ifrs in india (banking)

8/2/2019 ifrs in india (banking)

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A STUDY ON IFRS AND ITS IMPACT ON THE

BANKING INDUSTRY OF INDIA

* BIRLA INSTITUTE OF TECHNOLOGY

NOIDA

Submitted by:Saloni NandaBBA 4519/09

Submitted to:Ms. Neharika Shrivastava


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*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 theInternational Accounting Standards Board (IASB).

IFRSs are considered a "principles based" set of standards in which they establishbroad 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 businessesoperating in multiple countries to be able to create financial statements that areunderstandable 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 areessential 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 nameofInternational Accounting Standards(IAS).

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to develop, a single set of high quality, understandable and enforceableglobal accounting standards that require high quality, transparent andcomparable information in financial statements and other financial reportingto help participants in the world's capital markets and other users makeeconomic 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 andInternational Accounting standards and IFRS to high quality solutions.


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1. IASB Standards are known as International Financial Reporting Standards (IFRSs).

2. All International Accounting Standards (IASs) and Interpretations issued by the formerIASC and SIC continue to be applicable unless and until they are amended or withdrawn.

3. IFRSs apply to the general-purpose financial statements and other financial reporting byprofit-oriented entities -- those engaged in commercial, industrial, financial, and similar

activities, regardless of their legal form.

4. Entities other than profit-oriented business entities may also find IFRSs appropriate.

5. General-purpose financial statements are intended to meet the common needs ofshareholders, creditors, employees, and the public at large for information about an entity'sfinancial position, performance, and cash flows.

6. Other financial reporting includes information provided outside financial statements thatassists 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 incomestatement, a cash flow statement, a statement showing either all changes inequity or changes in equity other than those arising from investments by anddistributions to owners, a summary of accounting policies, and explanatory notes.

9. If an IFRS allows both a 'benchmark' and an 'allowed alternative' treatment,

financial statements may be described as conforming to IFRS whichevertreatment is followed.

10.In developing Standards, IASB intends not to permit choices in accountingtreatment. Further, IASB intends to reconsider the choices in existing IASs with aview to reducing the number of those choices.

11.The provision of IAS 1 that conformity with IAS requires compliance with everyapplicable IAS and Interpretation requires compliance with all IFRSs as well.

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International Financial Reporting Standards (IFRS)

IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 2 Share-based payment

IFRS 3Business Combinations (Revised)

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

IFRS 8Operating 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 offinancials.

Reporting standards such as IFRS does not exist in many entities.

The requirements of individual standards will often differ significantlyfrom those under an entity's previous GAAP.

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The globalization of the business world and the attendant structures and

the regulations, which support it, as well as the development of e-commerce make it imperative to have a single globally accepted financialreporting system.

The entities in emerging economies are increasingly accessing the globalmarkets to fulfill their capital needs by getting their securities listed on thestock exchanges outside their country.

The use of different accounting frameworks in different countries, whichrequire inconsistent treatment and presentation of the same underlyingeconomic transactions, creates confusion for users of financial statements.This confusion leads to inefficiency in capital markets across the world.

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This Framework sets out the concepts that underlie the preparation and presentation offinancial statements for external users.

The Framework deals with:

o The objective of financial statements;

o The qualitative characteristics that determine the usefulness of information in financialstatement;

o The Definition, recognition and measurement of the elements from which financial

statements are constructed; and

o Concept of capital and capital maintenance.

* FRAMEWORK FOR THE PREPARATION AND

PRESENTATION OF FINANCIAL STATEMENTS


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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 onFinancial Position, Operating Performance and changes in financialposition of an entity

Financial Statements are normally prepared on the assumption thatentity is a going concern and will continue in operation for theforeseeable future, and prepared on accrual basis of accounting.

The four Qualitative characteristics are Understandability, relevance,reliability and comparability are the attributes that make the financialinformation useful to users.

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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 toor from the entity.

o the item has a cost or value that can be measured with reliability.

Measurementis the process of determining the monetary amounts at which eachelement in the financial statements are to be recognized and carried in the BalanceSheet and Income statement.

The concept ofcapital maintenanceis concerned with how an entity defines thecapital that it seeks to maintain. It provides the linkage between the concepts ofcapital and the concepts of profit because it provides the point of reference bywhich profit is measured

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By adopting IFRS, we would be adopting a "global financial reporting" basisthat will enable companies to be understood in a global marketplace. Thishelps in accessing world capital markets and promoting new business. Itallows 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 andgroup decision-making.

In increasingly competitive markets, IFRS allows a company to benchmark

itself against its peers throughout the world, and allows investors and othersto compare the company's performance with competitors globally.

In addition, companies would get access to number of capital marketsacross the globe.

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Despite a general consensus of the inevitability of the global acceptance of

IFRS, many people also believe something will be lost with full acceptanceof IFRS.

Further ,certain issuers without significant customers may resist IFRSbecause they may not have a market incentive to prepare IFRS financialstatements.

Some other issuers may have to stick with existing GAAP because it isrequired for filings with other regulators and authorities, thus resulting inextra 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. Mostreserve the right to carve out selectively or modify standards they do notconsider in their national interest, an action that could lead toincomparability 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, networth 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, theeffects of a conversion go beyond these complex tax matters and also includematters 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 anopportunity 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 challengefor their IT department .

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

4. Financial Instruments-

The Institute of Chartered Accountants of India has issued AS 30, AS 31 and AS32 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 Measurementprescribes two options for the classification of financial assets, i.e. amortized cost orfair value

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5. Human Resources-

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

A conversion project will place increase in demands of the trained and professionalpersonnel, which may come at a time when they are able to handle it. It shall enhancethe 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 offmethod 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 Accountingfor Investments, the Investments of the organization shall be valued on lowerof cost or fair value.

However under the IFRS, the measurement of fair value shall be different fromthe existing method. Under IFRS 9, investments in equity instruments are fair

valued. The gains or losses are either recognized in the income statement orin a reserve account. That choice is required to be made at the inception onan instrument by instrument basis, and is irrevocable.

8. Derivatives and Hedge Accounting-

Under the existing Accounting Standards 30 (AS 30) on Financial Instruments:Recognition and Measurement. The derivatives are valued at the fair value in theBalance Sheet after making provision for difference in Income Statement for the fairvalue of such derivatives.

However under the IFRS, all such documents for measurement of fair value must bedocumented. Besides the documents, hedge effectiveness testing and ineffectiveness

testing are also required for measurement of fair value.

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9. 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 purelybased 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 isfinance or an operating lease. Finance leases are accounted for by the lessoras financing transactions.

Lease accounting under IFRS may affect those banks that under local GAAPkeep 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 mostcases allow companies to continue using existing GAAP and require somespecific disclosures

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

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Ques. 1

Compliance with IFRS

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80%

20%

COMPLIANCE

YES

NO


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Ques. 2 Perceived level of benefits

50%

40%

10%

BENEFITS UPON IFRSHIGLY BENEFITICIAL MODERATELY BENEFICITIAL

NO BENEFIT

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Ques. 3 Priority of convergence with IFRS as a project

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20%

50%

30%

PRIORITY OF IFRSVERY HIGH MID HIGH LOW

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Ques. 4 Difficulty of conversion to IFRS in specific areas

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1 2 3 4 5

0%

20%10%

50% 20%10%

30%30%

20% 10%

10%

10%

20%

50%

10%

10% 30%

10%30%

20%

Difficulty of certain items

Disclosures Derivatives Investments Loans And Advances

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

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60%

10%

30%

Level Of Preparedness

Assessing the impact of IND-AS Developing solutions for IND-AS

Not started

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

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20%

10%

70%

0%

Adapatability with workforce

YES NEW RECRUITS TRAIN EXISTING NO

70% of thebanks will train

the existingemployees, 20% say theyhave adaptable

workforce and10 % are goingfor freshrecruitment

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

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10%

20%

70%

Intention on Working Style

Outsourcing In-House Combination

70 % of the banksintend to work with a

combination , 20 %banks are going to relyon internal sources & 10% will take external

help

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Ques. 8 Technological systems modification requirement

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40%

50%

10%

0%

Compatibility with IT Systems

Singnificant change Moderate change Low change No change

40 % banks feelmoderatechanges arerequired , 40 %find major

changes tomade & 10 %perceive lowupgradation

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Ques. 9 Level of awareness on IFRS among the workforce of theirorganization

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20%

70%

10%

Awareness Among Workforce

Know about it Little knowledge No Idea

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Ques. 10 Most significant hurdle to converge to IFRS

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20%

30%

50%

Major Hurdles

Lack of skilled resources

Lack of support from other departments

Lack of Regulatory Guidance

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

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30%

50%

20%

Regulatory Direction From RBIComprehensive guidance Prescriptive on select issues Brief idea

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Though convergence with IFRS will improve the overall financial reporting andtransparency of companies and safeguard the interests of stakeholders, there arevarious challenges which Indian Inc. will have to face while converging with IFRS. Themajor challenge is to train the staff according to new accounting standards and tomake sure that there is proper mechanism for implementing such strategy. ICAI, ASBand government have taken various steps and have drafted proper implementationstrategy 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 ITsystems to support it. Since all the works of a bank now depend on computerstherefore they should employ competent software engineers.

To implement IFRS, the present as well the future employees should be trained towork with IFRS system.

The banks should deliberate with the education society to develop a course inIFRS to teach the young generation about it in order to develop futureprofessionals.

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ifrs in india (banking)

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