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© Grant Thornton International. All rights reserved.
IFRS workshopAll India Chartered Accountants Society
Session: AS convergence to IFRS
Aseem VohraJuly 10, 2010
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IFRS transition in India – Road AheadIFRS transition in India – Road Ahead
Impact of convergenceImpact of convergence
Process of transitioning financial reportingProcess of transitioning financial reporting
© Grant Thornton International. All rights reserved.
IFRS transition in India – an introduction
Need for Adoption in India
• Global economy - need to speak in a language which is globally accepted.
• International Financial Reporting Standards (‘IFRS’) has now evolved into being the most widely accepted and trusted financial reporting language
• Considering the emerging role of India in the global economy, it was imperative for India to harmonize with global financial reporting standards
• In August 2007, ICAI announced India’s intention to converge its reporting standards with IFRS - ICAI released a concept paper on convergence
• MCA has set up a core group to develop a roadmap for India's transition to IFRS – roadmap released in January 2010
• MCA also released a separate roadmap for Banking and Insurance Companies in March 2010
• SEBI amended the listing agreement to permit voluntary early adoption of IFRS (as issued by IASB) by listed parent companies
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IFRS transition in India – an introduction
Progress to date
Government remains strongly committed to achieving the 2011 deadline
ICAI released concept paper on
convergence with IFRS
MCA reiterates
commitment to transition
by 2011
MCA's roadmap on
transition released
SEBI approves move to permit voluntary early
adoption of IFRS
MCA sets up core group to
develop roadmap
ICAI releases update on
convergence process
BFSI Roadmap issued by MCAAmendment to
listing agreement permits IFRS
reporting
Oct 2007 Feb 2009 Nov 2009May 2008 July 2009 Jan 2010Mar / Apr 2010
Highlights of the MCA Roadmap
• Phased approach to convergence
• Companies (except banking & insurance) - 2011 to 2014
• Banking & Insurance Companies – 2012 to 2014
• Two separate sets of accounting standards to be maintained under Section 211(3C)
• Early adoption of IFRS converged standards permitted
• Clarifications on implementation matters issued by MCA
• Clarity still required on several practical aspects
© Grant Thornton India. All rights reserved.
IFRS transition in India – an introduction
Roadmap: Phased Approach
• Companies in Phase II and III can early adopt from years beginning April 1, 2011 onwards• Companies not covered in the 3 phases (including Small and Medium Companies can
voluntarily adopt converged standards
Classes of CompaniesListed (only in India)
Listed overseas (any securities)
Unlisted
Company in Nifty or Sensex Phase I Phase I NA
Net worth > Rs 1,000 Cr Phase I Phase I Phase I
Net worth > Rs 500 Cr upto Rs 1,000 Cr
Phase II Phase I Phase II
Net worth upto Rs 500 Cr Phase III Phase I Exempt
6
© Grant Thornton India. All rights reserved.
IFRS transition in India – an introduction
Roadmap: Phased Approach
• March 31, 2011 information to be given in an additional column (in addition to existing Indian GAAP comparatives)
• Phase II and III companies can early adopt from year starting April 1, 2011 onwards
Phases
Phase I
Phase II
Phase III
Opening balance sheet
date
First year end(without IFRS comparatives)
1 April 2011 31 March 2012
1 April 2013 31 March 2014
1 April 2014 31 March 2015
Opening balance sheet
date
First year end(with IFRS
comparatives)
1 April 2010 31 March 2012
1 April 2011 31 March 2013
1 April 2011 31 March 2013
MANDATORY REQUIREMENT OPTION FOR EARLY ADOPTION
7
© Grant Thornton India. All rights reserved.
IFRS transition in India – an introduction
MCA roadmap - BFSI: A phased approach
Criteria for phased implementation First financial statements
March 31, 2013
Opening balance sheet
April 1, 2012
Companies
Insurance Companies
All insurance companies-
March 31, 2014April 1, 2013Banking Companies
All scheduled commercial banks
March 31, 2015April 1, 2014Urban co-operative banks with net worth > Rs 200 cr but not exceeding Rs 300 cr
March 31, 2014April 1, 2013Non Banking Financial Companies (NBFCs) March 31, 2015April 1, 2014
All other listed NBFCs Unlisted NBFCs with net worth > Rs 500 cr (other than above)
NSE- Nifty 50 or BSE- Sensex 30 IndexListed & unlisted with net worth > Rs 1,000 cr
Urban co-operative banks net worth >Rs 300 cr
Urban Co-operative Banks with net worth less than Rs 200 Crores, Unlisted NBFCs with net worth less than Rs 500 Crores and Regional Rural Banks are exempt, though they may voluntarily opt to do so
8
© Grant Thornton India. All rights reserved.
IFRS transition in India – an introduction
MCA Roadmap: clarifications
• Net worth:• reference date for companies (other
than banking & insurance) is March 31, 2009
• Standalone net-worth to be considered
• Net worth = share capital + reserves – revaluation reserves – miscellaneous expenditure – debit balance of P&L
• Early adoption available for those in Phase II & Phase III
• From April 1, 2011 onwards (opening balance sheet on 1 April 2010)
• Once converged standards adopted, cannot revert to existing Indian GAAP
• Group situations • each entity to apply its own criteria.
However, early adoption permitted• Comparative information for first year
• no IFRS comparatives required – but voluntary disclosures permitted
• IFRS or Indian GAAP • Companies to follow converged
standards and not IFRS • First public reporting
• SEBI to clarify on quarterly reporting requirements (relevant for listed entities in the Group)
9
© Grant Thornton India. All rights reserved.
IFRS transition in India – an introduction
Roadmap: Developments to track
Company law• Draft Companies (Amendment) Bill• NACAS to finalise amendments to Schedule VI• Schedule XIV to also be amended shortly• New Companies Bill under evaluation of Parliamentary
Committees will also need revision before enactment
Accounting Standards• ICAI to finalise – NACAS to recommend by mid year
Taxation• ICAI and CBDT set up joint study group to recommend
changes• MCA considering a tax neutral state for year 1• Direct Tax Code under evaluation of Parliamentary
Committees will also need revision before enactment
Potential impact• Several of these changes will
impact IFRS transition strategies
• Key areas to watch out for include:• New standards, primarily
IFRS 1 equivalent as it would spell out the exact transitional provisions
• Tax laws – the Group would like to minimize the tax impact due to the transition to IFRS – key decisions and accounting choices would be impacted by these changes
• Schedule VI being amended – may require additional disclosures and possibly functional classification
10
© Grant Thornton India. All rights reserved.
IFRS transition in India – an introduction
International scenario
• IFRS continues to evolve• IFRS 9 to replace IAS 39 (AS 30)
– in the process of development
– Part issued – significant portions in progress.
– Expected completion date – end 2010
• Several significant projects in pipeline– Apart from 3 exposure drafts (ED) relating
to Financial Instruments, 10 other EDs expected in next 6 months
– Revenue recognition, leases, financial statement presentation, income taxes, etc
• India working to a moving target
Potential impact• Several of these changes
could impact you significantly• Key changes include revenue
recognition, leases, financial instruments, etc
• Very important for you to assess these likely changes when making the transition decisions and changes to systems, processes and business practices
11
© Grant Thornton International. All rights reserved.
IFRS transition in India – an introduction
Convergence
• ICAI has already issued exposure drafts of all existing accounting standards that will be converged with IAS and IFRSs
• ICAI has also issued exposure drafts on new standards, which are not existing as of now, key ones being:
– Ind-AS 41: equivalent to IFRS 1, First time adoption
– AS 40: equivalent to IFRS 9, Financial Instruments
– AS 33: equivalent to IFRS 2, Share based payments
– AS 37: equivalent to IAS 40, Investment properties
• Once adopted, the converged accounting standards shall form the basis of generally accepted accounting principles in India (Indian GAAP)
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Impact of convergence
Potential Areas of Impact
Internal controls
Information systems
Non-routine accounting
Business management
Tax and regulatory
Investor relations
Knowledge transfer / sharing
Industry issues
Transactional accounting
Impact of IFRS conversion
Tra
nsi
tio
n t
o IF
RS
rep
ort
ing
Leadership Commitment Project Management
Accounting impact
Systems impact
Organizational impact
Financial impact
Internal controls
Information systems
Non-routine accounting
Business management
Tax and regulatory
Investor relations
Knowledge transfer / sharing
Industry issues
Transactional accounting
Impact of IFRS conversion
Tra
nsi
tio
n t
o IF
RS
rep
ort
ing
Leadership Commitment Project Management
Accounting impact
Systems impact
Organizational impact
Financial impact
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Accounting and Reporting
• GAAP Differences
• Policy Choices
• Disclosure requirements
Systems & Processes• Information Systems Change
• Internal financial reporting processes & Controls change
• Modification to Clause 49 documentation
Strategic
• Dividend Policy
• Profitability projections
• Debt Covenant analysis
• Borrowing capacities
• Capital raising & Investment decisions
People
• Training People on IFRS: All levels (Audit committee, Senior management, accountants)
• Performance management & evaluation
• Regular knowledge update
Impact of convergence
Wider Impact
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Impact of convergence
Challenges to a enterprise
• Getting employees IFRS literate
• Gaining expertise to deal with complex accounting matters
• Getting processes and systems in place to generate IFRS information
• Making the whole IFRS reporting process, sustainable and cost effective so as to be able to generate information every quarter
Generate the IFRS financial information
• Employees and management – impact on performance linked compensation structures
• Lenders – impact on key debt covenants
• Investors and analysts – impact on key performance metrics
• Stakeholders – communicating with and educating on a timely basis
• Tax authorities – still unclear on how IFRS impacts taxation
Assess impact of IFRS information on key stakeholders
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Impact of convergence
Common issues and pitfalls
• Lack of a convergence plan
• Viewed as a technical accounting exercise resulting in under estimation of efforts involved
• Lack of senior management commitment
• Significant investment in IT Systems and training manpower
• Lack of communication with stakeholders and users of financial reports
• Difficulties in estimating fair values
• Complexities in the presentation of financial statements
• Non availability of skilled manpower
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Process of transitioning financial Process of transitioning financial reportingreporting
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Process of transitioning financial reporting
• Cost and time shall be based on the size of an enterprise and complexity of operations
• Process needs to be steered by the management
• Should be based on a focused approach using project management principles
• Changes shall be required at all functional processes, controls and data points
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Process of transitioning financial reporting
Key Activities
• Constitute a project management structure: all functions
• Draft a transition process
• Determine key accounting impact areas
• Determine areas of external assistance, valuation etc
• Coordinate with IT vendor and review of changes in ERP functionalities
• Draft a detailed training program for different functional and responsibility levels
20
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Process of transitioning financial reporting
Focused approach
Diagnostic Study
Sustainable IFRS
reporting
Initial IFRS conversion
Accounting Issue
resolution
Project Set up
Diagnostic review
DecideWay Forward
Give Authorityto Proceed
EstablishProject
Governance
ResearchBackground
IdentifyProblems
RecommendWay Forward
PrepareComponentEvaluations
ResolveIssues
PrepareInstructions
PrepareSubsidiaries
IFRSAccounts
Consolidate& Analyse
Group IFRSAccounts
Organisational& Operational
Changes
Implementnew Systems& Procedures
Implement -ation
Parallel run reporting
Change -over decision
Sustainable and efficient
reporting
Implementation Reporting
DecideWay Forward
Give Authorityto Proceed
EstablishProject
Governance
ResearchBackground
IdentifyProblems
RecommendWay Forward
PrepareComponentEvaluations
ResolveIssues
PrepareInstructions
PrepareSubsidiaries
IFRSAccounts
Consolidate& Analyse
Group IFRSAccounts
Organisational& Operational
Changes
Implementnew Systems& Procedures
-
Parallel run reporting
Change -over decision
Sustainable and efficient
reporting
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Process of transitioning financial reporting Aligning Operating processes & controls
• Currently processes & controls are designed to capture, review & record financial information as per Indian GAAP
• Converged AS shall bring in additional information requirements & accordingly new processes & related controls need to be defined
• An enterprise should consider the following while drafting its transition:
– Impact on CEO/CFO certification (Clause 49)
– Aligning Risk management framework
– Aligning Internal audit function & activity
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Process of transitioning financial reporting
Human resources needs
• Transition to different set of accounting rules & principles encompass resources at all levels for all functions
• Following functions need to be proficient in converged AS before April 01, 2011:
– Accountants (data entry)– Finance managers (Review
function)– Chief Financial Officer (Review
function)– Audit committee members
(Review function)– Senior Management (Decision
Making)
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Process of transitioning financial reporting
Human resources needs – Training programs
Sessions Indicative area of coverage
Induction workshops • Overview of IFRS and impacts• Introduction of Project Team and roles & responsibilities• Discussion on industry specific issues
Workshop for senior management
• Introduction to IFRS and potential impact• Areas of concern and questions they need to be asking to increase awareness• Impact on management reporting and human resources• Times lines, roles and responsibilities & risk management framework
Focused workshop on areas of impact
• Topical sessions run by specialists on detailed impact and way forward• Policy changes and disclosure required by an enterprise • Statement of procedures and interdependencies • Potential change management discussions
Workshop for non accounting personnel
• Introduction to IFRS and potential impacts for their business process• Discussions on specific areas of non accounting impact
24
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Process of transitioning financial reporting Aligning Information Systems
• Converged AS shall require following information systems to capture & generate GAAP compliant information
– Internal MIS reporting– Financial accounting
• Current Information system to be aligned depending upon application & modules currently implemented
• Integration exercise will at the minimum include the following:
– Establishing new data requirements
– Changes to Chart of Accounts– Re-configuration of applications– Manage parallel systems
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Illustrative timeline
Week
1 2 3 4 5 6 7Activity
Detailed assessment of impact on consolidated financial statements
Detailed assessment of impact on HR, IT, Processes etc.
Preparation of shell consolidated IFRS financial statements & reporting packs
Mapping of reporting packs back to Trial Balance of each entity
Phase 8 9 10 11 12
Rolling out the reporting packs and instructions for completion
Assistance with completion of reporting packs and consolidation thereof
I
II
III
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