Several companies are likely to see a fall in their other income during the January-March quarter as the timeframe to adjust their balance sheets with Ind-AS provisions comes to an end in March FY17. Many of these companies had otherwise seen a rise in their other income in the first three quarters of FY17. Reliance Infrastructure, for instance, reported a 38.6% (y-o-y) and a 76.6% sequential drop in other income in Q4FY17. A closer look at the reconciliation statement issued by the company with regard to its transition to Ind-AS reveals that it took a write-down of over Rs 10,000 crore in FY17 while fair valuing financial instruments.
Sridhar Narasimhan, its chief financial officer (CFO), also attributed lower finance income, and consequently lower other income during the quarter, to fair-valuing of certain financial instruments as at April 1, 2015. Interestingly, while Reliance Infra’s other income for the first three quarters of FY17, when restated as per Ind-AS, had seen upward revisions, the same for Q4 saw a large downward revision. When asked why Reliance Infrastructure hadn’t made the adjustements earlier, Narasimhan said it was evaluating possibilities and the effects have been given in Q4. Meanwhile, the other income of several large cap companies that have reported their Q4 FY17 results so far has also seen a drop due to factors other than the Ind-AS transition.
Hindustan Zinc, for instance, reported a 35.3% (y-o-y) drop in other income in Q4FY17 since its investment corpus had significantly reduced after the over Rs 12,000 crore of dividend it had paid in April, 2016, as a mark of celebration for turning 50.
Reliance Industries, similarly, reported both a year-on-year and sequential drop in other income in the March quarter. A look at its balance sheet revealed that non-current investments had shrunk by over Rs 15,000 crore (y-o-y) as of March, 2017, as the company spent Rs 1.14 lakh crore on capex during the financial year. Infosys, too, reported both a sequential and year-on-year drop in other income in Q4FY17.
Several analysts and consultants FE spoke to are of the opinion that Q4FY17 is likely to see heightened volatility in companies’ other income. “Q4FY17 is a great opportunity for companies to record adjustments to their balance sheets due to transition provisions as allowed while adopting Ind-AS for the first time. While this will lead to volatility in the March quarter numbers, if any company decides to do the same subsequent to March 31, 2017, then it will have to record the same through the profit and loss statement,” Sandip Khetan, Partner, in an Indian member firm of EY Global said.
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According to the Finance Bill, 2017, adjustments made by a company to its reserves due to its transition to Ind AS from Indian GAAP will have to be recorded on the day of transition and would subsequently never be reclassified to the statement of profit and loss.
The March quarter is also likely to see volatility in the other income and interest expense of companies that are a part of large groups since many of them were waiting for the Union Budget for clarifications on the treatment of inter-corporate loans. “Companies that had lent to their group companies at nominal interest rates will see a jump in their other incomes because they are no longer allowed to charge such low rates. On the other hand, companies that enjoyed such low interest debt from their group companies will see a rise in their interest expense during the quarter,” said the head of research at a large institutional brokerage.