norms, the telecom sector expects significant reporting
adjustments regarding reported net worth, revenue recognition, taxes, financial
instruments, business combination and consolidation.
A KPMG report found that, after adopting Ind AS, the telecom industry made
downward adjustments to net profit of more than Rs 592 crore, based on results
declared as of August 31, 2016.
The introduction of Ind AS will impact each sector’s operating metrics differently.
Here’s a look at the accounting standards most affected in the telecom industry:
Revenue recognition principles: Telecom firms have multiple streams of revenue from
multiple goods and services. Under Indian GAAP, revenue from postpaid service is
recognized on an accrual basis over the period in which the service was consumed,
while prepaid revenue is recognized as soon as a plan is purchased.
Under Ind AS, an entity can combine more goods and services for accounting purposes
than it did in the past, but the revenue earned in each transaction must be split up
for multiple elements using fair value principles.
As the telecom industry involves contracts, there may be additional revenue
attribution arising from these performance obligations and companies will have to
disclose any uncertainty around revenue and cash flows from contracts with
customers.
The capital intensive telecom sector in particular could be vulnerable to more write-
downs on account of investments made to increase market share that may take time
to realize.
Fair valuation of financial instruments: One major difference between Indian GAAP
and Ind AS is the latter’s emphasis on fair value accounting.
Under Indian GAAP, companies follow a historical cost based approach. However,
under Ind AS, fair value accounting has to be adopted, specifically for assets and
liabilities. Since most telecom companies have huge debt from heavy investments in
wireless infrastructure and spectrum auctions, restating balance sheets at fair value
will affect these liabilities.
Consolidation of joint ventures: Several telecom players have banded together to
provide shared infrastructure such as towers. This contributes revenue to some of the
companies and will have to be accounted for under changes in consolidation of
revenues from joint ventures.
As per the latest legal news in India, after a merger between Idea Cellular Ltd. and
Vodafone Group Plc’s India unit on the cards, consolidation means some assets, such
as licenses, may also have to be written down.
Impacts of IND AS are summarized as below:
1 Revenue Recognition-Activation fee (Customer Connection Revenue): Activation
fee/installation charges or other charges of similar nature are normally collected
from customers at the point of entry or subscription. The key difference in accounting
treatment of activation fee and its impact is as under:
1.1Treatment in IND AS 18:- Activation fee/installation charges or similar nature of
other charges is recognized over the expected life of the customer and is not
permitted to be recognized upfront.
1.2 Treatment in existing AS-9: There is no specific guidance under the existing
accounting standard. Companies are generally recognizing activation revenue/other
similar revenue upfront and showing revenue in the year of receipt.
1.3 Impact on accounts on adoption of IND AS Consequential effect on adoption of IND
AS: Adoption of IND AS will affect (reduce) the revenue recognition of the relevant
year in which the mobile connection is given due to its spread over the expected life
of the customer. This will be a case of deferment of revenue.
1.4 Consequential effect on adoption of IND AS as the revenue for the year of
transaction will come down, the license fee payable will be reduced for that year.
However, the revenue will be accounted for in future years and license fee will
accordingly be deferred to those years.
The deferment of revenue will have an impact on the profit for the year of
transaction as well as future years and consequently on RoCE.
Example: A service provider has charged activation fee of Rs. 200 at the time of giving
a new mobile telephone connection to a customer in April 2012. The expected life of
the customer is 2 years.
Treatment of activation fee as per existing accounting practice: The entire amount of
activation fee of Rs. 200 is recognized as income in the Profit & Loss account for the
year 2012-13.
Treatment of activation fee as per IND-AS 18: The activation fee of Rs. 200 will be
recognized over the expected useful life of the customer which is 2 years. Thus, Rs.
100 will be recognized as income in the Profit & Loss account for the year 2012-13.
There will be deferment of revenue for the balance amount of activation fee of Rs.
100 which will be recognized as income in the next year i.e. 2013-14.
2 Revenue Recognition-Multiple Deliverables: Telecom companies often offer
customers bundled products which involve multiple components such as sale of
equipment (like handsets, modems, etc. either at full price or subsidized prices or at
no separate price) with free minutes, subsidized call rate, etc when a customer signs
up for a service contract. The key difference in accounting treatment of multiple
deliverables and its impact is summarized below:
2.1 Treatment in IND AS 18: In case of bundled sales involving multiple
components/services, such multiple deliverables/ components of bundled sale shall
be required to be divided into separate unit for accounting and the consideration is to
be allocated based on their relative fair value as a stand-alone service/item.
2.2 Treatment in existing AS-9: There is no specific guidance under the existing
accounting standard. Companies are recognizing revenue as a single unit and are not
splitting revenue based on the component/ service in the bundled sales.
2.3 Impact on accounts on adoption of IND AS: There will be no impact on overall
revenue of the company. As IND AS requires the consideration to be allocated on the
basis of fair value of each unit/ service/item, only the classification of revenue will
change.
2.4 Consequential effect on adoption of Ind AS: No consequential impact on revenue
or assets/liabilities. However, the classification of such revenue will change on
account of presentation of its break up.
Example: A service provider has provided a mobile connection with mobile handsets
along with 500 free calls to a customer in April 2012 for a total value of Rs. 3000. All
free calls are used by customer in the year 2012-13.
Treatment of revenue from bundled sales as per existing accounting practice: The
amount of Rs. 3000 is recognized as income from providing telecom service in the
Profit & Loss account for the year 2012-13.
Treatment of revenue from bundled sales as per IND-AS 18: The bundled sale of Rs
3000 will be divided into two components viz sale of mobile handset and sale calls
based on fair value of each component. Say the fair value of mobile hand set is Rs.
2700 and of free calls is Rs. 300. The sale will be reflected in the Profit & Loss
account for 2012-13 as (i) Revenue from sale of mobile handsets-Rs 2700 (ii) Revenue
from sale of mobile calls- Rs. 300.
3 Revenue Recognition-Customer incentives (Free Minutes): Telecom companies
generally offer customers free talk time without charging any additional revenue for
the same. The key difference in accounting treatment of customer incentive and its
impact is summarized below:
3.1 Treatment in IND AS 18: Revenue recognition per minute is to be adjusted for the
impact of free talk time. In other words, revenue per minute will be reduced by the
amount of bonus talk time i.e revenue is measured at effective rate per minute.
3.2 Treatment in existing AS-9: There is no specific guidance under the existing
accounting standard. Free talk time to customer is presently ignored for the purpose
of measurement of revenue. Revenue recognition is based on actual usage of
chargeable talk time by customers.
3.3 Impact on accounts on adoption of IND AS: If the whole talk time is utilized by the
customer within the same financial year, there will be no impact on the revenue.
However, if this is not the case, then the revenue for the financial year in which the
transaction takes place will be reduced by the unutilized talk time (adjusted after
free talk time) but the revenue of the subsequent year/(s) will be increased when the
remaining talk time is utilized or the validity period of use of talk time expires.
3.4 Consequential effect on adoption of IND AS: If the whole talk time (adjusted after
free talk time) is not utilized, the revenue of the current financial year will be
reduced and consequently license fee will also be reduced for that year. However,
the revenue and license fee will be deferred to subsequent year/(s). This deferment
will have an impact on the profit for the year of transaction as well as for subsequent
years and consequently on RoCE.
Example: A customer purchased a package of 500 minutes for Rs. 500 in April 2012
and he has been given another 500 minutes free as Bonus talk time by the service
provider with a validity period of 2 years. The customer could use 600 minutes only in
the year 2012-13.
Treatment of revenue from sale of talk time as per existing accounting practice:
The full amount of Rs. 500 will be recognized as income from rendering telecom
service in the Profit & Loss account for the year 2012-13 treating revenue @ of Rs.
1.00 per minute (Rs. 500 for 500 minutes ignoring the impact of bonus talk time).
Treatment of revenue from sale of talk time as per IND-AS 18: The revenue per
minute will be reduced by the amount of bonus talk time and measured at effective
rate per minute. The effective rate per minute for recognition of revenue will be
Rs.0.50 (Rs. 500 / 1000 minutes-including bonus minutes). Since 600 minutes were
used by the customer in 2012-13, Rs 300 (600 minutes x Rs.0.50-effective rate per
minute) will be recognized in Profit & Loss account for 2012-13 as income from
rendering telecom service. The Balance amount of Rs. 200 will be recognized in Profit
& Loss account of 2013-14 when the rest of the free minutes are consumed or their
validity expires.
4 The Effects of Changes in Foreign Exchange Rates (Fixed Assets): The key
difference in accounting treatment of foreign exchange differences and its impact is
summarized below:
4.1 Treatment in IND AS 21: All foreign exchange differences which arise during a year
are recognized in profit or loss account of the same year or are systematically
recognized over the period of the Assets/Liabilities (relating to long term monetary
items).
4.2 Treatment in existing AS-11: All foreign exchange differences are recognized in
profit or loss account. However, an option is available to capitalize the exchange
difference on long term foreign currency monetary items in so far as they relate to
acquisition of depreciable capital asset.
4.3 Impact on accounts on adoption of IND AS: As per IND AS, the amount of foreign
exchange difference arising on the liabilities for acquisition of fixed assets would have
to be charged to P&L account. If a company has opted to capitalize the exchange
differences as per existing accounting standard, adoption of IND AS will affect the
amount of fixed assets as well as depreciation charged for the year and also for the
subsequent years because of non-capitalization of exchange differences.
4.4 Consequential effect on adoption of IND AS: Adoption of IND AS will affect the
profit and amount of the capital employed of the company, who opted to capitalize
exchange differences, due to change in the amount of fixed assets and also the profit.
This will have an impact on RoCE.
Example: A service provider has purchased an imported machine by taking foreign
currency loan of USD of 1000 in April 2011 when one USD was equal to Rs.50. The loan
is repayable in 3 three years. The exchange rate as on 31st March 2012 is one USD=
Rs. 52.
Treatment of effect of exchange rate on foreign currency loan taken for
acquisition of machine as per existing AS-11: The machine will initially be recorded
in the books of accounts for 2011-12 at Rs 50000 (1000 USD x Rs.50). The service
provider opts for capitalization of exchange differences as available in AS-11. At the
close of year 2011-12, the service provider will add Rs. 2000 (USD 1000 x Rs. 2-
exchange difference: Rs. 52 minus Rs. 50 as on 31-3-2012) to cost of imported
machine. Thus, the cost of acquisition of imported machine will be increased to
Rs.52000 as at the end of 31st March 2012 after adding the loss on account of
exchange difference.
Treatment of effect of exchange rate on foreign currency loan taken for
acquisition of machine as per IND AS 21: As per IND AS all foreign exchange
differences related to foreign currency loans taken for acquisition of an assets is
charged to Profit & Loss account and no other option is available for accounting
treatment. In this case the service provider has to charge Rs. 2000 (USD 1000 x Rs. 2-
exchange difference: Rs. 52 minus Rs. 50 as on 31-3-2012) in the Profit & Loss account
for the year 2011-12.
5 Property, Plant and Equipment (Fixed Assets)-Asset Retirement Obligations: The
key difference in accounting treatment of assets retirement obligations (ARO) and its
impact is as under:
5.1 Treatment in IND AS 16: Assets retirement obligations (ARO) are measured at
present value of the expected cost to settle the obligation.
5.2 Treatment in existing AS-10: Assets retirement obligations are not discounted and
are recorded at the amount expected to be paid in future.
5.3 Impact on accounts on adoption of IND AS: ARO liability is discounted and
measured at amortized cost with subsequent charging of the amortization amount as
finance cost. This will have impact on the profit for the year.
5.4 Consequential effect on adoption of IND AS
Adoption of IND AS will affect the profit due to charging of finance cost. ROCE will
also be impacted.
Example: A service provider has purchased an asset in April 2010 for Rs. 10000 having
useful life of 5 years. The service provider has made a provision (asset retirement
obligation) of Rs. 12000 in 2010-11 for replacement of this asset after its useful life (5
years).
Treatment of asset retirement obligation as per existing AS 10: The asset
retirement obligation of Rs. 12000 will be recognized in the books of accounts over
the useful life of the asset (i.e 5 years).
Treatment of asset retirement obligation as per IND AS 16: The asset retirement
obligation will initially be recognized at Rs. 12000 in the books of accounts of 2010-
11. In subsequent years, the asset retirement obligation will be recorded at present
value (PV). If the present value of Rs. 1 is Rs.0.90 as on 31st March 2012, the asset
retirement obligation of Rs. 12000 will be recorded at its present value of Rs. 10800
(Rs. 12000 x Rs. 0.90). The difference in value i.e. 1200 will be charged in Profit &
Loss account as finance cost. Similarly, the asset retirement obligation will be
recorded at present value in subsequent years.
6 Property, Plant and Equipment (Fixed Assets)-Review of useful life: The key
difference pertaining to useful life of fixed assets and its impact is as under:
6.1 Treatment in IND AS 16: Useful life of the Property, Plant and Equipment is
required to be reviewed at the end of each reporting period.
6.2 Treatment in existing AS: No provision for review of useful life of the assets.
Schedule of the Companies Act, 1956 provides the rates of depreciation of fixed
assets based on estimated useful life.
6.3 Impact on accounts on adoption of IND AS: Change of useful life of fixed assets
will have an impact on the amount of depreciation charged and consequently on the
written down value of the asset as well as on the profit for the year.
6.4 Consequential effect on adoption of IND AS: Adoption of IND AS will affect the
amount of profit and capital employed. This will have an impact on RoCE.
Example: A service provider has the following assets as on 31-3-2011 and depreciation
is charged on Straight Line Method (SLM) based on their useful life as prescribed under
the Companies Act, 1956:
Assets Book Value Rate of depreciation Useful life
Building Rs. 100000 5% 20 years
Plant & Machinery Rs. 50000 10% 10 years
Computers Rs.12000 25% 4 years
Treatment as per existing accounting practice: The written down value (WDV) of
assets and depreciation (SLM) will be as under in the subsequent year 2011-12:

Assets WD Value Depreciation Useful life

(Rs.) Charged (Rs.) Building
Building 95000 5000 20 years
Plant & Machinery 45000 5000 10 years
Computers 9000 3000 4 years
Total 149000 13000
Treatment as per IND AS 16: The useful life of each asset will be reviewed at the close
of year 2011-12 and depreciation (SLM) will be charged accordingly. The useful life of
each assets as on 31-3-2012 and consequently the WDV and depreciation (SLM) will be
as under:
Assets WD Value Depreciation Charged
(Rs.) (Rs.) Useful life
Building 90,000 10000 (10%) 10 years
Plant & Machinery 45000 5000 10 years
Computers 8000 4000 3 years
Total 143000 19000
7 Property, Plant and Equipment (Fixed Assets)-Componentization approach: The
key difference pertaining to componentization of fixed assets and its impact is as
under:
7.1 Treatment in IND AS 16: In case of composite assets (like BTS,), all items of fixed
assets are to be broken to significant parts for componentizing accounting.
7.2 Treatment in existing AS: Componentization approach is not prescribed. Items of
Fixed Assets are aggregated and accounted for.
7.3 Impact on accounts on adoption of IND AS: If the rate of depreciation (which
based on the useful life) of various components of fixed asset is different from those
used for the whole asset at present, there will be a change in amount of depreciation
charged and consequently the written down value of the components of fixed asset
and profit for the year.
7.4 Consequential effect on adoption of IND AS: If the rates of depreciation vary due
to componentization of the composite asset, the amount of profit will change. Capital
employed will also be affected because of change in the value of components of fixed
asset and the amount of depreciation charged thereon. RoCE will also be impacted.
Example: A service providers has BTS costing Rs. 100000 as on 31st March 2012. The
rate of depreciation for BTS (Composite asset) is 10 % under Straight Line Method
(SLM) considering its useful life as 10 years.
Treatment of BTS under the existing accounting standard: BTS will be shown at a
WDV of Rs. 90,000 as on 31st March 2012 in the Balance Sheet after deducting
depreciation of Rs. 10000 @ 10% under SLM. An amount of Rs. 10000 will be charged
as depreciation in the Profit & Loss account for the year 2011-12.
Treatment of BTS as per IND AS 16: BTS will be broken into significant parts. Say
there are three major components A, B & C of BTS having cost of Rs. 50000, Rs. 30000
and Rs.20000 and useful life 10 years, 5 years and 4 years respectively. The impact of
componentization of BTS (31-3-2012) will be as under:
Balance Sheet WDV Depreciation:SLM
(to be charged in P&L)
BTS:
Part A Rs. 45000 Rs. 5000
Part B Rs. 24000 Rs. 6000
Part C Rs. 15000 Rs. 5000
Total Rs. 84000 Rs. 16000
8 Property, Plant and Equipment (Fixed Assets)-First time adoption: The impact on
fixed assets at the time of first time adoption of IND As is as under:
Treatment in IND AS 101: Companies have the option to either adopt the carrying
amount of Property, Plant & Equipment as on the date of transition as per existing
accounting standard or the fair value.
Treatment in existing AS: NA.
Impact on accounts on adoption of IND AS: In case the company selects the fair value
option, there will be a change in value of fixed assets and also depreciation and
consequently in the profit/loss for the year of adoption as well as for the subsequent
years.
Consequential effect on adoption of IND AS: If the company adopts the fair value
option, the amount of profit will change due to change in the amount of depreciation
on fixed assets taken at fair value in place of historical cost. Consequently, Capital
employed and RoCE will also be affected.
Example: A service provider has the following fixed assets in their books of accounts
at the time of transition and adopted SLM for charging depreciation:
Carrying amount (Rs.) Rate of depreciation Depreciation
Building 500000 10% Rs.50000
Plant & Machinery 200000 15% Rs.30000
Vehicles 100000 20% Rs.20000
Total 800000 Rs.100000
Treatment of fixed assets as per IND AS 101: The service provider decides to opt for
fair value of assets at the time of transition. The fixed assets will be recorded in the
books of accounts at the following fair value (assumed) having consequential impact
on annual depreciation charged:
Fair Value Rate of depreciation Depreciation
Building Rs.800000 10% Rs.80000
Plant & Machinery Rs.100000 15% Rs.15000
Vehicles Rs.50000 20% Rs.10000
Total Rs. 950000 Rs. 105000

9 Employee Benefits- Recognition of actuarial gains and losses: The key difference
in accounting treatment of actuarial gains/losses and its impact is as under:
Treatment in IND AS 19: All actuarial gains and losses arising on both defined benefit
plans and other long-term employee benefits to be recognized in other comprehensive
income. They are recognized in retained earnings. The amount recognized in other
comprehensive income such as revaluation reserve, actuarial gains/losses are not part
of operating revenue/income of the company.
Treatment in existing AS-15: All actuarial gains and losses are recognized directly in
profit and loss account.
Impact on accounts on adoption of IND AS: Adoption of IND AS will affect the profit
for the year due to recognition of such gains/losses in the retained earnings and not
directly in the profit and loss account.
Consequential effect on adoption of IND AS: Adoption of IND AS will affect the
amount of the profit for the year and consequently the RoCE.
Example: A service provider has an accumulated liability of Rs. 100000 as on 31st
March 2011 towards employees retirement benefits calculated based on actuarial
valuation. This liability was re-assessed as Rs.110000 as on 31st March 2012 based on
actuarial valuation resulting in actuarial loss of Rs. 10000 as at the end of accounting
year 2011-12.
Treatment of actuarial loss as per existing accounting standard-15: The actuarial
loss of Rs. 10000 arising on account of employees’ retirement benefits as on 31st
March 2012 will be charged to Profit & Loss Account for the year 2011-12 and
consequently affect the profit/loss of the service provider to this extent.
Treatment of actuarial loss as per IND-19: The actuarial loss of Rs 10000 arising on
account of employees’ retirement benefits as on 31st March 2012 will be deducted
directly from the retained earnings/surplus shown in the balance sheet and does not
affect the profit/loss for the year 2011-12.

10 Financial Instruments: Recognition and Measurement-Fair valuation of financial

assets and liabilities on initial recognition: The impact of change in accounting
treatment of financial assets/liabilities like security deposits and its impact is as
under:
10.1 Treatment in IND AS- 39: Financial assets/liabilities like security deposits paid
are recognized at fair value on the date of initial recognition i.e. discounted present
value of the amount to be received in future. The difference between the present
value and the amount paid is recognized as an expense/income over the period of the
financial asset/liability (viz. security deposit).
10.2 Treatment in existing AS: There is no specific provision in any existing AS for
recognition of financial assets/ liabilities like security deposit at present value.
However, security deposit paid/ received is usually recognized at the nominal amount
i.e. the actual amount paid.
10.3 Impact on accounts on adoption of IND AS: Adoption of IND AS will affect the
profit for the year as well as the profit for subsequent years. Further the current
assets/liabilities will also change due to recognition of security deposit at present
value.
10.4 Consequential effect on adoption of IND AS: Adoption of IND AS will affect the
amount of the profit and capital employed. This will also affect RoCE.
Example: A service provider has taken a security of Rs. 500 from the customer at the
time of granting new mobile connection in April 2011 having validity period of 3 years.
Treatment of security deposit as per existing accounting practice: The security
deposit of Rs. 500 will be shown as liability in the balance sheet of each accounting
year till the expiry of validity of the connection and the refund of same is made.
Treatment of security deposit as per IND AS 39: The security deposit will be shown
at its net present value (NPV) in the balance sheet at the end of each accounting year
and difference between the NPV and actual amount will be credited to Profit & Loss
account of the relevant year. If the NPV of Rs. 1 is Rs. 0.90 at the end of year 2011-
12, the liability towards security deposit will be shown as Rs. 450 (Rs. 500 x Rs.
0.90)in the Balance Sheet as on 31st March 2012 and the difference Rs. 50 will be
charged to Profit & Loss account for the year 2011-12.

11 Financial Instruments: Recognition and Measurement-Subsequent measurement

of Investments: The change in valuation of investment and its impact is as under:
11.1 Treatment in IND AS39: After initial recognition, investment is measured at fair
value.
11.2 Treatment in existing AS-13: Short-term investments/current investments are
measured at lower of cost or market price. Long-term investments are carried at cost.
However, when there is decline, other than temporary, in the value of long term
investment, the carrying amount is reduced to recognize the decline.
11.3 Impact on accounts on adoption of IND AS: Since all the investments will be
measured at fair value after their initial recognition, the adoption of IND AS will have
an effect on the profit of the company to the extent of difference between the
valuation made at cost/ market price as per existing AS and the fair value determined
as per IND AS.
11.4 Consequential effect on adoption of IND AS: Adoption of IND AS will affect the
amount of profit and RoCE.
Example: A service provider has made investments of Rs. 10000 in the listed equity
shares for a period of 9 months and Rs. 20000 in 3 years’ term listed bonds. These
investments were made on 1st August 2011. It is assumed that the fair/market value
of the equity shares as on 31st March 2012 is Rs. 9000 and of Bonds is Rs. 19000.
Treatment of investments as per existing accounting standard-13: The short-term
investment will be shown at cost price or market value whichever is lower. In this
case the investment in equity shares will be shown at marker value of Rs.9000 (Cost
Rs. 10000, Market value Rs. 9000). The investment in bonds is a long term investment
and will be shown at cost of Rs. 20000 in the Balance Sheet as on 31st March 2012.
The total investments in shares and bonds will be shown as Rs. 29000 against the cost
price of Rs. 30000. The difference of Rs. 1000 will be charged to the Profit & Loss
account for the year 2011-12.
Treatment of investments as per IND- AS 39: All the investment whether short-term
or long term will be carried at fair value at the end of each accounting year. In this
case, the investments in shares and bonds will be shown at Rs. 28000 (Rs.
9000+Rs19000) in the Balance Sheet as on 31st March 2012. The difference amount of
Rs. 2000 will be charged to Profit & Loss account for the year 2011-12.
PART- B
Airtel