Already a broad fury of argument is ramping about the execution challenges of transitioning into International Financial Reporting Standards ( IFRS ) and its impact. A major and indispensable component of smooth passage into IFRS is the convergence of Reserve Bank of India ( RBI ) guidelines with the rules laid down in IFRS. Succinctly, the successful acceptance of IFRS is dependent on the flexibleness and acceptableness of IFRS by RBI. Banks would necessitate to shortly set to accounting alterations that are enforced by IFRS. Roadmap for the convergence of Indian Accounting Standards with IFRS, with regard to banking companies, requires all scheduled commercial Bankss to change over their opening balance sheets as of April 1, 2013. RBI has emphasised to Bankss that they need to pitch up to follow the new criterions. Practical experience from other states has proved that passage to IFRS can take 18-24 months to to the full implant and implement.
Given this background, RBI has constituted up a working group under the chairmanship of Mr. Ravi Mohan, Chief General Manager, Department of Banking Operations & A ; Development ( DBOD ) , RBI, to turn to the execution issues and facilitate preparation of operational guidelines in the context of IFRSs convergence for the Indian banking system. The group is entrusted with the issues such as ; ( I ) Categorization and measuring of fiscal assets ( 2 ) Categorization and measuring of fiscal liabilities and hedge accounting ( 3 ) Amortised cost and damage ( 4 ) Fair value measuring ( 5 ) Presentation, revelations and balance sheet formats and ( 6 ) Derecognition, consolidation and residuary issues.
In chase of its aims, the International Accounting Standards Board ( IASB ) works in close cooperation with stakeholders around the universe, including investors, national standard-setters, regulators, hearers, faculty members, and others who have an involvement in the development of high-quality planetary criterions. Progress toward this end has been steady. All major economic systems have established clip lines to meet with or follow IFRSs in the close hereafter and more than 100 states require or permit the usage of IFRSs. Approximately 100 states have adopted or are in the procedure of acceptance.
Convergence with IFRS has gained impulse in recent old ages all over the World. 110+ states including European Union, Australia, China, New Zealand, and Russia presently have permitted the usage of IFRS. Apart from India, states like Japan, Sri Lanka, Canada and Korea have besides committed to follow IFRS from 2011. United States of America has announced its purpose to follow IFRS from 2014 and it besides permits foreign private filers in the U.S. Stock Exchanges to register IFRS complied Financial Statement, without necessitating the presentation of rapprochement statement. The position of acceptance of IFRS in some choice states is furnished in table-1.
Table-1: Status of Adoption of IFRS in some Choice States
Status of IFRS Implementation
Similar to IFRS ( effectual for listed entities 2007 )
Presently applicable for Bankss.
2011 ( as per action program released )
Overview of IFRS
The term “ IFRSs ” presently comprises of: 9 IFRSs ( the 9th being in the phase of development, 29 IASs ( originally 41 ) , 18 IFRIC and 11 SIC readings, plus the Framework. IFRS-1: First clip acceptance 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 rating of mineral resources ; IFRS-7: Fiscal Instruments-Disclosures ; IFRS-8: Operating Sections ; and IFRS-9: Fiscal Instruments – Assetss.
Figure-1: Passage to IFRS
Fair Value Accounting
Historical Value Accounting
Chiefly the aims of IFRS include ; rules based high quality planetary criterions and accent on relevancy and revelations.
Further, Effective Project Management is besides an indispensable ingredient for a successful and sustainable IFRS execution procedure. As illustrated in figure-2, there are issues for Accounting and Reporting, Systems and Processes, People and for the wider Business.
Figure-2: IFRS execution procedure[ 1 ]
Why Convergence to IFRS?
The drivers of IFRS convergence are chiefly ; capital Markets, regulative demands, internal controls and public presentation rating. Converging to planetary accounting criterions i.e. IFRS facilitates comparison between endeavors runing in different legal powers. Therefore, planetary accounting criterions would take a frictional component to capital flows and lead to wider and deeper investing in markets. Convergence with IFRS is besides in the involvement of the industry since conformity with them would be able to make greater assurance in the head of investors and cut down the cost of raising foreign capital. It is besides onerous and dearly-won for endeavors runing across several states to follow with a battalion of national accounting criterions and change over them to a individual criterion for group coverage intents. Convergence would therefore assist cut down both the cost of capital and cost of conformity for industry.
Banks in India may confront several challenges along the way to convergence. Apart from the regulative challenges some of the important proficient accounting challenges could be ; Loan/Investment damage Losses, Fair value accounting of fiscal Instruments, Derived functions and Hedge Accounting, De-recognition of Financial Assets and Consolidation of Entities.
Loan / Investment Impairment Losses
Application of IFRS may ensue in higher loan losingss and damage charges, thereby impacting available capital and capital adequateness ratios. A instance by instance appraisal of the single facts and fortunes environing the recoverability and timing of future hard currency flows for all major recognition exposures is prescribed under the impairment theoretical account suggested under IFRS. Further, loan losingss are required to be calculated based on an nonsubjective damage appraisal of the specific facts & A ; fortunes of the recognition exposures and based on the usage of informed judgement. However under the current Indian GAAP / RBI guidelines, loan losingss are provided for the non executing assets based on prescribed purveying rates in a mechanical mode, without any such impairment appraisal. As such, Bankss need to better and beef up the loss prediction mechanisms within the organisation in analogue with all right tuning hazard adjusted pricing for fresh loans.
Fair value accounting of fiscal Instruments
Under IFRS, there may be a important addition in the extent that just value measuring needs to be used. For case all fiscal assets and liabilities will necessitate to be ab initio measured at just value. While in a figure of cases, just values may be represented by dealing monetary values, the burden on Bankss will be to turn out that dealing monetary values represent just value. In add-on, there will be a figure of cases where unfulfilled additions can/should be recognized ; for illustration, trading instruments and those where the bank elects the just value option. Further, due to the stringent standards prescribed under IFRS, a Held to Maturity ( HTM ) categorization, ( which presently consequences in an amortised cost rating footing for a important portion of most Indian Bankss ‘ investing portfolio ) , is improbable to be available taking to fair value measuring for a significant portion of the portfolio. Again, this is a important displacement from current accounting intervention under Indian GAAP.
Derived functions and Hedge Accounting
Under IFRS, all derived functions are recognized on the balance sheet at just values with alterations in just values being recognized by and large in the income statement other than in the instance of a modification hard currency flow hedge relationship. Application of hedge accounting does cut down the income statement volatility induced by the just value measuring of derived functions but comes with important strings attached in the signifier of certification, hedge effectivity proving and ineffectiveness measuring. In add-on, embedded derivative contracts ( such as equity transition options embedded in a exchangeable unsecured bond -the most common state of affairs found in India ) require to be separated from their host contracts and be accounted for individually. In contrast, current Indian GAAP does non specifically turn to the more ‘difficult to use ‘ commissariats of just value and hedge accounting.
De-recognition of Financial Assets
Under IFRS, de-recognition of fiscal assets is a complex, multi-layered country that follows the rule of transportation of hazards and wagess. In the Indian context, this will impact chiefly the securitisation activity. Securitsation minutess – where recognition collaterals are provided or warrant is provided to cover recognition losingss in surplus of the losingss inherent in the portfolio of assets securitised-may non run into the de-recognition rules enunciated in IAS 39. This will ensue in failure of de-recognition trial under IFRS and lead to prostration of securitisation vehicles into the transferor ‘s balance sheets. Banks will necessitate to measure the impact and see the possible impact on capital adequateness and ratios such as return on assets.
Consolidation of Entities
Under IFRS, consolidation is non driven strictly by the ownership construction of an entity but will hold to concentrate on the power to command an entity to obtain economic benefit. IFRS provides more strict consolidation trials and in pattern can ensue in the consolidation of a larger figure of entities as compared to under Indian GAAP. Banks will necessitate to execute consolidation appraisals every bit early as possible, peculiarly for non-shareholding related factors that impact consolidation, to measure its impact.
The Yin and Yang of Convergence to IFRS
Convergence besides entails keeping consistence with legal and regulative demands prevalent in the state. Towards this terminal, amendments need to be made to bing Torahs and ordinances, notably the Companies Act, 1956 commissariats and agendas that detail the demands of fiscal statements need to be harmonized with IFRS demands and converged Indian Accounting Standards demand to be notified under subdivision 211 ( 3C ) of the said Act. Additionally there are besides issues associating to taxation under an IFRS converged environment.
There is besides a demand to better consciousness in general and build proficient competency for the accounting and scrutinizing profession on IFRS. The ICAI has already included a comparative survey of Indian Accounting criterions with international criterions in its course of study for CA Final Advanced Accountancy and is besides offering classs and seminars for its members to update them in the field. The RBI excessively has been keeping periodical seminars and workshops to educate its staff on IFRS commissariats.
The IFRS convergence procedure will affect important challenges for the banking system in general. Banks would necessitate to upgrade their substructure, including IT and human resources, to confront the complexnesss and challenges of IFRS. Some major proficient issues originating for Indian Bankss during the convergence procedure would be differences between the IFRS and current regulative guidelines on categorization and measuring of fiscal assets, focal point in the criterion on the concern theoretical account followed by Bankss and the challenges for direction in this country, application of just values for minutess where non much counsel is available in India in footings of market patterns or benchmarks, and expected alterations in damage regulations.
Global Financial Crisis and the Lessons learnt
One of the most destabilizing elements of the planetary fiscal crisis has been the pro-cyclical elaboration of fiscal dazes through the banking system, fiscal markets and the broader economic system. The inclination of the market participants to act in a pro-cyclical mode has been amplified through a assortment of channels, including through accounting criterions for both mark-to-market assets and held-to-maturity loans, margining patterns and through the physique up and release of purchase among the fiscal establishments, houses and consumers. Failure to capture major on-and off-balance sheet hazards every bit good as derivative related exposures, was besides a cardinal destabilising factor. The commissariats of IAS 39-Financial Instruments-Recognition and Measurement issued by the International Accounting Standards Board ( IASB ) , establishes the rules for acknowledging and mensurating fiscal assets and fiscal liabilities. This criterion is of peculiar importance to the banking sector and NBFCs which deal chiefly in fiscal instruments. IAS 39 includes commissariats about categorization of fiscal instruments, their on-going measuring ( including when damage is required ) and derecognition. The commissariats of IAS 39 are presently applicable globally in regard of fiscal instruments.
In the background of the developments after the planetary fiscal crisis, the Ministry of Corporate Affairs ( MCA ) , GOI set up a high-octane Core Group under the chairmanship of Secretary ( MCA ) to analyze the impact of IFRSs and to understand the readiness of the Indian companies for meeting with IFRSs. The Road map towards IFRS convergence for corporates from April 1, 2011 has been finalized by the Ministry of Corporate Affairs in January, 2010.
Advantages of IFRS
IFRS is a rule based theoretical account as compared to govern based US GAAP. IFRS requires extended usage of just ratings for measuring of assets and liabilities. The aim of IFRS is to put the Balance Sheet right, and therefore a important volatility may come in Profit & A ; Loss statement.
a ) A A A A A A Improved entree to Global Market
A Majority of the Stock exchange globally necessitate fiscal information as per IFRS. If the fiscal information is as per Indian Accounting Standard so a hazard premium is added in pricing.
B ) A A A A A A Lower Cost of Capital
Convergence with IFRS means the Indian companies need non fix two sets of Financial Statements to follow with the demands abroad and this would take to lower cost of disposal, remotion hazard premium and hence pricing and the companies can near any market for capital.
degree Celsius ) A A A A A A A Benchmarking with Global Peers
Fixing histories as per IFRS will give better apprehension of public presentation relation to the Global equals / benchmarks. Targets and Milestones will be set based on planetary concern environment alternatively of Local.A
vitamin D ) A A A A A True Value of acquisition
In Indian GAAP except for a few exclusions net assets acquired is recorded on the transporting value alternatively of just value. Hence the true value of the combination is non reflected. IFRS overcomes this defect as it mandates accounting of concern combinations at just value.
Contemplations under IFRS
IFRS is an accounting-driven but it can drive major alterations to IT systems every bit good as concern procedures and forces.
Experience indicates that IT costs by and large constitute more than 50 per centum of IFRS transition costs.
Organizations benefit when they identify and integrate the attempts of the IT squad early in the IFRS transition procedure.
IT attempts will consist a mix of short- and long-run undertakings within the organisation ‘s overall IFRS enterprise.
The IFRS transition attempt provides chances for accomplishing synergisms with other IT undertakings and strategic enterprises.
Challenges in following IFRS
Regulatory indorsement and credence
Deficit of skilled resources
Huge cost of sweetening of IT systems
Credence by revenue enhancement governments
Pull offing market outlooks and investor relationships
Pull offing twenty-four hours to twenty-four hours concern issues – MIS, revenue enhancement planning, public presentation indexs, amalgamations and acquisitions, etc.
The cardinal divergencies between Indian GAAP and IFRS have arisen due to:
Legal and regulative demands
Present economic conditions
Degree of readiness
Following the crisis, there was widespread unfavorable judgment that the accounting criterions, more so, just value accounting significantly contributed to the fiscal crisis or at the really least exacerbated the badness of the crisis, in position of its failure to cover with illiquid markets and distressed gross revenues.
The G 20 Working Group on “ Enhancing Sound Regulation and Strengthening Transparency ” recommended that accounting standard compositors should beef up accounting acknowledgment of loan loss commissariats by sing alternate attacks for acknowledging and mensurating loan losingss that incorporate a broader scope of available recognition information. The G 20 Working Group besides recommended that the International Accounting Standards Board ( IASB ) should heighten its attempts to ease the planetary convergence towards a individual set of high-quality accounting criterions by sharing the experience of states that have completed this procedure and by supplying proficient aid. Another important recommendation was that accounting standard compositors should speed up attempts to cut down the complexness of accounting criterions for fiscal instruments and heighten presentation criterions to let the users of fiscal statements to better measure the uncertainness environing the rating of fiscal instruments.
In April 2009, in response to the input received on its work reacting to fiscal crisis, and following the decisions of the G 20 leaders and the recommendations of international organic structures such as the Financial Stability Board, the IASB announced an accelerated timetable for replacing the chief criterion for acknowledgment and measuring of fiscal instruments- IAS 39. IAS 39 is sought to be replaced by IFRS 9 in three stages. The first stage was completed with the issue of the part of IFRS 9 which trades with the categorization and measuring of fiscal assets and fiscal liabilities. The 2nd and 3rd stages are in the country of Hedge Accounting and Impairment, where presently work is underway. It is expected that IFRS 9 will replace IAS 39 in its entireness by June 2011.
Accounting criterions compositors and prudential supervisors should work together to place solutions for advancing stableness and bettering transparence.
In 2007 the ICAI decided that India should meet towards IFRS in a definite clip frame in the aftermath of developments taking topographic point in other major legal powers which had set up clip agendas for migrating towards IFRS.