A PRESENTATION ON CONVERGENCE TO IFRS

BY EKTA BAWA PRASANJIT PANDEY SUMAN SAHA SNEHASHISH BISWAS SAMIHO DUTTA

What is IFRS
IFRS is a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are generally principles-based standards and seek to avoid a rule-book mentality. Application of IFRS requires exercise of judgment by the preparer and the auditor in applying principles of accounting on the basis of the economic substance of transactions. IFRS are issued by the International Accounting Standards Board. The term IFRS comprises IFRS issued by IASB; IAS issued by IASC; and Interpretations issued by the Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB.

Convergence not Adoption

There are 2 approaches for implementation of IFRS. Each countrys national accounting body selects one of the two approaches
Adoption approach dropping existing national GAAP and adopting IFRS Convergence approach revising local GAAP so that their difference with IFRS can be reduced

Full and immediate adoption of IFRS would be a challenge in Indian environment because of conflicting legal & statutory requirements
The local standard setters (i.e. ICAI) can add or remove certain disclosure requirements which do not create a non-compliance with IFRS (carve outs)

Convergence To IFRS
The IFRS issued by the International Accounting Standards Board (IASB) are
increasingly being recognized as Global Reporting Standards. More than 100 countries such as countries of European Union, Australia, New Zealand and Russia currently require or permit the use of IFRSs in their countries. In line with the global trend, the Institute of Chartered Accountants of India (ICAI) has proposed a plan for convergence with IFRS with effect from April 1, 2011.

Convergence to IFRS would mean India would join a league of more than 100 countries, which have converged with IFRS

Why Convergence to IFRS?

A single set of accounting standards would enable internationally to standardize training and assure better quality on a global screen. It would also permit international capital to flow more freely, enabling companies to develop consistent global practices on accounting problems. It would be beneficial to regulators too, as a complexity associated with needing to understand various reporting regimes would be reduced

INDIAN GAAP VS. IFRS

Differences due to the legal & regulatory environment e.g. IFRS require depreciation of all assets over their estimated life whereas Indian GAAP mandates depreciation rates cannot be lower than rates prescribed by the law Differences due to the economic environment IFRSs dealing with investments, derivatives, and other financial instruments use fair value concept while Indian standards use carrying value approach Differences due to the level of preparedness accounting for deferred taxes under IFRS based on Balance Sheet approach while current Indian standards prescribe the income statement approach Conceptual differences Indian standards on intangibles is based on the concept that all intangible assets have a definite life which cannot generally exceed 10 years while IFRS acknowledge that some intangible assets may have indefinite lives which may exceed 10 years

DIFFERENCES IN PRESENTATION AND DISCLOSURE AS REQUIRED BY IFRS

Some of the key critical differences are: Preparation of the Statement of Financial position, Statement of Comprehensive Income, Statement of Changes in equity, Statement of Cash flow and the Notes to the Financial Statements Specific disclosures on Fair value. Disclosures on Financial risk management objectives and policies like Market Risk, Liquidity risk, Interest Rate risk etc. Detailed disclosure on Financial Assets and liabilities. Presentation and disclosure of Extraordinary items not allowed in IFRS.

IFRS Reporting In India: Proposed Timelines

Reporting under IFRS, as proposed by ICAI, would be applicable for accounting

periods beginning on or after April 1,2011.

The first set of IFRS financial statements for the year ending March 31, 2012 would require preparation of: Opening balance sheet as on April 1, 2010 Comparative financial statements year ending March 31, 2011 Reporting enterprises would need to ensure preparedness for IFRS reporting as early as April 2010.

Single Reporting

Benefits of Convergence
Increase Comparability Access to Global Capital Markets Convergence with IFRS will enable Indian entities to have easier access to global capital markets and eliminates barriers to cross-border listings. It encourages international investing and thereby leads to more foreign capital flows to the country. Benefits to the accounting professional

Convergence with
IFRS eliminates multiple reporting such as Indian GAAP, IFRS, US GAAP. IFRS balance sheet will be closer to economic value

IFRS will give more comparability among sectors, countries and companies. This will result in more transparent financial reporting of a companys activities which will benefit investors, customers and other key stakeholders in India and overseas.

Historical cost will be substituted by fair values for several balance sheet items, which will enable a corporate to know its true worth

Convergence to IFRS will increase the opportunities for Indian professionals in abroad as they will be able to sell their services as experts in different parts of the world

Which Entities will be covered under Convergence Strategy

Keeping in view the complex nature of IFRSs and the extent of differences between
the existing ASs and the corresponding IFRSs and the reasons therefore, the ICAI is of the view that IFRSs should be adopted for the public interest entities from the accounting periods beginning on or after 1st April, 2011.

Public Interest

Listed Entities

Banking Entities

Insurance Companies

Large Size Entities

Roadmap
MCA (Ministry of Corporate Affairs) issued road map in Jan 2010

Opening BS as on April 1 using IFRS converged AS 2013

Companies listed or not having a net worth between 500 and 1000 crores All scheduled commercial banks Urban Coop Banks with net worth>300 crores NBFCs

2011
NSENifty 50 companies BSE Sensex30 companies Companies whose shares are listed in foreign bourses Companies having net worth > 1000 crores whether listed or not

2012

2014
Listed companies having net worth less than 500 crores

All Insurance companies

IFRS - Measurement of Difference

IFRS - Reclassification

Challenges of Convergence
Complexity in the financial

Communication of Impact of IFRS to investors

Educating Stakeholders

reporting process Under IFRS,

Significant cost

companies would need to increasingly use fair value measures in the preparation of financial statements. Companies, auditors, users and regulators would need to get familiar with fair value measurement techniques

Companies also need to communicate the impact of IFRS convergence to their investors to ensure they understand the shift from Indian GAAP to IFRS

Educating
Stakeholders comprising of investors, lenders, employees, auditors, audit committee and etc would be a big challenge as this would require a considerable time and effort

Significant one-time
costs of converting to IFRS (including costs of internal personnel time, adapting IT systems, implementing revised reporting policies and processes, training personnel and educating investors, analysts and members of the board)

Challenges
Complex in nature as compared to National GAAP. Level of presentation and disclosure requirements to increase, which would require the company to invest additional time and resources in identifying those details. Concerns on consistency of application and involvement of judgment by the preparers and the advisors. Lack of internal knowledge and excessive reliance on external advisors. Major changes in the regulatory framework to make it consistent with the IFRS framework. Greater complexity in the financial reporting process-greater involvement of fair valuation. Business performance measures to be realigned. Renegotiation of the Debt and other significant business covenants. Definition of Distributable profits based on the existence of large unrealized gains.

What question arise

The process of convergence has raised a number of questions in the mind of the various stakeholders in corporate India from the board room to the ultimate end user of the financials like: Is the convergence realistic, feasible and the various challenges that a company may face during the process. Is Corporate India ready for such a major changeover. How would convergence with IFRS affect the financial position and financial performance reported by Corporate India and what are the significant areas of impact. Are the various laws and regulations aligned with the requirements of IFRS. What would be the costs and efforts involved in the process of changeover. Availability of resources and expertise.

Conclusion
Benefits derived from convergence are lot but also the challenges. The success of the convergence to IFRS in India will depend on cooperation from government, regulators and tax departments. Ultimately, it is imperative for Indian entities to improve their preparedness for IFRS adoption and get the conversion process right. Given the current market conditions, any restatement of results due to errors in the conversion process would be detrimental to the company involved and would severely damage investor confidence in the financial system. The transition to IFRS is likely to be challenging for corporate India. However, if the transitioned is planned and managed successfully, it will generally be positive for financial reporting in India. This will improve the quality and transparency of the financial reporting process and further align corporate India to the global economy and the global capital markets. There is an urgent need to address these challenges and work towards full adoption of IFRS in India. The most significant need is to build adequate IFRS skills and an expansive knowledge base amongst Indian accounting professionals to manage the conversion projects for Indian entities . This can be done by leveraging the knowledge and experience gained from IFRS conversion in other countries and incorporating IFRS into the curriculum for professional accounting courses.

Present situation
Ind-AS is a version of Indian Accounting Standards converged with IFRS. 35
Ind-AS notified by MCA on 26.2.2011 The new AS notified by MCA will be implemented once DTC(Direct Tax Code) is enacted Once DTC becomes an Act IFRS implementation date can be finalized. Implementation of IFRS may thus be delayed by 1year (i.e.2012) As an interim solution Finance Ministry has suggested restricting IFRS compliance for consolidated accounts of companies