The Hindu Business Line : ‘Convergence with IFRS may impact banks’ financial performance’

Hyderabad, Aug. 24 The financial impact of convergence with IFRS (International Finance Reporting System) will be significant for banks in India, particularly in areas relating to loan loss provisioning, financial instruments and derivative accounting, according to auditing and consultancy firm KPMG.

KPMG in a report ‘IFRS: Developing a roadmap to convergence for the Indian banking industry’, mentions how this is likely to impact financial performance, directly affecting capital adequacy ratios and the outcomes of valuation metrics that analysts use to measure and evaluate performance.

The Head of IFRS Conversion Services, KPMG India, Mr Jamil Khatri, in a statement said “In addition to the general accounting standards and practices that constitute Indian GAAP (Generally Accepted Accounting Practices), banking companies are currently required to adhere to accounting policies and principles that are prescribed by the Reserve Bank of India.”

Changes entailed

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 financial companies, he mentioned.

In addition to the financial accounting impact, the convergence process is likely to entail several changes to the financial reporting systems (including IT systems) and processes adopted by banks.

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.

IFRS requires increased use of judgement and extensive use of unobservable valuation inputs and assumptions. The regulatory review process would need to be adjusted to acknowledge the inherent judgements involved in the application of IFRS. 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.

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