IFRS Transition

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Mecklai's services in the area of IFRS transition, valuation of derivatives and effectiveness testing

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IFRS Transition

  1. 1. IFRS TRANSITION July 2010 CONFIDENTIAL © Mecklai Financial Services Limited 2008. No part of this document can be circulated or reproduced in any form without prior approval of Mecklai Financial Services Limited
  2. 2. A Time Of Transition <ul><li>Indian companies need to adopt IFRS (hedge accounting norms) by FY-12; ICFAI encourages earlier compliance </li></ul><ul><ul><li>Switch over / parallel accounting from the current financial year is highly recommended </li></ul></ul><ul><li>Under IFRS, financial statements will look different and P&L sensitivity to market movements will rise </li></ul><ul><li>This will be further accentuated in cases where companies have used financial derivatives (forwards, options, swaps, structured products) to hedge their risks </li></ul>
  3. 3. Challenges <ul><li>Companies need to be able to understand how this new framework will reflect their performance </li></ul><ul><ul><li>More specifically, how different market activities will reflect in this new framework </li></ul></ul><ul><li>Can be very time consuming to ensure full compliance with the new standards, in terms of </li></ul><ul><ul><li>Determining fair value of FC loans and hedges </li></ul></ul><ul><ul><li>Recognizing/derecognizing and reclassifying assets </li></ul></ul><ul><ul><li>Effectiveness testing of hedges </li></ul></ul><ul><li>Currently, there is a limited pool of trained resources with IFRS expertise </li></ul>
  4. 4. For First-Time Implementation <ul><li>We provide a customized guidance document for hedge accounting under AS30 </li></ul><ul><ul><li>List in detail the accounting requirements for the transition </li></ul></ul><ul><ul><li>Prepare a sample hedge document (to be filled in for all hedge transactions) </li></ul></ul><ul><ul><li>Provide illustrative valuation for all derivative instruments and effective tests for all hedges </li></ul></ul><ul><li>Interface with your auditors and accounting team to finalize best accepted practices </li></ul>
  5. 5. Annual services <ul><li>We provide quarterly/annual (certified) valuations of outstanding derivatives as per AS 30 </li></ul><ul><li>Effectiveness testing of all hedges </li></ul><ul><li>Mediate with auditors, as necessary, to ensure that accounts preparation follows best practices in the area of valuations of financial instruments </li></ul>
  6. 6. Case Study 1 <ul><li>Concerns </li></ul><ul><ul><li>A $ 2 bn company, with a large number of medium and long-term option hedges, needed to develop a process to ensure that it was able to finalize its accounts within 5 days of the end of each quarter </li></ul></ul><ul><li>Solution </li></ul><ul><ul><li>Since this assignment began in 2008, there was a serious scatter of knowledge between the company and its auditors as to the correct way to conduct and present the valuations </li></ul></ul><ul><ul><li>We not only provided the valuations but mediated this uncertainty to where, after 2 quarters, we were able to deliver the valuations on a timely basis </li></ul></ul><ul><ul><li>Today, 6 quarters down, the company has a smooth process </li></ul></ul>
  7. 7. Case Study 2 <ul><li>Concerns </li></ul><ul><ul><li>A $ 150 mn company in the IT space needed to implement AS30 </li></ul></ul><ul><ul><li>The accounts team was completely new to the area </li></ul></ul><ul><li>Solution </li></ul><ul><ul><li>Studied the impact of transition to AS30 on their accounts </li></ul></ul><ul><ul><li>Helped them determine how to define risk for different types of transactions </li></ul></ul><ul><ul><li>Designed appropriate hedge documentation and templates for hedge accounting </li></ul></ul><ul><ul><li>Illustrated effectiveness testing for different instruments </li></ul></ul><ul><ul><li>Currently provide ongoing valuations </li></ul></ul>
  8. 8. Other Services <ul><li>Debt issue / syndicated loan services </li></ul><ul><ul><li>Design of optimal structure, given your balance sheet and project requirements </li></ul></ul><ul><ul><li>Selection of merchant bankers </li></ul></ul><ul><ul><li>Negotiating all-in cost, eliminating surprise fine print </li></ul></ul><ul><ul><li>Documentation </li></ul></ul><ul><li>Investment of issue proceeds/other surpluses overseas with yield enhancement </li></ul><ul><li>Strategic advisory on managing FX and interest rate risk on both P&L and balance sheet </li></ul><ul><li>FCCB Valuation </li></ul>
  9. 9. Please contact C. Chandrasekar 9820293423 Chetan Raman 9967799445 Prasanth Warrier 9833001369

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