IFRS Convergence in India © Deloitte Haskins & Sells, Mumbai Deloitte Haskins & Sells Ananthi Amarnath Cochin December 20, 2010

IFRS Convergencein India

© Deloitte Haskins & Sells, Mumbai

DeloitteHaskins & Sells

Ananthi AmarnathCochinDecember 20, 2010

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

Europe2005

Australia 2005

Canada2009/11

South Africa2005

United States (2014/15/16?)

Current or anticipated requirement or option to use IFRS (or equivalent)

Brazil2010

China 2007

India 2011

Chile 2009

Japan(2016)

• 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 non-listed 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 Europe

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-by-case 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

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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 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.

Convergence Project in India

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.


• 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).


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.


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.


• 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.


• 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).


• 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

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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 options29

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


• 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.

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• 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?

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• 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

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• 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

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• 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.

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• 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?

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• 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.

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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 early adopt the Converged Accounting Standards.39

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 be calculated on the basis of the first balance sheet ending after that date.

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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.

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Regulatory updates

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

Steps to reduce inconsistencies between regulations

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.

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Progress of Convergence

Standards Cleared by CouncilStandard # 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


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


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 GAAPConceptual Differences

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Conceptual Differences IFRS 1IFRS

Conceptual Differences IFRS 1IFRS

IFRS CONVERSION ISSUES

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Business and organisational considerationsIFRS 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.

Treasury Management Hedge Accounting

Investments

Valuation Fair valuation approach

Fair valuation methodologies

Distribution 2010-11 profit will change

Dividend policy

Debt CovenantsIAS 1 requirements

Mergers & Acquisitions

Control Goodwill

Capital reserveIFRS 1 option

Management Compensation

ESOP fair valueTargets not achievable Director remuneration

Investors Tax Implication

Fair value adjustmentMost item will flow

through P & L

MIS Increased volatility Fluctuations outside

controlFair value adjustment

HR Training

Revised CTC

IT Systems Disclosures (IFRS 7)Hedge accounting

Data collection

Investor relations

Changes in EPSEU experience

ORGANISATION

IFRS Implementation Issues

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

price58

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 data59


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

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Potential tax implications Definition of “taxable profits”, follow accounting rules? Major accounting principles adopted:

Mark-to-market basis for valuationFlow through P&L accounts for most itemsBoth unrealized gains and loss will appear in profit and loss account

Items may cause material impact:Financial instrumentsShare-based paymentsInvestment properties Income taxesRevenue recognition


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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


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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


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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

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Planning for IFRS Technical Accounting Tax Internal Processes and Statutory Reporting Technology Infrastructure Organizational Issues Implementation strategy and timeline

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IFRS Conversion Approach

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•Determine business case & future state vision for IFRS adoption

•Perform comprehensive IFRS conversion

•Enable continued IFRS reporting and perform knowledge transfer

IFRS Resources

• IASB website

http://www.iasb.org/Home.htm

• ICAI’s website

http://www.icai.org/

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Deloitte IFRS Resources

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www. Iasplus.com

1,200 pages and files,350 mb of IAS stuff.

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www.iasplus.comDay 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……

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IFRS e-Learning

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e-Learning – IAS 40 “Home page”

Overview

Four

scenarios

Assessment

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IFRS in your pocket 2009

Free at

www.iasplus.com

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Model IFRS Financial Statements

for 2009

Free at

www.iasplus.com

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THOUGHT LEADERSHIP

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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.

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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.

Deloitte Haskins & Sells 78

Questions?

Thank you

79

Deloitte Haskins & Sells

Documents

IFRS Convergence in India © Deloitte Haskins & Sells, Mumbai Deloitte Haskins & Sells Ananthi Amarnath Cochin December 20, 2010