Changeover to IFRS is a complicated process. The number of companies reporting under the International Financial Reporting Standards (IFRS) in India will be far more than anywhere else in the world, according to Mr Sai Venkateshwaran, a partner with consultancy firm, Grant Thornton’s Assurance Group.
But at the same time India is working towards a moving target as IFRS is expected to undergo several changes between now and 2011, says Mr Venkateshwaran, who has worked on several IFRS and US GAAP (Generally Accepted Accounting Principles) advisory and US GAAS (Generally Accepted Auditing Standards) assurance assignments to Indian, US and multinational clients, in an interview with Business Line.
Excerpts from the interview:
Has there been a lack of clarity among Indian companies as far as drawing up a roadmap for implementation of IFRS is concerned.
Changeover to IFRS in India is definitely a complicated process. The ICAI (Institute of Chartered Accountants of India) has taken the first step and published a whitepaper which lays out the broad outline for this changeover. However, in terms of the finer details, there is a lot that needs to be done.
Several legislative changes need to be made, such as amendments to the Companies Act, the Income-Tax Act, SEBI regulations, etc. Further, current accounting and presentation guidance that’s not in line with the IFRS requirements would need to be amended.
Another significant decision point is whether India goes with a big bang approach and adopts all of the new guidance from April 1, 2011, or whether it will follow a gradual convergence process between now and 2011 and the resultant accounting for the transition-related impact.
So while a broad direction is available from the ICAI, it needs to gather a lot of momentum to put the complex machinery in India to work to achieve some of the intended results within the aggressive timelines currently proposed. There are less than 550 days between now and the transition date of April 1, 2010, when companies would be required to prepare their opening IFRS balance sheet.
Has there been any changes in the norms for increasing the current turnover thresholds for companies implementing IFRS?
The ICAI has not made any formal recommendations for raising the current thresholds. As per its whitepaper on convergence, it has recommended that all entities with a turnover in excess of Rs 100 crore or borrowings in excess of Rs 25 crore be required to apply IFRS from April 1, 2011. What this means is that companies reporting under IFRS in India will be far more than any other part of the world.
Most jurisdictions which currently mandate the use of IFRS only require this for listed companies, whereas all other companies are allowed to report under their local GAAP. However, in India, if such a large number of unlisted entities would also be required to report under IFRS, the coverage would be much larger. As a result the challenges faced by Indian companies only get compounded.
What are the issues which Indian companies need to address before implementing IFRS?
There are three key challenges for India in the changeover to IFRS. Firstly, understanding the accounting and regulatory landscape that will prevail in 2011. Accounting framework in India has multiple influencers and accounting standard-setters, such as the ICAI, SEBI, Companies Act, NACAS, income-tax authorities, and industry regulators such as the RBI, IRDA, etc. All of them need to work in tandem and see the broader picture of the proposed accounting landscape in 2011 and work towards that in a concerted manner. This obviously is easier said than done considering the Indian environment.
Secondly, the availability of a large pool of trained resources. The changeover to IFRS brings about significant changes in terms of complexities of accounting standards, requiring significant use of judgment in applying new and complex requirements. To achieve the end objective of comparability in financial reporting, all of these requirements need to be understood and applied in a consistent manner by a wide group of accountants, both within the industry and the profession.
Bringing such a large group of people to speed-on IFRS is a big challenge and time is certainly not on our side. In the US, which could possibly move to IFRS in 2014, the educational institutions are already revamping the academic curricula to include IFRS learning and the professional bodies are already carrying out significant continuing education programmes in IFRS — that’s the level of preparedness that the US is aiming for. In contrast, in India, we are yet to see any significant steps to get this level of preparedness.
Thirdly, India is working towards a moving target — IFRS is expected to undergo change between now and 2011.
Since the US is looking to adopt IFRS, there will be several changes that will be made to IFRS before the US fully accepts and commits to adopt IFRS.
Accordingly, significant changes can be expected in the guidance on areas such as revenue recognition, financial instruments, etc., between now and 2011-2012. This puts countries which are moving to IFRS around 2011, such as India, Brazil, and Canada, at a comparative disadvantage, as they still don’t know what would be the IFRS requirements to apply in 2011.
When do they (companies) actually start moving towards implementation of IFRS? At what stage of preparedness are the Indian companies for implementation of IRFS?
All companies need to start planning for this transition early. Most companies have still not woken up to realise what changeover to IFRS means. Several have started talking about IFRS, but very few have taken active steps to understand how it impacts them.
Most still think it is only an accounting change impacting a few accounting policy requirements. However, the impact of IFRS is on all stakeholders — investors, lenders, customers, employees, regulators, etc.
As a first step, all companies must at least start with carrying out a diagnostic review to understand how IFRS would impact them. This would give them a sense of what changes would be required and how much time they would require to make this change.
It is important to note that there is no standard formula that can be applied to all companies — the needs, the extent of impact and resultant change would vary from company to company. Factors impacting this would include, industry/sector-specific factors, size of the organisation, sustainability of the changes planned, etc. Once this diagnostic review is done, companies would have a better sense of how much time and resources they would require to make a smooth transition and can plan their activities better.
What is the next stage after the implementation of IFRS?
Moving to IFRS is only the first step. It would certainly be a few years before these standards are consistently applied and result in highly comparable financial reporting. Also considering that IFRS has very limited industry-specific guidance, initial reporting by companies would show an Indian flavour, which over time would vanish to give way to global industry-specific patterns on IFRS reporting.
Once global comparability of financial reporting is achieved, Indian companies would start seeing the benefits of using IFRS, including easier access to global capital markets, more transparent and consistent valuation multiples, better aligned internal and external reporting, etc.
How many chartered accountants would we need for the implantation of IFRS?
There are over 10,000 listed companies in India and possibly an equal number of unlisted companies that would be required to apply IFRS as per the currently planned thresholds. Even if one were to apply a simplistic approach and say that each of these companies would require on an average four chartered accountants, it adds to a whopping 80,000 chartered accountants who would need to be trained and made competent in IFRS in a very short period of time.
This would have to cover the chartered accountants working in companies as well as those in the auditing and accounting profession and those with regulators, etc. The reality however is that several companies would require far more resources and therefore the number required might be far in excess of this ‘guesstimate’ of 80,000 CAs.
How will the adoption of IFRS change financial reporting by companies?
Use of IFRS would significantly change financial reporting in India. For most of us, this clearly would be the single most important change to financial reporting during our lifetime. IFRS financial information is presented very differently from the Indian reporting that we have been used to.
There is much more relevance and transparency in the financial reporting through extensive disclosures. There will also be significant changes to earnings of entities — some of these include, revenue recognition norms getting stricter, use of fair values bringing more volatility to earnings, recognition of several financial instruments as liabilities increasing finance costs, share options being recognised as compensation cost using fair values, etc.
In summary, the use of IFRS for financial reporting would have significant impact on key stakeholders — it would impact performance-linked compensation structures of employees and management, it would impact key debt and borrowing covenants of lenders, it would impact key performance metrics such as net income, EPS, etc., and how investors and analysts perceive them.
Therefore companies would need to start communicating with and educating users of financial information in a timely manner to ensure a smooth transition to IFRS.
Excerpts from the interview:
Has there been a lack of clarity among Indian companies as far as drawing up a roadmap for implementation of IFRS is concerned.
Changeover to IFRS in India is definitely a complicated process. The ICAI (Institute of Chartered Accountants of India) has taken the first step and published a whitepaper which lays out the broad outline for this changeover. However, in terms of the finer details, there is a lot that needs to be done.
Several legislative changes need to be made, such as amendments to the Companies Act, the Income-Tax Act, SEBI regulations, etc. Further, current accounting and presentation guidance that’s not in line with the IFRS requirements would need to be amended.
Another significant decision point is whether India goes with a big bang approach and adopts all of the new guidance from April 1, 2011, or whether it will follow a gradual convergence process between now and 2011 and the resultant accounting for the transition-related impact.
So while a broad direction is available from the ICAI, it needs to gather a lot of momentum to put the complex machinery in India to work to achieve some of the intended results within the aggressive timelines currently proposed. There are less than 550 days between now and the transition date of April 1, 2010, when companies would be required to prepare their opening IFRS balance sheet.
Has there been any changes in the norms for increasing the current turnover thresholds for companies implementing IFRS?
The ICAI has not made any formal recommendations for raising the current thresholds. As per its whitepaper on convergence, it has recommended that all entities with a turnover in excess of Rs 100 crore or borrowings in excess of Rs 25 crore be required to apply IFRS from April 1, 2011. What this means is that companies reporting under IFRS in India will be far more than any other part of the world.
Most jurisdictions which currently mandate the use of IFRS only require this for listed companies, whereas all other companies are allowed to report under their local GAAP. However, in India, if such a large number of unlisted entities would also be required to report under IFRS, the coverage would be much larger. As a result the challenges faced by Indian companies only get compounded.
What are the issues which Indian companies need to address before implementing IFRS?
There are three key challenges for India in the changeover to IFRS. Firstly, understanding the accounting and regulatory landscape that will prevail in 2011. Accounting framework in India has multiple influencers and accounting standard-setters, such as the ICAI, SEBI, Companies Act, NACAS, income-tax authorities, and industry regulators such as the RBI, IRDA, etc. All of them need to work in tandem and see the broader picture of the proposed accounting landscape in 2011 and work towards that in a concerted manner. This obviously is easier said than done considering the Indian environment.
Secondly, the availability of a large pool of trained resources. The changeover to IFRS brings about significant changes in terms of complexities of accounting standards, requiring significant use of judgment in applying new and complex requirements. To achieve the end objective of comparability in financial reporting, all of these requirements need to be understood and applied in a consistent manner by a wide group of accountants, both within the industry and the profession.
Bringing such a large group of people to speed-on IFRS is a big challenge and time is certainly not on our side. In the US, which could possibly move to IFRS in 2014, the educational institutions are already revamping the academic curricula to include IFRS learning and the professional bodies are already carrying out significant continuing education programmes in IFRS — that’s the level of preparedness that the US is aiming for. In contrast, in India, we are yet to see any significant steps to get this level of preparedness.
Thirdly, India is working towards a moving target — IFRS is expected to undergo change between now and 2011.
Since the US is looking to adopt IFRS, there will be several changes that will be made to IFRS before the US fully accepts and commits to adopt IFRS.
Accordingly, significant changes can be expected in the guidance on areas such as revenue recognition, financial instruments, etc., between now and 2011-2012. This puts countries which are moving to IFRS around 2011, such as India, Brazil, and Canada, at a comparative disadvantage, as they still don’t know what would be the IFRS requirements to apply in 2011.
When do they (companies) actually start moving towards implementation of IFRS? At what stage of preparedness are the Indian companies for implementation of IRFS?
All companies need to start planning for this transition early. Most companies have still not woken up to realise what changeover to IFRS means. Several have started talking about IFRS, but very few have taken active steps to understand how it impacts them.
Most still think it is only an accounting change impacting a few accounting policy requirements. However, the impact of IFRS is on all stakeholders — investors, lenders, customers, employees, regulators, etc.
As a first step, all companies must at least start with carrying out a diagnostic review to understand how IFRS would impact them. This would give them a sense of what changes would be required and how much time they would require to make this change.
It is important to note that there is no standard formula that can be applied to all companies — the needs, the extent of impact and resultant change would vary from company to company. Factors impacting this would include, industry/sector-specific factors, size of the organisation, sustainability of the changes planned, etc. Once this diagnostic review is done, companies would have a better sense of how much time and resources they would require to make a smooth transition and can plan their activities better.
What is the next stage after the implementation of IFRS?
Moving to IFRS is only the first step. It would certainly be a few years before these standards are consistently applied and result in highly comparable financial reporting. Also considering that IFRS has very limited industry-specific guidance, initial reporting by companies would show an Indian flavour, which over time would vanish to give way to global industry-specific patterns on IFRS reporting.
Once global comparability of financial reporting is achieved, Indian companies would start seeing the benefits of using IFRS, including easier access to global capital markets, more transparent and consistent valuation multiples, better aligned internal and external reporting, etc.
How many chartered accountants would we need for the implantation of IFRS?
There are over 10,000 listed companies in India and possibly an equal number of unlisted companies that would be required to apply IFRS as per the currently planned thresholds. Even if one were to apply a simplistic approach and say that each of these companies would require on an average four chartered accountants, it adds to a whopping 80,000 chartered accountants who would need to be trained and made competent in IFRS in a very short period of time.
This would have to cover the chartered accountants working in companies as well as those in the auditing and accounting profession and those with regulators, etc. The reality however is that several companies would require far more resources and therefore the number required might be far in excess of this ‘guesstimate’ of 80,000 CAs.
How will the adoption of IFRS change financial reporting by companies?
Use of IFRS would significantly change financial reporting in India. For most of us, this clearly would be the single most important change to financial reporting during our lifetime. IFRS financial information is presented very differently from the Indian reporting that we have been used to.
There is much more relevance and transparency in the financial reporting through extensive disclosures. There will also be significant changes to earnings of entities — some of these include, revenue recognition norms getting stricter, use of fair values bringing more volatility to earnings, recognition of several financial instruments as liabilities increasing finance costs, share options being recognised as compensation cost using fair values, etc.
In summary, the use of IFRS for financial reporting would have significant impact on key stakeholders — it would impact performance-linked compensation structures of employees and management, it would impact key debt and borrowing covenants of lenders, it would impact key performance metrics such as net income, EPS, etc., and how investors and analysts perceive them.
Therefore companies would need to start communicating with and educating users of financial information in a timely manner to ensure a smooth transition to IFRS.
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