Deloitte
Haskins & Sells
IFRS Convergence
in India
Ananthi Amarnath
Cochin
December 20, 2010
© Deloitte Haskins & Sells, Mumbai
Agenda
• Global Convergence of Accounting
Standards
• Convergence of Indian Accounting
Standards with IFRS
• Conceptual Differences between IFRS and
Indian GAAP
• IFRS Conversion Issues – Business and
Technical Accounting
• IFRS Resources
2
GLOBAL CONVERGENCE
of ACCOUNTING STANDARDS
3
Convergence Drivers
• Capital Markets
• Regulatory requirements
• Internal controls
• Performance evaluation
4
IFRS Objective
• Principles based high quality global
standards
• Emphasis on relevance and disclosures
5
The Global Move Towards IFRS
Canada
2009/11
Europe
2005
United States
(2014/15/16?)
China
2007
Japan
(2016)
India
2011
Brazil
2010
Chile
2009
South Africa
2005
Australia
2005
Current or anticipated requirement
or option to use IFRS (or equivalent)
Use of IFRSs in Europe
• Europe moved to IFRSs from 1/1/2005 with
about 8000 EU listed companies mandated
• Non-EU listed companies allowed to use GAAPs
of US, Japan, China, S Korea, and India, other
countries to use IFRS – Review in 2011
• EU member states may require IFRSs for nonlisted companies and to separate company
statements
• European Commission has so far endorsed all
IASs, IFRSs and all interpretations (except some recent
amendments)
Use of IFRSs in Canada
• Currently Canadian companies listed in US
may use US GAAP for domestic reporting
and foreign issuers are allowed to use
IFRSs
• From 1 January 2011, all Canadian public
entities must use IFRSs
• Early adoption is permitted on case-bycase basis by securities regulator
• Not-for-profit and pension plans are not
required to transition to IFRSs
IFRS Adoption
• BIGGEST STAMP OF APPROVAL
Securities and Exchange Commission (SEC),
United States of America have permitted Foreign
Private Issuers to file IFRS compliant financial
statements (as promulgated by the IASB)
without reconciliation to US GAAP
SEC has issued a proposed roadmap to assess
whether US domestic registrants should be
permitted to use IFRS
9
SEC permits IFRS filings
• SEC now permits foreign private issuers to
file their financial statements prepared under
IFRS in stead of US GAAP – without the
need for reconciliation
• In November 2008, SEC revised its
“roadmap” to include milestones that could
lead to mandatory transition to IFRSs starting
fiscal years ending on or after 15 December
2014/15/16, with permission to certain
entities to adopt early.
Convergence Project in India
• Convergence Vs Adoption
• In October 2007, ICAI issued concept paper
giving the approach and roadmap for
convergence
• Various study groups have been formed
• The convergence exercise will be taken up
in phases - listed and bigger companies
initially, smaller public companies thereafter,
and eventually all private companies/SMEs
Convergence Project in India
• The Ministry of Company Affairs has
appointed two working groups, headed by
Mr. Y.H. Malegam and Mr. Mohandas Pai to
finalise the roadmap to IFRS convergence.
• SEBI Committee on Disclosures and
Accounting Standards (SCODA) is the
standing Committee - Voluntary adoption of
International Financial Reporting Standards
(IFRS) by listed entities having overseas
subsidiaries or by all listed entities.
IFRS in India
• On April 5, 2010 Amendment to listing
Agreement provides the option of adoption
of International Financial Reporting
Standards (IFRS) by listed entities having
subsidiaries while declaring Consolidated
results/financial statements
• Standalone results will be as per the
existing Indian GAAP
IFRS in India
• On January 22, 2010 MCA has released
Road Map for convergence with IFRS –
For large Companies
IFRS in India – Phase I
• The following categories of companies will convert
their opening balance sheets as at 1st April, 2011, if
the financial year commences on or after 1st April,
2011 in compliance with the notified accounting
standards which are convergent with IFRS. These
companies are:a. Companies which are part of NSE – Nifty 50
b. Companies which are part of BSE - Sensex 30
c. Companies whose shares or other securities are
listed on stock exchanges outside India
d. Companies, whether listed or not, which have a net
worth in excess of Rs.1,000 crores.
IFRS in India – Phase II
The companies, whether listed or not, having
a net worth exceeding Rs. 500 crores but not
exceeding Rs. 1,000 crores will convert their
opening balance sheet as at 1st April, 2013, if
the financial year commences on or after 1st
April, 2013 in compliance with the notified
accounting standards which are convergent
with IFRS.
IFRS in India – Phase III
Listed companies which have a net
worth of Rs. 500 crores or less will
convert their opening balance sheet as
at 1st April, 2014, if the financial year
commences on or after 1st April, 2014,
whichever is later, in compliance with
the notified accounting standards which
are convergent with IFRS.
IFRS in India – Road map
When the accounting year ends on
a date other than 31st March, the
conversion of the opening Balance
Sheet will be made in relation to the
first Balance Sheet which is made
on a date after 31st March.
IFRS in India – Road map
•
Companies which fall in the following categories will
not be required to follow the notified accounting
standards which are converged with the IFRS (though
they may voluntarily opt to do so) but need to follow
only the notified accounting standards which are not
converged with the IFRS. These companies are: • (a)
Non-listed companies which have a net
worth of Rs. 500 crores or less and whose shares or
other securities are not listed on Stock Exchanges
outside India.
• (b)
Small and Medium Companies (SMCs).
IFRS in India – Road map
The
draft
of
the
Companies
(Amendment)
Bill,
proposing
for
changes to the Companies Act, 1956
will be prepared incorporating the
recommendation of Sub-Group 1
Report.
IFRS in India – Road map
Revised Schedule VI to the Companies
Act, 1956 according to the converged
Accounting
Standards
has
been
submitted by the ICAI to NACAS which,
after review, will submit to the Ministry.
Amendments to Schedule XIV will also
be made in a time bound manner.
IFRS in India – Road map
• Roadmap recommended by Core Group of
MCA in respect of insurance companies,
banking companies and non-banking finance
companies.
• Insurance companies:• All insurance companies will convert their
opening balance sheet as at 1stApril, 2012 in
compliance with the converged Indian
Accounting Standards.
IFRS in India – Road map
• Banking companies:(a) All scheduled commercial banks and
those urban co-operative banks(UCBs) which
have a net worth in excess of Rs. 300 crores
will convert theiropening balance sheet as at
1st April, 2013 in compliance with the first set
ofAccounting Standards (i.e. the converged
Indian Accounting Standards).
IFRS in India – Road map
• Banking companies:(b) Urban co-operative banks which have a
net worth in excess of Rs. 200crores but not
exceeding Rs. 300 crores will convert their
opening balance sheets as at 1st April, 2014
in compliance with the first set of Accounting
Standards (i.e. the converged Indian
Accounting Standards).
IFRS in India – Road map
• Banking companies:(c) Urban co-operative banks which have a
net worth not exceeding Rs. 200crores and
Regional Rural banks (RRBs) will not be
required to apply the first set of Accounting
Standards i.e. the converged Indian
Accounting Standards(though they may
voluntarily opt to do so) and need to follow
only the existing notified Indian Accounting
Standards which are not converged with
IFRSs.
IFRS in India – Road map
• NON-BANKING FINANCE COMPANIES
Type of institution
Opening B/s conversion date
•Companieswhich are part of NSE
Nifty 50Companies & which are part
of BSE - Sensex 30
•Companies, whether listed or not,
which have a net worth in excess of
Rs.1,000 crores.
April 1, 2013
All listed NBFCs and unlisted NBFCs
which do not fall in the above
categories and which have a net
worth in excess of Rs. 500 crores
April 1, 2014
IFRS in India – Road map
• NON-BANKING FINANCE COMPANIES
Unlisted NBFCs which have a net worth of Rs. 500
crores or less will not be required to apply the
converged Indian Accounting Standards.
Clarification issued MCA on the
certain issues in the Roadmap
28
MCA Clarifications
• The Ministry of Corporate Affairs issued
clarification on the following issues in the
IFRS Roadmap on 4th May 2010:
− Determination of Applicability
− Applicability for entities that are subsidiaries, joint
ventures or associates of companies covered
under the convergence roadmap.
− Discontinuing use of the first set of Accounting
Standards (Converged Accounting Standards)
− Calculation of net worth
− Removal of options
29
MCA clarifies on: Determination of Applicability
• Whether companies can voluntarily
opt to provide comparative figures for
2010-11 in accordance with the
converged Accounting Standards?
30
MCA clarifies on: Determination of Applicability
• Previous year figures - Clarification:
– Companies should show previous years’ figures as per
the F/s for 2010-11.
– Option available to add an additional column to indicate
what the figures could have been if the Converged
Accounting Standards had been applied in the previous
year
– Companies which make this additional disclosure, for
this purpose, convert their opening balance sheet as the
date on which this pervious year commences and in
that case, a further conversion of the opening balance
sheet for the year for which the F/s are prepared will not
be necessary.
31
MCA clarifies on: Determination of Applicability
• Whether companies covered in 2nd / 3rd
phase for application of the converged
Accounting Standards can voluntarily opt to
apply the same w.e.f accounting year
beginning 1st April 2011?
32
MCA clarifies on: Determination of Applicability
• Clarification:
Companies in the 2nd / 3rd phase will have
an option for application of the Converged
Accounting Standards only for the
financial year commencing on 1st April
2011 or thereafter
33
MCA clarifies on: Determination of Applicability
• What is the cut-off date on which the
criterion set out in the roadmap shall be
applied in order to determine the
companies falling in each of the four
categories which will convert their opening
balance sheet as at 1st April 2011 in
compliance with the converged accounting
standards
34
MCA clarifies on: Determination of Applicability
• Clarification:
– The date of determination of the criteria is
the Balance Sheet as at 31st March 2009;
OR
– the first Balance Sheet prepared
thereafter when the accounting year ends
on another date.
35
MCA clarifies on: Determination of Applicability
• What is the cut-off date on which the criterion set
out in the roadmap shall be applied in order to
determine the scheduled commercial
banks/urban co-operative banks/NBFCs falling in
each of the categories (as set out in the roadmap
for Banks and NBFCs) which will convert their
opening balance sheet as at 1st April 2013 in
compliance with the converged Accounting
Standards?
36
MCA clarifies on: Determination of Applicability
• Clarification:
– The date of determination of the criteria is the
Balance Sheet as at 31st March 2011;
OR
– the first Balance Sheet prepared thereafter
when the accounting year ends on another
date.
37
MCA clarifies on: Status of subsidiaries, JVs and
Associates of entities who are covered under
roadmap
• Whether it would be permissible for the
companies which are not individually covered
under the phasing plan for application of the
Converged Accounting Standards to voluntarily
opt for application of the Converged standards
even for their standalone F/s?
38
MCA clarifies on: Status of subsidiaries, JVs and
Associates of entities who are covered under
roadmap
• Clarification:
– Criteria to be considered for each company’s standalone
accounts
– Companies covered in a particular phase having
subsidiaries, JVs or associates not covered in those phases
will prepare consolidate F/s according to Converged
Accounting Standards
– One of more companies in a group will continue to prepare
F/s in accordance with the Accounting Standards applicable
to the particular phase to which it belongs but parent will
need to make amendments to these accounts in order to
consolidate as per Converged Accounting Standards
– Such subsidiaries, JVs or associates may have the option to
39
early adopt the Converged Accounting Standards.
MCA clarifies on: Discontinuing use of
Converged Accounting Standards
• Does a company have the option to go back to
preparing F/s in accordance existing Indian
Accounting Standards if it no longer satisfies the
specified criteria in the future?
• Clarification:
– No.
– Once a company starts following the Converged
Accounting Standards on the basis of the eligibility
criteria, it will be required to follow such Accounting
Standards for all the subsequent financial statements
even if any of the eligibility criteria does not
subsequently apply to it. 40
MCA clarifies on: Calculation of Net worth
• Rules for calculation of qualifying net worth
• Clarification:
– Networth will be calculated as per audited balance sheet
of the company as at 31st March 2009 or first balance
sheet for accounting periods which ends after that date
– Networth = Share Capital + Reserves – Revaluation
Reserves – Miscellaneous Expenditure – Debit Balance
in Profit and Loss A/c
– For companies which are not in existence on 31st March
2009, networth will be calculated on the basis of the first
balance sheet ending after that date.
41
MCA clarifies on: Calculation of Networth
• Rules for calculation of qualifying networth
recommended to Scheduled Commercial Banks /
Urban Cooperative Banks / NBFCs
• Clarification:
– Networth will be calculated as per audited balance sheet
of the Bank / NBFC as at 31st March 2011 or first
balance sheet for accounting periods which ends after
that date
– Networth = Share Capital + Reserves – Revaluation
Reserves – Miscellaneous Expenditure – Debit Balance
in Profit and Loss A/c
– For Banks / NBFCs which are not in existence on 31st
March 2009, networth will 42
be calculated on the basis of
MCA clarifies on: Removal of Options
• Situation where Notified Converged Accounting
Standards ARE NOT fully consistent with IAS /
IFRS
• Clarification:
– Companies will follow the first set of Accounting
Standards i.e. the Converged Accounting Standards and
NOT IFRS.
43
Regulatory updates
Steps to reduce inconsistencies between
regulations
The ICAI has taken the following steps for Identification of
inconsistencies between various Laws and Regulations:
• Constitution of a Group on Liaison with Governmental
and Regulatory Authorities
• Group has constituted separate Core Groups to identify
inconsistencies between IFRSs and the following
statutes:
– Companies Act
– SEBI Regulations
– Banking Laws & Regulations
– Insurance Laws & Regulations
– CBDT
Convergence Status
• Exposure drafts on converged standards
were released for public comments by
ICAI
• The converged accounting standards
along with revised Sch VI and Sch XIV
have been finalized by NACAS and
recommended to the Government for
notification.
46
Progress of Convergence
Standards Cleared by Council
Standard #
Standard Description
AS 1
Corresponding to IAS 1, Presentation of Financial Statements
AS 2
Corresponding to IAS 2, Inventories
AS 3
Corresponding to IAS 7, Statement of Cash Flows
AS 4
Corresponding to IAS 10, Events after the Reporting period
AS 5
Corresponding to IAS 8, Accounting Policies and Changes in Accounting
Estimates and Errors
AS 7
Corresponding to IAS 11, Construction Contracts
AS 12
Corresponding to IAS 20, Accounting for Government Grants and Disclosure
of Government Assistance
AS 16
Corresponding to IAS 23, Borrowing Costs
AS 19
Corresponding to IAS 17, Leases
AS 25
Corresponding to IAS 34, Interim Financial Reporting
AS 34
Corresponding to IAS 29, Financial Reporting in Hyperinflationary
Economies
AS 35
Corresponding to IFRS 6, Exploration for and Evaluation of Mineral
Resources
Exposure Drafts issued and comments
considered by ASB
Standard #
Standard Description
AS 10
Corresponding to IAS 16, Property, Plant and Equipment
AS 11
Corresponding to IAS 21, The Effects of changes in Foreign
Exchange rates
AS 18
Corresponding to IAS 24, Related Party Disclosures
AS 20
Corresponding to IAS 33, Earnings Per Share
AS 21
Corresponding to IAS 27, Consolidation and Separate Financial
Statements
AS 23
Corresponding to IAS 28, Investments in Associates
AS 29
Corresponding to IAS 37, Provisions and Contingent Liabilities
and Contingent Assets
AS 37
Corresponding to IAS 40, Investment Property
Exposure Drafts issued and comments to be
considered by ASB
Standard #
Standard Description
AS 9
Corresponding to IAS 18, Revenue
AS 14
Corresponding to IFRS 3, Business Combinations
AS 15
Corresponding to IAS 19, Employee Benefits
AS 17
Corresponding to IFRS 8, Operating Segments
AS 22
Corresponding to IAS 12, Income Taxes
AS 24
Corresponding to IFRS 5, Non-current Assets Held for Sale and
Discontinued Operations
AS 26
Corresponding to IAS 38, Intangible Assets
AS 27
Corresponding to IAS 31, Interest in Joint Ventures
AS 28
Corresponding to IAS 36, Impairment of Assets
Exposure Drafts issued and comments to be
considered by ASB
Standard #
Standard Description
AS 30
Corresponding to IAS 39, Financial Instruments: Recognition and
Measurement
AS 31
Corresponding to IAS 32, Financial Instruments: Presentation
AS 32
Corresponding to IFRS 7, Financial Instruments : Disclosures
AS 33
Corresponding to 2, Share-based payment
AS 36
Corresponding to IAS 26, Accounting and Reporting by Retirement
Benefit Plans
AS 38
Corresponding to IAS 41, Agriculture
AS 39
Corresponding to IFRS 4, Insurance Contracts
AS 40
Corresponding to IFRS 9, Financial Instruments
AS 41
Corresponding to IFRS 1, First time Adoption of International
Financial Reporting Standards
IFRS Vs Indian GAAP
Conceptual Differences
52
Conceptual Differences
IFRS
1
IFRS
Conceptual Differences
IFRS
1
IFRS
IFRS CONVERSION ISSUES
55
Business and organisational considerations
IFRS impact beyond financial statements
Most aspects of the business
can be affected:
 Processes and systems
 Operations
 Tax
 Treasury
Examples include impact on:
 Debt covenants
 Compensation plans
 Revenue contracts
 Joint ventures and
alliances
 Investor communication
The adoption of IFRS affects more than a
company’s accounting policies, processes, and
people.
Ultimately, most aspects of a company’s business
and operations are affected potentially.
IFRS Implementation Issues
Treasury Management
Valuation
Distribution
Hedge Accounting
Investments
Fair valuation approach
Fair valuation methodologies
2010-11 profit will change
Dividend policy
Investor
relations
Debt Covenants
IAS 1 requirements
Changes in EPS
EU experience
ORGANISATION
IT Systems
Disclosures (IFRS 7)
Hedge accounting
Data collection
Mergers &
Acquisitions
Control
Goodwill
Capital reserve
IFRS 1 option
Management
Compensation
HR
Training
Revised CTC
MIS
Increased volatility
Fluctuations outside
control
Fair value adjustment
Tax Implication
Fair value adjustment
Most item will flow
through P & L
ESOP fair value
Targets not achievable
Director remuneration
Investors
Potential business issues
 Treasury management
 Certain financing and hedging policies will no longer
achieve the desired accounting effect, will instead create
volatility in reported profits
Challenge
have to find good economic strategies that will produce
right accounting treatment
 Distributions
 Equity will change – current dividend policy may no
longer be sustainable
 Altered dividend patterns may directly impact the share
price
58
Potential business Issues
 Debt covenants & financing
 Where debt covenants do not provide for changes in
accounting standards, changes to financial position may
cause these covenants to be breached
 Impact company’s ability to ensure continuity of financing
arrangements
 When seeking to raise finance, comparative figures may
need to apply IFRS as well
 Mergers & acquisitions
 Accounting for potential acquisitions will be altered by the
adoption of IFRS
 Goodwill => become non-amortised
 Past mergers/acquisitions may contain clauses including
price revisions based on accounting data
59
Potential business issues
 Management compensation
 Fair value of share options and other incentive plans
shall be recognised
 Additional cost to company
 Any adjustment to a directors’ remunerations scheme is
a sensitive issue
 Careful management of investor relations is essential
60
Potential business issues
 Potential tax implications
 Definition of “taxable profits”, follow accounting rules?
 Major accounting principles adopted:
Mark-to-market basis for valuation
Flow through P&L accounts for most items
Both unrealized gains and loss will appear in profit
and loss account
 Items may cause material impact:
Financial instruments
Share-based payments
Investment properties
Income taxes
Revenue recognition
61
Potential business issues
 Management information
 Forecasts and internal performance
measurements may no longer be comparable
with results reported in FS (eg fair value change)
 Making forecast more difficult
 Human resources & training
 Training will be required throughout the
organization, but not just for finance dept
 Existing skills may not be adequate to tackle
IFRS related issues  need to be
supplemented externally or by recruitment
62
Potential business issues
 IT systems
 Systems that will be affected:
internal and external reporting systems, accounting
systems and operating systems
 E.g. new accounting treatments for financial instruments
may require treasury systems to be integrated with
financial reporting system
63
Potential business issues
 Investor relations
 May challenge the changes in profits and EPS
 Investors will form their own expectation on new
accounting policies and expect certain accounting
outcomes
 Nobody likes surprises
64
Planning for IFRS






Technical Accounting
Tax
Internal Processes and Statutory Reporting
Technology Infrastructure
Organizational Issues
Implementation strategy and timeline
65
IFRS Conversion Approach
•Determine business case & future
state vision for IFRS adoption
•Perform comprehensive IFRS
conversion
•Enable continued IFRS reporting
and perform knowledge transfer
66
IFRS Resources
• IASB website
http://www.iasb.org/Home.htm
• ICAI’s website
http://www.icai.org/
67
Deloitte IFRS
Resources
68
www.
Iasplus.com
1,200 pages
and files,
350 mb
of IAS stuff.
69
www.iasplus.com
Day by day past news back to December 2000 (a new
page updated almost daily);
Detailed summaries of all Standards and Interpretations;
E-Learning modules;
Model IFRS financial statements and disclosure
checklists;
Comparisons of IFRS and various national GAAPs;
Deloitte IFRS publications; and
much more……
70
IFRS e-Learning
71
e-Learning – IAS 40 “Home
page”
Overview
Four
scenarios
Assessment
72
IFRS in your pocket 2009
Free at
www.
iasplus.com
73
Model IFRS
Financial Statements
for 2009
Free at
www.
iasplus.com
74
THOUGHT LEADERSHIP
75
Experience Learned
• Be Strategic. Accounting choices and a principles based approach
provides opportunity.
• The business will be impacted. Taxes. Systems. Debt Covenants.
Dividends. Earnings. MIS. The reach of IFRS can be widespread.
• Execution counts. Understanding concepts is only the beginning.
Striking the numbers and documenting your position requires a very
large effort.
• Communication is critical. Internal communication across your
business is needed. External communication with all stakeholders is
important. Don’t forget the analysts!
• Disclosures require a lot of effort. Don’t leave this until it’s too late.
The information requirements are extensive.
76
Summary
Key considerations for Industries
•
•
•
•
•
•
Impact on P&L and Net worth
Market valuation
Global image
More business
True picture
IFRS is much more than an accounting
matter.
Questions?
Deloitte Haskins & Sells
78
Thank you
Deloitte Haskins & Sells
79