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SAP Petrofed Conference: Oil & Gas Industry

*connectedthinking

Moving towards to I FRS,the f uture I ndian GAAP*

Shrenik Baid ([email protected]), +91-22-6669-1312, +91-98-2011-6904
mailto:[email protected]:[email protected]

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Slide 2PricewaterhouseCoopers

March 2009IFRS implementation and challanges

Agenda

Where are we?

How does it impact us?

What are the next steps?

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Where are we

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IFRS, the Global Revolution

Where are we...

More than 100 countries require, permit, or are converging to IFRSAll major capital markets are changing

IFRS (adapted)Australia

IFRS or US GAAPSwitzerland

IFRS for listedSpain

Converging to IFRSJapan

IFRS for listedGermany

Converging to IFRSCanada

IFRS for listedFrance

IFRS for listedUK

Converging to IFRSUS

Converging to IFRSIndia

Countries converging to IFRS with the goal of adoption

Countries that require or permit IFRS

Countries with no current plan to adopt

Countriesh

ave

movedbyg

ivenup

theirexisti

ng

framework

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The story so far

The ICAI has announced that all public interest entities in India need to adopt IFRS from 1April 2011, as per the convergence paper of ICAI

- Only 2 standards are in line with IFRS

- 10 would require regulatory approvals

- 12 standards have conceptual differences

- 6 standards would require technical preparedness- 6 standards would require minor adjustments

- 1 standard not applicable in Indian circumstances

Even the Securities Exchange Commission (SEC) of the United States has proposed aroadmap for potential use of IFRS by all US public companies; for certain qualifyingdomestic issuers starting as early as fiscal 2009

Joint standards by FASB and IASB already under way IFRS 3R and FAS 141R onbusiness combinations is a joint standard

Companies in India are already pro-actively seeking to manage the transition

Some listed companies have already started reporting under IFRS.

Where are we...

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The story so far

Proposed application to:

- A listed company or in the process of listing, whether in India or outside India; or

- a bank, financial institution, a mutual fund, or an insurance entity; or

- turnover exceeds Rs. 1,000 million in the immediately preceding accounting year; or

- public deposits and/or borrowings from banks and financial institutions in excess of Rs. 250million at any time during the immediately preceding accounting year; or

- a holding or a subsidiary of an entity which is covered in (i) to (iv) above.

Where are we...

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Timeline for IFRS conversion project required 2011

20112010

First IFRS year1st IFRS

2012 Annual report(+Mar 2011

comparatives)

Transition dateOpening IFRSbalance sheet(1 April 2010)

2012

IFRS

Comparatives(annual and interim)

IFRS

First year of reporting(annual and interim)

2009

1st IFRSinterim report(+ Jun 2010comparatives)

2008

Today

Where are we...

The standards applicable as at the balance sheet date are required to be complied for all years.

Opening IFRS balance sheet at "the date of transition to IFRS 1 April 2010". This is the beginning of the earliestperiod for which full comparative information is presented in accordance with IFRS.

IFRS has a first time adoption standard (IFRS 1), which has to be complied with by all first time IFRS preparers.The ICAI is still to announce its plan on transition provision.

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Fundamental Changes

Full compliance (no qualification)

More guidance all mandatory

Focus on risk and rewards

Focus on substance over form

- All transactions must be accounted for andpresented according to their economicreality and not only as a function of theirlegal form

Investor focused with moredisclosures

Comparability and transparency

Court Order or companies Actoverride

Historical cost versus fair valueapproach

- Fair value corresponds to the amount forwhich an asset can be exchanged or aliability extinguished between informed andconsenting parties transacting under normalcompetitive conditions

Missing Standards andpronouncements

- Business combinations

- Financial Instruments

- Share-based payments

- Service concession agreements

Practice differences


IFRS may not bea solution for the

current situationbut can provide

significanttransparency!

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Key Issues for Accounting, Reporting and Business

IGAAP US GAAP Dual reporting futureIndian GAAP

20132000 - 2005 2006 - 2008 2009 2010 2011 2012

IGAAP US GAAP Dual reporting futureIndian GAAP

20132000 - 2005 2006 - 2008 2009 2010 2011 2012

Accounting

Consolidation

BusinessCombinations

Property,Plant &

Equipment

FinancialInstruments

RevenueRecognition

Other issues

Reporting

SegmentalInformation

DisclosuresFinancialSystems

ManagementAccounting

ValuationModels

/Systems

Business

Training

InvestorRelations/

KPIs

ProductDesign/Viability

Top line &EPS impact

Debtcovenants

Tax

Board &Investor

Communication


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Key Areas of Differences

Consolidation

Primary set of financial statements

Control (substance over form)

Reveal true group strength

Joint ventures or control? (IFRS 9 soon)

Economic entity model (IAS 27R)

Alignment of Group accounting policies

Business Combinations

Demonstrate true value of acquisition

Move from legal form to substance

Fair value approach (IFRS 3)

Goodwill numbers may change;

Higher amortization


Revenue recognition

Driven by an assessment of transfer of risksand rewards?

Multiple element contracts

Service concession agreements (e.g. PPPcontracts - early recognition of revenue)

Discounting

Financial Instruments

Composite Contracts (FCCB)

Debt versus equity (Preference shares)

Risk and rewards model

IRR based revenue and expense recognition

Disclosures of risks and how are those aremanaged by the Company

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Convenience accounting

Revaluation versus historical cost model forfixed assets

Frequent revaluation

Benefit to B/s with Charge to I/s

Change in accounting policies

No discretionary change

Retrospective application

Full compliance of GAAP

Company specific accounting

Loan loss provisioning

Depreciation and amortization based onuseful lives

Insurance accounting

Electricity company regulations

Key Areas of Differences

Foreign currency

Comprehensive guidance

Functional currency (eg Shipping companies)

Related party

Relationship identified based on substance

Revealing transactions with owners andrelated parties

More disclosure especially for family runbusinesses


Guidance on share-basedpayments, biological assets,

real estate accounting,investment properties etc.

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Disclosures the cornerstone of IFRS reporting

Financial risk management

- Exposure and how managed e.g. credit risk, liquidity risk

- Sensitivity analysis for market risk

Related party transactions broader definition and based on substance

Segmental reporting what is reviewed by CODM? Detailed disclosures of assumption used for fair values, impairment etc.

Detailed accounting policies

Impact of recently issued accounting standards


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First-time adoption of IFRS (IFRS 1)

Application of IFRS 1 is a critical issue in makingthe transition to IFRS

The first annual financial statements in which an entityadopts IFRS, by an explicit and unreserved statementof compliance with IFRS.

Implications for the project:

Identify the first IFRS financial statements

Select accounting polices that comply with the IFRS inforce at the closing balance sheet date in the first IFRSfinancial statements, and apply those policiesretrospectively to all of the periods presented, exceptwhere exemption or exceptions allow or requireotherwise:

- IFRS 1 provides 15 optional exemptions and 4mandatory exceptions, when an entity adoptsIFRS for the first time.

Make extensive disclosures to explain the transition toIFRS

- Reconciliation required with previous GAAP.


Choice is between efforts required and impacton net income and equity, normally thesedecisions are made/approved at the CFO level

Relevant optional exemptions that you canchoose from:

Past business combinations based onhistorical values

Vested options prior to IFRS transition date may continue with approach followed inPrevious GAAP

Carrying values under IFRS versus FV of PPEmay be taken as deemed cost.

Actuarial gains and losses is recorded on day1

Cumulative translation difference set to zero

Designation of previously recognized financialinstruments

Fair value measurement of financial assets orfinancial liabilities at initial recognition

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There are challenges (in adopting IFRS)

Managing and communicating the change

Data capturing

Aligning different policies, practices and system across the group having presence inmultiple jurisdictions and having different reporting requirements including tax andstatutory reporting

IFRS itself is a moving target

Conforming accounting with changes in business

Aligning the business practices considering IFRS accounting requirements

Training across the organization

Lack of appropriately skilled resources in the market


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Required changes in legal framework

Form and substance of financial statements

Current/ Non-current vs Schedule VI presentation

Depreciation on revalued assets needs to be routed through income statement under IFRS

Companies Act disallows such a treatment

Preference shares are classified as debt instruments and not equity

Certain instruments may have both debt and equity features

No gain or loss on buy-back of shares

The requirement to present five years of historical financial statements for IPO will it beIndian GAAP or five years of IFRS

If yes, what would a company going public in 2011 do?


There are challenges (in adopting IFRS) Continued

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What all requires a change

The rules included in Companies Act, which have accounting impacts, for example: Dividends determined in accordance with Companies Act Managerial remuneration Thresholds determined in accordance with the Act on debts assumed

No concept of proposed dividend Declaration of dividend only when approved by the shareholders

Correction of errors in audited financial statements Restatement is must when correcting errors

Tax laws


There are challenges (in adopting IFRS) Continued

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Project Framework

Establishing an environment to

support the project

Controls andDocumentation

Embeddingthe Change

Creating a sustainablereporting environment

CommunicationandKnowledge

Sharing

TechnicalAccounting Advice

Ensuring theconversionprocess iscontrolled anddocumented

Monitoring the pace

and communicationof the work

Technical accountinginformation along with practicalapplication advice

Manag

ingtheChan

ge

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Top planning and implementation considerations

More differences, more effort, and more significant impacts, than expected

Not just finance function project; need commitment from whole organization (messaging /tone at the top; functional & BU breadth and depth; mobility / training)

Strategic approach and tactical execution (centralised, hubbed, decentralised)

Project management (route maps / levels, communication, roles & responsibilities)

A one time opportunity to re-set reporting - clean sheet of paper; benchmarking

Evolving nature of standards no longer a stable platform; regulatory challenge

Policy-setting and control challenges in a principles-based environment

Discovering (managing) prior accounting errors and GAAP changes

Addressing data/information gaps disclosures and multi-GAAP requirements

Managing investor communications transition period, EPS guidance, etc.

Revisions to contracts take time (debt, share-based compensation, revenue,securitizations, etc.)

I FRS impact I ndust r y and other company appr oaches to plann ing

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Suggested approach...

High level initial assessment

Prepare an inventory of all contracts and perform an impact analysis under IFRS numbersand disclosure

Prepare a desktop reconciliation

Select the appropriate accounting policies

Draw up a detailed training plan for staff

Engage in the conversion of the financial statements

Focus on systems and processes to be in place to effect smooth transition


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TransitionIFRS GAAP conversion methodology


IndianIndian

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TransitionIFRS GAAP conversion methodology


Outputs

Objectives

Phase 3Phase 2Phase 1

Prioritized project plan

Data and business requirements

System and configuration requirements

SOX and procedural documentation

Global Chart of Accounts (COA)

Pre- and post-implementation testingdocumentation

Operationalized Project Management Office (PMO)

Documented IFRS policies

IFRS adjustments

Data gaps inventory

Shell annual and quarterly IFRS F/S

IFRS reporting process and system

IFRS financial results for dual reporting period

High-level assessment of IFRS impactto F/S including financial reporting,business process and systems impact

Options for next steps includingstrategy with timeline

IFRS Workshop

Develop roadmap to embed IFRS asprimary reporting language

Embed IFRS into financial reportingprocesses and systems (corporate andbusiness units)

Embed IFRS into other financial andoperational processes and systems

Assess whether relevant contractualagreements and financial covenants reflecta different basis of accounting

Go live and close project

Establish proper governance and project management

Complete Component EvaluationSM

- Establish IFRS policies and determine adjustments

- Assess impact at business unit level

- Evaluate parent company policies and decisions

Develop IFRS shell F/S

Design, build and test IFRS reporting process (dualreporting period)

Prepare initial IFRS financial statements and recon(dual reporting period)

Assess impact of IFRS on F/S

Assess how IFRS is currentlyimpacting the organization

Assess the financial reporting,business process and systems impact

Deploy Measurement and DisclosureChecklist

Develop informed business case andstrategy

IndianIndian

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Steering Committee

Work Streams

TRC

Decision Maker

Issue Originators

Auditor

Expert

WS1 WS2 WS3 WS4

Technical ReviewCommittee

o IFRS 1

o Revenuerecognition

o Fixed assets

o Taxes

o Consolidation

o FinancialReporting

o FinancialInstruments

o Cash Flows

Technical supportmaterial

Roles &Responsibilities

Timelines

Nodal offices

INVITEES

TechnicalChampions

Needs

Project Structure


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IFRS Consolidation Accelerator Kit - Key advantages

Time and costs savings to implement the Legal Consolidation Process: A full set of Predefined but not Hard-coded consolidation eliminations

A full set of dynamic Input schedules

A full set of dynamic Audit Trails Reports

A full set of dynamic Reporting Templates

Highly flexible: Can be adapted to any chart of accounts

5 customable dimensions for analysis requirements

Fully IFRS standards Compliant: Disclosure requirements

Translation of financial statements

Segmental reporting

Intercompany elimination, minority interests calculation, equity accounting

Cash flow statement

Process control and audit trail Business Process Flow


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Enabling Tools and methodology

We propose to deploy the following methodologies and tools to help you achieve yourobjective;

Automated Disclosure Checklista software that will help ensure compliance with themaze of disclosure requirements under the US GAAP

IFRS NoEour globally deployed database to ensure uniforminterpretation and application of IFRS principles focussedfor each Industry

Excel based workaroundsthese are excel based simple tools created in the past,which have helped clients control the conversion processand create an audit trail

Project Management Frameworka methodology that helps monitor the progress and taketimely corrective actions to keep the project on track

Component EvaluationSM methodologya methodology that creates repository of key decisions

Issue resolution process

Other knowledge management and thoughtleadership tools

Comperio


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2009 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers , a registered trademark, refers to

PricewaterhouseCoopers Private Limited (a limited company in India) or, as the context requires, other member firms of

PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking

is a trademark of PricewaterhouseCoopers LLP (US).

we can team up*

This presentation has been prepared for general guidance on matters of interest only, and does notconstitute professional advice. You should not act upon the information contained in this presentation withoutobtaining specific professional advice. No representation or warranty (express or implied) is given as to theaccuracy or completeness of the information contained in this presentation, and, to the extent permitted bylaw, PricewaterhouseCoopers, its members, employees and agents accept no liability, and disclaim allresponsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on theinformation contained in this presentation or for any decision based on it. Without prior permission ofPricewaterhouseCoopers, the contents of this presentation may not be quoted in whole or in part orotherwise referred to in any documents.

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Ifrs Intro