IFRS Convergence in India

Group 1 Section F

BSR

CONTEXT FOR DISCUSSION

IFRS: The Global Perspective

IFRS India Roadmap

Challenges and practical insights Best practices for convergence

BSR

IFRS The Global Perspective

IFRS Now a Truly Global Standard Accepted and adopted across more than 100 countries
Push by U.S. SECs decisions
To drop reconciliation requirement for Foreign Private Issuers preparing IFRS financial statements

Proposal for IFRS transition for U.S. domestic companies between 2014 to 2016; with early adoption option for certain very large companies IASB-FASB convergence programme
Ongoing convergence programme

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

Convergence Drivers
Capital Markets Regulatory requirements Internal controls Performance evaluation
5

IFRS comprises
International Accounting Standards (IAS)

International Financial Reporting Standards (IFRS)

Standing Interpretations Committee (SIC)

International Financial Reporting Interpretations Committee (IFRIC)

Overview of IFRS
International Accounting Standards International Financial Reporting Standards Standing Interpretations Committee International Financial Reporting Interpretations Committee

Benefits of convergence
Widespread agreement on improvement in comparability Improvement of quality of financial reporting and trust in the financial statements

Alignment of external and internal reporting

Globalization of capital markets and reduced cost of capital One financial language across different locations

IFRS India Roadmap

Why IFRS Convergence? Unavoidable in globalised economy

Condition for listing abroad including GDRs and ADRs

Pre requisite for any joint venture or business relationship Assists in external borrowing and in-bound investment Better model worthy of emulation On adoption we can play a role in the standard setting process Need to have a common language

Two separate sets of Accounting Standards to co-exist

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

Existing Indian Accounting Standards

IFRS converged standards

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

Timelines for convergence

Phase 1
Companies included in the Nifty 50; Companies included in the Sensex 30; Companies which have shares or other securities listed on stock exchanges outside India and Companies (whether listed or not) which have a net worth in excess of Rs1,000 crores.

Phase 2
All companies (whether listed or not) with a net worth in excess of Rs.500 crores but less than Rs1,000 crores.

Phase 3
All listed companies with net worth less than Rs.500 crores

1st April 2011

1st April 2013

1st April 2014

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

Indian approach to IFRS

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

IFRS Convergence
India Opted for convergence & not adoption of IFRS Two sets of Accounting Standards IFRS Converged Indian Accounting Standards Ind-AS Existing Accounting Standards AS

PRESESNT STATUS 35 Ind AS have been notified on 25-2-2011 Applicability date yet to be notified IND AS Scheme of Ind AS Numbering pattern

IAS/IFRS converged
Ind AS No. 01 02 07 08 10 11 Title Presentation of Financial Statements Inventories Statement of Cash Flows IAS 1 IAS 2 IAS 7 IAS/IFRS

Accounting Policies, Changes in Accounting IAS 8 Estimates and Errors Events after the Reporting Period IAS 10 Construction Contracts IAS 11

12
16 17

Income taxes
Property, Plant and Equipment Leases

IAS 12
IAS 16 IAS 17

IAS/IFRS converged
18 19 20 21 23 24 Revenue Employees Benefits IAS 18 IAS 19 Accounting for Government Grants and IAS 20 Disclosure of Government Assistance The Effects of Changes in Foreign Exchange IAS 21 Rates Borrowing Costs IAS 23 Related party disclosures IAS 24

27
18 19 28

Consolidated Statements Revenue

and

Separate

Financial IAS 27
IAS 18 IAS 19 IAS 28

Employees Benefits Investments in Associates

IAS/IFRS converged
29 31 32 33 34 36 Financial Reporting in Hyperinflationary IAS 29 Economies Interest in Joint Ventures IAS 31 Financial Instruments: Presentation Earnings per share Interim Financial Reporting Impairment of assets IAS 32 IAS 33 IAS 34 IAS 36

37
29 31 32

Provisions, Contingent Liabilities and IAS 37 Contingent Assets Financial Reporting in Hyperinflationary IAS 29 Economies Interest in Joint Ventures IAS 31
Financial Instruments: Presentation IAS 32

IAS/IFRS converged
38 39 Intangible Assets IAS 38 Financial Instruments: Recognition and IAS 39 Measurement Investment Property IAS 40 First time adoption of Indian Accounting IFRS 1 Standards Share-based payment IFRS 2 Business Combinations Insurance Contracts IFRS 3 IFRS 4

40
101 102 103 104 105 106

Non-current Assets Held for and IFRS 5 Discontinued Operations Exploration for and Evaluation of Mineral IFRS 6 Resources

IAS/IFRS converged
107 Financial Instruments: Disclosures IFRS 7

108

Operating Segments

IFRS 8

IFRIC/SIC Converged
IndAS No. 10 11 11 12 12 16 Annexure Annexure to Ind AS and Title IFRIC/SIC No. Distributions of Non-cash Assets to IFRIC 17 A Owners A Service Concession Arrangements* IFRIC 12 B A B A Service Concession Arrangements: Disclosures* Income TaxesRecovery of Revalued Non-Depreciable Assets Income Tax: Changes in the tax status Income Taxes Changes Changes in Existing Decommissioning, Restoration and Similar Liabilities Operating leases-Incentives Evaluating the Transactions Substance SIC 29 SIC 21 SIC 25 IFRIC 1

17 17

A B

SIC 15

of SIC 27

17

Involving the Legal Form of a Lease Determining whether an Arrangement IFRIC 4 contains a Lease*

IFRIC/SIC Converged
18 18 18 19 20 27 29 A B C A A A A RevenueBarter Transactions Services Customer Loyalty Programmes Involving Advertising SIC 31 IFRIC 13 IFRIC 18

Transfers of Assets from Customers

Ind AS 19-The limit on a Defined Benefit Asset, IFRIC 14 Minimum Funding requirements and their interaction Government Assistance: No Specific Relation to SIC 10 Operating Activities ConsolidationSpecial Purpose Entities SIC 12 Applying the Restatement Approach under Ind AS 29 IFRIC 7 Financial Reporting in Hyperinflationary Economies Jointly Controlled Entities Non-Monetary SIC 13 Contributions by Venturers Interim Financial Reporting and Impairment IFRIC 10

31
34

A
A

37

Rights to Interests arising from decommissioning, IFRIC 5 Restoration and Environmental Rehabilitation Funds

IFRIC/SIC Converged
37 B Liabilities arising from IFRIC 6 Participating in a Specific Market Waste Electrical and Electronic Equipment Intangible Costs AssetsWeb Site SIC 32

38

39

Reassessment Derivatives

of

Embedded IFRIC 9

39

Hedges of a Net Investment in a IFRIC 16 Foreign Operation

Extinguishing Liabilities Instruments Financial IFRIC 19 Equity

39

with

Key Carve Outs in Ind AS

1. IAS/IFRS not converged with While converging with IFRS, the following IAS/IFRS have not been converged with: IAS 26: Accounting and Reporting by Retirement Benefit Plans (not applicable for Companies) IAS 41: Agriculture (carve out) IFRS 9: Financial Instruments (not mandatory at present)
23

Key Carve Outs in Ind AS

2. SIC/IFRIC not converged with SIC 7: Introduction of the Euro (not required for India) SIC 29: Service Concession Arrangements: Disclosures (applicability deferred, carve out) IFRIC 2: Member's Shares in Co-operative Entities and Similar Instruments (not applicable for Companies) IFRIC 4: Determining Whether an Arrangement Contains a Lease (applicability deferred, carve out) IFRIC 12: Service Concession Arrangements (applicability deferred, carve out) IFRIC 15: Agreements for the Construction of Real Estate (carve out)
24

Key Carve Outs in Ind AS

3. Removal of options not amounting to carve out or departure from IFRS Single statement presentation of the statement of profit and loss Classification of expenses in the statement of profit and loss by nature of expense method No option of carrying investment property at fair value Recognition of actuarial gains and losses in Other Comprehensive Income

25

Key Carve Outs in Ind AS

4. Additional options provided which if exercised will lead to carve out/departure from IFRS Option to use Indian GAAP carrying values on the date of transition as the deemed cost for property, plant and equipment, intangible assets and investment property Option to defer exchange differences on long term foreign currency monetary assets and liabilities and recognizing the same over the period of such asset or liability
26

Key Carve Outs in Ind AS

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

27

IFRS in Europe

28

 Since 2005 all listed companies in the E.U. must comply with IFRS In Continental Europe, IFRS adoption represents a major change: replacement of stakeholder-oriented accounting regulations by market-oriented standards heavily influenced by the Anglo-Saxon accounting model Aim of this presentation: Review the empirical evidence on the economic consequences of IFRS adoption

The expected consequences of IFRS adoption

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

Earnings management should decrease:

IFRS are more precise They admit a limited number of options Hidden reserves are prohibited

 Accounting data should be more value relevant

Value relevance: Ability of accounting data to reflect contemporaneous market prices or returns IFRS-based earnings should be more value relevant:
IFRS are more market-oriented Earnings management is more difficult under IFRS IFRS make a larger use of fair value

The cost of capital should decrease

Effect on information asymmetry

Has the bid-ask spread declined?
YES:
Germany: Leuz & Verrecchia (JAR 2000), Gossen & Sellhorn (WP 2006): Companies using IFRS exhibit smaller bid-ask spreads than those using German GAAP Europe: Platikanova & Nobes (WP 2006): On average, the bid-ask spread declines after IFRS adoption

BUT:
Switzerland: The effect is limited to small companies: Dumontier & Maghraoui (CCA 2006)

 Are analysts' forecasts more accurate?

YES:
Ashbaugh & Pincus (JAR 2001): Analyst forecast accuracy improves after IFRS adoption Hodgdon et al. (JIAAT 2008): Compliance with IFRS reduces analyst forecast errors Germany: Ernstberger et al. (WP 2008): Forecast accuracy is higher for estimates based on IFRS or US GAAP data than for those based on German GAAP figures

NO:
Germany: Maghraoui (PhD 2008): Compliance with IFRS does not reduce the dispersion of analyst forecasts or forecast errors Europe: Cuijpers & Buijink (EAR 2005): Dispersion of analyst forecasts is higher for firms using IFRS or US GAAP than for those using local GAAPs

Effect on earnings management

Does IFRS compliance restrict earnings management?
NO:
Germany: Van Tendeloo & Vanstraelen (EAR 2005): IFRS adopters do not present different earnings management behavior compared to companies reporting under German GAAP Sweden: Paananen (WP 2007): IFRS adoption does not reduce income smoothing. Germany: Lin & Paananen (WP 2008): Earnings management is higher in the post IFRS-adoption period

YES:
Barth et al. (JAR 2008): In the post-adoption period, firms applying IFRS evidence less earnings management

Effect on the value relevance of accounting data Has value relevance of earnings increased following IFRS adoption?
YES:
Barth et al. (JAR 2008): Firms applying IFRS exhibit more value relevant accounting figures than other companies Germany: Bartov et al. (JAAF 2005): The value relevance of IFRSbased earnings is higher than that of German GAAP-based earnings Germany: Jermakowicz et al. (JIFMA 2007): The value relevance of earnings is higher for DAX-30 companies using IFRS or US GAAP

NO:
Germany: Hung & Subramanyam (RAS 2007): IFRS adoption has no effect on the value relevance of book value and net income Sweden: Paananen (WP 2008): The value relevance of accounting figures is not affected by IFRS adoption Germany: Lin & Paananen (WP 2008): The value relevance of equity and earnings decreases after IFRS adoption

Effect on the cost of capital

Has the cost of equity capital declined after IFRS adoption?
YES: Germany: Ernstberger & Vogler (WP 2008): The cost of equity capital is lower for companies that adopted IFRS or US GAAP Kim & Shi (WP 2007): The cost of equity capital is significantly lower for IFRS adopters NO: Europe: Cuijpers & Buijink (EAR 2005): No evidence of a lower cost of equity capital for IFRS adopters Germany: Daske (JBFA 2006): Voluntary IFRS adopters do not exhibit lower cost of equity capital

Has the cost of debt declined after IFRS adoption?

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

Summary of the empirical evidence

No clear conclusion can be drawn from these studies because: The evidence is mixed Many studies were conducted in a single country (Germany in particular) Most studies deal with voluntary adoption

Explaining the conflicting evidence

The impact of IFRS adoption is a function of the degree of compliance with IFRS
Vogel et al. (WP 2008): There is considerable variation in the level of IFRS compliance among European companies (compliance index ranging from 13% to 100%) Daske et al. (WP 2007): "Serious" IFRS adopters experience stronger effects on the cost of capital and market liquidity than "label" adopters Hodgdon et al. (JIAAT 2008): Compliance with the disclosure requirements of IFRS enhances the ability of financial analysts to provide more accurate forecasts

 The impact of IFRS adoption is a function of the firm's incentives to comply with IFRS
Germany: Christensen et al. (WP 2008): Improvements in accounting quality are confined to firms with incentives to adopt IFRS Daske et al. (JAR 2008): The capital-market benefits of IFRS adoption occur only in countries where firms have incentives to be transparent and where legal enforcement is strong Wang & Yu (WP 2008): Better accounting standards are helpful only in countries with proper reporting incentives i.e. in common-law countries, in countries with better shareholder protection and effective legal enforcement Kim & Shi (WP 2007): The cost of capital-reducing effect of IFRS adoption is greater when the IFRS adopters are from countries with weak institutional infrastructures

European Effects
The adoption of IFRS will probably not be sufficient to standardize the quality of earnings throughout Europe Strong enforcement mechanisms (laws and corporate governance systems) also are necessary Adopting high quality standards might be a necessary condition for high quality information, but not a sufficient one (Ball et al., JAE 2003)

Case Study Wipro

41

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

Hypothesis
1. There is no significant difference between financial statement items based on Indian GAAP and IFRS for the opening Balance Sheet as at 1st April 2008 by Wipro 2. There is no significant difference between financial statement items based on Indian GAAP and IFRS for the opening Balance Sheet as at 31st March 2009 by Wipro

3. There is no significant difference between Indian GAAP and IFRS based accounting ratio for the fiscal year 31st March 2009 by Wipro

Effect on Financial Ratios

ROE ROA TAT 1 0.88 NPR Leverage

0.94

0.93

0.15

0.15

Leverage NPR

0.29

0.14

0.26

0.14

TAT ROA ROE

IGAAP

IFRS

Leverage ??
Leverage 12.00%
Debt Equity Ratio

Reason:

Value of Equity . Total Liabilities ..

8.13% 4.28%

Return on Equity ??
ROE 10.34%
Amount of net income returned as a percentage of shareholders equity

Reason:

Value of Equity . Net Profit ...

8.13% 0.61%

Total Liability and Equity

Reclassification between Equity and Total Liability
Dividend provision not recognized under IFRS Fair value measurement of Available for sale investment Share compensation expense
IFRS
Accelerated amortization of stock compensation expense in the initial years following the grant of options Stock compensation expenses recognized in graded manner on a straight line basis over the requisite vesting period for the entire award

IGAAP

Share based payment reserve

Learning's
IFRS
Fair value Oriented Accounting Balance Sheet Oriented Accounting More Transparent Disclosures

IGAAP
Conservative Approach of Accounting

BSR

Challenges and practical insights

BSR

49

What challenges to anticipate?

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

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

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

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

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

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

Training finance personnel

Specialization in fair valuation

Structured & consistent approach for transition

Modification in reporting systems

Regular IFRS accounting updates

What are the changes that have to be dealt with?

Technical GAAP difference Conceptual Embedded Derivatives Fair value Revenue recognition Business combinations etc etc Operational challenges Estimated useful life of the assets Sch XIV? ESOP intrinsic value v/s fair value Disclosures Schedule VI Not applicable Additional disclosures IFRS 7, risk management, consolidation, etc. (quantitative as much as qualitative)

Key decision to be taken Early adoption Comparatives

Key impacts on financial statements

Business combinations and consolidation

Financial Instruments

Changes in accounting policies and correction of errors

Presentation of financial statements

Business combinations and consolidation

IFRS Accounting Impact Adoption of purchase accounting for almost all amalgamations (accounted for at fair values) Pooling-of-interests method severly restricted Fair values on acquisition to be taken also on consolidation Would reflect true goodwill Goodwill and indefinite life intangibles No amortisation, annual impairment testing Impact of EBITA, P/E ratio, ROCE

Financial Instruments

IFRS Accounting Impact Most financial instruments in balance sheet at FV Investments to be categorized at fair value through profit or loss, available for sale, held to maturity

Hedge accounting detailed conditions and documentation required

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

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

Changes in accounting policies and correction of errors

IFRS Accounting Impact Changes in accounting policy generally made by adjusting opening equity and restating comparatives Correction of errors generally made by adjusting opening equity and restating comparatives Restatement of comparatives and adjusting opening equity generally not part of Indian GAAP at present

Impact of EBITA, P/E ratio, ROCE

Presentation of financial statements

IFRS Accounting Impact IFRS Accounting Impact

Consolidated Statements
Primary statements include Statement of changes in equity or statement of recognised income or expense No strict format but Balance sheet classified as current/non-current or based on liquidity income statement by nature or function

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

No statement of changes in equity or statement of recognised income and expense Schedule VI format: not fully on current/noncurrent basis Expense classification by nature

Detailed accounting policy and disclosures

Disclosures not as elaborate as per IFRS

First time adoption when and what to start

IFRS
Date of transition = IFRS opening balance sheet 1 April 2010 START BY
Recognise IFRS assets / liabilities Remove non-IFRS assets / liabilities IFRS measurements Adjust opening retained earnings Comply with latest IFRS Remember consistency

Reporting date
Comparative period First IFRS financial statements

31 March 2011
Apply IFRS 1 standard Ignore transitions in the individual standards

31 March 2012

WHICH IFRS?

Breaking through some common myths

IFRS requires fair valuation of everything IFRS lays too much emphasis on management judgment IFRS reporting can be managed as a reconciliation / out of book exercise IFRS was an important cause of the global financial crisis Global standards like IFRS do not take into account local conditions First-time transition rules allow an entity to clean up its act

IFRS will not change business actions

Best practices for convergence

BSR

How does one approach IFRS transition?

Rapid start to implementing work without a structured assessment Time to complete and/ or resources are underestimated: We will just switch to IFRS Accounting rules are seen as pretty similar, but small differences can matter a lot Impacts of IFRS conversion are not addressed with stakeholders Lack of clarity about strategies for selecting the various accounting options Inability to provide information on all areas impacted by IFRS (e.g. to analysts) Lack of sufficient communication with auditors

Strong leadership and support for the IFRS implementation project Timing starting sufficiently in advance Strong project management Steering committee Initial impact assessment Training and knowledge transfer Communication strategy

Holistic approach to evaluate impact beyond accounting changes Keeping Board involved and investors and analysts informed Involve professionals with the right subject matter specialization relating to IFRS, local GAAP, systems and processes Transfer of knowledge from advisors to the Company should start early and occur regularly

IFRS is not just an accounting project

IFRS implementation requires a structured approach to conversion

Project planning

Resource management

Project structure and governance

Training

Critical success factors

Auditor involvement

IT systems

stakeholders

IFRS will not be just an accounting project.

The use of IFRS will change how a business is managed and it will change how and what companies communicate with their marketplace How a companys peers use IFRS, and what policies they adopt, will influence how that company is perceived and valued in the marketplace

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

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

Questions?

Thank you

Chart Title
Total liabilities and equity Total Liabilities Other liabilities and provisions Unearned revenues Trade Payables Loan and Borrowings Minority Interest Total Equity Other reserves

Cash flow hedging reserve

Retained earnings Share application money Share capital and premium IFRS IGAAP Total Assets Other assets Net tax assets Cash and cash equivalents Unbilled revenue Trade receivables Inventories Investment in equity accounted

Available for Sale investment

PPE and Intangibles Goodwill 0 50000 100000 150000 200000 250000

References
1. Stent W, Bradbury M. and Hooks J.(2010) IFRS in New Zealand: Effects on Financial Statements and Ratios, Pacific accounting Review, Vol 22, No 2, pp 92-107 2. Lantto A.M and Sahlstrom P (2009) Impact of International Financial Reporting Standard Adoption on Key Financial Ratio, Accounting and Finance Vol 49, pp 341-361 3. Ball R.(2008) What is the Actual Economic Role of Financial Reporting available at http://ssrn.com/ abstract=1091538 4. Mingyi Hung, K.R. Subramanyam (2004) Financial Statement Effects of Adopting IFRS: The case of Germany available at http://ssrn.com/abstract=622921 5. Amir,E.T.Harris and E.Venuti 1993 A comparison of the Value relevance of Us versus Non US GAAP Accounting measure using Form 20F reconciliations. Journal of Accounting Reseearch 31(supplement):230-264 6. M.S. Turan and Dimple Transition from GAAP to IFRS An evidence from uk Journal of Accounting and Finance Volume 25, No 2 ,pp57-66 7. Capkun V. Jeny A.C Jeanjean T. and Weiss L.A (2008) Earnings management and value relevance during the Mandatory Transition from Local GAAP to IFRS in Europe available at http://ssrn.com/abstract=1125716 8. Lantto A.M (2007) Does IFRS improve the usefulness of Accounting information on code law country?' available at http:// ssrn.com/abstract=905218 retrieved on 10 August2010 9. Horton J.Serafeim G (2008) Does Mandatory IFRS adoption improve the information envirnmnet Harvard Business School working paper No 1264101 available at http:// ssrn.com/abstract=1264101 retrieved on 7 August 2010 10. Hope O.k Jin and Kang (2006) Empirical Evidence on Jurisdictions that Adopt IFRSavailable at http:// ssrn.com/abstract=751264 retrieved on 7 August 2010 11. Sujatha B Accounting Standards in India: Towards convergence published by ICFAI 12. http:// www.article base.com/accounting-articles/working towards a global convergence of accounting standards1379167.html 13. IFRS: A quick reference Guide by Robert Krik 14. http:// online library.wiley.com/doi/10.1002/jcaf.20406/abstract 15. http://icai.org/resoucre 16. http://www.pwc.com/en-GX/gx/ifrs-reportingservices/pdf/viewpoint_convergence.pdf

IFRS impact beyond Financial Statements

Most aspects of the business can be affected: Processes and systems Operations Tax Treasury Examples include impact on: Debt covenants Compensation plans Revenue contracts Joint ventures and alliances Investor communication