AFTERMATHS OF IFRS ON INDIAN CORPORATES

INTRODUCTION IFRS is an accounting framework that

establishes recognition, measurement, presentation and disclosure requirements relating to transactions and events that are reflected in the financial statements. IFRS was developed in the year 2001 by the International Accounting Standards Board (IASB) in the public interest to provide a single set of high quality, understandable and uniform accounting standards.

NEED OF IFRS To make a common platform for better

understanding of accounting, internationally. Synchronization of accounting standards

across the globe.  To create comparable, reliable, and

transparent financial statements. To facilitate greater cross-border capital

raising and trade. To having company-wide one accounting

language which have subsidiaries in different countries.

SUGGESTIVE GUIDELINES Understanding and analyzing the impact of

IFRS on financial performance Obtaining the new data required and adapting

systems to provide it Finding the resources and expertise needed to

make the changes Meeting employee training and knowledge

sharing needs Aligning systems for reporting for statutory,

regulatory and internal purposes Gaining shareholder and analyst understanding

of the impact of changing to IFRS.

IFRS AND INDIAN CORPORATES The use of international financial reporting standards

(IFRS) as a universal financial reporting language is gaining momentum across the globe.

The Institute of Chartered Accountants of India (ICAI) has recently released a concept paper on Convergence with IFRS in India, detailing the strategy for adoption of IFRS in India with effect from April 1, 2011. This has been strengthened by a recent announcement from the Ministry Of Corporate Affairs (MCA) confirming the agenda for convergence with IFRS in India by 2011.

Adopting IFRS by Indian corporates is going to be very challenging but at the same time could also be rewarding. Indian corporates are likely to reap significant benefits from adopting IFRS.

BENEFITS OF IFRS ON INDIAN CORPORATESThere are likely to be several benefits to corporates in

the Indian context as well. These are: Improvement in comparability of financial information

and financial performance with global peers and industry standards .

Adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements.

Better access to and reduction in the cost of capital raised from global capital market since IFRS are now accepted as a financial reporting framework for companies seeking to raise funds from most capital markets across the globe.

IMPACT OF IFRS ON OIL & GAS INDUSTRYAreas of Potential Change Decommissioning estimates Asset exchanges Derivatives and long term contracts Take or pay arrangements Production imbalances between joint

ventures

EFFECTS OF IFRS ON IT INDUSTRY The main effect on the IT industry is that the

changes in the systems and in the updation of the existing to the newer version of IFRS enabled accounting software

FIVE CONSIDERATION UNDER IFRS IFRS is an accounting-driven but it can drive

major changes to IT systems as well as business processes and personnel.

Experience indicates that IT costs generally constitute more than 50 percent of IFRS conversion costs.

Organizations benefit when they identify and integrate the efforts of the IT team early in the IFRS conversion process.

IT efforts will comprise a mix of short- and long-term projects within the organization’s overall IFRS initiative.

The IFRS conversion effort provides opportunities for achieving synergies with other IT projects and strategic initiatives.

IFRS:IMPACT ON INDIAN BANK The financial impact of convergence with IFRS

(International Finance Reporting System) will be significant for banks in India, particularly in areas relating to loan loss provisioning, financial instruments and derivative accounting according to auditing and consultancy firm KPMG.

IFRS: Developing a roadmap to convergence for the Indian banking industry’, mentions how this is likely to impact financial performance, directly affecting capital adequacy ratios and the outcomes of valuation metrics that analysts use to measure and evaluate performance.

In banking companies, financial reporting policies for provision for loan losses and investments are specified by the RBI.

REPERCUSSIONS OF IFRS ON BANKING’ FINANCIAL PERFORMANCE

Adoption of IFRS requires a significant change to such existing policies and could have a material impact on the financial statements of financial companies

In addition to the financial accounting impact, the convergence process is likely to entail several changes to the financial reporting systems (including IT systems) and processes adopted by banks.

By virtue of operating in a regulated industry, Banking companies are subject to regulatory reviews and inspections and are also subject to minimum capital requirements.

Application of IFRS may result in higher loan losses and impairment charges, thereby impacting available capital and capital adequacy ratios.

WHO BEARS THE IMPACT OF IFRS

Over 700 members are now more aware of the impact the move to IFRS will have on their business. Members realize that there is a lot to be done for business in all sectors (big, small, profit, non-profit) and it needs to start happening well before the January 2005 deadline. Members are now also aware of the importance of creating a business strategy to support a smooth transition to IFRS.

The pilot study results based on the first 100 listed entities (excluding financial institutions) did not make us stand back and gasp for air, but it did make us consider the impact these standards will have on business.

Members would be aware that this has a further impact on business, including:

(a) the effect on performance-based bonus plans; (b) the impact on the ability to pay a dividend; ( c) the ability to meet existing debt covenants. (d) further emphasizes the need for business to consider the

impact on its operations.

TYPES OF IFRS

IFRS 1 First-time Adoption of IFRS

IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale

and Discontinued Operations IFRS 6 Exploration for and evaluation of

Mineral Resources IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments

GENERAL DIFFERENCES IFRS provides much less overall detail than

GAAP IFRS contains relatively little industry-specific

instructions as compared to GAAP. IFRS use a single-step method for

impairment write-downs rather than the two-step method used in U.S. GAAP

IFRS does not permit Last In First Out (LIFO).

DISADVANTAGES U.S. issuers without significant customers or

operations outside the United States may resist IFRS because they may not have a market incentive to prepare IFRS financial statements.

Many people also believe that U.S. GAAP is the gold standard, and that something will be lost with full acceptance of IFRS.

THANK YOU

IFRS1 FIRST TIME ADOPTION OF IFRS This report helps first-time adopters address

the challenges of IFRS (International Financial Reporting Standards) 1. It puts the theory of IFRS 1 into practice by illustrating the steps involved in preparing the first IFRS financial statements

IMPLICATION OF IFRS 1

When to apply. The opening balance sheet. The selection of accounting policies. The optional exemptions and mandatory

exceptions. Disclosures The interim financial statements

IFRS 2 SHARE-BASED PAYMENT Goods or services received in a share-based payment

transaction are measured at fair value. Goods are recognized when they are obtained and services are recognized over the period that they are received. Equity-settled share-based payments are within the scope of the share-based payment standard even if settled by another group entity or by a shareholder. Cash-settled share-based payments are within the scope of the share-based Payment standard. However, there is no explicit guidance when the liability is settled by a shareholder or another group entity. Equity-settled grants to employees generally are measured based on the grant date fair value of the equity instruments issued. Grant date is the date on which the entity and the employee have a shared understanding of the terms and conditions of the arrangement. The service period may commence prior to the grant date. Awards with graded vesting are accounted for as a separate share-based payment arrangements. A share-based payment transaction settled in redeemable shares is classified as cash-settled.

SPECIFIC REQUIREMENTS OF IFRS 2 Equity-settled share-based payment transactions, in

which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options);

cash-settled share-based payment transactions, in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s shares or other equity instruments of the entity;

Transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments.

IFRS 3 BUSINESS COMBINATIONThis states that all business combinations are accounted for

using purchase accounting, with limited exceptions. A business combination is to bringing together of separate entities or business into one reporting entity. A business can be operated managed for the purpose of providing return to investors or lower costs. An entity in its development stage can meet the definition of a business. In some cases the legal subsidiary is identified as the acquirer for accounting purposes (reverse acquisition).The date of acquisition is the date on which effective control is transferred to the acquirer. The cost of acquisition is the amount of cash equivalents paid, plus the fair value of other purchase considerations given, plus any cost directly attributable to the acquisition. The fair values of securities issued by the acquirer are determined at the date of exchange. Costs directly attributable to the acquisition may be internal costs but cannot be general administrative costs. There is no requirement for directly attributable cost to be incremental.

REQUIREMENTS

Recognizes and measure in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquire;

Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and

Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

IFRS 4 INSURANCE CONTRACT

An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.The objective of this IFRS is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance contracts.

REQUIREMENTS

In particular, this IFRS requires: (a) Limited improvements to accounting

by insurers for insurance contracts. (b) Disclosure that identifies and explains

the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts.

IFRS 5 NONCURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

Non-current assets, and some groups of assets and liabilities known as disposal groups, are classified as held for sale when specific criteria related to their sale are met. Non-current assets (disposal groups) held for sale are measured at the lower of carrying amount and fair value less costs to sell, and are presented separately on the face of the balance sheet. Assets classified as held for sale are not amortized or depreciated. The comparative balance sheet is not re-presented when a non-current asset (disposal group) is classified as held for sale