What if India delays IFRS convergence?

The ministry of corporate affairs (MCA) has moved a cabinet note to amend the Companies Act of 1956 with the aim of converging Indian company law with the International Financial Reporting Standards (IFRS). The government seems will go the ordinance way and clarity with regards to taxation still has to come in.

CNBC-TV18's Menaka Doshi discussed the IFRS issue with Sir David Tweedie, Chairman of the International Accounting Standards Board (IASB), Prabhakar Kalavacherla, member, IASB and TV Mohandas Pai, head, SEBI Sub-Group on IFRS and asked them if it would be a big deal if India was unable to meet the April 1 deadline.

Below is a verbatim transcript of their interview. Also watch the accompanying video for more.

Q: Are you happy with the fact that India has picked convergence over adoption?

Tweedie: You have to choose what you want to do. Our mission is very simple; we have got to have one single set of global standards. It doesn't matter whether transaction takes place in Delhi, Denver or Durban, it should be same. The best answer is in South Africa; we should all have it and do it the same way. That is actually what we are trying to do.

The trouble is that people sometimes think that what the rest of the world thinks is the right answer and that's where we have to look at it. Perhaps India can persuade the rest of us that we should change, not India. The only trouble is that's going to take time.

There is a big statement being made where the G20 has asked us to complete this next year. India is a leading member of the G20. India opts out – that's really what happened if you do that. We could all do this. There are certain things I don't like about IFRS. I would like a carve out for me but it's not an offer.

I think the real thing to do and we have said it to every country - accept it. Then try and change it. You have the opportunity. We are putting out a request for what should the board do next year once our present programme is finished. The issues that India is concerned about - agriculture, foreign currency translation and the volume of disclosures are all there.

India's chance is to get in and get it fixed. If India opts out, people will say – well you were not in anyway so what is it to you? And that is going to be a problem. If India wants a real leadership role, the way to get it and I have seen that happen before in other countries - get in change the system from inside. Don't throw rocks from outside as it's not nearly as effective.

Q: A question that companies often bring up when I am talking to them about how they are moving on the convergence aspect and they say what happens if this is postponed by a year or two? We are going to have a new direct tax law come into effect in April 1, 2011. They ask - why can't we just have this when the law is compliant with the IFRS or speaks the same language? What is the problem if we push this by two-years in India?

Kalavacherla: Let me answer this in two parts. One is that India made a commitment that it will adopt to IFRS by 2011. There is the aspect that India made a promise to the G20 and to the EU. That's something we need to bear in mind whether we want to go back on our word.

The second thing which is more important in my mind is what is really happening? In my capacity as an Indian board member going to various countries, everybody wants to know what India's position on this issue is. The more we delay the adoption of convergence; India standing in the global debate is going to get diluted. This is my biggest worry.

My real worry is not April 1, 2011 or April 1, 2012. What is important is how is India going to lead the debate on some of the issues like agricultural accounting, foreign currency transactions, pension accounting etc. The debate needs to be led by us also and we are not leading the debate and that's my worry.

Q: Are you saying that if we don't converge next year and keep our word, we won't be part of the debate that decides upon crucial issues?

Kalavacherla: The point we need to understand is that unless you are within the tent, your voice is not going to be counted as effectively as it would be if you are outside.

Q: Is there in some sense a bit of fear mongering that if you don't meet the April 1 deadline where you have given your word then you won't be part of the global debate? The reason I ask is that isn't it better to converge or adopt?

Pai: This has been debated by the MCA. We had a core committee with the regulators, we had a committee of CFOs and a committee of opinion makers. The consensus was to have a roadmap where we will have a staggered convergence with IFRS. So the top 200-300 companies which are already global which probably already have an IFRS statement or US GAAP statement converging.

So that will show the way to others when you have another set of companies converging and then you have the banks coming in at the end. Why would the banks come in at the end? It is because some standards on derivatives which impact the banks are under revision and banks want stability and the Basel committee is also looking into accounting and there are some open issues.

Having it staggered gives people enough time to understand what this means to make an impact analysis and I don't like a big bang approach because everybody needs to get on and get educated in this matter.

For example tax - tax is a very critical issue for a corporate. That's where the fear is about taxation. I would personally think we should continue to file our tax returns under Indian GAP even though we produce financial statements under IFRS or converge IFRS. The reason is we are going through a tax law next year and even for the tax authorities they need to understand what an impact this will have on accounting.

ICAI lists companies for IFRS convergence

New Delhi, Nov. 13 The Institute of Chartered Accountants of India (ICAI) has brought out a list of over 400 companies that should converge their accounting practices with International Financial Reporting Standards (IFRS) by April 2011.

IFRS — issued by International Accounting Standards Board — is acknowledged by 113 countries. This is ICAI’s first list and more companies would be added on its next list, sources said.

The first list comprises 439 companies. It includes BSE-Sensex companies, NSE-Nifty companies, companies that have raised debt of over $50 million abroad, financial sector companies, publicly accountable companies (with total borrowings of over Rs 1,000 crore), Indian subsidiaries of foreign companies that have implemented IFRS at the parent company and companies outside these categories with capital of over $50 million abroad.

Significantly, ICAI is mulling including venture capital funds also in the IFRS convergence process.

The first list includes BSE and NSE companies (totalling 52), 44 insurance companies, 46 mutual fund companies, 37 Indian banks with presence only in India, 30 foreign banks with a presence in India, eight Indian banks with overseas branches, one Indian bank with subsidiaries or joint ventures abroad (Central bank of India) and four Indian banks with representative offices abroad.

Then there are 217 companies including Air India Charters, Indian Railway Finance Corporation, Reliance Ports & Terminals, Jet Lite, Educomp Solutions, Exim Bank, TVS Motor, GMR Energy, GVK Power & Infrastructure, Godrej Industries, NHPC, RNRL, Videocon and Wockhardt.

IFRS convergence will entail a change in the accounting process. Mr Rahul Roy, Director, Ernst & Young, said, “Depending on a company’s complexity, it will need a change in its IT and ERP systems, besides management information system. Besides, companies will have to employ valuers for various valuations.”

IFRS compliance is a huge opportunity for consultants, IT companies and tax experts. The cost of compliance will range from Rs 10-12 crore for a big company to Rs 8-10 lakh for a small company.

But finance professionals who have not updated their IFRS skills will become obsolete while IFRS experts will command a premium salary, Mr Roy said.

Companies will have to train their accounts and finance personnel on IFRS. After IFRS convergence, benchmarking Indian companies with their global peers will be more accurate.

ICAI will hold talks on IFRS convergence with SEBI, IRDA, RBI and the Corporate Affairs Ministry on the changes in SEBI guidelines, IRDA rules and regulations, the Banking Regulation Act, Companies Act and National Advisory Committee on Accounting Standards notifications.

ICAI will convene talks with companies in oil and gas, aviation, pharma and textiles to evaluate the sectoral impact. It will follow the IASB’s programmes on converging IFRS with US Generally Accepted Accounting Principles. ICAI could also evolve separate and simpler IFRS norms for small and medium enterprises as such companies lack the resources to converge with IFRS.

Good read in Mint.....

The basic concepts underlying preparation of financial statements will undergo significant change upon implementation of International Financial Reporting Standards (IFRS) in India. There are three key aspects that run through each principle laid down in IFRS: substance over form, fair value, and recognizing time value or time cost of money (present value). These three items need to be understood carefully.

Indian GAAP (generally accepted accounting principles), like any other GAAP, also recognizes the importance of substance over form. Accounting Standard 1 (AS-1) on “Disclosure of Accounting Policies” states that substance rather than form should be the guiding principle in selection and application of accounting policies. However, the true application of this principle will happen only under IFRS. That’s because IFRS is more contemporary and has prescribed the treatment for evolving issues. Also, unlike Indian GAAP, it does not recognize the concept of a legal override. Thus, IFRS will always go by the core substance of the transaction.

That will mean several changes. For instance, under Indian GAAP, preference capital (shares that do not come with voting rights but which have a higher priority over ordinary shares in terms of dividend payments, and which can be redeemed at the discretion of the issuer or shareholder) has to be treated as equity. IFRS, however, will require it to be treated as debt. Based on substance of terms, instruments such as convertible debentures are likely to be shown partly under debt and partly under equity, since the embedded warrant option in such instruments will be separately identified and presented at its fair value. Contracts for supply of goods and services may get concluded (wholly or partly) as leases (and it could be financial lease as well)!

IFRS will bring with it the concept of functional currency. Indian entities may need to maintain their books in US dollars and report in the same currency to the National Stock Exchange and the Bombay Stock Exchange if the dollar is determined to be the currency for the primary economic environment in which it is operating, subject to regulatory approvals. In rare circumstances, IFRS even allows users to adopt a policy contrary to IFRS principles if the management believes the treatment prescribed under IFRS would be misleading and the policy proposed to be adopted better represents the substance of the underlying transactions.

These concepts are unheard of in most other GAAP frameworks.

The use of fair value in measuring assets and liabilities will increase considerably upon adoption of IFRS, which mandates the use of fair value in measurement of financial instruments, employee compensation, share-based payments, and assets and liabilities acquired in a business combination, to name a few. It will allow use of fair value, as opposed to cost, in relation to property, plant and equipment, intangible assets and investment properties.

The application of these fair value principles would require a company’s management to use considerable judgment in making estimates about the future, and the role of valuation experts in the preparation of financial statements would increase significantly.

Thus, IFRS will be far more complex and challenging in its application compared with the existing regime of accounting standards. In the case of derivatives, held-for-trading investments and investment properties, IFRS allows gains or losses on fair valuation to be recognized in profit or loss accounts for the period. Undoubtedly, this is quite a bold move to allow even unrealized gains to be captured in profit or loss accounts. In such a situation, there will be extra onus on the management to exercise better financial discipline; otherwise, the company may end up declaring dividends out of unrealized profits.

IFRS recognizes that value of money changes with time. It will either be a cost or income, but there is a difference in Rs100 of today and Rs100 two years back or three years later. Hence, IFRS requires receivables and payable, that is, financial assets and liabilities or monetary items to be reflected at current value. Thus, the value of Rs100 payable in three months will be different from Rs100 payable after 36 months.

Consequent to these aspects, IFRS will focus on reflecting the working results and state of affairs of a business more on a current state basis rather than on a holistic long-term or historical cost basis. It will not place undue premium on prudence but push for recording of market gains and reflection of market-related realities over the reporting period. IFRS will allow flexibility in choosing the right accounting policy, but will also lead to enhanced disclosure requirements. Therefore, estimation efforts, subjectivity and judgment will increase manifold in preparing IFRS financial statements. And timelines and costs will also go up accordingly.

That said, the benefits of IFRS are expected to far outweigh the costs and hassles. It will integrate domestic businesses with the global investor and financial community so that there is no language gap and barrier. It will enhance the global competitiveness of Indian businesses as well as finance professionals. And IFRS-literate people will fuel the next wave of the knowledge processing outsourcing boom.

IFRS Implementation in India

Implementation of the International Financial Reporting Standards, seem to have hit a roadblock due to differences between the Finance Ministry and Ministry of Corporate Affairs, reports CNBC-TV18's Aakansha Sethi quoting sources.

CNBC TV18 had first broken this story where it was reported that the Ministry Of Corporate Affairs would be passing an ordinance to implement IFRS. The Minister for Corporate Affairs Salman Khurshid had also told CNBC-TV18 in an interview that IFRS would be implemented from the April 1, 2011. However this may not be possible now because of differences between the Finance Ministry and the Ministry of Corporate Affairs.

Sources close to the development said there are two key differences. One is that the finance ministry says that implementation from April 1, 2011 is not possible because the accounting norms have not been notified as yet. This will only be done by December and in three months from January to March is too little to educate stakeholders and that will require a longer period of time. So April 1, 2011 is not possible.

Secondly, the finance ministry says that these norms should only be for shareholder disclosures and taxation will be based on real income and not on the economic entity model as is proposed in the IFRS norms.

The Finance Ministry will now be writing to the Ministry of Corporate Affairs and this matter will now be taken up by the Committee of Secretaries which will meet in November to decide on the matter.

Fair Value

FAIR VALUE:

Fair value for most financial instruments, while it has limitations, is the best available method to reflect market conditions when accompanied by appropriate disclosure.

Financial instruments currently reported using fair value includes:

• as assets most equity and debt securities held

• derivatives

Most assets and liabilities

While fair value information is generally relevant to investors, it is not always sufficiently reliable or practical to implement.

These three criteria—relevance, reliability, and practicality—need to be more fully understood prior to any proposed extension of fair value to assets and liabilities where it is not used today.

Examples:

Assets

trade receivables and most bank loans

inventories used in production

plant and equipment

Liabilities

trade payables

contingent liabilities

company-issued debt

insurance and other non-traded liabilities

Reporting what most financial instruments can be exchanged for in the market—their fair value—provides valuable insight to investors. Markets, and not the business operations of a company, determine the economic value of financial instruments like bonds or common stock. For the most part, such instruments (or derivatives of them) obtain their value from contractual or residual cash flows. The expected cash flows are reflected in their market prices. Even when market prices are difficult to determine, preparers rely on these cash flows to develop estimates of fair value.

The challenges of using fair value

While fair value yields a relevant measure for financial instruments, it presents a number of challenges. Changes in fair value introduce earnings volatility, which makes it more dif­ficult to forecast earnings.

There is a second challenge: Fair value has been criticized for producing inaccurate results in the unusual market conditions recently experienced. Such results, it is argued, hurt the company in the long run. Critics claim that recording losses in such an environment signals bad news to investors that may ultimately prove misleading.

Turmoil in the credit markets has spotlighted a third challenge: When market information is in short supply, companies are required to employ models. But at what point should companies turn from market prices to mod­els? There is no clear-cut answer, and com­panies often rely on judgment to make that call. The difficulty does not end there. Once the decision to use models has been made, management—and investors interested in understanding management’s judgment—must grapple with a host of other complexi­ties inherent in modeling.

As of today, fair value remains the best available method

Some argue that fair value for financial in­struments should be suspended or replaced when markets are severely distressed. But fair value increases the transparency of the impact of market forces on financial perfor­mance, which investors prefer. If fair value were replaced with some other method, investors would be left to their own devices to estimate the future cash flows of finan­cial instruments, and their estimates would likely be less reliable. At least for now, fair value remains the best available measure for most financial instruments. Its limitations can be mitigated by appropriate explanations from management.

The credit crisis has highlighted the challenges of reporting fair value for financial instruments. For nonfinancial assets and liabilities, those challenges become even more prominent.

Fair value is questionable for most nonfinancial assets . . .

The economic value of most nonfinancial assets is determined through their use in business operations, and not by markets. A manufacturing plant, for example, typically generates operational cash flows when used in conjunction with a business’s other assets and liabilities.

Although it is possible to determine fair value for these nonfinancial assets, doing so may be impractical for two primary reasons: (1) markets for these assets may be limited or may not exist, and (2) the value of these assets is often generated from their use as part of a larger group, not on a stand-alone basis.

. . . and for most liabilities

Where most of a company’s liabilities are concerned, investors are interested in the resources required to meet those obligations. Consider, for example, debt issued by a company. In many cases, the resources required to settle that debt provide the most meaningful information about a company’s future cash outlay and solvency, a key objective of financial reporting.

New fair value requirements will soon be effective for one type of liability: contingen­cies in mergers and acquisitions. This is an example where the relevance, reliability, and practicality of developing and reporting fair value is questionable. Contingencies tend to be company-specific and to have limited or nonexistent markets. As a consequence, esti­mates of their fair value could be unreliable.

Niche issues exist

From time to time, situations arise in which it is both meaningful and practical to provide investors with fair value information about nonfinancial assets and liabilities. Those situations tend to be company- or industry-specific and should be handled on a case-by-case basis. Examples include trading inventories (oil, agricultural commodities) and real estate. Severe and progressive declines in market values have converted fair value from a tech­nical issue into a public debate.

Impact on the banking system

The credit crisis has had a heavy impact on the banking system. As markets took a turn for the worse, banks were required to mark asset holdings down to their fair value. For some banks, this has meant significant reductions in available capital. To maintain compliance with existing capital regulations, these banks have recapitalized, sold assets in distressed markets, and restricted lending—thereby extending market turmoil into the broader economy.

Concerns about the capital adequacy of banks and the safety and soundness of the banking system have called into question whether regulations need to be fine-tuned or overhauled. They have also prompted calls for standard setters to retract or modify the use of fair value in the banking industry. In our view, these are separate issues that should be addressed separately; matters involving capital adequacy regulations should not be resolved by changing financial reporting.

Impact on the market: the procyclicality argument

Does reporting downward values drive deeper market declines and intensify market turmoil? Some think so, and as a quick fix they sug­gest revising reported market prices to reflect more stable circumstances. But this argument implies that bad news should be swept under the rug. It also ignores an important fact: Financial reporting does not create adverse market conditions; it captures market perfor­mance after it has occurred.

Looking forward: the move to IFRS

Indian companies aren’t the only ones facing the challenges of reporting at fair value in the near future. International Financial Reporting Standards (IFRS), the framework used by most of the world today encourages greater use of fair value, but generally in niche areas—for example, real estate. Today’s efforts to improve the use of fair value will benefit the world both now and well into the future.

It is impossible to predict how fair value will evolve over the next few years—how it will be affected by changes in investor needs, modeling techniques, the way markets monetize assets and liabilities, and legal and regulatory influences. Nonetheless, standard setters and companies can take actions to improve fair value as it exists today.

DERIVATIVES

Derivative instrument is one whose principal source of value depends on the value of something else, such as an underlying asset, reference rate or index.

First and foremost, a derivatives instrument is a contract, or agreement, between two counter parties. Unlike many market transactions where ownership of an underlying asset is immediately transferred from the seller to the buyer, a derivatives transaction involves no actual transfer of ownership of the underlying asset at the time the contract is initiated. Instead, a derivative contract simply represents a promise, or an agreement, to transfer ownership of the underlying asset at a specific price and time specified in the contract. The counter party that contracts to buy is said to have established a long position. A counter party that contracts to sell is said to have established a short position. Because of the bilateral nature of derivative contract, the value of contract depends not only on the value of its underlying asset but also on the creditworthiness of the counter parties to the contract.

Derivative contracts are characterised by the fact that for every long position there is a corresponding short position. Prior to the agreement of the long and short, the contract defining the terms of the future exchange for that asset did not exist. This means that the aggregate net value of derivatives in the economy is zero.

Another characteristic of a derivative contract is that it must be based on at least one 'underlying'. An underlying is the asset, reference rate, or index from which a derivative derives its principal source of value. In practice, derivatives cover a diverse spectrum of underlying, including stocks, bonds, exchange rates, interest rates, credit characteristics, weather outcomes, political events, or stock market indexes. Further, some derivatives can be based on multiple underlying. For e.g. the value of derivative may depend on the difference between a domestic interest rate and foreign interest rate.

Considering the above characteristics described above, derivatives can be defined as an instrument (contract) with all the following characteristics:

1. whose value changes in response to a change is specific underlying;

2. requires no/ little investment ; and

3. settled at a future date.

Following within the definition are several types of derivatives, including commodity derivatives and financial derivatives. A commodity derivative is a derivative contract specifying a commodity or commodity index as the underlying. For e.g., a gold forward contract specifies the price, quantity and date of future exchange of gold that underlies the forward contract.

A financial derivative is a derivative contract specifying a financial instrument, interest rate, foreign exchange rate, or financial index as underlying. For e.g. a contract to buy USD 1,000 in exchange of INR.

As we can see, when prudently used, derivative instruments offer an efficient mechanism for financial institutions, commercial enterprises, governments, and individuals to 'hedge' preexisting risk exposures; that is, to transfer risk from those who do not want to those who are willing to accept it for a price. In addition, derivatives serve as important 'price discovery' role, meaning that the prices of derivative instruments are useful for accurately assessing the future prospects of the underlying asset prices, reference rates, and price indexes from which derivatives contracts inherit their value.

Although derivative instruments offer many benefits to our economy, they also hold the potential for being misused. Warren Buffet refers derivatives as 'time bombs' and 'financial weapons of mass destruction'.

Consolidated Financial Statements & CONTROL

1.1 Meaning of Consolidated Financial Statements

Consolidated Financial Statements (CFS) are the financial statements of a group presented as those of single economic entity. A group is a parent and all its subsidiaries. A parent is an investor that controls another entity called subsidiary. The parent and subsidiary (ies) constitute a Group.

A parent company is required to prepare CFS of the Group as a whole. CFS are:

1. Consolidated Balance Sheet

2. Consolidated Comprehensive Income Statement

3. Consolidated Statement of Changes in Equity

4. Consolidated Statement of Cash Flows

5. Notes and other statements

6. Statement of Restatement Analysis

1.2 Meaning of Control

Control: is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Criteria in deciding control over another entity are:

i. Majority voting power (more than half of the voting rights);

ii. Power to govern financial and operating policies of the entity under a statute or agreement;

iii. Power to remove majority of the board members and control of the entity is by that board;

iv. Power to cast majority votes at board meetings.

1.2.1 Potential voting rights: Financial instruments which are convertible into equity shares with voting rights are termed as instruments having potential voting rights. Examples are share warrants, convertible debentures, convertible preference shares, etc. While evaluating control the potential voting rights are taken into account. However, it is necessary to take into account all facts and circumstances including terms of exercise and other agreements before counting such potential voting rights.

Example 1.1 Planet Ltd. holds 45% stake in IStaR Ltd. out of the 20 million equity shares of the investee company. In addition, it holds 20 million out of the 30 million share warrants issued by the company. Does Planet Ltd. control IStaR Ltd.?

Solution 1.1 Total voting rights of IStaR Ltd.:

Current 20 million

Potential 30 million

Total 50 million

Out of which Planet Ltd. holds.:

Current 9 million

Potential 20 million

Total 29 million

So Planet Ltd. holds majority voting right of IStaR Ltd. on the basis of current and potential voting rights. IStaR Ltd. is a subsidiary of Planet Ltd.

It is not relevant to analyze whether the Planet Ltd. intends to exercise the warrants or it has the financial ability to exercise the warrants. Only issue evaluated is whether it has ‘authority’ to exercise the warrants.

Even ‘out-of-money call option’ held by the investor is counted as potential shares despite the fact that the options are currently worthless. The issue is the right to exercise not that whether the entity will exercise or not.

1.2.2 Dual control and issue of consolidation: Dual control may occur in rare situation when an entity establishes control through majority voting rights but another company has appointed majority Board members. In this case both the entities which have control should consolidate.

The Opening IFRS Balance Sheet

Adopting International Financial Reporting Standards (IFRS) present challenges that many people underestimate. The International Accounting Standards Board (IASB) on November 24, 2008 has issued Reconstructed version of IFRS 1: First Time Adoption of International Financial Reporting Standards applicable to the entities on or after January 1, 2009 although earlier application is permitted. The Institute of Chartered Accountants of India (ICAI) has issued Ind- AS 41 talking about the transition requirements on the lines of IFRS 1 (Revised).

When a company prepares its first IFRS financial statements for the year ending 31st March 2012 with one year comparatives, the date of transition to IFRS will be 1st April 2010 and the opening IFRS balance sheet will be prepared at that date. A company required to present two full years of comparative information should prepare an opening balance sheet at 1st April 2009. The opening IFRS balance sheet is the starting point for all subsequent accounting under IFRS.

An entity in its opening balance sheet shall:
• Recognize all assets and liabilities whose recognition is required by IFRSs (e.g. derivative financial instruments);
• Not recognize items as assets and liabilities if IFRS do not permit such recognition (e.g. general reserves);
• Reclassify items that it recognized in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with IFRS (e.g. netted-off assets where netting is not permitted);
• Apply IFRSs in measuring all recognized assets and liabilities (e.g. impairments of property, plant and equipment and intangible assets)

The exception to this is where one of the optional exemptions or mandatory exemptions does not require or permit recognition, classification and measurement in accordance with IFRS.

The adjustments as a result of applying IFRS for the first time are recorded in retained earnings or another equity category. For example, a company that is required to re-measure available-for-sale (AFS) investment to fair value should recognize the adjustment in the AFS reserve. Similarly if a company elects to adopt a revaluation model in IAS 16 should recognize the difference between the cost and fair value of property, plant and equipment in the revaluation reserve. Companies might also be required to consolidate entities that were earlier not consolidated under the local GAAP. Companies will be required to consolidate any entity over which it is able to exercise control. Subsidiaries that were previously excluded from the group financial statements are consolidated as if they were first time adopters on the same date as the parent. The difference between cost of the parent’s investment in the subsidiary and subsidiary’s net assets under IFRS is treated as goodwill.

The deferred tax and minority interest balance included in the opening IFRS balance sheet will be dependent on other adjustments made. These balances should therefore be calculated after all adjustments are made.

The preparation of opening IFRS balance sheet may require the calculation and /or collection of information which was not calculated earlier in our local GAAP. Converging to IFRS will be a bigger change for some companies than for others. With mandatory transition proposed to begin in 2011, it makes sense for management to start sizing up the volume and variety of financial, business, tax, and operational changes—the objective being to avoid a resource demanding effort at the eleventh hour. Perhaps just as important, sufficient lead time will allow companies to discover transition-related changes which have the potential to deliver future dividends, such as overhaul of an inflexible information technology system or rethinking of accounting choices and not just treating them as a compliance exercise. The earlier we begin, the greater the benefits are likely to be.

CAs in city feel India may not be ready for IFRS

International Financial Reporting Standards will be mandatory for financial statements from April 2011

With the commencement of the next financial year, the Indian Accounting Standards are all set to go global by converging with the International Financial Reporting Standards (IFRS). While it will enable Indian firms to access and understand the balance sheets of firms in the international markets, many chartered accountants (CA) in Pune feel that the country may not be ready for the transition.

According to the CAs, for an economy to make the transition, an enormous amount of training is required, not just for the CAs but for a vast group of people likely to be affected by the new accounting norms.

Dolphy D’Souza, national leader, IFRS, is of the view that only big accounting firms like KPMC and a few others have the expertise in IFRS as of now. “While Indian Institute of Chartered Accountants (ICAI) is training CAs, we need to train audit committee members, regulators, financial analysts, board members and even the investors for them to understand the market.”

With the IFRS, the real estate sector will also see massive changes in accounting norms. While revenue recognition now takes place simultaneously with the construction of a project, with IFRS, it can be done only after an entire project is completed. Even mergers and acquisitions norms will undergo a sea change, said D’Souza.

Many feel that the present course by ICAI need to be more of a hands on programme rather than remaining restricted to theoretical concepts.

Ramesh Lakshman, a practising CA, cites that the language in which the standards has been written is extremely complicated to grasp.

G Ramaswamy, vice president, ICAI, said, “ICAI has 100-hour course running in six cities to train chartered accountants and a few short term courses in the form of workshops. We need a batch of 30 for a course. While Pune has already had two workshops, soon we may also have the course in the city.”

IFRS will be mandatory in India for financial statements from April 1, 2011 as per notifications by ICAI and Reserve Bank of India. The changes will be implemented in phases with the first phase including companies listed with BSE and NSE, companies whose shares or other securities are listed on a stock exchange outside India, companies, whether listed or not, having net worth of more than INR1,000 crore.

IASB proposes improvements to insurance accounting

The International Accounting Standards Board (IASB) today published for public comment an exposure draft of improvements to the accounting for insurance contracts. The exposure draft proposes a single International Financial Reporting Standard (IFRS) that all insurers, in all jurisdictions, could apply to all contract types on a consistent basis.

When the IASB was established in 2001 there were no international financial reporting requirements for insurance contracts. In 2004 the IASB introduced IFRS 4 Insurance Contracts as an interim standard that permitted many existing international accounting practices to be retained, whilst beginning a more comprehensive review of insurance accounting as a second phase of the project. The proposals published today are the result of that review.

The IASB launched its public consultation when it published a discussion paper, Preliminary Views on Insurance Contracts, in 2007. In developing the proposals released today, the IASB considered more than 160 comment letters received on the discussion paper, as well as feedback from interested parties through an extensive outreach programme, including interaction with the IASB’s Insurance Working Group and a targeted field test with preparers. The IASB will undertake further outreach during the exposure draft’s comment period, including a second round of field tests, to ensure that the IASB considers the views of all interested parties before it issues an IFRS.

Commenting on the exposure draft, Sir David Tweedie, chairman of the IASB, said:

A fundamental review of insurance accounting was long overdue, with current practice resulting in financial information that is impenetrable to all but the most expert of users.

The publication of this exposure draft marks an important milestone in this review process. The proposed standard better reflects the economics of insurance contracts, and would result in more relevant, understandable and comparable information being available to investors.

The exposure draft Insurance Contracts is open for comment until 30 November 2010 and can be accessed via the ‘Comment on a Proposal’ section of www.ifrs.org

To find out more, visit the Insurance Contracts section of the IASB website viahttp://go.ifrs.org/insurance_contracts. Materials available on the website include a podcast introduction to the proposals by Warren McGregor, member of the IASB, as well as a high level executive summary of the proposals (Snapshot).

An interactive webcast introducing the proposed standard will be held at 10.00am London time on Friday 6 August, and repeated at 3.00pm London time on the same day for the benefit of interested parties in different time zones.

To register, go to: http://www.ifrs.org/Meetings/Live+webcast+Insurance+accounting.htm

MARK- TO- MARKET ACCOUNTING

Historical cost accounting is fading as India Inc marches into a new era. In the “fair value” accounting regime, what is a company’s really worth? This is the central question that accounting attempts to answer, and it is no easy exercise. Every answer invites debate, and that debate has now intensified, thanks to "fair value" accounting.
Under fair value, a company values its assets and liabilities based on what they would fetch today, rather than what they originally cost. The concept is not new — accounting has long operated under a "mixed model”, which records many items at historical cost while requiring that companies mark to market certain asset classes (such as securities and derivatives). But a host of factors have suddenly propelled the calculation of fair value from a secondary concern to a dominant theme of corporate accounting, and many companies are just beginning to understand the ramifications. If fair value takes full hold, as some have suggested it should, company results may look far different than they do today.
In stark contrast to most other accounting concepts, fair value has already achieved the improbable feat of making front-page news, thanks to its alleged role in the subprime mortgage crisis. Mired in mess, many financial services giants have staggering losses. The question has been: Has fair-value accounting played a role in the economic meltdown? The proponents of fair value say that the accounting standards merely help companies show how much their assets are truly worth at this very moment — and that the downfall of the financial institutions that took major write-downs after applying fair value was actually a delay in showing investors how much these banks were truly worth and were representative of a move toward a down market.
The ultimate intent of fair value is to give investors better visibility into how companies value their assets, and few deny that it achieves that aim. While recent events on Wall Street provide only an imperfect proxy for fair value's impact, those who claim that it will increase volatility have plenty of evidence on their side. The recent market conditions are most immediately felt by those fair valuing financial instruments. Fair value in accounting itself has come under attack from some quarters accused of making problems worse.
Yet not all criticism of fair value can be so easily dismissed. The credit crunch has raised three genuinely awkward questions. The first of these concerns which the bankers say that in a downturn fair-value accounting forces them all to recognize losses at the same time, impairing their capital and triggering fire sales of assets, which in turn drives prices and valuations down even more. Under traditional accounting, losses hit the books far more slowly. Some admire Spain's system, which requires banks to make extra provision for losses in good times, so that when loans turn sour their profits and thus capital fall by less.
The second — and immediate—question is how to value illiquid (sometimes unique) assets and how and when models should be used for its determination. A common solution is to use banks' own models. But some investors are concerned that this gives banks' managers too much discretion — and no wonder, because highly illiquid assets are worryingly large relative to many banks' shrunken market values. Such is the complexity of many such assets that it may not be possible to find a generally acceptable method. The best answer is to disclose enough to allow investors to form their own views. International Accounting Standards Board (IASB) has given a new guidance to the auditors and accountants on reviewing mark-to-market assumptions which should help in this regard.
The third problem is a longer-term one: the inconsistency of fair-value rules. Today the treatment of a financial asset is determined by the intention of the company. If it is to be traded actively, its market value must be used. If it is only "available for sale" it is marked to market on the balance sheet, but losses are not recognized in the income statement. If it is to be "held to maturity", or is a traditional loan, it can be carried at cost less impairment, if any. Different banks can hold the same asset at different values because of classification criteria prescribed by the standards.
Fair value is not perfect, but most agree it is relevant measure than historical cost for financial instruments. All companies would need to account for the effect of the recent economic turmoil on the business. If we are to have faith in accounting standards, fair value should be applied when the going is tough, as well as when it is fair. Long term confidence would be hurt by rejecting the fair value concept in response to short-term pressures.