IFRS – Overview

August 2009August 2009

Standard setting in India

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Standard setting in India and Current State

► Multiplicity of standard settersp y

► Paucity of industry specific standards

► Legislative conflict

► Judicial overrides

► Outlived Utility of Schedule VI

► Specific requirement under IRDA regulations► Specific requirement under IRDA regulations

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Can we say Indian accounts are true and fair

► Derivatives are still off balance sheet► Liability is classified as equity► FCCB accounting► Depreciation rates are regulatory based► Business combinations are not accounted on fair

l b ivalue basis► What is control??

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The economics of IFRS – CFO.com

► Two new studies discuss the optimism about the future of l b l t d d A b th I t ti la global standard. A survey by the International

Federation of Accountants asked 143 accounting leaders from 91 countries about the significance of convergingfrom 91 countries about the significance of converging standards, and 89% said it was very important or important

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About Indian AS

► Accounting Standards in India are issued by the ICAI based on IFRS issued by the IASB

► NACAS reviews AS issued by the ICAI and recommends t th G t f tifi ti d th C i A tto the Govt. for notification under the Companies Act

► Till date, Govt. has notified AS 1 to 29 (except AS 8 which is withdrawn) under the Actis withdrawn) under the Act

► ICAI has also issued AS 30, 31 and 32 on Financial Instruments which are yet to be notifiedInstruments which are yet to be notified

► Apart from AS, ICAI also issues Announcements, Guidance Notes and EAC opinions forming part of IndianGuidance Notes and EAC opinions forming part of Indian GAAP

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Introduction to IFRS

► IFRS are standards and interpretations adopted by theInternational Accounting Standards Board (IASB)International Accounting Standards Board (IASB),

► International Accounting Standards (IAS) were issued by theInternational Accounting Standard Committee (IASC) from 1973t 2000to 2000.

► The IASB replaced the IASC in 2001.► Amended some IASs► Amended some IASs► Replaced some IASs with new IFRSs,► Issued certain new IFRSs on topics for which there was no previous

IASIAS.► Through committees, both the IASC and the IASB also have issued

interpretation of standards.

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IFRS Governing Body

► IFRS are issued by IASB► A private sector organisation

► Chairman – Sir David Tweedie (formally head of the UK standard setter)setter)

► 14 members (12 full time)► The organisation as a whole has wide expertise and geographical

representation► IASB are involved in several significant joint projects with FASB in

the USthe US

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What is IFRS?

► IASB – Private sector organisation► IFRS comprises:

► 8 IFRSs and 31 IASs► 12 IFRIC and 11 SICs► 12 IFRIC and 11 SICs

► IFRS - Economic model focusing on balance sheet► IFRS moving towards► IFRS moving towards

► Increased use of fair values; and► Getting the balance sheet right► Getting the balance sheet right

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IFRS – A truly global accounting standard

Domestic listed companies Number of countries

IFRS required for all domestic listed companies 77

IFRS permitted for domestic listed companies 24

IFRS required for some domestic listed companies 4domestic listed companies

IFRS not permitted for domestic listed companies 32domestic listed companies

137

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IFRS Implementation – Status

Jurisdiction IFRS Currently Applied?

IFRS Convergence

to Come?

Comments

to Come?

Canada No 2011

U.S. No 2014

Mexico Yes IFRS is permitted for listed companiesMexico Yes IFRS is permitted for listed companies

Bermuda Yes IFRS is permitted

Ireland Yes Required for listed companies since 2005, permitted for unlisted

U.K. Yes Required for listed companies since 2005, permitted for unlisted

India No 2011

Chi Y 2007 Chi I R l t CIRC h id dChina Yes 2007 Chinese Insurance Regulator, CIRC, has provided additional guidance on adopting the China IFRS (PRC GAAP), in area such as product classification, LAT

Hong Kong Yes 2005 Closely follows IFRS 4

Indonesia No ?

Philippines No ?

Japan No ? Convergence project between IFRS and Japanese GAAP (30 June 2011)

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GAAP (30 June 2011)

Singapore Yes 2005 Local GAAP is almost identical to IFRS

Observations on implementation of IFRS

► More than 8,000 listed companies in EU implemented IFRS

► 2005 Implementation of IFRS in EU – A resounding success

► IFRS financial statements retain a strong national identity

► IFRS financial statements are more complex than financial statements based on national standards, which threatens decision usefulness

IFRS i l t ti h i d t i j d t t b li d► IFRS implementation has required extensive judgement to be applied in the selection and application of IFRS accounting treatments and this restricts consistency and comparability

► Companies do not seem confident that IFRS financial statements is sufficient and in a few cases entirely appropriate

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Why IFRS in India?

► One language► Comparability enhanced► Understanding enhanced

O t f b k► One set of books

► Access to Global capital markets

► Low cost of capital

► Attract foreign investment► Attract foreign investment

► Elimination of multiple reports

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IFRS task force - Key recommendations

► All at once approachpp

► Public interest entities – 1 April, 2011

► Actually means – 1 April, 2010

► Others – IFRS SME standard

► Indian GAAP to continue till 1 April, 2011

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Public interest entities

► Listed companiesp

► Banks, insurance companies, and financial institutions

► Turnover in preceding year > Rs 100 crores

► Borrowing in preceding year > Rs 25 crores

► Holding or subsidiary of the above

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Benefits Of Adopting IFRS

ØBenefits our clients have experiencedI d A l b ll t d t f i i l b d t d d ff► Improved quality of reporting

► A globally accepted set of principles-based standards may offer more room for accounting treatments that are consistently applied and possibly better reflect the true substance of transactions and underlying business performance

► Improved comparability

► As use of IFRS becomes more widespread, the new standards will increase comparability for investment analysis and performance measurement

► Reduced ► One of the criticisms often leveled at Local or US GAAP is that the► Reduced accounting complexity

► One of the criticisms often leveled at Local or US GAAP is that the accounting rules are perceived to be complex and sometimes difficult to apply in practice. IFRS offers the opportunity to reduce complexity and risk of errors

P d Th b f i h ld h IFRS i i d► Process and cost efficiencies

► The number of countries across the world where IFRS is a recognized reporting framework continues to grow. This brings opportunities to generate process and cost efficiencies in financial reporting. It will also potentially open up opportunities to standardize, simplify and centralise financial reporting

d f tiprocesses and functions

► Cost of capital ► It is widely expected that the use of a single global standard will enhance the efficiency of capital allocation on a global basis and help reduce the cost of capital

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capital

Implications Of Adopting IFRS – Financial Impact

Heat map itemsPotential financial statement impact

Potential business impact

ent I

mpa

ct High1

2

49

10

11

1 Insurance Contracts* and Actuarial Accounting High High

2 Investment accounting High High

3 Financial Instruments disclosure High High

1213

15

17

anci

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me Medium

Low35

67

8

114 Consolidation and derecognition High High

5 Property and Equipment Low Medium

6 Equity versus liability classifications Low High

7 Business combinations L M di

12 1416

Fin

HighMediumLow

Business Impact

37 Business combinations Low Medium

8 Intangible assets Medium Medium

9 Impairment of assets – goodwill, intangibles, long-lived assets High Medium

10 Contingencies

High conversion risk and effort.

Initial assessment of priority

10 Contingencies High Medium

11 Stock based compensation Medium Medium

12 Employee Benefits Medium Medium

13 Leases High Medium

Medium conversion risk and effort.

Low conversion risk and effort.

14 Income Taxes Medium High

15 Foreign currency transactions Medium Medium

16 Subsequent events Medium High

17 First time adoption High Medium

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High Medium*Anticipates change resulting from Phase II of Insurance Contracts

Challenges

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Key challenges

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► Impact on financial statements► Performance indicators

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► Volatility► IT/MIS systems► Contractual obligations IFRS

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► Contractual obligations (debt covenant, compensation)

► Taxes

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► Distributable profits► Managing market, investors

and analysts benefit plansand analysts

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Regulatory and Other challenges

► Regulatory amendments

► High court

► Training and resourcesg

► SME

► National interest

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First time adoption – Key steps

► Preparation of Opening IFRS balance sheetLast financial statements under ‘previous GAAP’

Comparative periodFirst IFRS

Comparative periodReporting period

First IFRS financial statements

31/03/2009 01/04/2010 31/03/2011 31/03/2012

Date of transition to IFRSs opening IFRS balance sheet

Beginning of the first IFRS reporting period

Reporting periodopening IFRS balance sheet IFRS reporting period

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Buy in needed throughout organisation

► Project sponsorship► Understand business impacts

The board► Understand business impacts

► Buy-in, allocate budget/resources► Understand IFRS performance measures

Senior management

► Project management, liaison with businesses► Modify accounting policies, internal reporting packages,

external financial statementsGroup finance external financial statements► Support ongoing information gathering

► Plan and execute systems changes to enable IFRS reporting Information y g p gon a sustainable basis

Information technology

► Collect data for new accounting & disclosure requirementsThe businesses

► Understand impact of IFRS on transaction structuresThe businesses

► Review basis of external communications► Educate analysts and investors

Investor relations

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► Educate analysts and investorsrelations

Critical Success Factors

► Take a structured approach to conversion► Gap analysis — identify the measurement and disclosure gaps between current GAAP

reporting and IFRS requirements► Strategic options — define key options and evaluating them against strategic criteria to

determine the preferred option set► Solution development and implementation define the high level IT and process impact set► Solution development and implementation — define the high-level IT and process impact, set

and establish the project structure, timelines, tasks and dependencies► Establish robust program management at the outset

► Create joint team that establishes an effective partnership with the business► Create joint team that establishes an effective partnership with the business► Right mix of technical v/s project management skills► Mix finance resources with BU resources to ensure conversion is embedded in the business

► Make sure the communication links have been established with all key ystakeholders► Engage with external auditors at all key stages of the process and formally document

agreements on significant accounting judgments► Ensure the senior management fully understands the extent of the changes► Make sure there are no surprises for the analysts

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Points To Be Kept In Mind

► Not just a corporate-level exercise► Management buy-in one of the biggest initial challengesg y gg g► Do not underestimate the amount of work involved► Need to limit as far as possible double reporting► Definitely not just a technical exercise► Definitely not just a technical exercise► Changes the way performance is measured and basis of incentive schemes► Interaction with internal controls and systems is key► Increasing complexity of IFRS and speed of change is requiring more technical

resources, training► Has increased the volatility of resultsy► Important to align internal and external reporting► Consider the impact on investor relations - timing and nature of communications

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