Accounting Advisory Services

ADVISORY

Challenges in converging to IFRS Challenges in converging to IFRS for SOEs for SOEs

Around the globe Around the globe …………

IFRS – the global landscape IFRS – the global landscape

June 2002EU adoption of

regulation requiring

all listed EU groups to apply IFRS in their financial

statements by 1 January 2005

2002 – 2008 and going on ……

Over 100 countries on IFRS

2011150 countries

expected to adopt IFRS

Why Global convergence?Why Global convergence?

Benefits for companiesBenefits for companiesImproved management information for decision makingImproved management information for decision makingBetter access to capital, including from foreign sourceBetter access to capital, including from foreign sourceReduced cost of capitalReduced cost of capitalEase of using one consistent reporting standard in subsidiariesEase of using one consistent reporting standard in subsidiaries from different from different countries/comparison of countries/comparison of SOEsSOEs across countries across countries Facilitated mergers and acquisitionsFacilitated mergers and acquisitionsEnhanced competitivenessEnhanced competitiveness

Benefits for investorsBenefits for investorsBetter information for decision makingBetter information for decision makingMore confidence in the information presentedMore confidence in the information presentedBetter understanding of risk and returnBetter understanding of risk and returnCompanies can be compared to a peer group of companiesCompanies can be compared to a peer group of companies

Why Global convergence?Why Global convergence?

Benefits for policy makersBenefits for policy makersStrengthened and more effective Indian capital marketBetter access to the global capital marketsPromotion of cross-border investment

Benefits for national regulatory bodiesBenefits for national regulatory bodiesImproved regulatory oversight and enforcementImproved regulatory oversight and enforcementA higher standard of financial disclosureA higher standard of financial disclosureBetter information for market participants to underpin disclosurBetter information for market participants to underpin disclosuree--based regulationbased regulationBetter ability to attract and monitor listings by foreign companBetter ability to attract and monitor listings by foreign companiesies

Benefits for other stakeholdersBenefits for other stakeholdersGreater credibility and improved economic prospects for the accoGreater credibility and improved economic prospects for the accounting unting profession.profession.Enhanced transparency of companies through better reportingEnhanced transparency of companies through better reportingBetter reporting and information on new and different aspects ofBetter reporting and information on new and different aspects of the businessthe business

The Indian landscape IFRS The Indian landscape IFRS convergence convergence

IFRS convergence in India – applicability IFRS convergence in India – applicability

Applicable to public interest entities Applicable to public interest entities for accounting years commencing for accounting years commencing 1 April 2011 onwards1 April 2011 onwards

Listed entitiesListed entitiesBanks, mutual funds, insurance Banks, mutual funds, insurance entitiesentitiesOther largeOther large--sized entities (Turnover sized entities (Turnover exceeds Rs 100 exceeds Rs 100 crorecrore or or public/bank borrowings exceed Rs public/bank borrowings exceed Rs 25 25 crorecrore))Holding and subsidiary companies Holding and subsidiary companies of the above entitiesof the above entities

ICAI’s approach to convergence ICAI’s approach to convergence

Stage-wise approach

Convergence

All-at-once approach

On adoption of IFRSs -Where standards are in conflict with the laws / regulations, the latter will prevail

India implementation challenges ……..India implementation challenges ……..

Regulatory challenges Regulatory challenges GovernmentGovernmentRegulators e.g., SEBI, RBI and IRDARegulators e.g., SEBI, RBI and IRDATaxation lawsTaxation lawsCourts/TribunalCourts/Tribunal

Economic environment Economic environment Trained/Qualified accounting professionalsTrained/Qualified accounting professionalsEducating academics, accountants, issuers, regulators Educating academics, accountants, issuers, regulators and investorsand investors

Further Challenges in SOE Further Challenges in SOE

Some key impact areas – presentation and accounting Some key impact areas – presentation and accounting

Components/Presentation of Financial statements Components/Presentation of Financial statements

Use of fair values Use of fair values –– relevance over reliability relevance over reliability

Business Combinations Business Combinations

Detailed guidance on treatment of government grants Detailed guidance on treatment of government grants

Extensive disclosure requirements Extensive disclosure requirements

Anticipating the challenge to solve it faster ….Anticipating the challenge to solve it faster

….

Key decision makers to adopt principles Key decision makers to adopt principles

Availability of IFRS technical resources Availability of IFRS technical resources

Cost of bridging gaps in knowledge Cost of bridging gaps in knowledge –– budget constraints budget constraints

Organization wide training in IFRS principles relevant to entityOrganization wide training in IFRS principles relevant to entity

IFRS 1 (still to be adopted by ICAI) may also require going backIFRS 1 (still to be adopted by ICAI) may also require going back in in time to evaluate impact time to evaluate impact –– unless record retention is reasonably unless record retention is reasonably effective just gathering information could be a challenge effective just gathering information could be a challenge

Applying fair values to accounting Applying fair values to accounting

So what is involved in IFRS So what is involved in IFRS convergence?........convergence?........

Do you want to consider looking at IFRS whollistically? Do you want to consider looking at IFRS whollistically?

How does IFRS impact my

systems and processes?

What are the needs for training and

how can training be provided?

What are the differences in accounting and disclosures between current and future GAAP?

What are further impacts of the IFRS implementation?

How does the Conversion Plan look like?What are the impacts on resources /

budget?… structured and efficient!

Multiple impacting areas to consider…….Multiple impacting areas to consider…….

••Accounting gap Accounting gap analysisanalysis

••Tax impact Tax impact analysisanalysis

••Reporting gap Reporting gap analysisanalysis

••Financial and Financial and business impact business impact

assessmentassessment

••Measures to Measures to reduce potential reduce potential

volatilityvolatility

••IT/process impact IT/process impact assessmentassessment

••Systems/process Systems/process conversion conversion

strategystrategy

••Initial IFRS Initial IFRS awareness trainingawareness training

••IFRS project plan IFRS project plan and budgetand budget

••Management Management presentationspresentations

IFRSIFRS

Accounting &Reporting

IT Systems & Processes

Business & Financial

People & Communicati

onDetermine financial and business aspects

Determine conversion path and budget

Determine systems impact

Determine accounting differences

••Alternative Alternative accounting accounting treatmentstreatments

Some factors that would affect …..Some factors that would affect …..

New system vs. modify existing systemsNew system vs. modify existing systems

Changes at group, company or source system levelsChanges at group, company or source system levels

Dual reporting requirementsDual reporting requirements

Cutover approach from local GAAP general ledger to Cutover approach from local GAAP general ledger to IFRS general ledgerIFRS general ledger

Harmonising internal and external reportingHarmonising internal and external reporting

Lessons learned: typical pitfallsLessons learned: typical pitfalls

Rapid start to implementing work without a structured Rapid start to implementing work without a structured assessmentassessment

Time to complete and/ or resources are underestimated: Time to complete and/ or resources are underestimated: ““We will just switch to IFRSWe will just switch to IFRS””

Accounting rules are seen as Accounting rules are seen as ““pretty similarpretty similar””, but small , but small differences can matter a lotdifferences can matter a lot

Impacts of IFRS conversion are not addressed with stakeholdersImpacts of IFRS conversion are not addressed with stakeholders–– Lack of clarity about strategies for selecting the various accouLack of clarity about strategies for selecting the various accounting optionsnting options

–– Inability to provide information on all areas impacted by IFRS (Inability to provide information on all areas impacted by IFRS (e.g. to e.g. to analysts)analysts)

Lack of sufficient communication with auditorsLack of sufficient communication with auditors

Key take Key take awaysaways

Conclusion Conclusion

Understand the IFRS impact early in the project Understand the IFRS impact early in the project lifecycle lifecycle –– accounting, process, people and IT accounting, process, people and IT

Complexities not to be underestimated Complexities not to be underestimated –– it cannot be it cannot be done in isolationdone in isolation

Not just a finance project Not just a finance project –– adopt a holistic approachadopt a holistic approach

Post conversion activities Post conversion activities –– the hard work may just be the hard work may just be beginning beginning –– develop a sustainable approach develop a sustainable approach

Presenter contact detailsPresenter contact details

Richard Rekhy Richard Rekhy Chief Operating Officer Chief Operating Officer KPMG India KPMG India 91 124 3074303 91 124 3074303 rrekhy@kpmg.comrrekhy@kpmg.comkpmg.com.inkpmg.com.in

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