Overviews and Challenges

National Institute of Industrial Engineering

11. 12. 2010

Dr. Paritosh. C. Basu

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Discussion Flow
Introduction to IFRS Striking Features of IFRS Indian GAAP IGAAP to IFRS An Exciting Journey Transition to IFRS Significant Impacts IT Enabled Solution Implementation Option to CFOs

Introduction to IFRS

IFRS - Broad Framework

1. The fourth of the four Frameworks of Accounting i) Conceptual, ii) Legal, iii) Regulatory, and iv) Institutional 2. The institution being International Accounting Standard Board (IASB) committed to A single set of high quality global accounting standard Transparent and comparable information for one global capital market One language for general purpose financial statements in one global village The constituents of IFRS - Standards and Interpretations International Financial Reporting Standards (IFRS): 1 - 9 International Accounting Standards (IAS): Till 41 International Financial Reporting Interpretations Committee (IFRIC) - 19 Interpretations Standing Interpretations Committee (SIC) - 33 Interpretations IFRS refers to the above entire body of pronouncements including interpretations
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IFRS - Broad Framework

3. Every Standard has several sections to facilitate reading, interpretation and application Introduction Standards Basis of Conclusion (BC) Implementation Guidelines (IG) Illustrative Examples (IE) Dissenting Opinions of board members, if any
4. Benefits of adopting IFRS

Improved access to international capital markets Lower cost of capital Enable benchmarking with global peers and improve brand value Escape multiple reporting Reflect true value of acquisition New Opportunities
5. Have come a long way since

Henry Benson created the first international study group in 1967 International Accounting Standards Committee (IASC),1973 International Accounting Standards Board (IASB), 2001
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IFRS - Broad Framework

6. IFRSs are principle-based standards The principle-based standards have distinct advantage that transactions can not be manipulated easily to achieve a particular accounting The Financial Accounting Standards Board (FASB), USA, is having a convergence project with the IASB and is broadly adopting the principle-based approach instead of rule-based approach IFRSs lay down treatments based on the economic substance of various events and transactions rather than their legal form. The application of this approach may result into events and transactions being presented in a manner different from their legal form (Example Lease Accounting (IAS 17 using IFRIC 4)

Genesis of IASB
1973 - Nine worldwide professional accountancy bodies agreed to formulate the International Accounting Standard Committee (IASC) May 2000 IASC was renamed as International Accounting Standard Board (IASB) and a Group of Trustees was appointed

Main objective is To develop a single set of globally acceptable and enforceable accounting standards which will produce high-quality financial information to help participants in the world's capital markets to make economic decisions

Framework of IFRS Standard Setting

International Accounting Standard Committee Foundation 22 Trustees provide oversight Appoints the members of the SAC*, the IASB and the IFRIC Monitors the IASB's effectiveness, raise funds, approve the IASB's budget and take responsibility for constitutional changes IFRIC - Interprets IFRS The interpretations tend to deal with reporting issues where unsatisfactory practice has arisen or where the Standards lack guidance in particular business circumstances
* Standard Advisory Council
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IFRS Standard Setting Process

Process Setting the agenda Project planning Developing and publishing discussion paper Developing and publishing exposure draft Developing and publishing the standard Review process Sections to facilitate reading, interpretation and application Introduction Standards Basis of Conclusion (BC) Implementation Guidelines (IG) Illustrative Examples (IE) Dissenting Opinions of board members, if any
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Status of Adoption and Path Forward

Path Forward No blackout period expected from IASB in transition course up to 2014 Substantial changes expected in Standards - Revenue, Consolidation Def. Tax, Lease, Fin. Liabilities Uncertainties about schedule in the USA albeit expected by 2014 / 15 Implementation challenges Scarce resources and IT solution Change in mindset of all concerned - Substance over Form 10

Countries that have already adopted IFRS are shaded with blue Countries in the process of adoption of IFRS are shaded in grey (Source. www.iasb.org)

Need for Common Accounting Standard

Deutsche Bank group prepared its consolidated financial statements under US GAAP until Dec. 31, 2006. Due to the requirement of European Union, the group had to adopt IFRS from Jan. 1, 2007. Under US GAAP, for the year ended Dec. 31, 2006, the groups total assets were 1.126 billion Euros, while under IFRS they were 1.572 billion Euros. Such dissimilarities weaken the usefulness of financial statements and hence there is a case for uniform financial statement reporting standards.

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Striking Features of IFRS vs. Indian GAAP

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IFRS Striking Features visvis--vis IGAAP

1. More similarities with IGAAP than differences 2. Two striking differences from IGAAP are that IFRS is driven by Fair valuation of assets and liabilities resulting in unrealised gains and losses Arms length basis for assessment of transaction even between holding and subsidiary companies 3. Becomes difficult at times to appreciate the combined impact of such fair valuations on financial results vis-a-vis actual business performance 4. IFRS, therefore, suggests and demands a. Exhaustive disclosures of Accounting Policies b. Large number of clarificatory notes for almost every line item disclosed in Income Statement and Balance Sheet c. Sensitivity Analysis of certain elements that may affect results due to variations, e. g., rate of exchange, floating rate of interest on loan, etc. d. Disclosure of results out of Managements annual review of: Efficacy of risk hedging instruments Credit risks and so on e. Mandatory annual assessment of Useful Life of assets by management

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IFRS Striking Features visvis--vis IGAAP

5. Functional Currency may be the one of that country which significantly influences operations and financial results (IAS 21) 6. Presentation of Financial Statements (IAS 1R) is significantly different from IGAAP Certain examples: a. Clean segregation of Assets and Liabilities into Current and Non Current groups b. Statement of Other Comprehensive Income (SoCI) c. Statement of Changes in Equity (SoCE) including Dividend d. Functional grouping of expenses (generally preferred) e. Prohibition in disclosure of Extraordinary Item unlike AS 5 f. Disclosure of Critical judgment of management in applying accounting policies Key sources of estimation uncertainty that have significant risks Information that enables users to evaluate entitys objectives, policies and process of managing capital

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Approach and Convergence Plan of India and the ICAI

1. Design and maintain national accounting standards (NAS) in a way that financial statements prepared in accordance with NAS draw unreserved statement of compliance with IFRS. 2. Convergence plan for Indian companies Phase - 1: Opening Balance Sheet on 1. 4. 2011 and follow IFRS there from
Under NIFTY 50 and SENSEX 30 Shares or other securities listed in Stock Exchanges outside India Net worth over Rs. 1000 Cr. irrespective of listed or not

Phase - 2: Opening Balance Sheet on1. 4. 2013 and follow IFRS there from
Net worth between Rs. 500 Cr. to Rs. 1000 Cr. irrespective of listed or not

Phase - 3: Opening Balance Sheet on1. 4. 2014 and follow IFRS there from
All listed companies with Net worth less than Rs. 500 Cr.

Exclusions
Non listed companies with Net worth less than Rs. 500 Cr. Other defined Small and Medium Companies

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Approaches for Convergence

3. While formulating National Accounting Standards, changes from the corresponding IAS / IFRS are made only in those cases where these are unavoidable considering Legal and regulatory frameworks prevailing in the country To reduce or eliminate alternatives so as to ensure comparability State of economic environment in the country, e.g., Agricultural Income is out of scope of IFRS convergence in India Level of preparedness of various interest groups involved in implementing the accounting standards

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Convergence Approach - Challenges

Management of variances and hurdles - A Rocky W a l k

1. Major modifications and amendments required
Legislations - Companies Act and Income Tax Act Regulations and Regulators RBI, IRDA, SEBI

2. Rigorous application of repetitive Fair Valuations Limited availability of Tools and Professionals Psychological preparedness for accepting volatility by all stakeholders 3. Shortage of trained Accountants with requisite knowledge and skill set 4. Change in mindset of all concerned Substance over Form 5. Disclosure requirements of Schedule VI Those stood the test of time 6. Functional Currency vs. General purpose currency and accounting 7. Replace Expert Advices, Guidance Notes by the likes of IFRIC and SIC 8. Protective confidentiality vs. complete transparency 9. Crowding of changed provisions towards the ultimate time line for convergence, 2011 10. Too many worksheets .. conversion Journal Vouchers
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Exemptions for First Time Adoption of IFRS

A. Exemption from IFRS on First Adoption IFRS 1 1. An entitys estimates under IFRSs at the date of transition to IFRS shall be consistent with estimates made as per earlier GAAP after adjustments to reflect GAAP difference, unless there was any error 2. Events after the subsequent period may be treated as a non adjusting event if information have been received much late after the balance sheet authorisation date on first adoption B. Exemptions From Other IFRSs (IFRS 1, Paragraph 18) An entity may elect to use one or more of the following exemptions a. Business combinations

b. Fair value or revaluation as deemed cost c. Employee benefits d. Cumulative translation differences e. Compound financial instruments
f. Assets and liabilities of subsidiaries, associates and joint ventures

g. Designation of previously recognised financial instruments

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Exemptions for First Time Adoption of IFRS

B. Exemptions From Other IFRSs (contd.)

An entity may elect to use one or more of the following exemptions: h. Share-based payment transactions i. Insurance contracts j. Decommissioning liabilities included in the cost of property, plant and equipment k. Leases l. Fair value measurement of financial assets or financial liabilities at initial recognition

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List of Standards Promulgated

Sl. No. Description IFRS & IAS No. Description Indian GAAP
A. International Financial Reporting Standards (IFRSs)
1. 2. 3. 4. 5. 6. 7. 8. IFRS 1 IFRS 2 IFRS 3 IFRS 4 IFRS 5 IFRS 6 IFRS 7 IFRS 8 First-time adoption of IFRS Share-based Payments Business Combinations Insurance Contracts Non-current Assets Held for Sale of Discontinued Operations Exploration for and Evaluation of Mineral Resources Financial Instruments: Disclosures Operating Segments AS 32 AS 17 AS 24 AS 14 No equivalent Standard required No equivalent Standard Accounting for Amalgamation No Equivalent Standard Discontinuing Operations No equivalent Standard. Guidance Note on Accounting for Oil and Gas Production Financial Instruments: Disclosures Segment Reporting

B. International Accounting Standards (IAS adopted by IFRSs)

9. 10. 11. 12. IAS 1 IAS 2 IAS 7 IAS 8 Presentation of Financial Statements Inventories Statement of Cash Flows Accounting Policies, Changes in Accounting Estimates and Errors AS 1 AS 2 AS 3 AS 5 Disclosure of Accounting Policies and Schedule VI Valuation of Inventories Cash Flow Statements Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies 21

List of Standards Promulgated

Sl.
13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.

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Description Indian GAAP
Contd.
Contingencies and Events Occurring after the Balance Sheet Date Construction Contracts Accounting for Taxes on Income Depreciation and Fixed Assets Accounting Leases Revenue Recognition Accounting for Retirement Benefits (Rev.) Accounting for Government Grants Accounting for the Effects of Changes in Foreign Exchange (Revised) Borrowing Costs Related Party Disclosure There is no equivalent standard

No.
IAS 10 IAS 11 IAS 12 IAS 16 IAS 17 IAS 18 IAS 19 IAS 20 IAS 21 IAS 23 IAS 24 IAS 26 IAS 27

Description
Events after the Reporting Period Construction Contracts Income Taxes Property Plant & Equipment Leases Revenue Employee Benefits Accounting for Government Grants and Disclosure of Govt. Assistance Effects of Changes in Foreign Exchange Rates Borrowing Costs Related Party Disclosures Accounting and Reporting Retirement Benefit Plans Consolidated and Separate Financial Statements

No.
AS 4 AS 7 AS 22 AS 6, 10 AS 19 AS 9 AS 15 AS 12 AS 11 AS 16 AS 18

B. International Accounting Standards (IAS adopted by IFRSs)

AS 21 As 23

Consolidated Financial Statement and Accounting for Investment in Cons. Fin. St. 22

List of Standards Promulgated

Sl.
26. 27. 28. 29. 30. 31. 32. 33. 34. 35.

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Description Indian GAAP
Contd. Accounting for Investment in Associates in consolidated Financial Statements There is no equivalent Standard

No.
IAS 28 IAS 29 IAS 31 IAS 32 IAS 33 IAS 34 IAS 36 IAS 37 IAS 38 IAS 39

Description
Investments in Associates Financial Reporting in Hyper inflationary Economics Investments in Joint Ventures Financial Instruments: Presentation Earnings Per Share Interim Financial Reporting Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets Intangible Assets Financial Instruments Recognition and Measurement (To be replaced by IFRS 9 from April, 2013) Investment Property Agriculture

No.
AS 23

B. International Accounting Standards (IAS adopted by IFRSs)

AS 27 AS 31 As 13 AS 20 AS 25 AS 28 AS 29 AS 26 AS 30 As 13 AS 13

Financial Reporting of Interest in Jnt. Ven. Financial Instruments: Disclosure and Presentation and Investment Earnings Per Share Interim Financial Reporting Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets Intangible Assets Financial Instruments: Recognition and Measurement and Investment Accounting for Investments There is no equivalent Standard

36. 37.

IAS 40 IAS 41

These IFRSs are supported by International Financial Reporting Interpretation Committee (IFRIC) and Standing Interpretation Committee (SIC) through their guidance and interpretations issued from time to time.

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Transition to IFRS Significant Impacts and Challenges

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Transition to IFRS - Significant Impacts

Impacts of transition to IFRS are significantly visible 1. At every stage of accounting Measurement Transaction processing Recognition Disclosure 2. In every aspect for reporting Accounting Policies Critical Accounting Judgments and Estimates * Income Statement Balance Sheet Statement of Other Comprehensive Income* Statement of Changes in Equity* Notes to Accounts Contingent Liabilities and Commitments * New Disclosure requirements under IFRS
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Significant Impacts - Revenue Recognition

Technology, Media and Telecom Bundled service commitments with handsets / data cards deferred till delivery Retail, Motor Car, Airlines Deferment for Fair Value (FV) of Liability against loyalty programme, future delivery of commodity, services or extended warranty Incentive to be netted-off from Sales instead as selling expenses Advertisement Barter transactions Reliably measured FV of services received or provided Construction, Realty and Infrastructure Terms of agreement are critical for revenue recognition At backend on delivery or Proportionate completion basis
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Significant Impacts - Revenue Recognition .. 2

Banks Upfront fees income against loans to be amortised over loan period on effective yield basis Substantial reclassification and fair valuation of investments Capital Goods Unbundling of installation services and recognition on completion NPV differential against deferred payments treated as finance income Change in Nature of Revenue Manufacturing / Service nature to Leasing Income if IFRIC 4 is applied Manufacturing to Service Revenue Free service coupon by Motor Car Industry Sale of Goods Physical control and ownership change CIF Exports - Bill of Lading vs. delivery Domestic FOR Destination Contract - Lorry Receipt is not the criteria
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Significant Impacts - Income Statement

EBIDTA (Not recognised as a measured value in Income Statement) Automobile Component, Power Generation Arrangement
Charges for components under take or pay arrangement may attract IFRIC 4 and be treated as Depreciation under Financial lease

Banks
Provisioning against NPAs as per RBI directives to be replaced by Impairment of future cash flow based on objective evidence

Income Statement PBT & PAT Combined impacts of

Revenue and Cost recognitions FV and Reassessed Life on Depreciation of Fixed Assets and Int. Assets

Functional Currency Change may impact all items in Income Statement

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Significant Impacts - Income Statement .. 2

Income Statement PBT & PAT (Contd.) Capital profit on business combination FV of investment property in Realty sector Interest cost against Preference Share on treatment as loan Amortisation of Upfront Fees for loans over door to door period Deferred Tax Asset / Liabilities against all fair valuation gains / losses Changes due to adjudged adjusting events post balance sheet date Provision for Contingent Liability Probable, Possible and Remote

Senior Executives may have to renegotiate Profit linked Variable Pay

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Significant Impacts - Balance Sheet and Net Worth

Reclassification of Loans as Current Liabilities, if waiver against covenant defaults not obtained within year end
Prescriptive provision and not substance over form May have implications on Going Concern assessment and repot by Auditors

Replace Fixed Assets by Long Term Receivables if IFRIC 4 applies to Take or Pay or servicing contracts with specific assets Preference Shares reclassified as Debt FV of Inter-company Borrowings at concessional rate Split of Convertible Instruments into Debt and Equity FCCB, Debenture Effective Hedge Accounting for derivatives FV impact on Net Worth Adjusting Loans for Effective Interest Method and Upfront Charges Reassessment of dffective Useful Life and Residual Value of Fixed Assets

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Significant Impacts - Balance Sheet and Net Worth .. 2

Functional Currency change Impact on Fixed Asset Valuation and CTR Current and Noncurrent approach towards Balance sheet Goodwill - Amortisation vs. impairment Deferred Tax Provision with Balance Sheet approach Revaluation and FV of Fixed Assets
Business Combinations First Time Adoption Depreciation method

Changes due to assessed Adjusting Events post balance sheet date Provision for Contingent Liability Probable, Possible and Remote

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Additional Notes and Disclosures for More Transparency

Financial Risk Management - Objectives and Policies covering Credit Risk on Customers Currency Exchange Exposures Liquidity Risk - Maturity Profile for Loans, Creditors, Derivatives, Lease Commodity Price Risk Restricted Cash Capital Management Policy - Objective, Debt, Equity Tax Reconciliation and Analysis Reconciliation at Effective Rate Component-wise Analysis of Deferred Tax Sensitivity Analyses
Interest Rate on Loan Portfolios with Reset Clauses or Floating Rate Exchange Variations on Financial Assets and Liabilities

Analyses of Contingent Liabilities - Probable, Possible and Remote

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Significant Impacts on Performance Indicators

Current Ratio - Mostly likely to be Adverse even Cash Equivalents may be Non Current Assets Fixed Assets to Loan - Movement may be Both Ways depending on FV, reassessment of Life and Residual Value Debt Equity Ratio - Likely to be Adverse due to Reclassification of Preference Share Convertible Instruments, Return on Net Worth - Combined effect may be Both Ways but likely to Improve EBIDTA over Revenue (Not a Standard Measure, may be included in Notes) - Combined effect from revenue and cost recognition Debt Service Coverage Ratio - May have to be recast under IGAAP till Indian Banks takes a policy decision about IFRS application. Analysts to exercise caution while using and comparing such disclosures

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IT enabled solution Implementation Options before the CFO

(Stand Alone and Consolidated Accounts)

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IT Enabled Solution - Options before CFOs

Option - I
Native GAAP to IFRS using JVs - No Change in ERP 1. Prepare GL, Financial Statements using given ERP and native GAAP 2. Identify GAAP differences vs. IFRS 3. Calculate numbers for
a. Passing JVs for first adoption under IFRS - I b. Passing JVs to bridge GAAP differences c. Additional notes and disclosures

4. Recast TB with JVs in 3 above > Draw IFRS Accounts and Notes Implications / Challenges 1. Voluminous excel sheets with huge human efforts repetitive costs 2. Scope for human error, discretion, slippages in data security. 3. Use of non-standardised Master / Meta Data and processes 4. Conversion cannot start before Accounts under Native ERP is drawn

This may be the given scenario in corporate India till Statutes are changed and one converged GAAP is adopted
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IT Enabled Solution Options before CFOs .. 2

Option - II
IFRS to Native ERP using JVs Marginal change in ERP for Transaction Processing 1. Pass all JVs for first adoption of IFRS 2. Configure in existing ERP auto JVs or pass manual ones for additional entries required to bridge GAAP differences 3. Follow same steps of Option - I for conversion to native GAAP Implications / Challenges 1. Manual worksheets cannot be avoided for passing GAAP adjustment JVs 2. Others - same as in Option - I Challenging option to implement without Comprehensive knowledge, stabilised processes and ERP support

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IT Enabled Solution - Options before CFOs .. 3

Option - III
Simultaneous Processing of General Ledger under IFRS and Native GAAP {Use FI-CO Modules of SAP (ECC 5 / 6)or Oracle} 1. GL - I : Used for Native GAAP 2. GL - II : Used for IFRS* 3. Configure in existing ERP auto JVs or pass manual ones for additional entries required to bridge GAAP differences in GL - II 4. Incorporate Changes in Opening balance for first adoption
(* Separate solution is required where Functional Currency is different)

Implications / Challenges 1. Huge time required to change the ERP to meet IFRS requirements 2. Manual Worksheets cannot be avoided for preparing numbers to pass JVs for GAAP conversion 2. Others: same as in Option - I Challenging option to implement without Comprehensive knowledge, stabilised processes and ERP support

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Your Questions
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Thank you

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