Global Outlook

Indian Companies are gearing up to converge with International Financial Reporting Standards

Contributed by Nirmal Bang

By Nirmal Bang

Convergence with International Financial Reporting Standards (IFRS) by 2011 has become mandatory. The Ministry of Corporate Affairs (MCA) recently announced dates for achieving convergence with IFRS by next year. This landmark announcement has set to rest the uncertainty surrounding IFRS convergence in India.

While the countdown to convergence has already begun, companies are confronted with formidable challenges, on the verge of initiation of the actual transition process. They have innumerable queries awaiting reply. Several important issues need to be addressed urgently.

The phased approach to IFRS convergence - which is consistent with the current proposal in the United States of America - will greatly smoothen the IFRS convergence journey for both medium-sized as well as small listed companies.

Transition from the Indian Generally Accepted Accounting Practices (IGAAP) to the International Financial Reporting Standards (IFRS) has gained momentum over the last few months.

Based on the recommendations of the Core Group set up to facilitate IFRS convergence in India, the Ministry of Corporate Affairs, on 22nd Jan ’10, has announced the approach and timelines for achieving convergence with the IFRS.

This landmark announcement eliminates the uncertainty around IFRS convergence in India. The announcement lays down a phased approach to convergence and is similar to the proposed approach of other countries such as Japan and United States.

However, several implementation issues arise as affected companies consider the impact of the announcement and are looking to gain from the practical experience of other professionals and industry leaders who have already embarked on the IFRS journey.

Managing transition to IFRS poses a great challenge to the makers and users of financial statements and to the reporting enterprises. The objective of many industry bodies currently is to provide industry insights that would enable them to take appropriate steps for navigating the complex issue surrounding IFRS implementation.

Many such bodies are organizing forums to help companies analyze this development and the matters that companies would need to consider as they seek to converge to IFRS.

There will be two separate sets of Accounting Standards under Section 211(3C) of the Companies Act, 1956. The first set would comprise of the Indian Accounting Standards, which are converged with the IFRS (IFRS converged standards) and which shall be applicable to the specified class of companies in a phased manner.

The second set would mainly comprise of the existing Indian Accounting Standards and would be applicable to other companies, including the Small and Medium Companies (SMC).

In relation to the IFRS converged standards, the Chairman of the Accounting Standards Board of the Institute of Chartered Accountants of India (ICAI) will submit the converged version of individual Accounting Standards to the National Advisory Committee on Accounting Standards (NACAS) from time to time for recommendations and onward submission to the MCA.

The convergence of all accounting standards is required to be completed by the ICAI by 31st Mar ’10. NACAS will submit its recommendations to the MCA by 30th Apr ’10.

Other amendments to the Companies Act will be undertaken in a time-bound manner to facilitate the process of convergence. For example, it is anticipated that certain amendments to the Companies Act will be undertaken as early as February ’10.

The announcement states that a separate roadmap for banking and insurance companies will be prepared and submitted to the government for consideration after consultation with the concerned regulators that was to be done by 28th Feb ’10. The announcement lays down a phased approach to convergence. Convergence with IFRS is planned in three phases as mentioned below:

Phase 1:
Companies covered in this phase will prepare an opening balance sheet in accordance with IFRS converged standards as of 1st Apr ’11 and will follow the IFRS converged standards from this date. The following companies will be covered in Phase 1:
- Companies included in Nifty 50,
- Companies included in 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 Rs 1,000 crore.

Phase 2:
Companies covered in this phase will prepare an opening balance sheet in accordance with IFRS converged standards as of 1st Apr ’13 and will follow the IFRS converged standards from this date. All companies (whether listed or not) with a net worth in excess of Rs 500 crore but less than Rs 1,000 crore will be covered in Phase 2.

Phase 3:
Companies covered in this phase will prepare an opening balance sheet in accordance with IFRS converged standards as of 1st Apr ’14 and will follow the IFRS converged standards from this date. All listed companies with net worth less than Rs 500 crore will be covered in Phase 3.

For companies with an accounting year-end other than 31st March, the above requirements will apply in relation to the first balance sheet, which is made on a date after 31st March.

For example, for a company with a net worth in excess of Rs 1,000 crore with 1st July to 30th June as its accounting year, the opening balance sheet will be prepared as of 1st Jul ’11.

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

The announcement effectively addresses the previous uncertainty regarding the manner and timeline for IFRS convergence in India. This would enable affected companies to finalize their approach to the transition. For companies covered by Phase 1 and which are yet to substantially commence their IFRS convergence projects, the time to start is ‘now’.

Further, the phased approach to IFRS convergence would greatly smoothen the path to convergence for medium-sized and small listed companies. The convergence experience of the large companies covered in Phase 1 would provide other companies with a better understanding of the technical changes due to convergence, provide examples of best practices to manage convergence projects and also provide access to a larger resource pool with experience in IFRS.

As inevitable with such large policy announcements, several implementation issues would arise as affected companies consider the impact of the announcement.

Since IFRS is a new concept in many cases it is vastly different from the manner in which it treats the accounting of items in a company’s profit and loss account and the balance sheet. Since some of these reporting standards are market-sensitive, they sometimes have material impact on reported results which could lead to stock price volatility.

The impact is also on the tax and operating structures, which could alter once IFRS comes into place. But the biggest challenge in convergence with IFRS is that our chartered accountants will have to unlearn all that they have spent practising in the past 20 to 30 years. This puts a big emphasis on training.

As phase 1 of convergence includes all top notch companies, players such as L&T, JSW have adapted the training procedure according to their needs. In the case of companies like Tata Steel and Hindalco, which had made large overseas acquisitions, the need to adopt IFRS had been taken as their international subsidiaries currently follow that accounting standard.

Companies are hence forming core groups that would first experience implementation of the new standards and then pass it on to the rest of the company, which in HR parlance is popularly called ‘training the trainer’. This helps in large companies where there are subsidiaries spread all over the country.

The core group of the company is the first to customize the training so that they can then teach an operations team or the marketing team, the impact of such a concept. Time can only tell how easy or difficult this implementation will get and what kind of success it will witness.