IFRS Indian Standards of now

1
B Dash & Co
Chartered Accountants
www.bdashco.com

2
B Dash & Co
Chartered Accountants
www.bdashco.com

• Global Markets – the Services Revolution
• Accountability
• Cross border Capital flows
• Bases for business decisions
• Corporate Reporting failures
• Corporate Governance
• Regulatory Framework
• Changes in Technology and Products
The Reporting Landscape

• A business enterprise receives
capital from outside investors,
lenders, and other creditors.
• It is accountable to them – it has an
obligation to keep them informed
about performance, conditions, and
prospects.
• Also accountable to others who
provide resources or environment in
which to operate: Employees,
government, community at large.
Accountability

• Capital Market transactions
• Mergers & Acquisitions
• Employee Stock Options
• Borrowing and Lending
Bases for business decisions

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Corporate Governance Pillars
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Corporate Governance
Primary characteristics
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• Sarbanes Oxley
• Reporting in the financial services sector
• Quotas, obligations, etc.
• Taxation
• Eligibility for business transactions
Regulatory Framework

 Intangible Assets – Licenses, Rights, etc
 Tangible Assets – component accounting
 Barter transactions
 Options and Swaps
 Futures
– Complex arrangements – BOOT, BOT, BOMT,
Service concession agreements, etc
Changes in aTechnology and Products

 This is what corporate accounting is all about.
 Accounting standards help ensure the financial information is:
Accountability
Relevant Transparent
Reliable Comparable
Understandable

 Historically accounting standards have evolved
country by country.
 Standards set by government, or accounting profession, or
independent board.
 In the USA: Independent board – Financial Accounting
Standards Board (FASB) since 1973. Before that – accounting
profession.
 In Hong Kong: Accounting profession – Hong Kong Society of
Accountants.
 In China: Government – Ministry of Finance.
Evolution of Accounting Standards

• National standards made sense when
companies raised money in, and investors
looked for investment opportunities in, only
their home country.
• But that is no longer the case.
Evolution of Accounting Standards

• Big change in 4th quarter of 20th century:
Globalisation of capital markets.
• Now, investors seek investment
opportunities all over the world.
• Companies seek capital at the lowest price
anywhere.
• Cross-border mergers.
• Accounting differences can completely
obscure comparisons.
Global Accounting Standards Are
Needed

Number of Foreign Companies Listed on major stock exchanges
(October 2006)
London SE, 327
Euronext , 256
Others, 814
Deutsche
Börse, 104
Singapore
Exchange, 232
Luxembourg
SE, 223
NYSE, 453
Nasdaq, 329
Global Accounting Standards Are Needed
World: 51 stock exchanges, 2700 foreign (cross border listings) out of 40,000
companies

Globalisation of Capital Markets
Billion $ % of
GDP
Billion $ % of
GDP
U.S. 4,167 38 1,922 17
Euro Area 3,569 44 3,609 44
U.K. 2,387 133 2,247 125
Switzerland 343 111 510 165
Canada 223 26 297 34
Australia 212 42 124 24
Sweden 190 63 223 74
Capital inflows Capital Outflows
Source: IMF Workpaper

 On many stock exchanges foreign listings are a large %
of total - USA October 2006:
 NASDAQ: 10% (329 cos., 36 countries).
 NYSE: 20% (453 companies, 47 countries).
 Foreign is 33% of market value.
 US SEC total:
 1981: 173 foreign companies listed in US.
 1991: 439 foreign companies listed in US.
 2002:1,400 foreign out of 16000 total
 2004: 1,236 foreign companies from 53
countries
 2005: 1240 foreign companies from 55
countries

 Foreign companies that sell securities publicly in the US
must either:
 Prepare their financial statements using US
Generally Accepted Accounting Principles
(GAAP),
or
 Use their national GAAP and include a
reconciliation of earnings and net assets to
comparable US GAAP figures.
 The 1,240 foreign companies registered with the SEC use
about 55 GAAPs!

 Even with the reconciliation, perhaps 95% of the
financial figures in a foreign company’s annual
report are based on their national GAAP – not
comparable to US GAAP.
• Pity the poor investor who has to compare foreign
GAAP companies with US investment alternatives.
• Pity the SEC staff reviewer, too.

• Same problem all over the world.
– And these exchanges do not even require a
reconciliation to national GAAP.
• London Stock Exchange (Jan 2006):
– 17% of companies are non-UK.
• 550 foreign companies, 65 countries.
– 66% of market value is non-UK.
• Euronext: 25% foreign (345 / 1,392)
• Switzerland: 32% (132 / 419)
• Germany: 21% (182 / 866)

Examples of Reconciling Items
Item US GAAP Many foreign GAAPs
Revaluation of
land, buildings,
and intangible
assets
Prohibited Permitted, even occasionally
required. Sometimes all assets
are revalued. In other cases
only selected assets are
revalued (company can select).
Business
combinations
Measure the
acquired
company’s assets
at their fair values
at the time the
merger takes
place.
Sometimes – Carry forward the
acquiree’s old historical costs.
Do not remeasure assets to fair
value.

Goodwill Do not amortise this
asset.
Generally require
amortisation, usually
with 20 year maximum
life.
Investments in
equity securities
Measure at fair value
(quoted market price).
Generally, measure at
historical cost if not
purchased for short-
term trading.
Stock option
plans
Permits recognition of
the fair value of stock
options given to
employees as expense.
If not recognised, must
disclose fair value in the
notes. Soon will propose
expensing the fair value.
Expense is in some
cases not recognised or
disclosed.

Research and
development
costs
All research and
development costs are
charged to expense
when incurred
While research is
generally charged to
expense, product
development costs often
are recognised as
amortisable assets rather
than expenses.
“Off-balance-
sheet” debt
Fairly strict rules* on
“derecognition” of
financial assets through
securitisations
repurchase agreements,
and on consolidation of
special purpose entities.
*Not quite strict enough
for Enron.
Limited, if any, rules in this
area. Much more off-
balance-sheet debt.

Derivatives On the balance sheet and
remeasured to fair
market value at each
reporting date.
Frequently off the balance
sheet. Only recognised at
settlement date.
Deferred income
taxes
Recognised based on
balance sheet
differences with tax
bases of assets and
liabilities.
Sometimes not
recognised. If recognised,
usually income statement
approach. Also deferred
tax assets frequently not
recognised. Often not
adjusted for changes in
tax rates.

Revenue recognition:
 When is a “sale” made?
 What if seller has significant
ongoing obligations or
performance guarantees or
servicing commitments?
 What if buyer’s payment is
deferred?
Detailed rules,
industry by
industry,
particularly for
SEC listed
companies.
Limited rules. Usually
much more flexibility.

• Weak relationships with national standard
setters.
• Lack of convergence of IAS and major national
GAAPs.
• Part-time Board, full-time work load.
• Needed broader sponsorship than accounting
profession.
• Needed recognition by regulators.
• Needed resources.
Structure review 1999-2000. Results . . .
Shortcomings of Old IASC

Topics Covered by Existing IASs
1 Presentation of financial statements
2 Inventories
7 Cash flow statement
8 Accounting Policies, Changes in
Accounting Estimates and Errors
10 Events after balance sheet date
11 Construction contracts
12 Income taxes
14 Segment reporting
16 Property, plant, and equipment
17 Leases
18 Revenue Recognition

19 Employee Benefits
20 Government Grants
21 Foreign Currency translation
23 Borrowing Cost
24 Related Party disclosures
26 Accounting and Reporting by Retirement Benefit Plans
27 Consolidation and Separate Financial Statements
28 Investments in associates
29 Hyperinflation
30 Bank disclosures
31 Joint Ventures

32 Financial Instruments: Disclosures and Presentation
(disclosure provisions superseded by IFRS 7)
33 Earnings per share
34 Interim Reporting
35 Discontinued Operations (superseded by IFRS 5)
36 Impairment of assets
37 Provisions, Contingent Liabilities and Contingent Assets
38 Intangible assets
39 Financial instruments
40 Investment Property
41 Agriculture

• IFRS 1 First time adoption of IFRS
• IFRS 2 Share based Payment
• IFRS 3 Business Combinations
• IFRS 4 Insurance Contracts
• IFRS 5 Non-current Assets held for Sale and
Discontinued Operations
• IFRS 6 Exploration for and Evaluation of
Mineral Resources
• IFRS 7 Financial Instruments: Disclosures
(issued 18 August 2005)

• Issued [30 November]
• Effective 1 January 2009
– Earlier adoption permitted
• Replaces IAS 14
IFRS 8 Operating Segments

• No significant changes from ED
• Adopts FAS 131 approach to determining
segments—’management approach’
– Focus on the information presented to the
‘chief operating decision maker’
– Vertically-integrated operations can have
segments
• Measurement
– Based on measures reported to chief
operating decision maker
– No requirement for IFRS-based measurement
IFRS 8

• Disclosure
– Enhanced from those in IAS 14
– Reconciliation to IFRS-based reporting
required
– IAS 34 disclosures amended
IFRS 8

• Group and Treasury Share Transactions – IFRIC
11
• Service Concession Arrangements – IFRIC 12
IFRIC developments

• Issues:
– Share-based payments involving own shares
– Share-based payments involving shares of
the parent
– Intra-group transfers
• Share-based payments involving own shares
– Will always be equity-settled if equity-settled
under
IFRS 2
IFRIC 11 – Group share plans

• Share-based payments involving parent shares
– Parent offers its shares to employees of the
subsidiary
• Always equity-settled
– Subsidiary offers its employees shares of the
parent
• Cash-settled in the individual accounts of the subsidiary
• Intra-group transfers—non-market vesting
conditions
IFRIC 11 (ii)

• IFRIC 12 Service Concession Arrangements
– Approved, to be issued [30 November]
– Effective date 1 January 2008
• Public-to-private arrangements only
– Grantor controls or regulates what services are
provided; to whom; and the price
– Grantor controls any significant residual interest in
the infrastructure
– Whole life assets are within the scope if the
Grantor controls services, intended customers
and price
– Operator’s pre-existing PP&E
– Grantor accounting is not addressed
IFRIC 12

• Some significant issues
– Arrangement consideration
– Financial asset vs. intangible asset
– Repairs, restoration and maintenance
– Borrowing costs
– Applicability of other IFRS
• Amends IFRIC 4
– Scope exclusion for concession arrangements
subject to IFRIC 12
IFRIC 12 (ii)

• Draft—comment period closed
– D19 - The Asset Ceiling: Availability of Economic
Benefits and Minimum Funding Requirements
– D20 - Customer Loyalty Programmes
• In development
– IAS 18 - Real estate sales
– IAS 18 - Initial fees received by a fund manager
– IAS 18 - Identifying agency arrangements
– IAS 38 - Advertising and promotional costs
– IAS 41 - Recognition and measurement of biological
assets
The IFRIC’s agenda—status

• Early stages
– IFRS 2 - Accounting for employee benefit trusts
– IAS 11 - Allocation of profit in unsegmented
contracts
– IAS 17 - Sales and leasebacks with repurchase
agreements
– IAS 21 - Hedging a net investment
– IAS 39 - various hedge accounting issues
The IFRIC’s agenda (ii)

• Greater use of fair values in measuring transactions:
– Impairment recognition.
– Prohibit poolings.
– Non-monetary exchanges.
• Fair values on balance sheet for both financial and non
financial assets:
– Financial Instruments.
– Agriculture.
– Investment property.
– Commodity inventories.
Recent and Emerging Trends in
International Accounting Standards

• More unrealised components of income:
– Performance reporting becomes key.
• No income smoothing, cost deferrals, general provisions:
– Remove corridor approach to pensions.
– Balance sheet approach to deferred tax.
– No accruals for future losses.
– Rigorous hedge accounting rules.

• Eliminate off-balance sheet items:
– Derivatives.
– Special purpose entities.
– Stock compensation.
• More disclosure, especially judgements, plans,
assumptions:
– Judgement in applying accounting policies.
– Risk management policies.
– Sensitivity analyses.
• Eliminate accounting choices.
• Convergence with US GAAP.

• International Organization of Securities Commissions: 100
securities regulators (including the US SEC).
• Basel Committee: Global bank regulators (including the
US Federal Reserve)
• The World Bank and IMF.
• The G7 Finance Ministers.
• And many others.
These are non-binding endorsements.
“Endorsement” of IFRS in Past Few Years

• Europe – domestic listed companies:
– IFRS required in consolidated financial
statements of all European listed companies
starting 2005.
• About 9,000 companies
• in 28 countries (15 current EU + 10 joining May
2004 + 3 EEA).
– Member states may require or permit IFRS for
unlisted companies, for individual-company
statements and/or for foreign companies listed
on EU exchanges.
Use of IFRS Around the World

Countries that adopt
IFRS almost word for
word as national GAAP
(time lag)
Countries that have stopped developing national
GAAP and just use IFRS
 Australia
 New Zealand
 South Africa
 Singapore
 Hong Kong
 Philippines
 Bahrain
 Croatia
 Costa Rica
 Cyprus
 Dominican Republic
 Ecuador
 Guatemala
 Haiti
 Honduras
 Jamaica
 Kenya
 Malta
 Mauritius
 Nepal
 Oman
 Panama
 Tanzania
 Tajikstan
 Trinidad
 United Arab Emirates

• IFRS already required or permitted for some
domestic companies:
– Antilles, Bangladesh, Bolivia, China (B-
shares), Egypt, Hong Kong (if incorporated
outside HK), Hungary, Kuwait, Russia, South
Africa, Switzerland, Turkey.
• IFRS is the “fallback” if national GAAP does not
address a question:
– Mexico, Venezuela.
• IFRS permitted for foreign registrants:
– Most European countries, USA, and many
others.

• Adoption of IFRS in place of national GAAP:
– Bangladesh.
• National GAAP mostly word for word IFRS:
– Australia (new policy), Hong Kong, New Zealand (new policy),
Philippines, Singapore. Also several recent standards in India.
• IFRS “looked to” in setting national GAAP:
– Most other A-P countries. To varying degrees.
• Some domestic listed companies use IFRS:
– China, Laos, Myanmar.
• Foreign listed companies may use IFRS:
– Australia, Hong Kong, New Zealand, Pakistan, Singapore,
Thailand. Several in Japan also.
Asia-Pacific Summary

Other developed countries:
• Canada: Domestic companies not allowed to use IFRS. In Jan 2006
the Accounting Standards Board of Canada adopted a plan which
includes a decision to move financial reporting for Canadian publicly
accountable enterprises to IFRSs.
– Canadian companies registered with US SEC may use US GAAP.
• South Africa: All listed companies must follow IFRS starting 2005.
• Switzerland: Most listed companies already use IFRS.
• Russia: IFRS required for listed holding companies and all banks
starting 2004. Phased in for other large companies to 2007.

In terms of largest companies
included in Fortune 500 list, 176
prepare their accounts under US
GAAP , 200 under IFRS and 81
under Japanese GAAP
Market Capitalisation
(end 2005 - US $ Trillions)
Others, 8
IFRS, 11
US GAAP, 17
Largest companies -
Fortune 500 List
US GAAP,
176
IFRS, 200
Japanese
GAAP, 81
IFRS accepted in
about
75 jurisdictions
Out of worldwide market
capitalisation of over 36 trillion
dollars at end 2005: 11 trillion$
corresponds to markets where IFRS
are required or permitted and
17trillion $ where US GAAP is the
rule

Benefits of Global Accounting Standards
Positive Findings on IFRS *:
• Overall increase in comparability and
transparency
• Enables level playing fields and strengthens
market discipline
• Provision of early warning signals on exposure
or risks relevant for risk assessment
• Use of a principles-based framework, which
provides for adequate degree of flexibility in
implementation
* Source: Report titled ‘Assessment of Accounting
Standards from a Financial Stability Perspective’
published by European Central Bank – December,
2006

 Easier access to foreign capital markets.
 Credibility of domestic capital markets to
foreign capital providers.
 Lower cost of capital to companies.
 Comparability of financial data across
borders.
 Understandability.
 Companies keep “one set of books”.
 Global education and training.
Benefits of Global Accounting
Standards

 Meaningless without convergence in local
practices and laws as national standards are
drawn up having regard to local laws, customs,
usages and business environment.
 Convergence of local practices is a distant dream
 Implementation may result in an economic
disadvantage to the user considering that
national statutes either do not accept the basis
on which the standard has been formulated or
accept a different basis that secures an
economic benefit for the user
Convergence criticism

Convergence
Training
Debt
covenants
Stat. accounts
& taxes
M & A
Management
compensation
Forecasts –
Internal Reporting
I T Systems
Measure of
performance
Business Issues

Convergence process
Improving quality
Eliminating
numerous options
ConvergenceShared objectives
In developing
international
standards
In content and
quality – facilitate
convergence
Active
participation of
US
Guided by some
vision of the desired
outcome

• “As regulators around the world continue the process of developing a
set of international accounting standards, some would like the U.S. to
embrace standards that would be of higher quality than those
currently used in many countries but less rigorous than U.S. GAAP.
That would be a mistake”.
- Arthur Levitt
• “…..the trend particularly in the U.S. to have a detailed accounting
rule for everything, no matter how narrow or obscure the issue…
Accountants should encourage the new IASB to emphasize a
principles-based approach. Further, as part of the commitment to
convergence, it is time for the FASB and SEC to change their
behaviour and become more like the rest of the world.”
- Dennis R. Beresford, former chairman FASB
U.S. views

• “I have always wondered if some of those advocating
the use of international standards failed to recognize
and give appropriate credit to the fact that we in the
U.S. have the world’s largest, most liquid capital
markets because we do in fact have the ‘best of breed’
financial reporting today. This in turn has provided
companies with capital at the lowest possible cost that
has been used to generate jobs and an improved
global economy.
- Lynn Turner – final speech as Chief Accountant of
SEC
U.S. views

• “The coherent consistent application of IFRS is an essential
prerequisite to the elimination of the reconciliation
requirement in the U.S. It will take us some time to assess
how IFRS is being implemented and enforced, but I am
optimistic that we will complete our assessment, well within
the 2009 goal for reconciliation, and be able to determine
that the reconciliation requirement is unnecessary. Our
new Chief Accountant, Conrad Hewitt, is committed to
working to achieve this objective as quickly as possible.” –
Paul S. Atkins U.S. SEC Commissioner
Convergence

• Inadequate compliance with international
standards
• Global auditing standards
• International standard oversight function
Convergence concerns

• The accounting confusion that results from dozens
of national GAAPs in a global financial market is a
disservice to investors, creditors, and others who
use corporate financial statements.
• No one country – not even the USA – has a
monopoly on the best financial reporting standards
and practices.
– The accounting scandals of the past few years have
driven that point home in the United States.
Conclusion

• Accounting is not a science. Truth is not discovered by
scientific experiments in a laboratory. Truth is what the
standard setters say it is!
– Based on a Conceptual Framework.
– Focused on users’ needs.
– Without bias.
• Users have pretty much the same needs all over the world.
Conclusion

• Clear lesson from Enron, WorldCom, Parmalat, etc:
Accounting Does Matter!
• A single set of accounting standards leading to high
quality, transparent, and comparable financial
statements makes a lot of common sense.
An opportunity for the Indian profession to rise to
global standards and be amongst the premier and
much sort after professionals of the world.
Conclusion

IFRS Indian Standards of now

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