Ifrs presentation slides

Vinay Kaushik & Co.Chartered Accountantswww.vinaykaushik.com

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IFRS : Conversion Challenges and Implementation Approach for Banks in India


Vinay Kaushik & Co.Chartered Accountants

Second Floor, Meridian Tower-IIIndira Gandhi Marg, Udhna Darwaja,

Surat-395003, Gujarat-INDIA

+91-261-2333527+91-261-6534665+91-9227907024

Email: [email protected]: www.vinaykaushik.com


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Over View

This presentation aims to provide increased awareness towards the Challenges of IFRS convergence and the need for developing a roadmap to facilitate implementation through advance planning.


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IntroductionThe International Accounting Standard Board (IASB) is

● a stand alone privately funded accounting standard setting body

● established to develop global standards of financial reporting.

● successor to the International Accounting Standard Committee (IASC)

Since 2001, the standards that the IASB develops and approves have been known as International Financial Reporting Standards (IFRS)


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IntroductionThe term IFRS comprises:-

● IFRS issued by IASB;

● IAS issued by IASC;

● the interpretations issued by the Standing Interpretations Committee (SIC); and

● the International Financial Reporting Interpretations Committee (IFRIC) of IASB.

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IntroductionAuthority to formulate Accounting Standars in India:

● The Accounting Standards Board of the Institute of Chartered Accountants of India ('ICAI') was constituted on 21 April, 1977, to formulate Accounting Standards applicable to Indian enterprises.

● ICAI, being a full-fledged member of the International Federation of Accountants (IFAC), while formulating the Accounting Standards (ASs), the ASB gives due consideration to IASs issued by IASC and IFRSs issued by the IASB.

● ICAI try to integrate them, to the extent possible. However, where departure from IFRS is warranted keeping in view the Indian conditions, the ASs have been modified to that extent.


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IntroductionAuthorities requiring for compliance with the Accounting Standards issued by ICAI:

● Ministry of Corporate Affairs in case of companies;

● The Reserve Bank of India (RBI) in case of banks;

● The Insurance Regulatory and Development Authority (IRDA) in case of insurance companies; and

● The Securities and Exchange Board of India (SEBI) in case of all listed companies.


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Benefits of IFRS Convergence

● IFRS significantly improves the comparability of entities.

● IFRS gives better access to global capital markets and reduces the cost of capital.

● IFRS provides impetus to cross-border acquisition.

● Improvement in quality and consistency of information, avoid multiple reporting and reduce cost of the finance function.

● IFRS balance sheet is closer to economic value


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IFRS in IndiaICAI has decided to follow a convergence approach to IFRS implementation rather than adoption of IFRS as issued by the IASB due to various reasons as follows:

● The legal and the regulatory environment prevailing in the country.

● Alternative accounting choices that are permitted in IFRS may be incompatible with the local requirements and considerations within specified sectors and industries.

● The current level of preparedness within the country for implementation of IFRS.


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Timelines for Convergence

Phase I - 1 April 2011*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 `1,000 crores.Phase II - 1 April 2013*The companies, whether listed or not, having a net worth exceeding ` 500 crores but not exceeding `1,000 crores.Phase III - 1 April 2014*Listed companies which have a net worth of `500 crores or less.


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Deadline for UBC

RBI has vide circular no.25/12.05.001/2011-12, dated 6th March, 2012, made it clear that all urban co-operative bank (UCB) having:

● Net worth in excess of `300 crore would, in the preparation of their accounts, converge with IFRS in tendem with the time schedule given for scheduled commercial banks and accordingly convert their opening balance sheet as on 1st April, 2013 in compliance with IFRS converged IAS.

● Net worth in excess of `200 crore but not exceeding `300 crore would convert their opening balance sheet as on 1st April, 2014 in compliance with IFRS converged IAS.


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Net worth compution

The MCA press release dated May 5, 2010, clarifies in Issue 8 that net worth will be calculated as:

Share Capital XXXAdd : Add : Reserves XXX

Total A XXXLess: Less: Revaluation Reserve XXX

Miscellaneous Expenditure XXXDebit Balance of the P&L Account XXXTotal B XXXNetworth A-B XXX


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Underlying Assumptions

Accrual basis:

It is assumed that the effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate

Going concern:

It is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.


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Qualitative characteristics of IFRS financial statements

The four principal qualitative characteristics are:

● Understandability● Relevance● Reliability● Comparability


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IFRS financial statements

Complete set of IFRS Financial Statements comprises of:● A statement of financial position as at the end of the period;● A statement of comprehensive income for the period;● A statement of changes in equity for the period;● A statement of cash flows for the period;● Notes, comprising a summary of significant accounting policies,

and other explanatory information; and● A statement of financial position as at the beginning of the earliest

comparative period.


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Comparative Position

IAS No. And Title Corresponding Indian GAAPIAS 1. Presentation of financial

StatementsAS 1

IAS 2. Inventories AS 2 (Revised)IAS 7. Statement of Cash Flow AS 3 (Revised)IAS 8. Accounting Policies change in Accounting Estimates and Errors

AS 5 (Revised)

IAS 10. Events after the Reporting Period

AS 4 (Revised)

IAS 11. Construction Contracts AS 7 (Revised)IAS 12. Income Taxes AS 22


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IAS / IFRS No. And Title Corresponding Indian GAAPIAS 16. Property Plant and Equipment

AS10 and AS 6 (Revised)

IAS 17. Leases AS 19IAS 18. Revenue AS 9IAS 19. Emplyee Benefits AS 15IAS 20. Accounting for Government Grants and Disclosure of Governmant Assistance

AS 12

IAS 21. The effect of changes in Foreign Exchange Rates

AS 11 (Revised)


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IAS / IFRS No. And Title Corresponding Indian GAAPIAS 23. Borrowing Costs AS 16IAS 24. Related Party Disclosures AS 18IAS 26. Accounting and Reporting by Retirement Benefit Plans

AS under preparation by ICAI

IAS 27. Consolidated and Separate Financial Statement

AS 21

IAS 28. Investments in Associates AS 23IAS 29. Financial Reporting in Hyperinflationary Economics

Not Relevant for Indian Conditions

IAS 31. Interest in Joint Ventures AS 27


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IAS / IFRS No. And Title Corresponding Indian GAAPIAS 32. Financial Instruments Presentation

AS 31 (Not mandatory at present)

IAS 33. Earning per share AS 20IAS 34. Interim Financial Reporting AS 25IAS 36. Imparement of Assets AS 28IAS 37. Provisions, Contingent Liabilities and Contingent assets

AS 29

IAS 38. Intangible Assets AS 26IAS 39. Financial Instruments: Recognition and Measurements

AS 30 (Not Mandatory at present)


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IAS / IFRS No. And Title Corresponding Indian GAAPIAS 40. Investment Property Partly Covered by AS 13IAS 41. Agriculture AS under preperation by ICAIIFRS 1. First Time Adoption of IFRS Not relevant to India at presentIFRS2. Share based Capital AS under preperation by ICAIIFRS3. Business Combination AS 14IFRS4. Insurance Contracts AS under preperation by ICAIIFRS 5. Non Current Assets held for sale and discontinued operations

AS 24


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IAS / IFRS No. And Title Corresponding Indian GAAPIFRS 6 Explanation for and evaluation of Mineral Resources

Covered by Guidance Note on Accounting for Oil and Gas Producing Activities

IFRS 7. Financial Instruments Disclosure

AS 32 (Not mandatory at present)

IFRS 8. Operating Segments As 17IFRS 9. Financial Instruments AS 30 (Not Mandatory at present)


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First Time Adoption of IFRS

● FRS 1 sets out the procedures that a first-time adopter must follow on first-time adoption of IFRS.

● IFRS- 1 requires an entity to follow all the accounting standards in the preparation and presentation of its financial statements which are effective at the reporting date.For eg. an entity which carries out the transition in 2009 has to comply with the standards effective 31st December 2009.

● IFRS 1 also permits an entity to apply a new IFRS that is not yet mandatory if that standard allows early application.


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First Time Adoption of IFRS

● The first-time adopter establishes its date of transition, which is defined as the beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS financial statements.

● At the date of transition the first-time adopter prepares an opening statement of financial position. This is the starting point for its accounting under IFRS.

● In the opening statement of financial position, the first-time adopter applies its IFRS accounting policies in recognising and measuring all assets and liabilities, and if appropriate reclassifies items recognised under previous generally accepted accounting principles (GAAP) as another type of asset, liability or component of equity.


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First Time Adoption of IFRS● In preparing the opening statement of financial position, the first-

time adopter may choose the optional exemptions from retrospective application.

● The first-time adopter applies the mandatory exemptions in all applicable cases.

● A first-time adopter prepares reconciliations between previous GAAP and IFRS, and discloses these reconciliations in its first IFRS financial statements (and interim report, if applicable). The entity complies with other note disclosures in IFRS 1 in addition to those required by other IFRSs.


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How Opening IFRS Balance Sheet is Prepared

● Recognise all assets and liabilities whose recognition is required

by IFRS

● Derecognise assets and liabilities where recognition is not permited

by IFRS

● Classify all assets and liabilities inaccordance with IFRS

● Measure all recognised assets and liabilities in accordance with

applicable IFRS


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Impact of key differences

● Currently, only listed Indian companies and banks are required to prepare consolidated financial statements. Adoption of IFRS would require all defined entities (which include large-sized entities that are not listed on stock exchanges) to prepare and present consolidated financial statements.

● The accounting for acquisition is largely dependent on the form of the acquisition. Under IFRS, all acquisitions are generally accounted for using the purchase method whereby the purchase price is compared to the fair value of all identifiable tangible assets, liabilities, contingent liabilities and intangible assets of the acquired company, with the excess being recognised as goodwill. This goodwill is not amortised, but is assessed for impairment annually.


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Impact of key differences● Under Indian GAAP intangible assets are generally recognised only if

they are acquired separately. Under IFRS, intangible assets are recorded either while accounting for acquisitions using the purchase method, or when intangible assets are acquired separately.

● Under Indian GAAP all intangible assets are amortised over their useful lives (and tested for impairment) and there is a rebuttable presumption that the useful life cannot exceed 10 years. IFRS acknowledges that certain intangible assets may have indefinite useful lives (for example, brands that demonstrate certain characteristics) and accordingly, such intangible assets are not amortised, but tested for impairment annually.


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Impact of key differences● Indian GAAP on share-based payment to employees (for example,

employee stock options) provides entities with a choice to either adopt the intrinsic value method (under this employee stock options are granted with an exercise price equal to the market price on the grant date, no compensation cost is recognised) or the fair value method. IFRS mandates the use of the fair value method, whereby the fair value of the options is determined using an option pricing model. This would usuall result in recognition of compensation cost even if the options are in-the-money on the grant date.


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Impact of key differences● IFRS require that a financial instrument should be classified in

accordance with the substance of the contractual agreement rather than its legal form (substance over form). Thus, redeemable preference share would be a financial liability and dividends on redeemable preference shares are recognised as interest expense under IFRS and impact the profits and loss for the year. This is different from the Indian GAAP classification of redeemable preference shares as equity and the related presentation of dividends on such preference shares as appropriation of profits. This would impact financial structures and debtequity ratios.


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Impact of key differences

Under Indian GAAP, long-term investments are generally carried atcost, less impairment; and current investments are carried at lower ofcost or market value. IFRS requires that investments be categorised into three categories:

● Trading or investment carried at fair value,

● Held-to-maturity and

● Available-for-sale.

Except for held-tomaturity investments, all investments are carried at fair value. Held-to-maturity investments are carried at amortised cost.


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Impact of key differences● Unlike Indian standards, where prior period items that represent

correction of errors; and cumulative impact of change in accounting policies, are recorded as an adjustment in the current period, IFRS generally require accounting policy changes and correction of prior period errors to be made by adjusting opening retained earnings and restating comparatives. This is a relatively new concept for preparers, auditors, users, regulators, investors and analysts in India (although such restatements are required in certain limited situations that involve initial public offerings) and would require companies to clearly communicate with and educate investors and other users to highlight the impact of this change.


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Presentation of FinancialStatements

● Financial statements presentation formats under Indian GAAP are primarily driven by regulatory requirements specified in the Indian Companies Act and other regulation for specific industries (for example, banking and insurance).

● Under IFRS, IAS 1 sets out detailed requirements for presentation of financial statements, including their structure and minimum requirements for content.

● Under IFRS, in addition to the balance sheet, income statement and cash flow statement, a Statement of Changes in Equity (SOCIE) with supplimentry notes are required.


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Critical success factor for IFRS convergence

Following are the common critical success factors identified for Indian entities for successful IFRS conversion projects:

● Strategy

● Leadership

● Communication

● Resources

● Knowledge

● Project Management

● Time


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Project Management

Complex tasks are easier when divided into manageable pieces. IFRS conversion projects can be broken down into key phases.

Phase 1 Phase 2 Phase 3Assess Impact and Plan Conversion

Learn and build the tools

Roll out and Parallel run

Assets Design Implement


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Project Management

Asset Impect and Plan Conversion:

● Mobile Core Team;

● Impact assessment;

● Resource Budget;

● IFRS Treaning needs assessment;

● Management decision; and

● Plan Conversion


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Project Management

Learn and build the Tools:

● Mobile finance function and informational Technology;

● IFRS training detailed plan;

● Make policies and financial statement reporting package; and

● Convert system and budgets


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Project Management

Roll out parallel run:

● Mobile business and parallel run;

● April 1, 2012 balance sheet;

● 2012-2013 financial statements; and

● Manage business on IFRS Basis


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CA. Vinay KaushikB.Com., F.C.A., D.E.M., DISA(ICAI),

DIRM(ICAI), Cer. IFRS (CICA)

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