The Institute of Company Secretaries of India
IFRS
A Paradigm Shift in Financial Reporting
CA. Vinayak Pai V
B.Com, FCA, CIFRS (UK), CIA , ICWAI (Int), Dip.IFRS (UK)
March 12, 2011
The Institute of Company Secretaries of India
Presentation segments
Overview
of IFRS
India and
IFRS
Case
studies
Key impact
areas
Updates
In
conclusion
March 12, 2011
CA. Vinayak Pai V
1
The Institute of Company Secretaries of India
March 12, 2011
The Institute of Company Secretaries of India
Overview of IFRS
March 12, 2011
CA. Vinayak Pai V
2
The Institute of Company Secretaries of India
IFRS
A set of accounting • IASB is an independent accounting
standards developed
standard-setting body
by the International • Approximately 120 nations and reporting
Accounting
jurisdictions permit or require IFRS for
Standards Board
domestic listed companies
(IASB)
The
authoritative
literature
• IFRSs, IASs
• IFRICs, SICs
March 12, 2011
The Institute of Company Secretaries of India
An Overview
The global accounting landscape
IFRS
The United States and IFRS
India and IFRS
March 12, 2011
CA. Vinayak Pai V
3
The Institute of Company Secretaries of India
Mergers and
acquisitions
Discounting
SOFP and
SOCI
presentation
Valuation –
Fair value
Components
of financial
statements
Principle of
substance
over form
Concept of
control
Property,
plant and
equipment
Constructive
obligations
Goodwill and
intangibles
Functional
currency
Segment
reporting
Transition - Key GAAP differences
March 12, 2011
The Institute of Company Secretaries of India
Critical accounting judgments
Sources of estimation uncertainty
Disclosure ----- Notes
March 12, 2011
CA. Vinayak Pai V
4
The Institute of Company Secretaries of India
IFRS - An Overview of First-Time Adoption
The accounting literature
A standard for transition
The general principle of IFRS1
The flexibility provided
March 12, 2011
The Institute of Company Secretaries of India
The Timelines under IFRS 1
01-Apr-09
01-Apr-10
Date of Transition
to IFRS
01-Apr-11
31-Mar-12
Beginning of first
IFRS period
Comparative Period
Reporting Date
First IFRS Reporting
Period
First IFRS Financial Statements
Ind_AS 41 position – The option provided
March 12, 2011
CA. Vinayak Pai V
5
The Institute of Company Secretaries of India
Presentation,
reconciliations and
disclosures
The process and
methodology
Which IFRS to
apply
Opening SOFP to
be prepared at the
date of transition
Exceptions and Exemptions
Business
combinations
Estimates
Hedge accounting
De-recognition of
financial assets and
liabilities
Non-controlling
interests
Share-based
payment transactions
Deemed costs
Employee benefits
Compound financial
instruments
March 12, 2011
The Institute of Company Secretaries of India
India and IFRS
March 12, 2011
CA. Vinayak Pai V
6
The Institute of Company Secretaries of India
Scenario – AS IS
Statutory requirements
Companies Act 1956
• Section 211, Schedule VI, other
provisions
Accounting standards (AS)
issued by the Institute of
Chartered Accountants of India
SEBI listing agreement
Position with respect to India registered companies
listed overseas
March 12, 2011
The Institute of Company Secretaries of India
Scenario – recent changes
Listing agreement
Position with respect to India
registered companies listed overseas
March 12, 2011
CA. Vinayak Pai V
7
The Institute of Company Secretaries of India
India Inc. and IFRS
Convergence vs. Adoption
Phased approach
Convergence status
March 12, 2011
The Institute of Company Secretaries of India
The Roadmap ?
A phased approach
• Phase I - April 1, 2011
• Companies forming part of Nifty 50, Sensex 30, Listed on Stock
Exchanges Outside India, Companies, whether listed or not, which
have a net worth in excess of Rs.1,000 crores
• Phase II – April 1, 2013
• Companies, whether listed or not, having a net worth exceeding Rs.
500 crores but not exceeding Rs. 1,000 crores
• Phase III – April 1, 2014
• Listed companies which have a net worth of Rs. 500 crores or less
• Insurance Companies – April 1, 2012
• Banking companies with separate dates – April 1, 2013
March 12, 2011
CA. Vinayak Pai V
8
The Institute of Company Secretaries of India
Converged Indian Accounting
Standards (IND-AS)
The Ind-AS
series
February 25,
2011 : MCA
Notification of
Converged
Indian
Accounting
Standards
2 parallel sets of
standards : “AS”
and “IND-AS”
IFRSs not part of
the current
notification :
35 IFRS accounting standards part of
this notification
Accounting and
reporting by
retirement benefit
plans, agriculture and
IFRS 9 on financial
instruments
Dates of implementation yet to be notified
March 12, 2011
The Institute of Company Secretaries of India
The “Carve-outs”
Presentation
of financial
statements
Agreements
of
construction
of real estate
Employee
benefits
Unrealized
exchange
differences
on long-term
monetary
assets and
liabilities
Investment
property
Bargain
purchase
gain on
business
combinations
First-time
adoption of
converged
Indian
accounting
standards
March 12, 2011
CA. Vinayak Pai V
9
The Institute of Company Secretaries of India
The convergence vs adoption debate
March 12, 2011
The Institute of Company Secretaries of India
The convergence Vs Adoption Debate
Does convergence make
sense for India?
Is the Ind-AS approach a
purpose defeating
exercise?
Will Indian
corporates
financials be
perceived as
less acceptable
with Ind-AS as
against IFRS ?
March 12, 2011
CA. Vinayak Pai V
10
The Institute of Company Secretaries of India
Revised Schedule VI
• MCA release dated February 28, 2011
• Applicable to all companies for YE March 2011
March 12, 2011
The Institute of Company Secretaries of India
Case studies
March 12, 2011
CA. Vinayak Pai V
11
The Institute of Company Secretaries of India
Equity
Net income
142.9%
107.0%
100.0%
100.0%
42.9%
7.0%
IGAAP
GAAP
difference
IFRS
IGAAP
GAAP
difference
IFRS
TATA Motors
March 12, 2011
The Institute of Company Secretaries of India
160%
140%
120%
100%
80%
60%
40%
20%
0%
-20%
IGAAP
Series1
100%
Consolida PPE tion
Forex
-2%
0%
Employe Interest
Foreign
PPE FCCN Finance
PPE Deferred
Investme Dividend currency
Minority
e
and debt
Others
Preopera
conversio
receivabl
Interest separatio issue
taxes
nts
s
interest
translatio
tive
n options
es
n cost expenses
n
-1%
1%
0%
4%
3%
0%
0%
24%
8%
0%
0%
7%
IFRS
143%
IFRS1 choices
Business combinations
Business combinations prior to the transitions date have been
accounted for as per Indian GAAP
Employee benefits
applied the exemption relating to application of recognizing
cumulative actuarial gains and losses on defined benefit pension
schemes and other post retirement benefits in reserves as of the
transition date
March 12, 2011
CA. Vinayak Pai V
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The Institute of Company Secretaries of India
Tata Motors
Dr. Reddy's
150%
Series1
100%
150%
100%
50%
50%
0%
0%
IGAAP
Series1
IGAAP
100%
IGAAP
Difference
Difference
IFRS
Difference
1%
IFRS
101%
Series1
IGAAP
100%
IFRS
Difference
43%
IFRS
143%
Equity reconciliation as of March 31, 2008
Indian GAAP – Equity
Equity reconciliation as of March 31, 2008
Indian GAAP – Equity
Add/(less): GAAP Reconciliation items
Impairment impact on intangibles
Amortization reversal on intangibles reversed
Employee benefits
Fringe benefit taxes on employee stock
options
Tax adjustments
Foreign exchange rate impact on above
adjustments
IFRS – Equity
Rs. in
million
47,067
99
26
16
(53)
47,350
86,975
Add/(less): GAAP Reconciliation items
Consolidation of subsidiaries and equity accounted investees
(1,862)
Property, plant and equipment - Foreign exchange (net of depreciation)
(220)
Property, plant and equipment - Pre-operative expenses (net of depreciation)
(553)
Property, plant and equipment - Interest capitalized (net of depreciation)
685
Employee separation costs
(64)
Interest including debt issue expenses
3,173
Foreign currency convertible notes – conversion options
2,584
Deferred taxes
170
25
Rs. in
million
Transfer of finance receivables
Investments
Dividends
Foreign currency translation adjustment
Others – net
Minority interest
233
90
20,639
6,597
52
(365)
6,352
37,341
IFRS – Equity
124,316
March 12, 2011
The Institute of Company Secretaries of India
The IT companies
Plus…Issue of convenience translation March 12, 2011
CA. Vinayak Pai V
13
The Institute of Company Secretaries of India
Case : Comparative balance sheets
Financial Position as at Dec 31, 2009
(Rs. In crores)
IFRS
Indian GAAP
ASSETS
Current Assets
Cash and cash equivalents
9,176
Available for sale financial assets
5,273
Trade receivables
3,369
Unbilled revenue
803
Derivative financial instruments
7,625
3,369
74
Prepayments and other assets
Total current assets
545
4,000
19,240
14,994
4,473
4,473
832
914
Non-current assets
Property, plant and equipment
Goodwill
Intangible assets
69
-
Deferred Income Tax assets
637
286
Income Tax assets
374
Other non-current assets
Total non-current assets
Total Assets
341
5,273
6,726
10,946
25,966
25,940
March 12, 2011
The Institute of Company Secretaries of India
Case : Comparative balance sheets
Financial Position as at Dec 31, 2009
(Rs. In crores)
LIABILITIES AND EQUITY
Current Liabilities
Trade payables
Derivative financial instruments
Current income tax liabilities
Client deposits
Unearned revenue
Employee benefit obligations
Provisions
Other current liabilities
Total current liabilities
Non-current liabilities
Deferred income tax liabilities
Employee benefit obligations
Other non-current liabilities
Total non-current liabilities
Equity
Share capital
Share premium
Retained earnings
Other components of equity
Total equity
Total liabilities and equity
IFRS
Indian GAAP
13
720
15
620
141
75
1,667
3,251
1,101
2,431
3,532
39
216
40
295
-
286
3,008
19,068
58
22,420
25,966
286
2,988
19,070
64
22,408
25,940
March 12, 2011
CA. Vinayak Pai V
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The Institute of Company Secretaries of India
Key impact areas
March 12, 2011
The Institute of Company Secretaries of India
Key impact areas
Statement of financial position
Statement of comprehensive income
Statement of changes in stockholders equity
Judgements, assumptions and estimates
Revenue, margins
First-time adoption
Ratios
Cash Flows ?
March 12, 2011
CA. Vinayak Pai V
15
The Institute of Company Secretaries of India
Investor communication
Performance measures
Financial Statement Impact
Distributable profits
Taxes, Structuring, Covenants
Comparability
Convergence Issues in India – Applicability, interpretations, market pressure and
competition – Catch Up
The mind-set issue – Looking for detailed guidance
Uncertainty in future enforcement
Change management challenges
March 12, 2011
The Institute of Company Secretaries of India
Earnings
management
Internal
Controls
Financial
Modeling
Budgets
Governance
Issues
Internal
audits
Board
responsibility
Guidance
Valuation
models
Audit
committees
Frauds
M&A
March 12, 2011
CA. Vinayak Pai V
16
The Institute of Company Secretaries of India
Transitioning
GAPs
Business impact
and issues
Accounting
manuals
Investor
communication
Impact
Areas
Systems
Transition plan
Impact
analysis
Data issues
Governance
Implementation
March 12, 2011
The Institute of Company Secretaries of India
The EU Experience
Upfront
communication
The
Transition
Market
reaction
March 12, 2011
CA. Vinayak Pai V
17
The Institute of Company Secretaries of India
Updates
March 12, 2011
The Institute of Company Secretaries of India
Challenges and issues from dynamic financial reporting
standards regime
Extracts from a speech given by IFRS
Foundation Trustee at a conference in
November 2010 at New York
• The SEC has talked in terms of 2015 or 2016 for
mandatory implementation, and in my view, 2016 is the
earliest, realistic date. This would provide ample time
for planning, education, training, and retooling
• A recent survey found that 94% of 900 responders
indicated that their organization could accomplish the
effective implementation of IFRS by 2016, if the
adoption decision were made in 2011
• I believe that the IASB and the FASB have done much to
reduce transition difficulties and costs by narrowing
differences between the two systems in their
convergence projects. Also, through convergence, both
sets of accounting standards have been improved. Both
regimes now have strengths and weaknesses. Both are
of high quality, but only one -- IFRS -- has the prospect
of global acceptance
IFRS Trustee’s strategy review, November 5
2010
The next 18 months will be critical in
determining whether the goal of a single set of
high-quality globally accepted accounting
standards is achieved
The next few years will determine whether the
organisation will be able to achieve its ultimate
objective of single set of global standards.
The challenge facing the Foundation is to
maintain momentum towards global IFRS
adoption in order to bring the remaining major
economies into the IFRS world
March 12, 2011
CA. Vinayak Pai V
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The Institute of Company Secretaries of India
Progress report on convergence of IFRS with US GAAP : Nov 29, 2010
Priority projects
Other projects
• Financial instruments
• Leases
• Revenue recognition
• Consolidations
• Fair value measurement
• De-recognition
• Insurance contracts
• Post employment benefits
• Joint ventures
• Financial statement presentation
• Financial instruments with characteristics of
equity
• Emissions trading schemes
De-recognition
IAS 39 and
IFRS 7
•
•
A single approach to de-recognition based on control
Improved and expanded disclosures
Fair value measurement
n/a
•
•
•
•
Clarify the definition of fair value
Establish a single source of guidance
Enhance disclosures
Increased convergence with US GAAP
Financial statement presentation
IAS 1
•
•
•
Lack of distinction between different items in OCI
Lack of consistency in presentation
Lack of comparability with US GAAP
Hedge accounting
IAS 39
•
•
•
•
A new model for hedge accounting
Better alignment to risk management activities
A new approach to net positions
A comprehensive set of disclosures
Insurance contracts
IFRS 4
•
Proposal to replace IFRS 4 with a high-quality standard that better meets the
needs of users
Leases
IAS 17
•
•
A “right of use” accounting model
Recording of all leases on the balance sheet
Revenue recognition
IAS 18
•
•
Revenue from contracts with customers
A single “core revenue recognition principle”
Consolidation
IAS 27
•
Control model
March 12, 2011
The Institute of Company Secretaries of India
Business combinations
Non-controlling interests
Revenue
Inventory
Fair value, hierarchy
and challenges
Leases
Property, plant and equipment
Impairment
Financial instruments
Compound financial instruments
Employee benefits
Income Taxes and IFRS
Fair value changes
ICAI Position paper -Dec 29, 10
Other comprehensive income
Components of accounting
MAT
Employee taxes
DTC
March 12, 2011
CA. Vinayak Pai V
19
The Institute of Company Secretaries of India
Concluding
March 12, 2011
The Institute of Company Secretaries of India
The financial
reporting
process…. …back
to basics…
Investor
expectations
•
•
•
•
IFRS
transitional
Issues and
Challenges
Consistent, reliable and relevant
information
Same View as Management
Business Value Drivers
Sustainability of Revenue and margins
How to
Address
Challenges
and Issues
March 12, 2011
CA. Vinayak Pai V
20
The Institute of Company Secretaries of India
Thank You
Vinayakpaiv@hotmail.com
March 12, 2011
CA. Vinayak Pai V
21