IFRS convergence in India from 2015-16

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The Finance Minister’s announcement to introduce new accounting standards converged with International Financial Reporting Standards (IFRS) is a welcome step towards the long pending alignment of Indian financial reporting standards with global standards. It is expected that companies would be permitted to voluntarily follow the new converged Indian Accounting Standards (Ind-AS) from 2015-16, which will become mandatory from 2016-17. The timelines for the financial services sector, including banks and insurance companies, is also expected to be finalised soon. Further, the tax accounting standards will also be notified separately.

As the capital market and investment activity gains momentum, both in India and globally, it is of utmost importance to have a uniform globally accepted standard in financial reporting that would aid in better comparability and transparency. These converged standards are likely to increase global acceptance of financial statements of Indian companies, thus resulting in lower cost of capital and improved valuations.

The appended KPMG IFRS Flash News aims to provide companies with an insight to the proposed implementation of the new accounting standards and how it impacts them, and accordingly develop an approach for their IFRS/Ind-AS transition to ensure a smooth implementation and be compliant with the regulations prescribed, in a timely manner.

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IFRS convergence in India from 2015-16

  1. 1. IFRS convergence in India from 2015-16 15 July 2014 The Finance Minister’s announcement to introduce new accounting standards converged with International Financial Reporting Standards (IFRS) and tax accounting standards is a welcome step towards the long pending alignment of Indian financial reporting standards with global standards. It is expected that companies would be permitted to voluntarily follow the new converged Indian Accounting Standards (Ind-AS) from 2015-16, which will become mandatory from 2016-17. Further, the tax accounting standards will also be notified separately. This announcement comes at a time when the capital market and investment activity is picking up, both in India and globally, and it certainly comes as a boost to further strengthen the Indian capital markets and investment environment. This comes in addition to the many reporting changes and leading industry practices that have been incorporated in the recently pronounced Companies Act, 2013. Uniformly following a globally accepted standard would lead to better comparability and transparency in financial reporting, thereby increasing its global acceptance, which in turn should result in lowering the cost of capital and improving valuations. KPMG IN INDIA Implementation roadmap As a next step, we expect that the government will announce a detailed roadmap for Ind-AS implementation, including for banks and insurance companies, the timelines for which is currently not known. Learning from past efforts, convergence in 2011, the Ministry of Corporate Affairs (MCA) should finalise the roadmap for implementation at the earliest so as to allow covered companies to start their preparations well in advance of the transition date. This roadmap should consider implementation in a phased manner, like was announced earlier. Ind-AS standards The MCA had published Ind-AS standards in 2011. However, those standards would not be in line with IFRSs as several new changes had been incorporated in important areas such as revenue recognition, consolidation, financial instruments, etc. Delayed issuance of Ind-AS was cited as one of the reasons for lack of preparedness by the Indian corporate sector at that time, and had resulted in the deferral of implementation. Considering this, the MCA and National Advisory Committee on Accounting Standards (NACAS) or National Financial Reporting Authority (NFRA) should, this time, immediately update and issue the new set of IFRS aligned standards. MCA should endeavour to keep the carve-outs to the bare minimum when finalising the new Ind-AS standards to help ensure that there is global acceptability for financial statements when they are issued. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  2. 2. Tax accounting standards Another important reason for the deferral of Ind-AS implementation was ambiguity on how the changes in accounting rules would impact taxation, as taxable income was computed using the accounting income as a starting point. Companies were uncertain of the tax implications of the changes that would have to be adopted for accounting purposes, including the greater use of fair values, adjustments to reserves, etc. The contemporaneous issue of Tax Accounting Standards (TAS) should address this challenge. Next steps for companies Companies typically approach any IFRS/Ind-AS conversion exercise in phases to ensure a smooth implementation: • planning and gap assessment • compute the impact on profitability and key metrics, including communication with stakeholders on the key impact areas • prepare financial statements including disclosures • build capacity and align systems to achieve ‘business as usual’. Summing up On the whole, the announcement is a reinforcement and continuation of government policies on reporting, with the objective of aligning governance in India with international norms. By moving forward with the implementation, India can play a significant role in accounting standard setting globally. The Government has made the right move by announcing implementation of TAS as well which will de- bottleneck any implementation challenges. The regulators need to act fast and avoid pitfalls encountered in the past and ensure that there is full clarity for corporates, provide them adequate time for transition and ensure that the standards meet the objective of convergence; the corporate sector should also ensure that there is timely preparation for a smooth transition. 2 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International.kpmg.com/in While the implementation road map is being defined, there are a number of learnings from past experience to be kept in mind. Companies should use the available time to start assessing the impact that the new standards would have on business, financial statements, systems and processes, training needs, and start preparing for the change. Prior experience has shown that the implications of this change are not restricted to just the accounting function, but has an organisation-wide impact, and possibly also on the way the company does business, raises capital, etc. Therefore, it may be best for companies to start early and carry out the transition in a smooth and efficient manner. Sai Venkateshwaran } } Sai Venkateshwaran Partner and Head Accounting Advisory Services M: +91 98203 45741 E: saiv@kpmg.com Madhu Sudan Kankani Partner Accounting Advisory Services M: +91 98453 20711 E: mkankani@kpmg.com

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