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BIRLA

INSTITUTE OF TECHNOLOGY NOIDA

A STUDY ON IFRS AND ITS IMPACT ON THE BANKING INDUSTRY OF INDIA

Submitted to: Ms. Neharika Shrivastava

Submitted by: Saloni Nanda BBA 4519/09

*OBJECTIVE

To know about the accounting Policy of IFRS. To know changes made by companies to meet its guidelines. To know its impact on banking firms

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IFRS are International Financial Reporting Standards, which are issued by the International Accounting Standards Board (IASB).

IFRSs are considered a "principles based" set of standards in which they establish broad rules as well as dictating specific treatments.
With businesses turning global, it is important that investors are able to compare companies under similar standards. Likewise, it is important for businesses operating in multiple countries to be able to create financial statements that are understandable in all of the countries they operate in. Two of the main advantages of adopting IFRS are those of more transparency and a higher degree of comparability. Both of these will benefit investors and are essential to achieving the goal of an integrated global and financial market place. Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS).

to develop, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions; to promote the use and rigorous application of those standards;

to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies;
to bring about convergence of national accounting standards and International Accounting standards and IFRS to high quality solutions.

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1. 2. 3. 4. 5. 6.
IASB Standards are known as International Financial Reporting Standards (IFRSs). All International Accounting Standards (IASs) and Interpretations issued by the former IASC and SIC continue to be applicable unless and until they are amended or withdrawn. IFRSs apply to the general-purpose financial statements and other financial reporting by profit-oriented entities -- those engaged in commercial, industrial, financial, and similar activities, regardless of their legal form. Entities other than profit-oriented business entities may also find IFRSs appropriate. General-purpose financial statements are intended to meet the common needs of shareholders, creditors, employees, and the public at large for information about an entity's financial position, performance, and cash flows. Other financial reporting includes information provided outside financial statements that assists in the interpretation of a complete set of financial statements or improves users' ability to make efficient economic decisions.

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7.
IFRS apply to individual company and consolidated financial statements.

8.

A complete set of financial statements includes a balance sheet, an income statement, a cash flow statement, a statement showing either all changes in equity or changes in equity other than those arising from investments by and distributions to owners, a summary of accounting policies, and explanatory notes.
If an IFRS allows both a 'benchmark' and an 'allowed alternative' treatment, financial statements may be described as conforming to IFRS whichever treatment is followed. treatment. Further, IASB intends to reconsider the choices in existing IASs with a view to reducing the number of those choices. applicable IAS and Interpretation requires compliance with all IFRSs as well.

9.

10.In developing Standards, IASB intends not to permit choices in accounting

11.The provision of IAS 1 that conformity with IAS requires compliance with every

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International Financial Reporting Standards (IFRS)

IFRS 1 IFRS 2 IFRS 3 IFRS 4 IFRS 5 IFRS 6 IFRS 7 IFRS 8

First-time Adoption of International Financial Reporting Standards Share-based payment Business Combinations (Revised) Insurance Contracts Non-current Assets Held for Sale and Discontinued Operations Exploration for and Evaluation of Mineral Resources Financial Instruments: Disclosures Operating Segments

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Although entities are frequently required to adopt new accounting standards under their national Generally Accepted Accounting Principles (GAAP), adopting IFRS, an entirely different basis of accounting, poses a distinct set of problems:

Information may need to be collected that was not required under the previous GAAP. Practical experience of applying a principles-based system of financials.

Reporting standards such as IFRS does not exist in many entities. The requirements of individual standards will often differ significantly from those under an entity's previous GAAP.

The globalization of the business world and the attendant structures and the regulations, which support it, as well as the development of ecommerce make it imperative to have a single globally accepted financial reporting system.
The entities in emerging economies are increasingly accessing the global markets to fulfill their capital needs by getting their securities listed on the stock exchanges outside their country. The use of different accounting frameworks in different countries, which require inconsistent treatment and presentation of the same underlying economic transactions, creates confusion for users of financial statements. This confusion leads to inefficiency in capital markets across the world.

FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

This Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users.
The Framework deals with:

o
o

The objective of financial statements;

The qualitative characteristics that determine the usefulness of information in financial statement;

o
o

The Definition, recognition and measurement of the elements from which financial statements are constructed; and
Concept of capital and capital maintenance.

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The Objective of Financial statements is to provide useful information to users of financial statements in making economic decision. Financial Statements are prepared to provide information on Financial Position, Operating Performance and changes in financial position of an entity Financial Statements are normally prepared on the assumption that entity is a going concern and will continue in operation for the foreseeable future, and prepared on accrual basis of accounting. The four Qualitative characteristics are Understandability, relevance, reliability and comparability are the attributes that make the financial information useful to users.

An item that meets the definition of an element should be recognized if:

o it is probable that any future economic benefit associated the item will flow to
or from the entity.

o the item has a cost or value that can be measured with reliability. Measurement is the process of determining the monetary amounts at which each
element in the financial statements are to be recognized and carried in the Balance Sheet and Income statement. The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to maintain. It provides the linkage between the concepts of capital and the concepts of profit because it provides the point of reference by which profit is measured

By adopting IFRS, we would be adopting a "global financial reporting" basis that will enable companies to be understood in a global marketplace. This helps in accessing world capital markets and promoting new business. It allows companies to be perceived as an international player.

A consistent financial reporting basis would allow a multinational company to apply common accounting standards with its subsidiaries worldwide, which would improve internal communications, quality of reporting and group decision-making.

In increasingly competitive markets, IFRS allows a company to benchmark itself against its peers throughout the world, and allows investors and others to compare the company's performance with competitors globally.
In addition, companies would get access to number of capital markets across the globe.

Despite a general consensus of the inevitability of the global acceptance of IFRS, many people also believe something will be lost with full acceptance of IFRS.
Further ,certain issuers without significant customers may resist IFRS because they may not have a market incentive to prepare IFRS financial statements. Some other issuers may have to stick with existing GAAP because it is required for filings with other regulators and authorities, thus resulting in extra costs than currently incurred by following only existing GAAP.

Another concern is that many countries that claim to be converting to international standards may never get to 100 percent compliance. Most reserve the right to carve out selectively or modify standards they do not consider in their national interest, an action that could lead to incomparability one of the very issues that IFRS seeks to address.

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1.
Compliances Burden-

All the policies regarding valuation of loans and advances, capital adequacy, net worth etc. are measured as per the rules prescribed by the Reserve Bank of India. The compliances burden shall enhance the non-operating costs of the banks.

2.

Tax Reporting Practices-

For banks, tax accounting differences are of great significance. However, the effects of a conversion go beyond these complex tax matters and also include matters such as pre-tax accounting changes on tax methods, global planning strategies, and tax information systems.

If a conversion to IFRS is approached properly and well in advance of conversion, it has the potential to strengthen an entitys tax function by providing an opportunity from a detailed review of tax matters and processes.

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3.
Information Technology-

The realignment of the bankings information systems will pose a real challenge for their IT department .

The information technology department of the bank will need to take into account external factors such as local and international regulations, financial consolidation of subsidiaries, stock markets, and external auditors.

4.

Financial Instruments-

The Institute of Chartered Accountants of India has issued AS 30, AS 31 and AS 32 respectively in parallel to International Accounting Standards 39 (IAS 39) on Financial Instruments. It shall have an impact over the income of the industry. To illustrate the forthcoming key standard IFRS 9, Financial Instruments: Classification and Measurement prescribes two options for the classification of financial assets, i.e. amortized cost or fair value

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5.
Human Resources-

IFRS involves much more than reorganizing the chart of accounts. It represents a change that cascades well beyond the finance department.

A conversion project will place increase in demands of the trained and professional personnel, which may come at a time when they are able to handle it. It shall enhance the wages cost as percentage of the total expenses for the bank.

6.

Impairment in Advances-

The banking industry, at present recognizes the provisioning and writes off method for the valuation of its advances as per the prudential norms of Reserve bank of India.

Under IFRS 9, loans and receivable portfolio are accounted on amortized cost basis, provided these loans do not contain any exotic embedded derivatives.

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7.
Investments-

As per the existing Indian Accounting Standard 13 (AS 13) on Accounting for Investments, the Investments of the organization shall be valued on lower of cost or fair value.

8.

Derivatives and Hedge Accounting-

However under the IFRS, the measurement of fair value shall be different from the existing method. Under IFRS 9, investments in equity instruments are fair valued. The gains or losses are either recognized in the income statement or in a reserve account. That choice is required to be made at the inception on an instrument by instrument basis, and is irrevocable.
Under the existing Accounting Standards 30 (AS 30) on Financial Instruments: Recognition and Measurement. The derivatives are valued at the fair value in the Balance Sheet after making provision for difference in Income Statement for the fair value of such derivatives.

However under the IFRS, all such documents for measurement of fair value must be documented. Besides the documents, hedge effectiveness testing and ineffectiveness testing are also required for measurement of fair value.

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Consolidation of financial statements-

As per the Accounting Standard 23 (AS 23) on consolidation of Financial Statement of entities, the consolidation of financial statements are purely based upon the ownership and control over the another organization.

However, as per IFRS, the consolidation is mandatory for all the organization. The measurement and test of ownership shall also be change in the IFRS.

10.Leases

Accounting for leases under IFRS currently depends on whether a lease is finance or an operating lease. Finance leases are accounted for by the lessor as financing transactions. Lease accounting under IFRS may affect those banks that under local GAAP keep assets off-balance sheet as operating leases.

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11.Insurance Contracts
IFRS has minimal guidance on accounting for insurance contracts. IFRS 4 Insurance Contracts only provides minimum accounting criteria, which in most cases allow companies to continue using existing GAAP and require some specific disclosures

IFRS 4 does define an insurance contract and some contracts entered into by an insurance business

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Ques. 1

Compliance with IFRS

COMPLIANCE
20%

YES NO
80%

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Ques. 2

Perceived level of benefits

BENEFITS UPON IFRS

HIGLY BENEFITICIAL NO BENEFIT
10%

MODERATELY BENEFICITIAL

50% 40%

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Ques.

3 Priority of convergence with IFRS as a project

PRIORITY OF IFRS
VERY HIGH MID HIGH LOW

20% 30%

50%

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Ques. 4 Difficulty of conversion to IFRS in specific areas

Difficulty of certain items

Disclosures Derivatives Investments Loans And Advances

10% 10% 30% 20% 10% 10% 30%

30% 20%

50%
10%

20% 30%

10%

10% 20% 10%

50%

20%

0%
1 2 3 4 5

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Ques. 5 Level of preparedness of banks to converge with IFRS

Level Of Preparedness
Assessing the impact of IND-AS Not started Developing solutions for IND-AS

30%

60% 10%

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Ques. 6 Banks having adaptable and skilled workforce for converging to IFRS

Adapatability with workforce

YES NEW RECRUITS
0% 20%

TRAIN EXISTING

NO

10%

70%

70% of the banks will train the existing employees, 20 % say they have adaptable workforce and 10 % are going for fresh recruitment

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Ques. 7 Intention to work the IFRS convergence project at their bank

Intention on Working Style

Outsourcing In-House Combination

10%

20%

70 % of the banks intend to work with a combination , 20 % banks are going to rely on internal sources & 10 % will take external help

70%

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Ques. 8 Technological systems modification requirement

Compatibility with IT Systems

Singnificant change Moderate change
0% 10%

Low change

No change

40%

50%

40 % banks feel moderate changes are required , 40 % find major changes to made & 10 % perceive low upgradation

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Ques. 9 Level of awareness on IFRS among the workforce of their organization

Awareness Among Workforce

Know about it Little knowledge No Idea
10%

20%

70%

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Ques. 10 Most significant hurdle to converge to IFRS

Major Hurdles
Lack of skilled resources Lack of support from other departments Lack of Regulatory Guidance

20% 50%

30%

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Ques. 11 What kind of regulatory direction from RBI on accounting would they prefer upon convergence in India

Regulatory Direction From RBI

Comprehensive guidance Prescriptive on select issues Brief idea

20% 30%

50%

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Though convergence with IFRS will improve the overall financial reporting and transparency of companies and safeguard the interests of stakeholders, there are various challenges which Indian Inc. will have to face while converging with IFRS. The major challenge is to train the staff according to new accounting standards and to make sure that there is proper mechanism for implementing such strategy. ICAI, ASB and government have taken various steps and have drafted proper implementation strategy to ensure effective and efficient convergence of I-GAAP to IFRS.

RECOMMENDATIONS:

To implement IFRS, the banks must put in great efforts to develop strong IT systems to support it. Since all the works of a bank now depend on computers therefore they should employ competent software engineers.

To implement IFRS, the present as well the future employees should be trained to work with IFRS system. The banks should deliberate with the education society to develop a course in IFRS to teach the young generation about it in order to develop future professionals.

THANK YOU