Benefits of adopting IFRS for Indian companies

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International Financial Reporting Standards (IFRS) have recently emerged as the numero-uno accounting framework, with widespread global acceptance. The IASB, a private sector body, develops and approves IFRS. The IASB replaced the IASC in 2001. The IASC issued IAS from 1973 to 2000. Since then, the IASB has replaced some IAS with new IFRS and has adopted or proposed new IFRS on topics for which there was no previous IAS. Through committees, both, the IASC and the IASB have issued Interpretations of Standards.

IFRS refers to the new numbered series of pronouncements that the IASB is issuing, as distinct from the IAS series issued by its predecessor. More broadly,IFRS refers to the entire body of IASB pronouncements, including standards and interpretations approved by the IASB, IFRIC, IASC and SIC. Currently, 29 IAS and 8 IFRS are effective. In addition, 11 SICs and 16 IFRICs provide guidance on interpretation issues arising from IAS and IFRS.

IFRS is principle based, drafted lucidly and is easy to understand and apply. However, the application of IFRS requires an increased use of fair values for measurement of assets and liabilities. The focus of IFRS is on getting the balance sheet right, and hence, can bring significant volatility to the income

Statement.

IFRS - A truly global accounting standard

The year 2000 was significant for IAS, now known as IFRS. The International Organization of Securities Commission formally accepted the IAS core standards as a basis for cross-border listing globally. In June 2000, the European Commission passed a requirement for all listed companies in the European

Union to prepare their CFS using IFRS (for financial years beginning 2005). Since 2005, the acceptability of IFRS has increased tremendously. There are now more than 100 countries across the world where IFRS is either required or permitted. This figure does not include countries such as India, which do not follow IFRS but whose national GAAP is inspired by IFRS.

IFRS and India

The issue of convergence with IFRS has gained significant momentum in India. At present, the ASB of the ICAI formulates Accounting Standards based on IFRS; however, these standards remain sensitive to local conditions, including the legal and economic environment. Accordingly, the Accounting Standards issued by the ICAI depart from the corresponding IFRS in order to ensure consistency with the legal, regulatory and economic environments of India.

At a meeting held in May 2006, the Council of ICAI expressed the view that IFRS may be adopted in full at a future date, at least for listed and large entities. The ASB, at a meeting held in August 2006, considered the matter and supported the council's view that there would be several advantages of converging with IFRS. Keeping in mind the extent of differences between IFRS and Indian Accounting Standards, as well as the fact, that convergence with IFRS would be an important policy decision, the ASB decided to form an IFRS Task Force. The objectives of the Task Force were to explore:

• The approach for achieving convergence with IFRS, and

• Laying down a road map for achieving convergence with IFRS with a view to make India IFRS-

Compliant.

Based on the recommendation of the IFRS Task Force, the Council of ICAI, at its 269th meeting, decided to converge with IFRS, for accounting periods commencing on or after 1 April 2011. IFRS will be adopted for listed and other public interest entities such as banks, insurance companies and large-sized organizations. With an objective to ensure smooth transition to IFRS from 1 April 2011, ICAI is taking up the matter of convergence with IFRS with NACAS and other regulators including RBI, IRDA and SEBI. The NACAS has been established by the Ministry of Corporate Affairs, Government of India. ICAI is taking various other steps as well to ensure that IFRS is effectively adopted from 1 April 2011. These include:

• Formulation of work-plan, and

• Conducting training programmes for members of ICAI and others concerned to prepare them to

implement IFRS.

Benefits of adopting IFRS for Indian companies

The decision to converge with IFRS is a milestone decision and is likely to provide significant benefits to Indian corporates.

Improved access to international capital markets

Many Indian entities are expanding or making significant acquisitions in the global arena, for which large amounts of capital is required. The majority of stock exchanges require financial information prepared under IFRS. Migration to IFRS will enable Indian entities to have access to international capital markets, removing the risk premium that is added to those reporting under Indian GAAP.

Enable benchmarking with global peers and improve brand value

Adoption of IFRS will enable companies to gain a broader and deeper understanding of the entity's relative standing by looking beyond country and regional milestones. Further, adoption of IFRS will facilitate companies to set targets and milestones based on global business environment, rather than merely local ones.

Escape multiple reporting

Convergence to IFRS, by all group entities, will enable company managements to view all components of the group on one financial reporting platform. This will eliminate the need for multiple reports and significant adjustment for preparing consolidated financial statements or filing financial statements in different stock exchanges.

Reflects true value of acquisitions

In Indian GAAP, business combinations, with few exceptions, are recorded at carrying values rather than fair values of net assets acquired. Purchase consideration paid for intangible assets not recorded in the acquirer's books is usually not reflected separately in the financial statements; instead the amount gets added to goodwill. Hence, the true value of the business combination is not reflected in the financial statements. IFRS will overcome this flaw, as it mandates accounting for net assets taken over in a business combination at fair value. It also requires recognition of intangible assets, even if they have not been recorded in the acquiree's financial statements.

Lower cost of capital

Migration to IFRS will lower the cost of raising funds, as it will eliminate the need for preparing a dual set of financial statements. It will also reduce accountants' fees, abolish risk premiums and will enable access to all major capital markets as IFRS is globally acceptable

New opportunities will open up for corporates

Benefits from the adoption of IFRS will not be restricted to Indian corporates. In fact, it will open up a host of opportunities in the services sector. With a wide pool of accounting professionals, India can emerge as an accounting services hub for the global community. As IFRS is fair value focused, it will provide significant opportunities to professionals including, accountants, valuers and actuaries, which in-turn, will boost the growth prospects for the BPO/KPO segment in India.

IFRS challenges

Shortage of resources

With the convergence to IFRS, implementation of SOX, strengthening of corporate governance norms, increasing financial regulations and global economic growth, accountants are most sought after globally. Accounting resources is a major challenge. India, with a population of more than 1 billion, has only approximately 145,000 Chartered Accountants, which is far below its requirement.

Training

If IFRS has to be uniformly understood and consistently applied, training needs of all stakeholders, including CFOs, auditors, audit committees, teachers, students, analysts, regulators and tax authorities need to be addressed. It is imperative that IFRS is introduced as a full subject in universities and in the Chartered Accountancy syllabus.

Information systems

Financial accounting and reporting systems must be able to produce robust and consistent data for reporting financial information. The systems must also be capable of capturing new information for required disclosures, such as segment information, fair values of financial instruments and related party transactions. As financial accounting and reporting systems are modified and strengthened to deliver information in accordance with IFRS, entities need to enhance their IT security in order to minimize the risk of business interruption, in particular to address the risk of fraud, cyber terrorism and data corruption.

Distributable profits

IFRS is fair value driven, which often results in unrealized gains and losses. Whether this can be considered for the purpose of computing distributable profits, will have to be debated, in order to ensure that distribution of unrealized profits will not eventually lead to reduction of share capital.

Taxes

IFRS convergence will have a significant impact on financial statements and consequently tax liabilities. Tax authorities should ensure that there is clarity on the tax treatment of items arising from convergence to IFRS. For example, will government authorities tax unrealized gains arising out of the accounting required by the standards on financial instruments? From an entity's point of view, a thorough review of existing tax planning strategies is essential to test their alignment with changes created by IFRS. Tax, other regulatory issues and the risks involved will have to be considered by the entities.

Communication

IFRS may significantly change reported earnings and various performance indicators. Managing market expectations and educating analysts will therefore be critical. A company's management must understand the differences in the way the entity's performance will be viewed, both internally and in the market place and agree on key messages to be delivered to investors and other stakeholders. Reported profits may be different from perceived commercial performance due to the increased use of fair values, and the restriction on existing practices such as hedge accounting. Consequently, the indicators for assessing both business and executive performance, will need to be revisited.

Management compensation and debt covenants

The amount of compensation calculated and paid under performance-based executive, and employee compensation plans may be materially different under IFRS, as the entity's financial results may be considerably different. Significant changes to the plan may be required to reward an activity that contributes to an entity's success, within the new regime. Re-negotiating contracts that referenced reported accounting amounts, such as, bank covenants or FCCB conversion trigger, may be required on convergence to IFRS.

First-time adoption of IFRS

ICAI has announced convergence with IFRS for accounting periods commencing on or after 1 April 2011. As per the Announcement, all listed entities, public interest entities, such as banks, insurance entities and large-sized entities shall adopt IFRS. In addition, the Ministry of Corporate Affairs (MCA) recently issued a press release in which the Ministry has committed to IFRS convergence by 1 April 2011.

Most Indian entities are adopting IFRS for the first time. Although, entities often adopt new accounting standards under Indian GAAP, adopting IFRS, an entirely different basis of accounting, poses a distinct set of problems:

The sheer magnitude of the effort involved in adopting a large number of new accounting standards,

The requirements of individual IFRS differ significantly from those under Indian GAAP, and

The large amount of information that needs to be collected, not previously required under Indian GAAP

After the IASB had been made aware of the considerable practical difficulties surrounding first-time application of IFRS, it published IFRS 1 First-time Adoption of International Financial Reporting

Standards in order to assist preparers to overcome the practical difficulties in applying IFRS for the first time. IFRS 1 provides the basis on which entities will convert their financial statements to IFRS. It lays down the ground rules and prescribes the accounting policies to be followed in an entity's first set of IFRS financial statements, and in preparation of its opening IFRS balance sheet, which serves as the starting point for its future accounting under IFRS.

Though IFRS 1 goes some way to reduce the burden of historical accounting information, it does not turn the transition process into a hassle free job. Even under IFRS 1, the transition process remains complex and time- consuming for many entities. It places demands on companies in areas such as staff training, data collection, and new or modified information system requirements. Another challenge relates to the exemptions from IFRS available in preparing the transition date balance sheet. The standard includes both optional and mandatory exceptions and companies are required to make judgments and decisions about which options to apply in their first set of IFRS financial statements. It is essential for everyone involved in the conversion process to understand the issues and to know how these can be resolved. This chapter explains the application of IFRS 1 in the particular context of Indian entities. Thus, Indian GAAP has been considered to be the previous GAAP for such entities.

First-time adoption

IFRS 1 prescribes the procedures that an entity is required to follow when adopting IFRS for the first time. The underlying principle is that a first-time adopter should prepare financial statements as if it had always applied IFRS, subject to a number of exemptions and exceptions, whereby, a first-time adopter is allowed to deviate from this general rule. The objective of IFRS 1 is to ensure that an entity's first IFRS financial statements, and its interim financial reports for part of the

period covered by those financial statements, contain high quality information that:

is transparent for users and comparable over all periods presented,

provides a suitable starting point for accounting under IFRS, and

can be generated at a cost that does not exceed the benefits to users

Scope of IFRS 1

IFRS 1 is applicable to the first set of annual IFRS financial statements prepared by an entity. The first IFRS financial statements are defined as the first annual financial statements in which an entity adopts IFRS by an 'explicit and unreserved statement' of compliance with IFRS. The decisive factor is whether

or not the entity made that explicit and unreserved statement. An entity is not considered to be a first-time adopter if it departed from certain IFRS (whether recognition, measurement or disclosure) in its previous financial statements but still made an explicit and unreserved statement of compliance with IFRS. Accordingly, such an entity is not allowed to apply IFRS 1 in accounting for changes in its accounting policies. Instead, it would need to apply IAS 8 in making any corrections. IFRS 1 states that an entity's first IFRS financial statements will be subject to IFRS 1, even if it presented its most recent previous financial statements in compliance with IFRS in all respects, except that they did not contain an explicit and unreserved statement. Below are some examples of situations where an entity's financial statements under IFRS would be considered as the first IFRS financial statements, and therefore, would be subject to IFRS 1 requirements:

An entity presented its most recent previous financial statements:

Under national requirements that are not consistent with IFRS in all respects,

In conformity with IFRS in all respects, except that the financial statements did not contain an explicit and unreserved statement of compliance with IFRS,

Containing an explicit statement of compliance with some, but not all, IFRS,

Under national requirements inconsistent with IFRS, using some individual IFRS to account for items for which national requirements did not exist, and

Under national requirements, with a reconciliation of some amounts to the amounts determined under IFRS.

An entity prepared financial statements under IFRS for internal use only, without making them

available to the entity's owners or any other external users,

An entity prepared a reporting package under IFRS for consolidation purposes without preparing a

complete set of financial statements as defined in IAS 1-R Presentation of Financial Statements, and

An entity did not present financial statements for previous periods.

If the most recent previous financial statements of an entity contained an explicit and unreserved statement of compliance with IFRS, then it will not be considered as a first-time adopter.

First-time adoption timeline/ key dates

Two terms are key to understanding IFRS 1: reporting date and transition date. The reporting date is the end of the latest period covered by financial statements or by an interim financial report. The transition date is the beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS financial statements. For an Indian company with a March year-end the first reporting date under IFRS will be 31 March 2012 and transition date will be 1 April 2010.

Therefore, the first set of financial statements shall be for 1 April 2011 to 31 March 2012 with IFRS comparables also provided for 1 April 2010 to 31 March 2011. The opening balance sheet date shall be 1 April 2010.

Opening IFRS balance sheet and accounting policies

IFRS 1 requires an entity to prepare an opening IFRS balance sheet at its transition date (1 April 2010 in the above example). The opening IFRS balance sheet is the starting point for all subsequent accounting under IFRS.

A first-time adopter needs to use the same accounting policies in its opening IFRS balance sheet as those used in all periods presented in its first IFRS financial statements. The fundamental principle of IFRS 1 is to require full retrospective application of the standards in force at an entity's reporting date, with limited exceptions.

When selecting accounting policies, a first-time adopter:

Needs to apply IFRS effective at the reporting date. It should not apply previous versions of IFRS that were effective at earlier dates

May apply a new IFRS that is not yet mandatory if it permits early application. Transitional provisions in other IFRS do not apply to a first-time adopter's transition to IFRS.

Determine which exemptions to use.

Take into account the exceptions to retrospective application.

Transition from Indian GAAP to IFRS

In preparing its opening IFRS balance sheet, an entity should:

Not recognize items as assets or liabilities if IFRS does not permit such recognition

Assets and liabilities recognized under Indian GAAP that do not qualify for recognition under IFRS need to be eliminated from the opening balance sheet. For example, share issue expenses carried forward does not meet the definition of intangible asset under IAS 38. Therefore, it cannot be carried in the IFRS opening balance sheet. Proposed dividends cannot be disclosed as liability in IFRS and this liability should be eliminated in the opening IFRS balance sheet.

Recognize all assets and liabilities whose recognition is required by IFRS. Some of the examples are:

All derivative financial assets and liabilities and embedded derivatives need to be recognized in opening IFRS balance sheet. If these are not recorded under Indian GAAP, entities need to bring them on the IFRS balance sheet

IFRS requires restructuring provisions to be recognized based on a constructive obligation, while Indian GAAP permits recognizing such provision only when legal obligation arises. Therefore, if an entity had constructive obligation on the opening balance sheet date, it needs to record the provision in the IFRS balance sheet. If there was no legal obligation by that date, the Indian GAAP balance sheet would not have recorded such provision.

IAS 12 is based on the balance sheet liability approach. AS 22 requires deferred taxes to be recognized based on the income statement liability approach. Therefore, temporary differences, for which deferred tax is not recognized under Indian GAAP, need to be identified and deferred tax in respect thereof need to be recognized in the opening balance sheet date.

Entities also need to gather information required to be disclosed in the IFRS balance sheet that is not disclosed in Indian GAAP. For example,Indian GAAP prohibits disclosure of contingent assets, whereas, IFRS require such disclosure. Therefore, entities need to develop their systems to capture such information.

Reclassify assets, liabilities and items of equity as per the requirements of IFRS Asset and liability classifications under Indian GAAP do not comply with IFRS. Therefore, the assets and liabilities need to be reclassified in order to draw up the opening IFRS balance sheet in accordance with IFRS requirements. Certain common differences are highlighted below:

In an Indian GAAP balance sheet, liability and equity classification is based on legal form, rather than their substance. For example, all redeemable preference shares are classified as equity. Therefore, items which meet the definition of equity and liability under IFRS need to be identified first and then to be reclassified in the opening IFRS balance sheet.

There may be acquired intangible assets in the past business combinations, which do not meet the definition of intangible assets under IFRS. These need to be reclassified to goodwill. In addition, intangible assets on acquisitions that were not previously recognized need to be reclassified from goodwill to intangibles in the opening balance sheet.

IFRS 1 provides an exemption from split accounting of compound financial instruments when certain conditions are satisfied. When this exemption cannot be availed by the entity, compound financial instruments need to be split into equity and liability portions for their appropriate classification. Those items which are liabilities but are classified as equity under Indian GAAP, such as mandatory redeemable preference shares, need to be reclassified as a liability in the opening balance sheet.

IAS 27 does not provide any exemption from consolidating subsidiaries. Therefore, if the entity has not prepared CFS under Indian GAAP or has not consolidated any subsidiary in its Indian GAAP CFS, the opening IFRS balance sheet needs to be drawn up to ensure all subsidiaries are recorded in the consolidated opening balance sheet.

Measure all assets and liabilities in accordance with IFRS

All assets and liabilities need to be measured using IFRS principles. For example, an entity would need to measure investment classified as at fair value through profit or loss at fair value in the opening IFRS balance sheet.

The resulting differences between the carrying values under Indian GAAP and carrying values under IFRS are accounted in the retained earnings in the opening balance sheet.

Optional exemptions from the requirements of certain IFRS

IFRS 1 grants limited optional exemptions from the general requirement of full retrospective application of IFRS where the cost of complying with them would be likely to exceed the benefits to users of financial statements. These exemptions relate to:

Use of fair value as deemed cost,

Decommissioning liabilities included in the cost of property, plant and equipment,

Leases,

Service concession arrangements,

Borrowing costs,

Business combinations,

Assets and liabilities of subsidiaries, associates and joint ventures, Investments in subsidiaries, jointly controlled entities and associates in separate financial statements

Cumulative translation differences,

Financial instruments,

Employee benefits,

Share-based payment transactions, and

Insurance contracts.

Use of fair value as deemed cost

Items of property, plant and equipment are long-lived which means that accounting records for the period of acquisition may not be available anymore. In certain cases, the required records may have never existed to apply accounting as per IAS 16. Furthermore, even if these items are being carried at depreciated cost, the accounting policy for recognition and depreciation may not have been IFRS compliant. For example, unlike IAS 16, Indian GAAP does not mandate component approach with regard to depreciation and the replacement of parts of items of property, plant and equipment. In such a scenario, full retrospective restatement as per IFRS may not only be difficult, but would often also involve undue cost and effort.

To deal with practical issues in the retrospective restatement, IFRS 1 permits a first-time adopter to measure individual items of property, plant and equipment at deemed cost at the date of transition to IFRS. The deemed cost that a first-time adopter uses is either:

The fair value of the item at the date of transition to IFRS,

A revaluation under the Indian GAAP at, or before the date of transition to IFRS, if the revaluation was, at the date of the revaluation, broadly comparable to:

Fair value, or

Cost or depreciated cost under IFRS, adjusted to reflect, for example, changes in a general or specific price index, or

The deemed cost under the Indian GAAP that was established by measuring items at their fair value at one particular date because of an event such as a privatization or initial public offering.

Decommissioning liabilities included in the cost of property, plant and equipment

Under IAS 16, the cost of an item of property, plant and equipment includes 'the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period'. Under IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities, changes in the estimated timing or amount of the outflow of resources embodying economic benefits required to settle an existing decommissioning, restoration or similar liability, or a change in the discount rate, shall be added to, or deducted from, the cost of the related asset. The adjusted depreciable amount of the asset is depreciated prospectively over its remaining useful life.

Leases

IFRIC 4 requires an assessment of, whether a contract or arrangement contains a lease. The assessment should be carried out at the inception of the contract or arrangement. First-time adopters must apply IFRIC 4, but can elect to make this assessment as of the date of transition based on the facts at that date, rather than at inception of the arrangement.

Indian GAAP does not provide any guidance on determining, whether an arrangement contains a lease.

Using the lease exemption, companies can choose to perform the embedded lease assessment either at the date of transition or at the arrangement inception date for those contracts.

Service concession arrangements

IFRIC 12 applies to contractual arrangements in which a private sector operator participates in the development, financing, operation, and maintenance of infrastructure for public sector services. Under IFRIC 12, the operator cannot recognize infrastructure as its own asset, since, it does not control the use of the public service infrastructure. The operator acts as a service provider. Therefore, the operator recognizes the revenue and costs relating to construction or upgrade service in accordance with IAS 11 and revenue in accordance with IAS 18 for services it performs. The consideration received for construction or upgrade services is recognized at its fair value. A first-time adopter may apply the transitional provision in IFRIC 12. This requires retrospective application, unless, it is, for any particular service arrangement, impracticable for the operator to apply IFRIC 12 retrospectively, at the start of the earliest period presented, in which case it should:

Recognize financial and intangible assets that existed at the start of the earliest period presented,

Use the previous carrying amounts as the carrying amount at that date (no matter how they were

previously classified), and

Test the financial and intangible assets recognized at that date for impairment.

Borrowing costs

A first-time adopter may apply IAS 23 Borrowing Costs using the following guidelines:

If the accounting treatment for capitalized interest required by IAS 23 is different from the company's previous accounting policy, the company should apply IAS 23 to borrowing costs related to qualifying assets capitalized on or after 1 January 2009, or the date of transition to IFRS, if later

Alternatively, companies can designate any date before 1 January 2009, and apply the standard to borrowing costs relating to all qualifying assets capitalized on or after that date.

Business combinations

Business combination prior to transition date

Accounting for business combinations under Indian GAAP is significantly different to that under IFRS. Retrospective application of IFRS 3-R Business Combinations may be difficult and in certain cases, impossible for past business combinations. Against this background, besides fair value as deemed cost in case of fixed asset, the business combinations exemption in IFRS 1 is probably the most important exemption, as it provides a first-time adopter an exemption from restating business combinations prior to its date of transition to IFRS, subject to certain requirements. A first-time adopter choosing to apply this exemption is not required to restate business combinations to comply with IFRS 3-R, if control was obtained before the transition date, however, it may choose to restate previous combinations. If a first-time adopter restates any business combination prior to its date of transition to comply with IFRS 3-R, it must restate all business combinations under IFRS 3-R which occur after the date of that combination. This exemption is available to all transactions that meet the definition of a business combination under IFRS 3-R, irrespective of their classification under Indian GAAP. The exemption also applies to acquisitions of investments in associates and joint ventures. Thus, a first-time adopter taking advantage of the exemption will not have to revisit past business combinations, acquisitions of associates and joint ventures to establish fair values and amounts of goodwill under IFRS. However, application of the exemption is complex, and certain adjustments to transactions under Indian GAAP may still be required.

When the exemption is applied:

Classification of the combination as an acquisition, reverse acquisition or a pooling of interests does not change,

Assets and liabilities acquired or assumed in the business combination are recognized in the acquirer's opening IFRS balance sheet, unless IFRS does not permit recognition,

For assets and liabilities that are accounted for on a cost basis under IFRS, the carrying amount under Indian GAAP shall be their deemed cost under IFRS at that date. If IFRS require a cost-based measurement of those assets and liabilities at a later date, that deemed cost shall be the basis for cost-based depreciation or amortization from the date of the business combination, and

Assets and liabilities that are measured at fair value under IFRS are restated to fair value in the opening IFRS balance sheet, with the offset being recorded in equity (for example, available-for-sale financial assets).

An asset acquired or a liability assumed in a past business combination may not have been recognized under Indian GAAP. However, this does not mean that such items have a deemed cost of zero in the opening IFRS balance sheet. Instead, the acquirer recognizes and measures those items in its opening IFRS balance sheet on the basis that IFRS would require in the balance sheet of the acquiree. Under IFRS 1, when recognizing an asset or liability associated with a business combination prior to the transition date, the recording of the offsetting debit or credit depends on the nature of the entry. The recognition of most assets or liabilities will result in a corresponding debit or credit in retained earnings. Two adjustments are, however, recorded against goodwill arising from prior business combinations:

Goodwill is increased for an intangible asset, recognized under Indian GAAP, that does not qualify for recognition as an asset under IAS 38. Alternatively, goodwill is decreased for an intangible asset that was subsumed in goodwill under Indian GAAP and qualifies for recognition as a separate intangible asset under IAS 38.

Goodwill is impaired at the transition date after applying IAS 36.

Previously unconsolidated subsidiaries

Under Indian GAAP, a first-time adopter may not have consolidated a subsidiary acquired in a past business combination. In that case, a first-time adopter applying the business combinations exemption should adjust the carrying amounts of the subsidiary's assets and liabilities to the amounts that IFRS would require in the subsidiary's balance sheet. The deemed cost of goodwill equals the difference at the date of transition to IFRS between:

The parent's interest in those adjusted carrying amounts, and

The cost in the parent's separate financial statements of its investment in the subsidiary.

Currency adjustments to goodwill

IAS 21 The Effects of Changes in Foreign Exchange Rates requires that any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation. For a first-time adopter, it may be impracticable, especially after a corporate

restructuring, to determine retrospectively the currency in which goodwill and fair value adjustments should be expressed. Consequently, under IFRS 1, a first-time adopter need not apply this requirement of IAS 21 retrospectively to fair value adjustments and goodwill arising in business combinations that occurred before the date of transition to IFRS. If IAS 21 is not applied retrospectively, a first-time adopter should treat such fair value adjustments and goodwill as assets and liabilities of the entity rather than as assets and liabilities of the acquiree. Therefore, those goodwill and fair value adjustments are either already expressed in the entity's functional currency or are non-monetary foreign currency items, which are reported using the exchange rate applied under Indian GAAP.

Cumulative translation differences

IAS 21 requires, inter alia, the following exchange differences to be recognized in a separate component of equity:

Those arising on a monetary item that forms part of a reporting entity's net investment in a foreign operation, and

Those arising on certain translations to a different presentation currency and any gains and losses on related hedges.

IAS 21 and IAS 39 also require that, on disposal of a foreign operation, the cumulative amount of the exchange differences deferred in the separate component of equity relating to that foreign operation should be recognized in profit or loss when the gain or loss on disposal is recognized. Full retrospective application of IAS 21 would require a first-time adopter to restate all financial statements of its foreign operations to IFRS from their date of inception or later acquisition onwards, and then to

determine the cumulative translation differences arising in relation to each of these foreign operations. The costs of this restatement are likely to exceed the benefits to users of financial statements. For this reason, a first-time adopter need not comply with these requirements for cumulative translation differences that existed at the date of transition to IFRS. If a first-time adopter uses this exemption:

The cumulative translation differences for all foreign operations are deemed to be zero at the date of transition to IFRS, and

The gain or loss on a subsequent disposal of any foreign operation shall exclude translation differences that arose before the date of transition to IFRS and shall include later translation differences.

IFRS conversion - Global experience and process

Currently, there are more than 100 countries across the world wherein entities are required or permitted to speak a common accounting language, viz., IFRS. Come April 2011, India will also join the list of such countries. Adopting IFRS in the financial statements increases comparability of entities within the country as well as with their global counterparts. IFRS is also looked upon as a reliable framework by users of financial statements. It helps entities gain cross-border capital listing and it also helps management, who may be based in another country, to follow uniform systems of reporting across the group in entities with worldwide presence. Most countries in the EU adopted IFRS for accounting periods beginning on, or after 1 January 2005. Approximately, 8,000 entities listed in the EU are required to follow IFRS in their CFS. All these entities have undergone the conversion exercise from their local GAAP to IFRS. The experience of these entities has been:

Certain IFRS requirements are highly complex,

Some of the entities did not have the required data to implement IFRS,

The accounting staff is not trained enough to implement IFRS, and

Regulatory requirements are not in compliance with IFRS.

Issues in implementing IFRS

Some of the issues faced by entities while transiting to IFRS are as follows:

Lack of guidance on IFRS conversion,

Entity specific issues requiring detailed analysis of facts and circumstances to apply IFRS,

Untrained staff,

Time spent for converting to IFRS was under budgeted,

Collating the data required for conversion,

Use of experts for valuations,

IFRS application requires management to exercise judgement and make estimations in many areas, since it is a principle based framework and not rule based,

Being the initial years, IFRS was interpreted differently by different people,

Increased communication was required for keeping analysts and stakeholders informed about the implications of IFRS conversion,

In some cases, IFRS dictated business decisions, due to significant accounting impact, and

The conversion exercise was handled casually, leading to critical problems as the target date drew closer.

Expected difficulties

When Indian entities adopt IFRS, certain difficulties, set out below, are expected. To overcome these difficulties one needs careful planning and a good advisor.

There is sufficient time to overcome these difficulties. However, as the time passes by, the difficulties may become overwhelming.

IFRS is significantly different from Indian GAAP in the areas of fixed assets, financial instruments, business combinations, and group accounts. For some entities this may completely wipe out their retained earnings, whereas, for others it may significantly add to the retained earnings.

IFRS knowledge, resources and literature is very scarce in the country.

Analysts and stakeholders, including regulators, do not understand IFRS financial statements.

Difficulties in fair valuation due to:

Very few valuers have the expertise to perform valuations required by IFRS,

Lack of data for the valuers to perform valuation, and

Lack of availability of statistical models.

Lack of availability of competitors data.

Regulatory requirements may continue to require different accounting treatment as compared to IFRS, such as in the case of tax accounts.

IFRS conversion process

In an IFRS conversion an entity undertakes to change its financial reporting from its current GAAP (Indian GAAP for most Indian entities) to IFRS. Obviously, differences between the Indian GAAP treatment and IFRS would be one of the key inputs to the conversion process in case of Indian entities.

These differences may vary significantly from one entity to another depending on the industry and the current accounting policies chosen under Indian GAAP. However, the magnitude of an IFRS conversion project will not depend solely on the magnitude of the GAAP differences, but will be influenced by other

factors such as:

The quality and flexibility of the existing financial reporting infrastructure,

The size and complexity of the organization, and

The effect of GAAP changes on the business.

Ultimately, the purpose of an IFRS conversion is to put entities in a position, where they are able to report, unaided and reliably, under IFRS and are able to recognize the IFRS dimension of their actions. However, before the actual start of the conversion project, an initial diagnostic phase should put companies in a position where they are aware of:

The differences between IFRS and the entity's current accounting policies,

The impacts of the change to IFRS on the financial statements,

The impacts of the change to IFRS on tax, business IT and process,

The impacts of IFRS on future business decisions, and

An understanding of the approach underlying the formulation of IFRS.

The process of Conversion

IFRS conversion project needs to address more than just accounting issues and that a conversion project is sufficiently complicated to warrant professional project management. It is for these reasons that the methodology comprises five phases, each of which deals with a specific part of the conversion, and that throughout the project it recognizes five different workstreams, each dealing with a specific aspect of the conversion process. This is to facilitate involvement of specialists on need basis. It is, however, important to recognize that the phases can overlap one another and entities need not wait for completion of one phase to end before beginning another. Also, a clear breakdown of all the activities by workstream is not always possible as a mandatory allocation of activities by phase. Thus, this methodology should be tailored according to project specificities, starting point and in place project structure, etc.

Key goals and outputs of each phase

Diagnostic :- This phase involves high level identification of accounting and reporting differences and the consequences to the business, IT, processes and tax. The major outcome management should expect from this phase includes an impact assessment report, which provides implications on above areas. It also entails determining a high-level road map for future phases of the conversion. This phase will also help management to identify potential interdependence between the IFRS conversion project and current or planned organization-wide initiatives (for example, new accounting system implementations such as ERP and finance transformations) and an assessment of, whether the company has adequate resources to complete a conversion.

Design and planning :- This phase involves setting up the project infrastructure, the project management function, including conversion roadmap and change management strategy. The aim of this phase is to set-up a core IFRS team framing conversion time-tables and deciding on detailed way-forward. Formation of the project structure, project charter, communication plan, training plan and expanded conversion roadmap are typical outputs from this phase.

Solution development :- The objective of this phase is to identify solutions to various issues identified in relation to accounting and reporting, tax, business process and system changes. Typical outputs from this phase comprise of IFRS accounting manuals, group reporting packages, IFRS skeleton accounts, group accounting policies, technical papers on IFRS accounting issues, crystallizing the impact on current and deferred tax, developing solutions for tax functions and identifying processes which need to be re- designed, modified or developed.

Implementation :- This phase involves roll out of solutions developed in the previous phase. In this phase the company will conduct a process of dry-run of financial statements to ensure that before the reporting deadline, company is geared up to prepare IFRS financial statements. Post dry-run accounts, the company will roll-out final deliverables, i.e., the opening IFRS balance sheet and the first IFRS financial statements. All business and process solutions developed will also be implemented to facilitate the company transition to the new reporting framework.

Post-implementation :- This phase involves an assessment of how various solutions developed work in the implementation phase and the identification of any issues in the operational model. These issues are tackled in this phase to ensure successful on-going functioning of systems and processes in IFRS reporting regime. On-going update training is also provided, to ensure that company's personnel are updated with latest IFRS developments, and also changes are made in systems and processes. IFRS manuals will also need to be regularly updated for changes in IFRS.

Concluding remarks

Considering comparables, the IFRS conversion date for India is 2010. Experience tells us that major European companies took about eighteen months to two years to convert from national GAAP to IFRS. The right time to start thinking and converting to IFRS is 'NOW'. This process cannot be delayed any further.More importantly, there are no disadvantages to getting a start on the process, but the advantages include:

Securing the right people, whether by engaging a third party to provide assistance or by hiring them directly,

Putting fewer burdens on valuable accounting, financial reporting and IT resources as the conversion date nears,

More time to train employees on IFRS and to have them become comfortable with the standards and interpretations, and

Discussing the financial reporting effects of conversion to IFRS with analysts to provide them with confidence that this significant undertaking is well in hand.

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