Thursday, November 11, 2010

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.


Monday, November 1, 2010

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.