Implementation of Ind AS and IFRS -

1
CFO Summit, 2011
Implementation of Ind AS and IFRS -
Implications on Corporate Governance
Dr. Paritosh C. Basu
October 20, 2011
2
Discussion Flow

• Corporate Governance Revisited
• IFRS The World Scenario
• Challenges in Forward Path
• Key Questions from Audit Committee and Board of
  Directors

The Big Question - Is Good Corporate Governance
GAAP Agnostic?
3
Corporate Governance Revisited
4
Accounting and Reporting in Changing Environment

Challenges, Risks and Sustenance
Pinnacle
Frequency
Reporting to
Frameworks
Functions

• Critical documents
• Risk Register and
• Financial Reporting Procedure

5
Dimensions of Corporate Governance
Risk and Performance Management
Effectiveness of Audit Committee
Functioning of Board of Directors
Legal and Regulatory Boundaries
Disclosure and Transparency
Corporate Governance
Independence and Value Orientation
Business Practices and Ethics
6
Corporate Governance Revisited Factors that
Influence

• Ownership structure Co-existence of multiple
  categories
• Composition of Board of Directors and its Sub
  Committees
• Independent Directors Positions in too many
  corporate houses
• Financial Structure External debt vs. equity
• Socio-economic environment
• Effective Audit Committee
• Risk Management
• Value - Maximise creation and minimise
  destruction
• Multiplicity of Tools
• Statutes, Rules, Regulations, Regulators
• Discipline in Capital and Bond Market

To be directly or indirectly impacted more by
IFRS / IND AS
7
Corporate Governance Revisited 2 Issues
and Controversies

• Questionable ethics
• Behaviour and attitude at the top
• True independence of the Board
• Doctrine of Indoor Management Lifting the
  corporate veil
• Aggressive earnings management
• Gaps and Ineffectiveness in accounting and
  reporting
• Faulty executive compensation practices
• Outdated rule based accounting disregarding
  substance
• People are important than process
• Senior management not responsible for control

To be directly or indirectly impacted more by
IFRS / IND AS
Fishes start rotting from the head
8
Corporate Governance Revisited 3 Attributes
and Facets of Good CG

• Depends on the culture in which the corporate
  operates
• Honesty, integrity and transparency beyond
  regulation
• DNA and value system of the Group Ethical code
  of conduct
• Top management in a state for readiness to
• Face challenge
• Deal with fear factor
• Responsive to dynamic environment
• Good CG is philosophy and matter of attitude
• Non compromising, adaptable, and scalable
• Trustworthy for all stakeholders

To be directly or indirectly impacted more by
IFRS / IND AS
Protect Existing Enable Growth More Results
for Stake Holders
9
IFRS - The world scenario
10
Need for Common Accounting Standard
Deutsche Bank group prepared its consolidated
financial statements under US GAAP until Dec. 31,
2006. Due to the requirement of European Union,
the group had to adopt IFRS from Jan. 1, 2007.
Under US GAAP, for the year ended Dec. 31,
2006, the groups total assets were 1.126 billion
Euros, while under IFRS they were 1.572 billion
Euros. Such dissimilarities weaken the
usefulness of financial statements and hence
there is a case for uniform financial statement
reporting standards.
11
IFRS Implementation World Scenario
Countries that have already
adopted IFRS are shaded with blue
Countries in the process of adoption of IFRS
are shaded in grey

(Source. www.iasb.org)

• No blackout period expected from IASB in
  transition course up to 2014
• Substantial changes expected in Standards -
  Revenue, Consolidation
• Deferred Tax, Lease, Financial Liabilities
• Uncertainties about schedule in the USA albeit
  expected by 2014 / 15
• Implementation challenges Scarce resources and
  IT solution
• Change in mindset of all concerned - Substance
  over Form

12
Corporate Governance (CG) and Properties
of IFRS Adoption

• Areas of Study in Europe
• How CG associates with reporting
  quality and transparency with focus on three
  properties of IFRS adoption
• The extent of disclosure on the restatement
  process itself.
• Compliance and disclosure of specific standards
  which are identified to have the largest impact
• Choice to early adopt IAS39 or to postpone its
  adoption around the time of IFRS adoption. 
• Findings
• European firms with strong CG engage in higher
  financial reporting quality
• Firms with more independent and active Boards and
  especially with more effective Audit Committees
  disclose substantially more information about the
  impact of IFRS 
• A corporate with strong governance 
• Disclose more extensive on specific Standards
• Use the timing adoption flexibility in a
  conservative fashion while

Arnt Verriest, Tilburg University ,
Netherlands Ann Gaeremynck Catholic University of
Leuven, Belgium Daniel B. Thornton Queen's
University, Canada November, 2009
http//papers.ssrn.com/sol3/papers.cfm?abstract_id
1266698
13
Style of Governance since the Economic Crisis
Strategy Formulation McKinsey Quarterly Survey
July, 2011
Source Indian Management, August 2011
14
Challenges in Forward Path
15
Challenges in Forward Path

• Information content
• Protective confidentiality vs. complete
  transparency
• Completeness vs. Invasion by analysts, who till
  recently knew IGAAP
• More volatility in Income Statement
• Relevance for stakeholders
• Recognition and transaction processing with
  flexibility for
• Corporate reporting Substance over Form,
• Tax Accounts and Return Historical Cost vs.
  Fair Valuation
• Least possible application of Regulatory
  framework of accounting
• Test of Functional Currency
• Unlearning and relearning Research, Reading,
  Benchmarking
• Guidance of EAC of ICAI, RBI Replaced by IFRIC,
  SIC and IND AS
• Schedule VI and Regulatory Provisions Revised
• Revenue recognition Retail, Automobile,
  Construction, Airlines, etc.

16
Challenges in Forward Path 2

• Mandatory tests and measurements
• Covenant compliance
• Classification of Current liabilities
• Test of Going concern
• Debt and Interest - in Preference Shares and
  Quasi Equity Instruments
• Modeling and valuation of Options and other
  Derivative contracts
• ERP System under new standards
• Automated process vs. Worksheets in excel with
  associated risks
• Handling of GAAP differences for conversion
• Annual Business Plan preparation under converged
  IFRS Standards
• Emerging needs of Direct Tax Code and Goods and
  Service Tax

To be effective, governance standards need to be
implemented in a way that fits the culture and
organisation structure of the individual
company

CFO, Tata Steel


Source Indian Management, August 2011

17
Challenges in Forward Path 3

• Socio Economic Impacts of IFRS Some researched
  out thoughts
• . Introduction of IFRS should be re-examined
  from at least two distinct perspectives
• the use, misuse, and abuse of principle-based
  Fair Value Accounting (FVA) in the wider arena
  of socio-economies . FVA should be re-examined
  as a specific mode of information that changes
  the epistemic, operational and control frameworks
  of various organisations
• The long term consequence of adoption or
  convergence which would affect the Sovereign
  Right and National Strategy to control Indias
  socio-economy for the sake of sustainable growth
  .
• The mode of international standards should be
  reexamined for whether it will affect the power
  balance between Indian Government and
  international organizations (Page 3)
• We are not concerned with isolated corporate
  scandals. . concerned about the indirect , long
  term, mental impacts of the new accounting on the
  socio-economies in India. (Page 114)
  Contd. ..

18
Challenges in Forward Path 4

• Socio Economic Impacts of IFRS Some researched
  out thoughts
• Countries such as China and India may require
  tight control of, for example insurance
  industry, for the protection of a large
  population that should not be subjected to the
  logic and power of international institutional
  investors whose main interests are investment
  return. (Pages 114-115)
• Once the global accounting standards are
  implemented, the performance of Indian companies
  and industries is likely to be compared with that
  of other countries without taking social needs
  and context into account. (Page 115)
• Convergence is a carefully crafted although it
  may not be commonly understood definition or the
  one desired by IASB. (Page 115)
• Chinese political leaders have treated
  accounting as a matter of national strategy .
  Converted accounting as a governmental tool to
  transform communist business organisations into
  modern economic entities. (Page 121)
• Source Socio-Economic Impacts of IFRS on Wider
  Stakeholders in India Tomo Sujuki and Jaypal
  Jain, Said Business School, University of Oxford,
  2010 v.2.3.2

19
Key Questions to be Answered For The Audit
Committee and Board of Directors
20
Key Questions to be Answered for AC and BoD

• Revenue Recognition and Accounting
• Industry specific changes - Retail, Vehicle,
  Telecom, Constn. etc.
• Approaches to revisit measurement and recognition
• IT enablement of the process
• Articulation of disclosure for policy and
  measurement
• Fixed Assets Institutionalised Process
• Fair valuation on first adoption
• Componentisation of assets
• Annual review of useful life and residual value
• Annual tests for impairment and accounting of
  outcomes
• Instances of leases under Take or Pay
  Arrangement (IFRIC 4)
• Tax implications for all the above Current and
  Deferred
• Assets and Liabilities Current Non Current
• Covenant compliances for Loans and consequent
  changes
• Split Pref. Shares and Combined Instruments into
  Debt , Equity and Interest
• Restricted Cash Cash Equivalents

21
Key Questions to be Answered for AC and BoD 2

• Business Combinations
• Effects on transactions planned for future
• Impacts of changes due to fair valuations of
  assets and liabilities
• Future exit strategies
• Investments in Associates and Joint Ventures
• Changes in number of entities under Equity
  Accounting method
• Modifications required in Joint Venture
  agreements
• Alignment of policies and procedures for
  measurement and accounting
• Taxes
• Deferred Tax Balance Sheet based approach
• Overall impact on Current IncomeTaxes
• Effect on Indirect Taxes due to changes in
  Revenue accounting
• Contingent Liabilities
• Reassessment and categorise into Remote,
  Possible, or Probable
• Provision requirement for probable cases

22
Key Questions to be Answered for AC and BoD 3

• Financial Statement Presentation
• Changes in Formats and Classifications
• Functional vs. natural grouping of expenses
• Volatility in Income Statement
• EBITDA not a defined measurement
• Additional Comprehensive Income and Changes
  in Equity
• Capital Management Policy Objective, Debt and
  Equity
• Assessed adjusting events post Balance Sheet date
• Sensitivity Analyses Currency Exchange Rate and
  Interest
• Financial Risk Management

23
Additional Notes and Disclosures for More
Transparency

• Financial Risk Management - Objectives and
  Policies covering
• Credit Risk on Customers
• Currency Exchange Exposures
• Liquidity Risk - Maturity Profile for Loans,
  Creditors, Derivatives, Lease
• Commodity Price Risk
• Restricted Cash
• Capital Management Policy - Objective, Debt,
  Equity
• Tax Reconciliation and Analyses
• Reconciliation at Effective Rate
• Component-wise Analysis of Deferred Tax
• Sensitivity Analyses
• Interest Rate on Loan Portfolios with Reset
  Clauses or Floating Rate
• Exchange Variations on Financial Assets and
  Liabilities

Analysts to exercise caution while using and
comparing such disclosures
24
Further Thoughts
25
Thank You