IFRS: Implementation
Challenges

and
Approach
for
Banks
in
India
KPMG IN INDIA
 In
line
with
the
global
trend,
the
Institute
of
Chartered
Accountants
of
India
(ICAI)
proposed
a
plan
for
convergence
with
International
Financial
Reporting
Standards
(IFRS)
for
certain
defined
entities
-
including
banks
-
with
effect
from
April
1,
2011.
Convergence
to
IFRS
would
mean
India
would
join
a
league
of
more
than
100
countries,
which
have
converged
with
IFRS.

We
believe
that
for
Indian
banks,
the
financial
impact
of
convergence
with
IFRS
will
be
significant,
particularly
in
areas
relating
to
loan
loss
provisioning,
financial
instruments
and
derivative
accounting.

We
also
expect
that
in
addition
to
the
financial
accounting
impact,
the
convergence
process
is
likely
to
entail
several
changes
to
financial
reporting
systems
and
processes
adopted
by
banks
in
India.
These
changes
would
need
to
be
planned,
managed,
tested
and
executed
in
advance
of
the
implementation
date.
Such
changes
are
likely
to
be
time
Russell Parera
consuming.
In
view
of
this,
banks
in
India
would
need
to
start
considering
a
Chief
Executive
Officer
roadmap
for
convergence
to
IFRS,
at
the
earliest.

KPMG
in
India
For
many
banks,
convergence
with
IFRS
is
expected
to
have
a
significant
impact
on
their
financial
position
and
financial
performance,
directly
affecting
key
parameters
such
as
capital
adequacy
ratios
and
the
outcomes
of
valuation
metrics
that
analysts
use
to
measure
and
evaluate
performance.

Through
this
publication
we
seek
to
share
our
perspectives
on
some
key
financial
reporting
impact
areas
and
challenges
that
would
impact
the
banking
sector
in
India.

We
have
also
shared
our
views
on
some
of
the
approaches
that
banks
can
adopt
to
address
these
challenges
and
to
ensure
successful
implementation
of
IFRS
within
the
required
timelines.

For
more
than
a
decade,
we
have
provided
IFRS
implementation
services
to
over
1,400
companies
globally,
including
some
of
the
largest
global
banking
and
financial
services
companies.

We
have
also
assisted
several
large
Indian
banks
as
Jamil Khatri they
have
adopted
international
reporting
practices.

We
are
committed
to
Head
–
IFRS
Services leverage
this
experience
as
we
assist
banks
in
India
in
developing
their
roadmap
KPMG
in
India to
address
the
challenges
of
convergence
with
IFRS.

Russell Parera Jamil Khatri

Chief
Executive
Officer Head
–
IFRS
Services

KPMG
in
India KPMG
in
India
 Page 1

1. Overview

Background
Subsequent
to
the
announcement
of
the
proposal
by
the
Institute
of
Chartered
Accountants
of
India
(ICAI)
to
converge
the
Indian
accounting
standards
(Indian
GAAP)
with
International
Financial
Reporting
Standards
(IFRS)
effective
April
1,
2011,
there
has
been
significant
debate
among
the
standard
setters,
regulators,
corporate
India
and
professional
accounting
firms,
on
the
roadmap
to
convergence
and
its
implications.

Our
publication
titled
‘IFRS:
Developing
a
Roadmap
to
Convergence’
(March
2008)
provided
our
perspective
on
several
issues
relating
to
this
proposed
convergence.
Our
recent
interactions
with
standard
setters,
regulators
and
large
companies
indicate
that
even
though
several
questions
relating
to
this
convergence
process
remain
unanswered,
stakeholders
are
committed
to
achieve
the
goal
of
convergence.

Specific challenges for the banking sector

In
addition
to
the
several
challenges
along
the
path
to
convergence
that
are
applicable
to
all
companies,
banking
companies
in
India
face
certain
additional
challenges.

These
include:

• In
addition
to
the
general
accounting
standards
and
practices
that

constitute
Indian
GAAP,
banking
companies
are
currently
required
to
adhere
to
accounting
policies
and
principles
that
are
prescribed
by
the
Reserve
Bank
of
India
(RBI).

For
example,
financial
reporting
policies
for
provision
for
loan
losses
and
investments
are
specified
by
the
RBI.
Our
experience
indicates
that
adoption
of
IFRS
requires
a
significant
change
to
such
existing
policies
and
could
have
a
material
impact
on
the
financial
statements
of
banking
companies

• Application
of
IFRS
in
areas
such
as
provision
for
loan
losses
and
impairment
of
investments
generally
requires
a
high
level
of
judgment
and
would
require
significant
changes
in
the
financial
reporting
processes
(for
example,
to
estimate
cash
flows
that
will
be
recovered
including
through
sale
of
collateral).
Our
experience
indicates
that
banking
companies
that
are
currently
using
accounting
models
that
require
limited
judgment
(for
example,
due
to
prescribed
loss/provision
rates)
would
face
significant
challenges
in
incorporating
some
of
the
revised
accounting
models
into
the
financial
reporting
system
 Page 2

• Assuming
that
India
converges
with
IFRS
using
the
transition
provisions
of
IFRS
1,
First-time
Adoption
of
International
Financial
Reporting
Standards
(currently,
there
is
discussion
regarding
whether
IFRS
1
would
be
adopted
for
transition),
several
provisions
of
IFRS
would
need
to
be
retroactively
applied,
subject
to
available
exemptions
under
IFRS
1.

Current
information
systems
(including
IT
systems)
of
several
banking
companies
may
not
be
sufficient
to
generate
information
required
to
retroactively
apply
these
standards

• International
Accounting
Standard
39
(IAS
39)
on
Financial
Instruments:
Recognition
and
Measurement
along
with
its
related
guidance,
is
one
of
the
most
complex
and
comprehensive
accounting
pronouncements
under
IFRS.
Substantially
all
the
assets
and
liabilities
of
banking
companies
comprise
financial
instruments
that
would
be
governed
by
the
provisions
of
IAS
39.

Our
experience
indicates
that
this
poses
significant
complexity
and
application
challenges
and
results
in
significant
volatility
in
the
income
statement

• Similarly,
IAS
39
requires
extensive
use
of
fair
valuation.
Given
the
economic
environment
and
lack
of
relatively
developed
financial
markets
for
certain
foreign
exchange
and
interest
rate
instruments,
application
of
these
required
fair
valuation
techniques
poses
additional
implementation
challenges

• By
virtue
of
operating
in
a
regulated
industry,
banking
companies
are
subject
to
regulatory
reviews
and
inspections
and
are
also
subject
to
minimum
capital
requirements.

As
highlighted
earlier,
IFRS
requires
increased
use
of
judgment
and
extensive
use
of
unobservable
valuation
inputs
and
assumptions.

The
regulatory
review
process
would
need
to
be
adjusted
to
acknowledge
the
inherent
judgments
involved
in
the
application
of
IFRS.

Additionally,
our
experience
indicates
that
application
of
IFRS
may
result
in
higher
loan
losses
and
impairment
charges,
thereby
impacting
available
capital
and
capital
adequacy
ratios.

Similarly,
use
of
fair
values
would
introduce
additional
volatility
in
reported
capital
with
its
consequent
impact
on
capital
adequacy.

Response of the Indian banking sector

Banks
in
India
need
to
start
thinking
through
some
of
the
challenges
highlighted
above
and
develop
a
roadmap
to
meet
the
challenges
of
convergence.

This
publication
shares
some
of
our
thoughts
on
the
key
IFRS
technical
accounting
impact
areas
that
would
affect
banks
and
our
thoughts
and
perspectives
on
some
frequently
asked
questions
that
may
be
considered
by
banks
while
developing
their
IFRS
implementation
plans.

While
several
of
these
questions
and
best
practices
would
be
equally
applicable
to
non-banking
companies,
the
size
and
complexity
of
most
Indian
banks
would
make
these
questions/best
practices
extremely
relevant.
 Page 3

2. Top five technical accounting

challenges for banks
2.1 Loan/ investment impairment
IFRS
prescribes
an
impairment
model
that
requires
a
case
by
case
(for
significant
exposures)
assessment
of
the
facts
and
circumstances
surrounding
the
recoverability
and
timing
of
future
cash
flows
relating
to
a
credit
exposure.

Should
there
be
an
expectation
that
all
contractual
cash
flows
would
not
be
recovered
(or
recovered
without
full
future
interest
applications),
an
account
would
be
classified
as
impaired
and
impairment
be
measured
on
present
value
basis
using
the
effective
interest
rate
of
the
exposure
as
the
discount
rate.

For
groups
of
loans
that
share
homogenous
characteristics
(such
as
mortgage
and
credit
card
receivables),
impairment
can
be
assessed
on
a
collective
basis.

The
aim
of
an
individual
or
collective
assessment
is
to
capture
the
incurred
loss
for
a
specified
portfolio.

General
provisions
are
permissible
only
to
extent
that
they
relate
to
a
specified
risk
that
can
be
measured
reliably
and
for
incurred
losses.

No
provisions
are
permitted
for
future
or
expected
losses.

For
investments,
a
similar
analysis
is
conducted,
the
key
difference
being
that
the
fair
value
of
the
investment
is
also
considered
as
an
input
in
addition
to
the
financial
/
credit
standing
of
the
issuer
etc.

The
bedrock
of
this
impairment
assessment
is
a
system
that
considers
all
the
facts
and
circumstances
and
requires
the
use
of
informed
judgment.

This
aspect
represents
the
most
significant
difference
from
Indian
GAAP
for
banks
in
India.
Current
Indian
GAAP
/
RBI
guidelines
require
a
limited
use
of
judgment
and
are
mechanistic
nature
with
prescribed
loss
/
provision
rates.

What should banks focus on to meet this challenge?

• Develop
/
strengthen
a
data
capture
system
to
enable
the
impairment
assessment
after
determining
tactically
where
information
will
be
collected
/
who
will
make
the
impairment
assessment
/
templates
and
information
gathering
and
storage
systems
etc.

• Use
and
align
this
process
of
information
gathering
and
assessment
to
strengthen
the
credit
risk
management
function
and
feed
into
other
strategic
initiatives
such
as
internal
ratings,
Basel
II
compliance
and
potential
application
of
internal
ratings
based
/
advanced
approaches

• Improve
and
strengthen
the
loss
forecasting
mechanisms
within
the
organization
in
parallel
with
fine
tuning
risk
adjusted
pricing
for
fresh
loans
being
sanctioned
by
the
bank

• Certain
system
changes
would
need
to
be
made
for
accounting
for
impairment;
for
example,
computation
of
discounted
future
cash
flows
to
facilitate
the
booking
of
the
required
accounting
adjustments.
 Page 4

2.2 Required use of fair value for more financial

instruments
Fair
value
measurement
is
infrequently
used
under
Indian
GAAP
and
in
most
cases
where
it
is,
the
aim
is
primarily
to
capture
a
lower
of
cost
or
fair
value
measurement
base.

Under
IFRS,
there
may
be
a
significant
increase
in
the
extent
that
fair
value
measurement
needs
to
be
used.

For
instance
all
financial
assets
and
liabilities
will
need
to
be
initially
measured
at
fair
value.

While
in
a
number
of
instances,
fair
values
may
be
represented
by
transaction
prices,
the
onus
on
banks
will
be
to
prove
that
transaction
prices
represent
fair
value.

In
addition,
there
will
be
a
number
of
instances
where
unrealized
gains
can/should
be
recognized;
for
example,
trading
instruments
and
those
where
the
bank
elects
the
fair
value
option.

Further,
due
to
the
stringent
criteria
prescribed
under
IFRS,
a
Held
to
Maturity
(HTM)
classification,
(which
currently
results
in
an
amortised
cost
valuation
basis
for
a
significant
part
of
most
Indian
banks’
investment
portfolio),
is
unlikely
to
be
available
leading
to
fair
value
measurement
for
a
substantial
part
of
the
portfolio.
Again,
this
is
a
significant
shift
from
current
accounting
treatment
under
Indian
GAAP.

What should banks focus on to meet this challenge?

• Fair
valuation
methodologies
and
practices
would
need
to
be
re-examined
to
ensure
that
they
are
current,
up
to
date
and
are
validated
and
back
tested
in
the
current
market
conditions

• Adequately
trained
personnel
need
to
be
made
responsible
for
this
significant
area
of
expertise
and
judgment

• Profit
planning
and
budgeting
need
to
be
fine
tuned
to
incorporate
the
expected
increase
in
income
statement
volatility
arising
of
the
increased
use
of
fair
values
as
a
measurement
attribute.
 Page 5

2.3 Derivatives and hedge accounting

Under
IFRS,
all
derivatives
are
recognized
on
the
balance
sheet
at
fair
values
with
changes
in
fair
values
being
recognized
generally
in
the
income
statement
other
than
in
the
case
of
a
qualifying
cash
flow
hedge
relationship.
Application
of
hedge
accounting
does
reduce
the
income
statement
volatility
induced
by
the
fair
value
measurement
of
derivatives
but
comes
with
significant
strings
attached
in
the
form
of
documentation,
hedge
effectiveness
testing
and
ineffectiveness
measurement.
In
addition,
embedded
derivative
contracts
(such
as
equity
conversion
options
embedded
in
a
convertible
debenture
–
the
most
common
situation
found
in
India)
require
to
be
separated
from
their
host
contracts
and
be
accounted
for
separately.

In
contrast,
current
Indian
GAAP
does
not
specifically
address
the
more
‘difficult
to
apply’
provisions
of
fair
value
and
hedge
accounting.

What should banks focus on to meet this challenge?

• Derivative
valuation
models
need
to
be
validated
and
back
tested
–
their
use
will
be
much
more
significant
in
the
IFRS
world;

• Hedge
relationships
are
a
specialized
area
of
accounting
and
it
is
crucial
that
organizational
awareness
of
the
rules
are
enhanced.

Certain
process
and
system
changes
need
to
be
made
(for
example,
to
designate
hedging
relationships
at
a
‘gross’
level
and
not
at
a
‘net’
level
given
that
many
interest
rate,
foreign
exchange
and
liquidity
positions
are
monitored
only
on
a
‘net’
basis),
documentation
and
hedge
effectiveness
testing
processes
need
to
be
incorporated

• Certain
strategic
decisions
will
need
to
be
made
as
to
where
and
when
hedge
accounting
is
to
be
applied
(even
perhaps
what
contracts
are
transacted
in),
where
individual
banks
will
be
comfortable
with
the
income
statement
volatility
as
it
does
not
see
value
in
the
cost
benefit
analysis
of
applying
hedge
accounting.
 Page 6

2.4 De-recognition of financial assets

Under
IFRS,
de-recognition
of
financial
assets
is
a
complex,
multi-layered
area
with
the
de-recognition
decision
dependent
largely
on
whether
there
has
been
a
transfer
of
risks
and
rewards.
If
the
assessment
of
the
transfer
of
risks
and
rewards
is
not
conclusive,
an
assessment
of
control
and
the
extent
of
continuing
involvement
is
required
to
be
performed.
In
many
cases,
this
cannot
be
restricted
to
qualitative
assessments
and
needs
to
be
necessarily
a
quantitative
assessment.

A
major
area
impacted
would
be
securitization
activity
–
most
Indian
securitization
vehicles
are
currently
structured
to
meet
Indian
GAAP
de-recognition
norms.
Substantially
all
those
securitization
vehicles
would
collapse
into
the
transferor’s
balance
sheet
and
assets
would
fail
the
de-recognition
test
under
IFRS.
For
example,
securitization
transactions
where
credit
collaterals
are
provided/guarantee
is
provided
to
cover
credit
losses
in
excess
of
the
losses
inherent
in
the
portfolio
of
assests
securitized
may
not
meet
the
derecognition
principles
enunciated
in
IAS
39.

Given
that
the
IFRS
position
is
significantly
different
from
that
followed
under
Indian
GAAP,
application
of
the
new
norms
would
in
general
lead
to
more
instances
of
transfers
failing
the
de-recognition
criteria
thereby
resulting
in
large
balance
sheets,
capital
adequacy
requirements,
lower
return
on
assets
and
deferral
of
gains/losses
on
such
securitization
transactions.

What should banks focus on to meet this challenge?

• Assess
the
impact
of
transactions
that
would
fail
de-recognition
and
consider
the
potential
impact
on
capital
adequacy
and
ratios
such
as
return
on
assets

• Work
towards
developing
(in
consultation
with
investors,
originators
and
legal
counsel)
new
securitization
structures
that
are
designed
to
meet
the
de-
recognition
norms
under
IFRS

• Assess
at
a
strategic
level
if
the
organization
is
willing
to
compromise
on
credit
ratings
for
securitized
pools
in
order
to
achieve
the
desired
capital
and
accounting
result
of
de-recognition

• Certain
process
and
system
changes
will
need
to
be
made
for
accounting
for
these
transactions
from
current
practice
(including
for
example,
how
an
assessment
of
transfer
of
risk
and
rewards
will
be
measured
and
documented)

• Create
an
assessment
model
that
incorporates
the
full
cost
benefit
analysis
of
undertaking
securitization
transactions
even
if
they
don’t
meet
the
de-
recognition
norms
as
a
funding
alternative
to
raising
deposits.
 Page 7

2.5 Consolidation of entities

Under
IFRS,
consolidation
is
not
driven
purely
by
the
ownership
structure
of
an
entity.

Instead
the
focus
is
more
on
the
power
to
control
an
entity
to
obtain
economic
benefits
-
this
power
to
control
could
be
expressed
as
ownership
of
equity
securities
but
is
not
limited
to
it.

For
instance,
this
will
include
a
consideration
of
currently
exercisable
potential
voting
rights
/
shares;
management
and
other
agreements,
de
facto
control
and
other
arrangements
that
provide
the
power
to
control
an
entity.

IFRS
also
provides
guidance
on
how
consolidation
decisions
for
special
purpose
entities
should
be
arrived
at.

In
a
number
of
ways,
IFRS
provides
more
rigorous
consolidation
tests
and
in
practice
can
result
in
the
consolidation
of
a
larger
number
of
entities
as
compared
to
Indian
GAAP
which
focuses
on
a
narrower
set
of
tests
(majority
of
ownership
and
control
over
a
majority
of
the
composition
of
the
board
of
directors
or
similar
body).

What should banks focus on to meet this challenge?

• Collate
and
inventorise
the
full
set
of
entities
where
consolidation
assessment
need
to
be
made
and
perform
those
assessments
as
early
as
possible
including
a
consideration
of
non
shareholding
related
factors
that
impact
consolidation

• Ensure
that
common
accounting
policies
are
applied
across
the
group

• Prepare
for
the
impact
of
factors
arising
out
of
consolidation
such
as
how
disclosures
at
a
group
level
can
be
collated
and
populated,
chart
of
accounts,
group
reporting
packages,
reporting
timelines
and

• Consider
specifically
how
inter-company
transactions
and
deferred
taxation
related
aspects
will
be
dealt
with.
 Page 8

3. Questions to consider

As
discussed
above,
IFRS
implementation
is
likely
to
have
a
significant
impact
for
most
banks.

Based
on
our
experience
with
several
large
IFRS
implementation
projects,
we
have
summarized
our
thoughts
and
perspectives
on
some
important
questions
that
you
may
wish
to
consider
while
developing
a
plan
for
IFRS
implementation
at
your
bank.

What are the advantages of starting early in

implementing IFRS?
A
significant
advantage
in
being
an
early
adopter
is
that
you
are
better
suited
to
confront
the
myriad
of
tactical
and
strategic
decisions
(e.g.
impact
on
existing
operations
and
information
systems;
impact
on
other
technical
or
strategic
initiatives
currently
underway
at
your
bank)
that
would
need
to
be
made
as
the
project
progresses.
Our
experience
has
shown
that
early
adopters
are
generally
more
successful
in
managing
the
overall
change
process,
both
with
respect
to
the
IFRS
conversion
effect
as
well
as
with
respect
to
other
change
initiatives
being
executed
concurrent
with
the
IFRS
conversion.
An
added
benefit
to
being
an
early
adopter
is
that
decisions
are
not
unduly
compromised
by
time
and
resource
constraints
in
effectuating
changes
to
critical
process
and
systems
activities.

Starting
early
would
also
enable
you
to
better
manage
the
expectations
of
internal
stakeholders
such
as
the
Board
of
Directors
and
senior
management,
regulators
and
external
investors
and
analysts
about
the
impact
on
earnings
and
equity.

This
can
also
enable
you
to
determine
any
potential
need
for
additional
capital
that
you
may
need
on
mandatory
adoption
of
IFRS
at
a
future
date.

We
have
also
found
many
companies
in
Europe
actually
waited
till
quite
late
in
the
conversion
timetable
to
start
their
implementation
projects.
This
meant
that
they
did
not
leave
themselves
any
scope
for
slippage
in
the
event
that
the
diagnostics
revealed
aspects
that
they
had
not
fully
considered.
More
importantly,
they
needed
to
default
to
the
use
of
certain
manual
workarounds
to
effectuate
compliance,
thereby
losing
the
opportunity
to
re-design
and
embed
functionality
within
existing
financial
product
systems.

There
are
a
number
of
other
key
reasons
why
starting
early
is
important.
One
is
the
need
to
create
time
to
consider
the
true
commercial
implications
of
alternative
accounting
treatments.
Another
is
to
do
a
complete
dry
run
of
accounting
systems
and
the
end-to-end
reporting
process
before
the
actual
conversion.
Many
companies
in
Europe
did
not
have
enough
time
to
do
a
dry
run.
They
therefore
introduced
significant
risk
into
their
projects
by
having
their
first
restatement
producing
the
IFRS
numbers
that
would
be
first
published
to
the
market.
 Page 9

What are the top three risks to an effective IFRS

implementation project? How should we manage them?
There
are
a
multitude
of
risks
that
we
have
encountered
over
our
broad
experience
of
managing
these
engagements
globally.
It
is
challenging
to
separate
out
three
specific
ones
but
based
on
the
key
differentiators
of
successful
and
less
successful
projects,
we
would
like
to
highlight
the
following
three:

1 Sufficient dedicated internal staff –
the
single
biggest
differentiator
of

successful
and
less
successful
conversion
projects
is
the
presence
or
absence
of
full-time
internal
staff
that
are
dedicated
to
the
project,
particularly
in
the
project
management
arena.
You
cannot
successfully
manage
a
large
project
with
part-time
staff.
Within
the
organisation
there
has
to
be
a
core
team
who
do
nothing
but
focus
on
the
day-to-day
progress
of
the
IFRS
implementation
project.
We
find
that
part-time
resources
inevitably
get
lost
to
their
day
jobs,
and
this
has
critical
implications
for
the
overall
momentum
of
the
project

2 Failure to spend sufficient time and energy on ‘impact assessment’ –
we

believe
that
the
initial
‘impact
assessment’
is
by
far
the
most
critical
phase
of
the
project.
It
is
essential
that
banks
plan
for
this
phase
and
allow
sufficient
time
to
ensure
that
the
gap
analysis
is
conducted
on
a
line-by-line
basis
through
the
income
statement
and
balance
sheet.
The
gap
analysis
feeds
the
systems
changes,
the
training
program
and
the
accounting
policies
–
only
realising
that
elements
of
this
have
been
missed
later
in
the
conversion
proces,
leads
to
expensive
unwinding
of
activities

3 Failure to train staff to a sufficient standard –
many
organisations
that
we

have
encountered
underestimated
the
level
of
investment
required
in
training
their
finance
community.
A
comprehensive
training
strategy
and
program
is
a
complex
area
and
needs
to
be
carefully
considered.
Training
should
be
tailored
to
the
needs
of
the
organisation
with
delivery
in
a
range
of
different
ways
to
various
stakeholders
with
different
needs
and
requirements.
This
is
a
complex
aspect
of
the
project
and
one
that
requires
experience
as
well
as
web-enabled
technology,
if
required.
 Page 10

Should we think about freeing up resources within our

organisation to join the project and ensure they are not
being distracted by business as usual activities?
As
discussed
above,
one
of
the
single
biggest
differentiators
between
successful
and
less
successful
projects
is
the
ability
to
place
full-time
resources
into
the
core
project
team
to
work
with
your
advisors.
You
may
want
to
consider
backfilling
some
of
your
key
line
positions
and
moving
some
of
your
best
people
full
time
into
the
project.
We
have
seen
organisations
do
this
effectively,
as
it
ensures
that
the
right
people
are
working
on
the
project,
receive
the
necessary
training
and
knowledge
transfer
and
then
move
back
into
the
line
with
this
knowledge.
Conversely,
it
does
not
make
sense
to
bring
in
temporary
resources
to
work
on
the
project
as
your
bank
would
not
benefit
from
the
knowledge
transfer
that
naturally
occurs.
Part-time
project
team
members
tend
to
get
lost
in
to
their
day
jobs
and
are
therefore
not
as
effective.

Who else should we be involving in this conversion

process beyond the finance team?
Since
an
IFRS
conversion
is
much
more
than
an
accounting
project,
we
would
expect
to
see
–
in
addition
to
core
members
of
the
finance
function
–
representatives
from
the
following
areas
and
functions
of
your
organization:

• Steering committee: Plays
an
important
role
in
signing
off
on
accounting

options
where
treatments
vary
and
can
have
different
effects
on
the
business
from
a
commercial
point
of
view

• Information technology: Getting
the
finance
function
and
the
IT
function
to

talk
to
each
other
is
critical
as
accounting
and
disclosure
gap
differences
are
translated
into
systems
functionality
changes

• Divisional business leads: Treasury,
internal
audit
and
business
sector
heads

within
each
division
are
critical
to
ensuring
commitment
and
sponsorship
within
each
divisional
sub-project

• Human resources: Plays
a
major
role
in
the
global
training
program,
which
can

be
a
complex
logistical
exercise
with
various
strategies
open
to
how
you
choose
to
roll
out
training
to
your
finance
and
business
community.
 Page 11

What is the optimal use of external advisors and

specialists on such a project?
This
is
a
significant
amount
of
work
and
internal
specialist
resources
are
typically
in
short
supply
so
we
see
companies
using
a
combination
of
internal
and
external
resources
to
address
the
specialist
needs.
From
an
internal
perspective,
we
suggest
using
dedicated
resources
as
much
as
possible
to
make
critical
decisions
for
the
project
work.
As
far
as
external
resources
are
concerned,
we
see
that
given
the
resource
constraints
that
exist
at
many
organisations
-
there
are
numerous
areas
where
external
resources
have
been
used.

For
example,
at
the
beginning
of
the
project,
an
impact
assessment
is
required,
which
includes
considerations
such
as:

• Assessment
of
accounting
differences

• Preparation
of
disclosures,
a
very
significant
exercise
for
many
IFRS
adopters
due
to
the
detailed
quantitative
and
qualitative
information
required

• Assessment
of
processes
which
are
likely
to
require
change
including
manual
workarounds
as
needed

• Review
of
spreadsheets
–
How
many
spreadsheets
are
currently
in
use
that
would
require
adjustments?
Are
these
easy
or
more
challenging?

• Evaluation
of
resources
–
which
locations
will
have
the
right
people?

Using
an
external
specialist
advisor
provides
an
objective
voice
to
these
very
difficult
assessments
which
are
often
under-estimated
by
the
internal
specialists.
Our
experience
also
suggests
that
using
an
external
specialist
team
with
experience
during
the
actual
conversion
process
assists
in
making
your
execution
more
successful.

During
the
conversion,
external
advisors
are
used
in
a
variety
of
ways;
assisting
with
technical
issue
resolution
as
implementation
issues
arise,
bringing
industry
perspectives
on
a
variety
of
specialist
topics,
providing
back-filling
of
resources
as
specialists
are
taken
off-line
to
work
on
conversion,
assisting
with
understanding
the
modeling
outputs
and
interpretations,
and
assisting
with
the
preparation
of
the
requisite
disclosure
information,
just
to
name
a
few.
Again,
what
we
have
seen
in
the
industry
is
that
internal
specialist
resources
are
limited
and
need
to
continue
to
‘run
the
business’
while
the
conversion
effort
is
happening.

So
a
reasonable
balance
of
internal
and
external
resources
helps
meet
the
project
objectives,
ensures
speed
of
knowledge
transfer
and
of
course
keeps
the
business
running.
 Page 12

How do we ensure effective knowledge transfer to our

team members?
Knowledge
transfer
is
essential
to
ensure
your
ability
to
embed
IFRS
as
business-
as-usual.
Knowledge
transfer
from
external
advisors
and
internal
specialists
to
other
internal
team
members
should
continue
through
the
term
of
the
conversion
project.

Training
is
a
key
element
of
a
successful
conversion
project.
Training
is
needed
for
internal
staff
to
help
ensure
proper
understanding
of
the
IFRS
guidance
and
you
should
incorporate
significant
amounts
of
training
in
your
approach
and
plan.
Elements
of
training
include
workshop-based
training
for
more
complex
and
specific
aspects
of
IFRS
such
as
financial
instruments
or
share
based
compensation
on
income
taxes,
or
different
media
such
as
Web-enabled
training
to
reach
a
broader
audience.

Another
key
element
to
consider
is
the
different
levels
of
training
for
different
stakeholders.
Certain
senior
stakeholders
only
require
high
level
awareness
of
what
impact
IFRS
will
have
on
the
bank’s
business
and
financial
results
and
how
this
should
be
explained
to
brokers
and
analysts.
More
specialized
and
detailed
training
would
be
required
for
other
members
of
the
finance
community.

What are the IT system-related challenges to

implementing IFRS?
Challenges
relating
to
systems
changes
resulting
from
IFRS
can
be
quite
significant,
especially
in
organizations
with
disparate
source
systems
at
the
local
entity
level.
The
more
heterogeneous
your
IT
systems,
the
more
tailored
local
level
systems
changes
will
be
required
to
ensure
the
right
data
is
being
collected
for
implementing
IFRS
(including
retroactive
application
on
first-time
adoption).

The
mapping
of
your
chart
of
accounts
to
take
into
consideration
the
new
format
of
your
reports
and
accounts
can
also
be
a
considerable
challenge
for
organizations
of
your
size
and
complexity.
This
activity
should
be
kicked
off
at
a
conceptual
level
as
early
in
the
process
as
possible.

We
have
seen
some
organisations
attempt
to
manage
their
IFRS
conversion
off-
line
at
first
using
Excel
spreadsheets
with
a
medium-term
strategy
to
embed
more
sustainable
and
repeatable
systems
solutions
into
the
organisation
over
the
longer
term.
This
can
be
a
risky
strategy
as
off-line
spreadsheets
can
become
cumbersome
and
extremely
difficult
when
attempting
to
consolidate
a
lot
of
information.
Be
sure
to
understand
the
functionality
of
your
consolidation
system
and
be
clear
as
to
the
degree
of
change
required
to
make
it
fit
for
purpose
in
relation
to
IFRS
consolidation
activity.

The
key
therefore
is
not
to
underestimate
the
investment
that
may
well
need
to
be
made
on
the
systems
side
of
the
conversion
process.
Critical
to
understanding
the
magnitude
of
work
involved
will
be
a
thorough
gap
analysis
that
takes
into
account
the
systems
implications
of
the
accounting
differences
that
are
being
uncovered.
A
frank
assessment
needs
to
be
made
at
an
early
stage
as
to
whether
the
bank
is
looking
at
systems
enhancements
or
a
major
overhaul.

 Page 13

What should be disclosed externally and when?

There
is
no
need
to
be
secretive
about
the
results
you
are
generating
under
IFRS,
assuming
you
are
comfortable
with
them
and
that
you
are
able
to
tell
a
sensible
story
around
them.
In
Europe,
regulatory
bodies
insisted
the
companies
insert
a
qualitative
note
into
their
accounts
giving
an
overview
of
the
progress
they
were
making
on
their
conversion
effort.
This
gave
the
markets
some
comfort
that
deadlines
would
not
be
missed.

As
a
general
practice,
we
would
recommend
that
you
adopt
a
similar
strategy,
whether
required
or
not,
and
consider
being
proactive
in
disclosing
information
on
the
progress
you
are
making
on
your
project
as
soon
as
it
makes
sense
and
you
are
comfortable
to
do
so.
Your
project
team
should
also
pay
very
close
attention
to
emerging
guidance
from
the
ICAI,
RBI
and
other
related
regulatory
developments.

In
terms
of
actual
numbers,
we
would
suggest
greater
caution.
It
may
make
sense
to
begin
early
in
the
process
managing
expectations
around
the
indicative
impact
on
earnings
and
equity
and
why
there
may
be
movements
in
these
numbers
from
Indian
GAAP
based
on
the
conversion
to
IFRS.
External
analysts
will
likely
not
understand
IFRS
in
the
early
stages
of
conversion,
and
therefore
you
may
want
to
consider
providing
internal
awareness
sessions
for
them
to
ensure
they
appreciate
not
only
how
results
change,
but
why
they
change.
The
more
you
manage
their
expectations,
the
more
likely
it
is
that
they
will
not
be
surprised
when
published
numbers
are
released.

How do we keep the internal teams and sponsors fully

apprised of project progress? How do we ensure all new
policies are implemented consistently?
The
project
manager
is
responsible
for
establishing
a
clear
understanding
of
the
types
of
communication
channels
that
work
within
the
bank
and
then
using
these
to
ensure
the
IFRS
messages
and
progress
updates
are
clearly
communicated
to
all
relevant
stakeholders.
Channels
may
include,
but
not
be
limited
to,
project
news
letters,
email
alerts,
and
a
dedicated
intranet
site
for
the
project.
Forms
of
mass
communication
will
be
punctuated
with
specific
and
focused
IFRS
conferences
and
location-based
face-to-face
communications.

The
application
of
new
policies
is
a
critical
challenge
and
you
should
look
to
address
these
in
several
ways
during
the
conversion
exercise.
We
have
often
seen
the
drafting
of
accounting
policies
accompanied
by
the
development
of
an
overall
accounting
manual
that
also
contains
specific
sections
relating
to
policy
application.

 Page 14

4. How KPMG can help

Our track record

KPMG
has
worked
extensively
with
several
companies
across
the
globe
on
IFRS
adoption
and
IFRS
conversion
strategies.
In
India,
we
have
worked
with
several
companies
that
have
adopted
IFRS
either
for
the
purposes
of
accessing
capital
in
overseas
markets,for
cross-border
mergers
and
acquisitions
activity,
to
meet
the
requirements
of
international
investors
or
analysts,
or
for
the
purposes
of
reporting
to
overseas
parent
entities
that
report
under
IFRS.

We
currently
work
with
more
than
50
companies
across
different
industry
sectors
that
report
under
IFRS.
Additionally,
subsequent
to
the
ICAI
decision
to
plan
for
IFRS
adoption
from
2011,
several
large
Indian
companies
have
engaged
us
to
understand
the
impact
of
adopting
IFRS
and
to
design
and
implement
their
IFRS
conversion
strategies.
Our
large
client
base
enables
us
to
maintain
a
trained
IFRS
resource
pool
of
more
than
100
professionals.

Additionally,
we
employ
several
senior
professionals
who
have
worked
in
Europe
and
assisted
companies
in
the
EU
on
IFRS
adoption
or
have
worked
with
our
IFRS
technical
accounting
group
in
London.

Tested tools and methodologies

A
successful
conversion
will
depend
in
equal
measure
both
on:

• getting
the
IFRS
technical
requirements
right
and

• managing
the
process.

Our
coordinated
approach
is
scaleable,
tailored
to
individual
needs
and
uses
tested
methodologies
and
tools.
These
not
only
play
a
key
part
in
producing
faster
and
better
results;
they
also
add
value
to
management's
decision-making
in
their
own
right.
The
global
methodology
used
by
us
in
providing
IFRS
conversion
project
assistance,
revolves
around
five
work
streams;

• Accounting
and
reporting

• Business
impacts

• Systems
and
processes

• People
issues

• Project
management.
 Page 15

Examples
of
the
tools
we
use
and
the
deliverables
they
can
provide
include:

• Quick
Scan
-
A
high
level
analysis
by
ours
IFRS
specialists
that
provides
a
qualitative
assessment
of
the
impact
IFRS
conversion
will
have
on
a
company's
business
activities,
resources
and
financial
statements.

• Accounting
and
disclosure
gap
analyses
-
in
key
areas
such
as
highlighting
the
differences
between
local
GAAP
and
IFRS,
peer
comparisons,
training
assessments
and
conversion
master
plans.

• IFRS
Executive
briefings
-
Tailored
briefings
on
IFRS
conversion
with
a
focus
onthe
issues
that
are
relevant
to
Directors
and
senior
executives.

• IFRS
Training
-
Tailored
training
to
reflect
an
organisation's
specific
requirements
and
recognising
that
IFRS
conversion
will
have
different
and
wide-ranging
impact
for
individual
organisations.

• IFRS
audit
-
Audit
conducted
in
accordance
with
International
Standards
on
Auditing
(ISA)
and
IFRS.

Flexible and practical approach

As
important
as
the
right
deliverables
and
tools,
is
the
ability
to
provide
a
tailored
approach.
To
anticipate
changing
events
and
adjust
wherever
necessary
are
equally
critical
to
successful
IFRS
conversions.
Our
people
will
endeavor
to
be
around
when
you
want
them
to
be
and
provide
continuing
support
for
as
long
as
you
need
it.
We
also
adopt
a
totally
open
approach
to
issues,
encouraging
teamwork
with
our
clients
to
solve
problems
together.

We
have
experienced
trainers
and
IFRS
training
materials
that
we
can
quickly
adapt
to
take
into
account
the
unique
skill
sets
and
knowledge
requirements
within
each
client
organisation.
The
net
result
is
practical
IFRS
conversion
assistance
in
which
our
knowledge
is
turned
into
real
value.

For
banks
and
financial
institutions,
selecting
the
right
accounting
policies
for
financial
instruments
is
crucial
as
it
could
affect
reported
profit
significantly.

We
help
clients
navigate
the
maze
of
standards
like
IAS
39
through
experienced
professionals.
For
example,
areas
like
impairment
losses
for
loans,
classification
of
investments,
accounting
for
derivative
instruments,
etc,
require
knowledge
and
the
careful
use
of
judgment.
Our
experienced
professionals
can
provide
practical
guidance
on
such
issues.


 Page 16

About KPMG in India

KPMG
is
a
global
network
of
professional
firms
providing
Audit,
Tax
and
Advisory
services.

We
operate
in
145
countries
and
have
123,000
people
working
in
member
firms
around
the
world.

The
independent
member
firms
of
the
KPMG
network
are
affiliated
with
KPMG
International,
a
Swiss
cooperative.
Each
KPMG
firm
is
a
legally
distinct
and
separate
entity
and
describes
itself
as
such.

The
Indian
member
firms
affiliated
with
KPMG
International
were
established
in
September
1993.
As
members
of
the
cohesive
business
unit
they
respond
to
a
client
service
environment
by
leveraging
the
resources
of
a
global
network
of
firms,
providing
detailed
knowledge
of
local
laws,
regulations,
markets
and
com-
petition.
We
provide
services
to
over
2,000
international
and
national
clients,
in
India.
KPMG
has
offices
in
India
in
Mumbai,
Delhi,
Bangalore,
Chennai,
Hyderabad,
Kolkata
and
Pune.
The
firms
in
India
have
access
to
more
than
2000
Indian
and
expatriate
professionals,
many
of
whom
are
internationally
trained.
We
strive
to
provide
rapid,
performance-based,
industry-focused
and
technology-
enabled
services,
which
reflect
a
shared
knowledge
of
global
and
local
industries
and
our
experience
of
the
Indian
business
environment.
 in.kpmg.com

KPMG
in
India KPMG
Contacts
Mumbai Jamil Khatri
KPMG House, Kamala Mills Compound Head - IFRS Services
448, Senapati Bapat Marg Tel: +91 (80) 3980 6300
Lower Parel e-Mail: jkhatri@kpmg.com
Mumbai 400 013
Tel: +91 22 3989 6000 Manoj Kumar Vijai
Fax: +91 22 3983 6000 Executive Director - Audit
Tel: +91 (22) 3983 5121
Delhi e-Mail: mkumar@kpmg.com
4B, DLF Corporate Park
DLF City, Phase III
Gurgaon 122 002
Tel: +91 124 307 4000
Fax: +91 124 254 9101

Pune
703, Godrej Castlemaine
Bund Garden
Pune 411 001
Tel: +91 20 305 85764/65
Fax: +91 20 305 85775

Bangalore
Maruthi Info-Tech Centre
11-12/1, Inner Ring Road
Koramangala
Bangalore 560 071
Tel: +91 80 3980 6000
Fax: +91 80 3980 6999

Chennai
No.10 Mahatma Gandhi Road
Nungambakkam
Chennai 600 034
Tel: +91 44 3914 5000
Fax: +91 44 3914 5999

Hyderabad
II Floor, Merchant Towers
Road No. 4, Banjara Hills
Hyderabad 500 034
Tel: +91 40 2335 0060
Fax: +91 40 2335 0070

Kolkata
Park Plaza, Block F, Floor 6
71 Park Street
Kolkata 700 016
Tel: +91 33 2217 2858
Fax: +91 33 2217 2868

©
2008
KPMG,
an
Indian
Partnership
and
a
member
firm
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information
contained
herein
is
of
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nature
and
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