Receivables management is not only a function of operational efficiency and credit discipline but also heavily influenced by the underlying accounting policies adopted by a company. The way receivables are recognized, measured, presented, and provisioned affects not just the financial health of an organization, but also investor perception, regulatory compliance, and risk management. For a large global company like Tata Consultancy Services (TCS), which reports financials under both Indian GAAP (specifically Ind AS, which is converged with IFRS) and International Financial Reporting Standards (IFRS), it is essential that its accounting policies around receivables reflect both financial accuracy and prudence.
Under Indian GAAP (specifically Ind AS 109, which aligns closely with IFRS 9), TCS already follows the expected credit loss (ECL) model for impairment of trade receivables. This is a significant step forward compared to earlier standards, which required provisioning only when a loss was incurred or identified. However, there is always scope for refining these policies to make receivables management more dynamic, responsive, and risk-sensitive.
Key Proposals for Policy Improvements:
1. Refinement of the Expected Credit Loss (ECL) Model
Although TCS follows the ECL model under Ind AS 109, the model can be further improved by incorporating more granular risk assessment criteria. Currently, many firms use a simplified approach, applying historical loss rates to receivables grouped by age brackets. TCS could enhance this by using client-specific credit scoring, macroeconomic indicators, industry risk profiles, and geographic risk variables. This would allow more accurate forecasting of bad debts and improve the reliability of receivables reporting. Additionally, factoring in forward-looking information such as economic downturns, sector-specific stress, or client payment behavior trends would make the ECL model more robust.
2. Stricter Criteria for Revenue and Receivable Recognition:
Under IFRS 15 / Ind AS 115 (Revenue from Contracts with Customers), revenue is recognized when performance obligations are satisfied, and it is probable that economic benefits will flow to the entity. However, in service-oriented businesses like TCS, there can be ambiguity in long-term contracts, milestone-based billing, and service-level agreements. TCS should apply even more conservative standards for recognizing revenue and the corresponding receivables, especially in cases of disputed invoices or performance-linked milestones. A stricter policy would ensure that only realizable receivables are reflected in the balance sheet, reducing the risk of overstatement.
3. Adoption of Client Credit Ratings in Receivable Recognition:
TCS can adopt a policy that links receivable recognition and provisioning to internal or external client credit ratings. This would provide a risk-adjusted view of receivables. Clients with lower ratings could trigger earlier provisioning or more cautious revenue recognition. This aligns well with IFRS 9’s focus on credit risk and ensures that the balance sheet better reflects expected recoveries.
4. Alignment of Provisioning Practices Across Geographies:
Given TCS’s global footprint, it faces diverse regulatory and financial reporting environments. There may be inconsistencies in how subsidiaries or branches recognize and provision receivables. A unified internal receivables policy, harmonized across geographies and aligned with global best practices, would bring better control and transparency. This would also facilitate easier consolidation and comparability in financial reporting.
5. Enhanced Disclosures Related to Receivables:
- Average Days Sales Outstanding (DSO) by region or industry
- Credit concentration risk (e.g., top 5 or 10 customers)
- Breakdown of receivables into disputed vs. non-disputed amounts
- Recoveries and write-offs trends over past periodsSuch disclosures would enhance transparency and give stakeholders a clearer view of how well TCS manages its receivables.
Comparison between Indian GAAP (Ind AS) and IFRS:
- Impairment of Receivables: Both Ind AS 109 and IFRS 9 prescribe the expected credit loss model. The implementation, however, can vary based on judgment, risk factors considered, and historical data. TCS should ensure consistency in applying ECL across both frameworks, using sophisticated risk models.
- Revenue Recognition: Ind AS 115 and IFRS 15 are nearly identical in their principles. However, IFRS-compliant entities in certain jurisdictions may have to deal with local interpretations or audit expectations that are more stringent. TCS should ensure that its contract accounting policies are conservative and applied uniformly across all reporting entities.
- Presentation and Disclosure: IFRS typically requires more extensive disclosures than traditional Indian GAAP (pre-Ind AS). With Ind AS now being converged, TCS must ensure that its reporting under both frameworks is detailed, consistent, and reflective of actual risks.
- Judgment and Estimates: IFRS tends to allow more judgment, especially in measuring credit risk, probability of default, and macroeconomic factors. TCS’s finance team must be trained to use judgment responsibly and consistently document the basis of assumptions.
Subscribe on YouTube - NotesWorld
For PDF copy of Solved Assignment
Any University Assignment Solution
.webp)
