IFRS

B S RB S R

IFRS Convergence in India

Group 1Section ‘F’

B S RB S R

CONTEXT FOR DISCUSSION IFRS: The Global Perspective

IFRS India Roadmap

Challenges and practical insights

Best practices for convergence

IFRS – The Global Perspective

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IFRS – Now a Truly Global Standard

By 2011, 150 countries have adopted IFRS, including China, Brazil and Korea

Accepted and adopted across more than 100 countries

Push by U.S. SEC’s decisions

To drop reconciliation requirement for Foreign Private Issuers preparing IFRS financial statements

Proposal for IFRS transition for U.S. domestic companies between 2014 to 2016; with early adoption option for certain very large companies

IASB-FASB convergence programme

Ongoing convergence programme

Convergence Drivers

• Capital Markets

• Regulatory requirements

• Internal controls

• Performance evaluation

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IFRS comprises

Overview of IFRS

• International Accounting Standards• International Financial Reporting Standards • Standing Interpretations Committee • International Financial Reporting

Interpretations Committee

Benefits of convergence

Widespread agreement on improvement in comparability

Improvement of quality of financial reporting and trust in the financial statements

Alignment of external and internal reporting

Globalization of capital markets and reduced cost of capital

One financial language across different locations

IFRS India Roadmap

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Why IFRS Convergence?

Unavoidable in globalised economy

Condition for listing abroad including GDRs and ADRs

Pre requisite for any joint venture or business relationship

Assists in external borrowing and in-bound investment

Better model worthy of emulation

On adoption – we can play a role in the standard setting process

Need to have a “common language”

Two separate sets of Accounting Standards to co-exist

Announcement by the Ministry of Corporate Affairs (MCA) dated January 22, 2010

IFRS converged standardsExisting Indian Accounting

Standards

Other amendments to the Companies Act (including, e.g. Schedule VI and Schedule XIV) will be undertaken in a time bound manner to facilitate the process of convergence.

Timelines for convergence

Phase 2

1st April 2011 1st April 2013 1st April 2014

Phase 3 Companies included in the Nifty

50; Companies included in the Sensex

30; Companies which have shares or

other securities listed on stock exchanges outside India and

Companies (whether listed or not) which have a net worth in excess of Rs1,000 crores.

Phase 1 All companies (whether

listed or not) with a net worth in excess of Rs.500 crores but less than Rs1,000 crores.

All listed companies with net worth less than Rs.500 crores

Clarifications:Non-listed companies which have a net worth less than Rs.500 crores and whose shares or other securities are not listed on stock exchanges outside India; and other defined Small and Medium Companies (SMC) will not be required to follow the IFRS converged standards. However, such entities may also voluntarily opt to follow the IFRS converged standards.

Indian approach to IFRS

Convergence not adoption Two sets of accounting standards Public Interest Entities Phased approach

IFRS ConvergenceIndia – Opted for convergence & not adoption of IFRS

Two sets of Accounting Standards •IFRS Converged Indian Accounting Standards – Ind-AS •Existing Accounting Standards – AS

PRESESNT STATUS35 Ind AS have been notified on 25-2-2011Applicability date yet to be notified

IND ASScheme of Ind ASNumbering pattern

IAS/IFRS convergedInd AS No. Title IAS/IFRS

01 Presentation of Financial Statements IAS 1

02 Inventories IAS 2

07 Statement of Cash Flows IAS 7

08 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 8

10 Events after the Reporting Period IAS 10

11 Construction Contracts IAS 11

12 Income taxes IAS 12

16 Property, Plant and Equipment IAS 16

17 Leases IAS 17

IAS/IFRS converged18 Revenue IAS 18

19 Employees Benefits IAS 19

20 Accounting for Government Grants and Disclosure of Government Assistance

IAS 20

21 The Effects of Changes in Foreign Exchange Rates

IAS 21

23 Borrowing Costs IAS 23

24 Related party disclosures IAS 24

27 Consolidated and Separate Financial Statements

IAS 27

18 Revenue IAS 18

19 Employees Benefits IAS 19

28 Investments in Associates IAS 28

IAS/IFRS converged29 Financial Reporting in Hyperinflationary

EconomiesIAS 29

31 Interest in Joint Ventures IAS 31

32 Financial Instruments: Presentation IAS 32

33 Earnings per share IAS 33

34 Interim Financial Reporting IAS 34

36 Impairment of assets IAS 36

37 Provisions, Contingent Liabilities and Contingent Assets

IAS 37

29 Financial Reporting in Hyperinflationary Economies

IAS 29

31 Interest in Joint Ventures IAS 31

32 Financial Instruments: Presentation IAS 32

IAS/IFRS converged38 Intangible Assets IAS 38

39 Financial Instruments: Recognition and Measurement

IAS 39

40 Investment Property IAS 40

101 First time adoption of Indian Accounting Standards

IFRS 1

102 Share-based payment IFRS 2

103 Business Combinations IFRS 3

104 Insurance Contracts IFRS 4

105 Non-current Assets Held for and Discontinued Operations

IFRS 5

106 Exploration for and Evaluation of Mineral Resources

IFRS 6

IAS/IFRS converged

107 Financial Instruments: Disclosures IFRS 7

108 Operating Segments IFRS 8

IFRIC/SIC ConvergedIndAS No. Annexure

No.Annexure to –Ind AS and Title IFRIC/SIC

10 A Distributions of Non-cash Assets to Owners

IFRIC 17

11 A Service Concession Arrangements* IFRIC 12

11 B Service Concession Arrangements: Disclosures*

SIC 29

12 A Income Taxes—Recovery of Revalued Non-Depreciable Assets

SIC 21

12 B Income Tax: Changes in the tax status Income Taxes — Changes

SIC 25

16 A Changes in Existing Decommissioning, Restoration and Similar Liabilities

IFRIC 1

17 A Operating leases-Incentives SIC 15

17 B Evaluating the Substance of Transactions

Involving the Legal Form of a Lease

SIC 27

17 C Determining whether an Arrangement contains a Lease*

IFRIC 4

IFRIC/SIC Converged18 A Revenue—Barter Transactions Involving

Advertising ServicesSIC 31

18 B Customer Loyalty Programmes IFRIC 13

18 C Transfers of Assets from Customers IFRIC 18

19 A Ind AS 19-The limit on a Defined Benefit Asset, Minimum Funding requirements and their interaction

IFRIC 14

20 A Government Assistance: No Specific Relation to Operating Activities

SIC 10

27 A Consolidation––Special Purpose Entities SIC 12

29 A Applying the Restatement Approach under Ind AS 29 Financial Reporting in Hyperinflationary Economies

IFRIC 7

31 A Jointly Controlled Entities–– Non-Monetary Contributions by Venturers

SIC 13

34 A Interim Financial Reporting and Impairment IFRIC 10

37 A Rights to Interests arising from decommissioning, Restoration and Environmental Rehabilitation Funds

IFRIC 5

IFRIC/SIC Converged37 B Liabilities arising from

Participating in a Specific Market— Waste Electrical and Electronic Equipment

IFRIC 6

38 A Intangible Assets—Web Site Costs

SIC 32

39 C Reassessment of Embedded Derivatives

IFRIC 9

39 D Hedges of a Net Investment in a Foreign Operation

IFRIC 16

39 E Extinguishing Financial Liabilities with Equity Instruments

IFRIC 19

Key Carve Outs in Ind AS

1. IAS/IFRS not converged withWhile converging with IFRS, the following IAS/IFRS have not been converged with:IAS 26: Accounting and Reporting by Retirement Benefit Plans (not applicable for Companies)IAS 41: Agriculture (carve out)IFRS 9: Financial Instruments (not mandatory at present)

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Key Carve Outs in Ind AS2. SIC/IFRIC not converged withSIC 7: Introduction of the Euro (not required for India)SIC 29: Service Concession Arrangements: Disclosures (applicability deferred, carve out)IFRIC 2: Member's Shares in Co-operative Entities and Similar Instruments (not applicable for Companies)IFRIC 4: Determining Whether an Arrangement Contains a Lease (applicability deferred, carve out)IFRIC 12: Service Concession Arrangements (applicability deferred, carve out)IFRIC 15: Agreements for the Construction of Real Estate (carve out)

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Key Carve Outs in Ind AS3. Removal of options not amounting to carve out or departure from IFRSSingle statement presentation of the statement of profit and lossClassification of expenses in the statement of profit and loss by nature of expense methodNo option of carrying investment property at fair valueRecognition of actuarial gains and losses in Other Comprehensive Income

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Key Carve Outs in Ind AS

4. Additional options provided which if exercised will lead to carve out/departure from IFRSOption to use Indian GAAP carrying values on the date of transition as the deemed cost for property, plant and equipment, intangible assets and investment propertyOption to defer exchange differences on long term foreign currency monetary assets and liabilities and recognizing the same over the period of such asset or liability

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Key Carve Outs in Ind AS

5. Mandatory carve outs as no option is provided in Ind AS Revenue recognition for real estate sector on the basis of percentage completion methodAccounting for the equity conversion option of a FCCB as an equity componentBargain purchase in case of business combination to be treated as capital reserve except in certain cases where it can be credited to Other Comprehensive Income

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IFRS in Europe

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• Since 2005 all listed companies in the E.U. must comply with IFRS

• In Continental Europe, IFRS adoption represents a major change: replacement of stakeholder-oriented accounting regulations by market-oriented standards heavily influenced by the Anglo-Saxon accounting model

• Aim of this presentation: Review the empirical evidence on the economic consequences of IFRS adoption

The expected consequences of IFRS adoption

• Information asymmetry should decrease:– IFRS are more market-oriented– IFRS disclosure requirements are larger

• Earnings management should decrease:– IFRS are more precise– They admit a limited number of options– Hidden reserves are prohibited

• Accounting data should be more value relevant– Value relevance: Ability of accounting data to

reflect contemporaneous market prices or returns– IFRS-based earnings should be more value

relevant:• IFRS are more market-oriented• Earnings management is more difficult under IFRS• IFRS make a larger use of fair value

• The cost of capital should decrease

Effect on information asymmetry

• Has the bid-ask spread declined?– YES:

• Germany: Leuz & Verrecchia (JAR 2000), Gossen & Sellhorn (WP 2006): Companies using IFRS exhibit smaller bid-ask spreads than those using German GAAP

• Europe: Platikanova & Nobes (WP 2006): On average, the bid-ask spread declines after IFRS adoption

– BUT:• Switzerland: The effect is limited to small companies: Dumontier &

Maghraoui (CCA 2006)

• Are analysts' forecasts more accurate?• YES:

– Ashbaugh & Pincus (JAR 2001): Analyst forecast accuracy improves after IFRS adoption

– Hodgdon et al. (JIAAT 2008): Compliance with IFRS reduces analyst forecast errors

– Germany: Ernstberger et al. (WP 2008): Forecast accuracy is higher for estimates based on IFRS or US GAAP data than for those based on German GAAP figures

• NO:– Germany: Maghraoui (PhD 2008): Compliance with IFRS does not

reduce the dispersion of analyst forecasts or forecast errors– Europe: Cuijpers & Buijink (EAR 2005): Dispersion of analyst forecasts

is higher for firms using IFRS or US GAAP than for those using local GAAPs

Effect on earnings management

• Does IFRS compliance restrict earnings management?– NO:

• Germany: Van Tendeloo & Vanstraelen (EAR 2005): IFRS adopters do not present different earnings management behavior compared to companies reporting under German GAAP

• Sweden: Paananen (WP 2007): IFRS adoption does not reduce income smoothing.

• Germany: Lin & Paananen (WP 2008): Earnings management is higher in the post IFRS-adoption period

– YES:• Barth et al. (JAR 2008): In the post-adoption period, firms applying

IFRS evidence less earnings management

Effect on the value relevance of accounting data• Has value relevance of earnings increased following

IFRS adoption?– YES:

• Barth et al. (JAR 2008): Firms applying IFRS exhibit more value relevant accounting figures than other companies

• Germany: Bartov et al. (JAAF 2005): The value relevance of IFRS-based earnings is higher than that of German GAAP-based earnings

• Germany: Jermakowicz et al. (JIFMA 2007): The value relevance of earnings is higher for DAX-30 companies using IFRS or US GAAP

– NO:• Germany: Hung & Subramanyam (RAS 2007): IFRS adoption has no

effect on the value relevance of book value and net income• Sweden: Paananen (WP 2008): The value relevance of accounting

figures is not affected by IFRS adoption• Germany: Lin & Paananen (WP 2008): The value relevance of

equity and earnings decreases after IFRS adoption

Effect on the cost of capital• Has the cost of equity capital declined after IFRS adoption?

– YES:• Germany: Ernstberger & Vogler (WP 2008): The cost of equity

capital is lower for companies that adopted IFRS or US GAAP• Kim & Shi (WP 2007): The cost of equity capital is significantly

lower for IFRS adopters– NO:

• Europe: Cuijpers & Buijink (EAR 2005): No evidence of a lower cost of equity capital for IFRS adopters

• Germany: Daske (JBFA 2006): Voluntary IFRS adopters do not exhibit lower cost of equity capital

• Has the cost of debt declined after IFRS adoption?– YES:

• Kim et al. (WP 2007): IFRS adopters have lower interest rates, larger amount of loan facility, less restrictive loan covenants, and they attract more foreign lenders

Summary of the empirical evidence

• No clear conclusion can be drawn from these studies because:– The evidence is mixed– Many studies were conducted in a single country

(Germany in particular)– Most studies deal with voluntary adoption

Explaining the conflicting evidence• The impact of IFRS adoption is a function of the

degree of compliance with IFRS– Vogel et al. (WP 2008): There is considerable variation in

the level of IFRS compliance among European companies (compliance index ranging from 13% to 100%)

– Daske et al. (WP 2007): "Serious" IFRS adopters experience stronger effects on the cost of capital and market liquidity than "label" adopters

– Hodgdon et al. (JIAAT 2008): Compliance with the disclosure requirements of IFRS enhances the ability of financial analysts to provide more accurate forecasts

• The impact of IFRS adoption is a function of the firm's incentives to comply with IFRS

– Germany: Christensen et al. (WP 2008): Improvements in accounting quality are confined to firms with incentives to adopt IFRS

– Daske et al. (JAR 2008): The capital-market benefits of IFRS adoption occur only in countries where firms have incentives to be transparent and where legal enforcement is strong

– Wang & Yu (WP 2008): Better accounting standards are helpful only in countries with proper reporting incentives i.e. in common-law countries, in countries with better shareholder protection and effective legal enforcement

– Kim & Shi (WP 2007): The cost of capital-reducing effect of IFRS adoption is greater when the IFRS adopters are from countries with weak institutional infrastructures

European Effects…

• The adoption of IFRS will probably not be sufficient to standardize the quality of earnings throughout Europe

• Strong enforcement mechanisms (laws and corporate governance systems) also are necessary

• Adopting high quality standards might be a necessary condition for high quality information, but not a sufficient one (Ball et al., JAE 2003)

Case StudyWipro

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Scope

The study is based on secondary data on selected variables sourced from the published annual reports of Wipro for the year ended 31st March 2010. Wipro had voluntarily prepared its annual report on the basis of Indian GAAP and IFRS for the year ended 31st March 2010, wherein reconciliation of equity based on Indian GAAP and IFRS is presented for the opening Balance Sheet as at 1st April 2008 and for Balance Sheet ended 31st March 2009

Hypothesis

1. There is no significant difference between financial statement items based on Indian GAAP and IFRS for the opening Balance Sheet as at 1st April 2008 by Wipro

2. There is no significant difference between financial

statement items based on Indian GAAP and IFRS for the opening Balance Sheet as at 31st March 2009 by Wipro

3. There is no significant difference between Indian GAAP

and IFRS based accounting ratio for the fiscal year 31st March 2009 by Wipro

Effect on Financial Ratio’s

Leverage ??

Leverage ………………… 12.00%

Value of Equity …………. 8.13%

Total Liabilities ….………. 4.28%

Debt – Equity Ratio

Reason:

Return on Equity ??ROE ……………………… 10.34%

Value of Equity …………. 8.13%

Net Profit ………...……… 0.61%

Amount of net income returned as a percentage of shareholder’s equity

Reason:

Total Liability and Equity

Dividend provision not recognized under IFRSFair value measurement of Available for sale investment Share compensation expense

Reclassification between Equity and Total Liability

Accelerated amortization of stock compensation expense in the initial years following the grant of options

Stock compensation expenses recognized in graded manner on a straight line basis over the requisite vesting period for the entire award

Share based payment reserve

IFRS

IGAAP

Learning's …

IFRS

IGAAP

Fair value Oriented AccountingBalance Sheet Oriented AccountingMore Transparent Disclosures

Conservative Approach of Accounting

Challenges and practical insights

49B S RB S R

B S RB S R

What challenges to anticipate?

Skill Sets Judgment Fair valueGroup transition

Data Capture

IFRS Updates

Finance team to be conversant with IFRS – end objective to churn out timely IFRS Financial Statements for regular reporting

Training finance personnel

Robust support of decisions taken

Application of management judgment in accounting policies, evaluation of options under IFRS (Eg, determining useful life of assets / loan provisioning in absence of rules)

Extensive use of fair value measurements in certain areas of financial instruments, business combinations, etc.

Changes in recognition criteria & extensive disclosure requirements need redesigning of accounting systems to provide timely information

IFRS itself is evolving, leading to constant updates and changes in existing standards

Specialization in fair valuation

Regular IFRS accounting updates

IFRS compliant data requirements from subsidiary, joint ventures and associates for consolidation purposes

Modification in reporting systems

Structured & consistent approach for transition

What are the changes that have to be dealt with?

Technical GAAP difference

– Conceptual

• Embedded Derivatives

• Fair value

• Revenue recognition

• Business combinations etc etc

– Operational challenges

• Estimated useful life of the assets Sch XIV?

• ESOP – intrinsic value v/s fair value

Disclosures

– Schedule VI – Not applicable

– Additional disclosures – IFRS 7, risk management, consolidation, etc.(quantitative as much as qualitative)

Key decision to be taken

– Early adoption

– Comparatives

Key impacts on financial statements

Business combinations and consolidation

Financial Instruments

Changes in accounting policies and correction of errors

Presentation of financial statements

Business combinations and consolidation

Adoption of ‘purchase’ accounting for almost all amalgamations (accounted for at fair values)

‘Pooling-of-interests’ method severly restricted

Fair values on acquisition to be taken also on consolidation

Would reflect true “goodwill”

Goodwill and indefinite life intangibles – No amortisation, annual impairment testing

Impact of EBITA, P/E ratio, ROCE

IFRS Accounting ImpactIFRS Accounting Impact

Financial Instruments

Most financial instruments in balance sheet at FV

Investments to be categorized – at fair value through profit or loss, available for sale, held to maturity

Hedge accounting – detailed conditions and documentation required

Debt-equity classification – preference share capital meeting specified conditions classified as liability

Impact of EBITA, P/E ratio, ROCE, debt – equity ratio

IFRS Accounting ImpactIFRS Accounting Impact

Changes in accounting policies and correction of errors

Changes in accounting policy generally made by adjusting opening equity and restating comparatives

Correction of errors generally made by adjusting opening equity and restating comparatives

Restatement of comparatives and adjusting opening equity generally not part of Indian GAAP at present

Impact of EBITA, P/E ratio, ROCE

IFRS Accounting ImpactIFRS Accounting Impact

Presentation of financial statements

Consolidated Statements

Primary statements include ‘Statement of changes in equity’ or ‘statement of recognised income or expense’

No strict format but

– Balance sheet classified as current/non-current or based on liquidity

– income statement by nature or function

Detailed accounting policy and disclosures

IFRS Accounting ImpactIFRS Accounting Impact IFRS Accounting ImpactIFRS Accounting Impact

Stand-alone, but listed companies and banks present CFS also

No statement of changes in equity or statement of recognised income and expense

Schedule VI format:

– not fully on current/non-current basis

– Expense classification by nature

Disclosures not as elaborate as per IFRS

First time adoption – when and what to start

Date of transition = IFRS opening balance sheet

1 April 2010

Comparative period

31 March 2011 31 March 2012

Reporting dateFirst IFRS financial statements

IFRS

Recognise IFRS assets / liabilities

Remove non-IFRS assets / liabilities

IFRS measurements

Adjust opening retained earnings

Comply with latest IFRS

Remember consistency

STA

RT

BY

Apply IFRS 1 standard

Ignore transitions in the individual standards

WH

ICH

IFR

S?

Breaking through some common myths…

IFRS requires fair valuation of everything

IFRS lays too much emphasis on management judgment

IFRS reporting can be managed as a reconciliation / ‘out of book’ exercise

IFRS was an important cause of the global financial crisis

Global standards like IFRS do not take into account local conditions

First-time transition rules allow an entity to ‘clean up’ its act

IFRS will not change business actions

Best practices for convergence

B S RB S R

How does one approach IFRS transition?

Rapid start to implementing work without a structured assessment

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

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

Impacts of IFRS conversion are not addressed with stakeholders

Lack of clarity about strategies for selecting the various accounting options

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

Lack of sufficient communication with auditors

Strong leadership and support for the IFRS implementation project

Timing – starting sufficiently in advance

Strong project management

– Steering committee

– Initial impact assessment

– Training and knowledge transfer

– Communication strategy

Holistic approach to evaluate impact beyond accounting changes

Keeping Board involved and investors and analysts informed

Involve professionals with the right subject matter specialization relating to IFRS, local GAAP, systems and processes

Transfer of knowledge from advisors to the Company should start early and occur regularly

IFRS is not just an accounting project…

IFRS implementation requires a structured approach to conversion

Critical successfactors

Project planning

Project structure and governance

Auditor involvement

stakeholders

Resource management

Training

IT systems

IFRS will not be just an accounting project….

The use of IFRS will change how a business is managed and it will change how and what companies communicate with their marketplace

How a company’s peers use IFRS, and what policies they adopt, will influence how that company is perceived and valued in the marketplace

How a company manages its IFRS conversion will affect its business and , potentially, market confidence in its reported information and its share prices

“It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.” Charles Darwin

Questions?Questions?

Thank you

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accounting Review, Vol 22, No 2, pp 92-107 2. Lantto A.M and Sahlstrom P (2009) “Impact of International Financial Reporting Standard Adoption on Key

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available at http://ssrn.com/abstract=622921 5. Amir,E.T.Harris and E.Venuti 1993 A comparison of the Value relevance of Us versus Non US GAAP Accounting

measure using Form 20F reconciliations. Journal of Accounting Reseearch 31(supplement):230-264 6. M.S. Turan and Dimple “Transition from GAAP to IFRS An evidence from uk “ Journal of Accounting and Finance Volume

25, No 2 ,pp57-66 7. Capkun V. Jeny A.C Jeanjean T. and Weiss L.A (2008) “Earnings management and value relevance during the

Mandatory Transition from Local GAAP to IFRS in Europe” available at http://ssrn.com/abstract=1125716 8. Lantto A.M (2007) Does IFRS improve the usefulness of Accounting information on code law country?' available at

http:// ssrn.com/abstract=905218 retrieved on 10 August2010 9. Horton J.Serafeim G (2008) “Does Mandatory IFRS adoption improve the information envirnmnet” Harvard Business

School working paper No 1264101 available at http:// ssrn.com/abstract=1264101 retrieved on 7 August 2010 10. Hope O.k Jin and Kang (2006) “Empirical Evidence on Jurisdictions that Adopt IFRS’available at http://

ssrn.com/abstract=751264 retrieved on 7 August 2010 11. Sujatha B Accounting Standards in India: Towards convergence published by ICFAI 12. http:// www.article base.com/accounting-articles/working towards a global convergence of accounting standards-

1379167.html 13. IFRS: A quick reference Guide by Robert Krik 14. http:// online library.wiley.com/doi/10.1002/jcaf.20406/abstract 15. http://icai.org/resoucre 16. http://www.pwc.com/en-GX/gx/ifrs-reportingservices/pdf/viewpoint_convergence.pdf

IFRS impact beyond Financial Statements

Most aspects of the business can be affected:

Processes and systems Operations Tax Treasury

Examples include impact on: Debt covenants Compensation plans Revenue contracts Joint ventures and alliances Investor communication