The Hindu Business Line : IFRS implementation issues

The derivatives issue seems to have been forgotten with inflation now hogging the limelight. The implementation of accounting standards, however, can neither be forgotten nor can it wait for long. Many major stock exchanges across the world today require or accept IFRS (International Financial Reporting Standards), a common accounting language for preparing financial statements.

“It is expected that more than 150 countries would follow IFRS by 2011. The US already allows IFRS for foreign filers. More importantly, by 2011, it is expected that the US will follow IFRS even for local filers.

India needs to step up action in order to reap benefits of IFRS convergence,” says Mr Dolphy D’Souza, Partner & National IFRS Leader, Ernst & Young. When Business Line asked him, ‘What needs to be done then?’ Dolphy’s reply was: “Without regulatory approvals the whole thing will fall flat. Certain regulatory amendments have to be taken up quickly. IFRS is not only going to help Indian companies benchmark their performance with global counterparts but also escape from filing multiple reports for Indian companies who have gone global.”

There seems to be some confusion regarding ICAI’s date for changing to IFRS by all Indian public interest entities. Is it April 1, 2010 or 2011?

Let me clarify to you that the date is actually 2010 since comparatives also have to comply with IFRS.

How will this transition impact the Indian industry?

Convergence to IFRS will greatly enhance an Indian entities’ ability to raise and attract foreign capital at a low cost. A common accounting language, such as IFRS, will help Indian companies benchmark their performance with global counterparts.

There will be escape from multiple reports for global Indian companies that have to prepare their financial statements under multiple GAAPs. With the knowledge of IFRS, the Indian Chartered Accountant would be globally acceptable.

Lets talk about IFRS in the international context. How prevalent is IFRS and what are its implications for Indian companies?

Many major stock exchanges across the world today require or accept IFRS financial statements. It is expected that more than 150 countries would follow IFRS by 2011. The US already allows IFRS for foreign filers.

More importantly, by 2011, it is expected that the US will follow IFRS even for local filers. This is inevitable; else, the US may lose its capital market advantage.

India needs to step up action to reap benefits of IFRS convergence. For this purpose, it is imperative that certain regulatory amendments take place such as those relating to Schedule VI, preference capital, securities premium account, depreciation, and so on, to bring them in line with the requirements of IFRS.

Considering your experience in IFRS conversions in India, what is your assessment of efforts required by Indian companies to migrate to IFRS framework?

Our experience is that the conversion from Indian GAAP to IFRS requires significant efforts. The preparers, users and auditors continue to encounter practical implementation challenges. Conversion to IFRS is more than a mere technical exercise.

The consequences are far wider than financial reporting issues and extend to various significant business and regulatory matters including compliance with debt covenants, structuring of ESOP schemes, training of employees, modification of IT systems and tax planning. Companies also need to communicate the impact of IFRS convergence to their investors to ensure they understand the shift from Indian GAAP to IFRS.

It is believed that there are only a few differences between Indian GAAP and IFRS. Does that make conversion efforts for Indian companies minimal?

That is a myth. Even though Indian GAAP is inspired from IFRS, there are significant differences between them especially in areas of business combinations, group accounts, fixed asset accounting, presentation of financial statement, accounting for foreign exchange and financial instruments, to name a few; Indian GAAP is still a long way behind IFRS.

We have recently published "Thinking IFRS?", an IFRS publication, which elaborates on these innumerable differences. The publication is available as a PDF file on our firm's Web site. (www.ey.com/GLOBAL/content.nsf/India/IFRS)

What are some of the significant challenges that need to be addressed for transition to IFRS framework?

Most Indian companies tend to underestimate the efforts involved to convert to IFRS. As IFRS would become effectively mandatory in 2010, companies should start looking at the conversion process right now.

Early adoption of IFRS gives companies the opportunity to anticipate challenges, manage outcomes and implement the best solutions. Without careful study, the full impact of converting to IFRS will not be clear. Companies need to conduct a diagnostic study before proceeding for a full IFRS conversion.

After completing the preliminary assessment, the management should prepare a detailed IFRS conversion programme. Given the enormity of the exercise, companies should consider a dedicated team that will work on the conversion exercise.

How do you see the role of the regulator in IFRS implementation?

For successful implementation of IFRS in India, the regulator should immediately announce its intention to convert to IFRS and make appropriate regulatory amendments. This will start the ball rolling and companies will start taking the IFRS conversion process seriously.

Without regulatory approvals, the whole thing will fall flat. Sooner the endorsement, the better for Indian companies. Regulators should also consider the impact of IFRS on income-tax and other taxes. This is absolutely critical. Time is running out and quick action is imperative. Last minute announcements can be suicidal.

D. MURALI

KUMAR SHANKAR ROY

http://InterviewsInsights.blogspot.com

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