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Date: 29^th March 2010	Compiled by: M Sathya Kumar
IFRS impact on retail sector On transition to IFRS, Indian companies need to adhere to revised guidelines on timing the expensing of advertising and promotional expenditure. There are significant differences between the Indian GAAP and IFRS, which pose both accounting and business challenges to entities in the retail sector. Straight-lining of lease rentals in an operating lease, is required both by Indian GAAP and IFRS. However, under Indian GAAP, not all companies are straight-lining because land is scoped out of AS-19. It may be noted that under IFRS there is no exemption. The UK's IFRS conversion experience indicates that straight-lining had an impact on decisions to take new leases, because future rental increases were burdening current income statement. Henceforth, decision to take on a new lease will have to be taken both in the light of commercial and IFRS requirements. Similar considerations will apply to leases that have rent-free periods. Investment decisions Another unintended consequence of IFRS accounting could be to potentially distort investment decisions. To cite an example, a company may open a key store to represent presence in a particular location (the store is not profitable on a standalone basis, but will provide further economies of scale and enhance branding); however, if that store is treated as a separate cash generating unit it would cause an impairment to be recognised. Whilst on this matter Indian GAAP is similar, application of IFRS may require a stricter interpretation. This could lead a company taking an inappropriate commercial view because of the required accounting treatment. Retailers typically spend a huge amount on furnishing new stores. The cost of idle staff when the store is under construction is not to be capitalised under both IFRS and Indian GAAP. In practice, few companies may have interpreted Indian GAAP as allowing capitalisation, which going forward under IFRS should be expensed. Certain retail entities do business on a ‘store-in-store' basis, where the retailer allocates a corner to another entity and sells the products of that entity. Under Indian GAAP, the retailer generally discloses sales made by the other entity as its own revenue. Upon transition to IFRS, a critical analysis of the arrangement would need to be made to determine whether the retailer is acting as an agent or principal. It may be noted that IAS 18 includes specific guidance to determine the principal-agent relationship. If, based on guidance, it is concluded that the retailer is acting as an agent for the other entity, they should account only commission as revenue. Loyalty programmes Many retailers use customer loyalty programmes to increase sales volumes. Usually, customers purchase goods and earn award points that can be used to obtain free or discounted goods in future. No specific guidance is available under Indian GAAP but the general practice is to recognise the full sales, with a corresponding provision made for the cost of award points. The provision is subsequently squared-off on redemption of the award points. Under IFRS, the fair value of the total consideration received in the initial sales transaction is allocated between the award credits and the sale of goods. The amount allocated to the award credit is recognised as revenue only on its redemption. Ad expense Retailers typically spend significant amount on advertising. Both AS 26 and IAS 38 require advertising expenditure to be expensed off as and when incurred. However, little guidance is available on the notion “… when it is incurred”, resulting in companies adopting a range of interpretations. The International Accounting Standards Board (IASB) recognised that diversity in practice exists for the interpretation of the notion “… as incurred” and amended IAS 38. The amended version of IAS 38 clarifies that advertising and promotional expenditures should be recognised as an expense when the company has right to access the goods or when it receives the services. Paragraph 69a of IAS 38 describes more in detail when advertising and promotional expenditures should be expensed. “An entity has a right to access goods when it owns them. Similarly, it has right to access goods when they have been constructed by a supplier in accordance with terms of a supply contract and the entity could demand delivery of them in return for payment. Services are received when they are performed by supplier in accordance with a contract to deliver them to the entity and not when the entity uses them to deliver another service, for example, to deliver an advertisement to customers”. This means that expenditures on advertising and promotions should be expensed off immediately and not deferred until they are delivered to customers. Indian companies need to adhere to revised guidelines on timing of expensing off advertising and promotional expenditure on transition to IFRS. In addition to these retail-specific differences, other major differences would be in the area of fixed assets, financing arrangements, business acquisitions, hedging, long term supply contracts and presentation and disclosures in financial statements. Article by Dolphy D souza, The author is, Partner & National IFRS leader, Ernst & Young
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