Ministry of Corporate Affairs issues roadmap for IFRS conversion in India
On 22 January 2010, the Ministry of Corporate Affairs (MCA) issued a press release setting out the roadmap for International Financial Reporting Standards (IFRS) convergence in India. The roadmap requires IFRS to be made applicable in a phased manner. This is an historic step that will elevate Indian entities and their finance and accounting professionals to much greater heights. The publication of the roadmap was eagerly awaited by those who have been saying that the convergence to IFRS in India is a matter of when and how" and not "if."
Certain Indian companies have already begun to plan the conversion to IFRS. They have found that IFRS conversion is more than an accounting change and may affect many aspects of a company outside of the finance function including information technology, group structures, direct and indirect taxes, strategic plans such as an initial public offering or an acquisition, investor relations, debt arrangements, and executive compensation. For the companies covered in Phase I (see below), there is no time to lose: listed companies having net worth greater then 1000 corers in Phase I are required to start reporting IFRS results from the first quarter of year beginning 1 April 2011. Furthermore, depending on how a company elects to present comparative information in the first year, its actual date of transition could be as early as 1 April 2010. Companies in Phase I should therefore accelerate the process of conversion to IFRS to allow them to complete the project efficiently, select meaningful accounting choices, and enhance the overall quality of their financial reporting. Companies in later phases are advised that IFRS reporting may quickly become the norm in their sector and it is better to be prepared for IFRS conversion sooner, rather than later.
In this document we set out questions, perspectives and points of view on the roadmap. We expect that this roadmap will be followed by the publication of detailed guidance by the MCA and/or the Core Group. Since these questions will only be answered by the publication of guidance by the regulators, companies are advised not to treat this document as formal guidance.
An overview of IFRS roadmap
- IFRS converged accounting standards (hereinafter referred to as "IFRS") shall apply to Indian companies in 3 phases as per the table:
- The Core Group and its sub-group 1, constituted by the MCA for IFRS convergence, shall determine IFRS conversion roadmap for banking and insurance companies separately by 28 February 2010.
- Non-listed companies with net worth of less than INR 500 crore and other small and medium-sized companies (SMCs) have been given an option to continue to either follow non converged standards (hereinafter referred to as "Indian GAAP") or to adopt IFRS.
- The draft of the Companies (Amendments) Bill, proposing for changes to the Companies Act, 1956, will be prepared by February, 2010.
- The Institute of Chartered Accountants of India (ICAI) has submitted to the MCA revised Schedule VI to the Companies Act, 1956. The NACAS shall review the draft and submit a revised Schedule VI to the MCA by 31 January 2010. Amendments to Schedule XIV will also be carried out in a time bound manner.
- Convergence of all the accounting standards with IFRS will be completed by the ICAI by 31 March 2010 and the NACAS will submit its final recommendations to MCA by 30 April 2010.
| Phase | Date | Coverage |
| Phase 1 | Opening balance sheet as at 1 April 2011* | i. Companies which are part of NSE Index – Nifty 50 ii. Companies which are part of BSE Sensex – BSE 30 - Companies whose shares or other securities are listed on a stock exchange outside India
- Companies, whether listed or not, having net worth of more than INR1,000 crore
|
| Phase 2 | Opening balance sheet as at 1 April 2013* | Companies not covered in phase 1 and having net worth exceeding INR 500 crore |
| Phase 3 | Opening balance sheet as at 1 April 2014* | Listed companies not covered in the earlier phases |
| * If the financial year of a company commences at a date other than 1 April, then it shall prepare its opening balance sheet at the commencement of immediately following financial year. |
Practical issues and perspectives
Determination of applicability and applicability date
Consider that ABC Limited and XYZ Limited are covered in Phase I of the roadmap as their net worth exceeds INR 1,000 crore. The financial years of ABC and XYZ end on 30 June and 31 December, respectively. What shall be the transition date to IFRS for these companies?
Companies covered in Phase I need to prepare their opening IFRS balance sheet as at 1 April 2011. If the financial year of a company commences at a date other than 1 April, then it shall prepare its opening balance sheet at the commencement of the next financial year. Accordingly, for ABC
Limited, the date of transition is 1 July 2011 and for XYZ it is 1 January 2012. Similar considerations shall apply for determining transition date in the later phases as well.
Companies covered in Phase I need to prepare their opening balance sheet as at 1 April 2011, instead of 1 April 2010 (for purposes of IFRS comparatives as was commonly understood earlier). Does this mean that the first IFRS financial statements can be issued without comparatives?
We believe that the core group should provide guidance on this issue. Based on our understanding, the core group may have decided not to require 2010-11 IFRS comparatives to avoid cost involved in preparing two sets offinancial statements – one in accordance with Indian GAAP and the other in accordance with IFRS – for a single year. If this is correct, entities may choose to publish IFRS numbers for the year 2011-12 with Indian GAAP comparatives. However, companies should note that there are various advantages of giving 2010-11 IFRS comparatives in the year 2011-12, as set out in our response to the next question.
IFRS 1 First-time Adoption of IFRS requires that an entity's first IFRS financial statements shall include comparative year information in accordance with IFRS. Therefore though IFRS 2011-12 financial statements of Indian entities with 2010-11 Indian GAAP comparatives will be compliant with Indian law, Indian entities will not be able to make an "unreserved and explicit statement of compliance with IFRS" in the year 2011-12. That statement can be made in the year 2012-13 as thefinancial statements for that year would include IFRS 2011-12 comparatives.
XYZ Limited is a listed company having net worth of more than INR 1,000 crore and, therefore, covered in Phase I of the roadmap applicable from 1 April 2011. XYZ believes that publishing 2011-12 IFRS numbers with 2010-11 Indian GAAP comparative numbers will not be useful to investors and analysts since the results of the company during 2011-12 will not be comparable to the previous period. It is therefore considering presenting comparable numbers (2010-11) also under IFRS on a voluntary basis. What may be the potential benefits of early adoption?
These are complex issues on which the MCA should provide detailed guidance. We believe that the roadmap lays down only the minimum requirements for IFRS conversion. Ifa company intends to adopt IFRS early, it should be allowed to do so. We believe that XYZ can expect the following benefits by adopting IFRS from 1 April 2010:
- Application of IFRS from 1 April 2010 will allow XYZ to make an "unreserved and explicit statement of compliance with IFRS" in the year 2011-12. Thus, it will be able to state dual compliance with IFRS as notified by MCA and IFRS as issued by IASB.
- Providing comparative information under IFRS instead of Indian GAAP will make the financial statements more meaningful to all stakeholders.
- Once IFRS becomes applicable from 1 April 2011, XYZ will also be required to file quarterly results for the period ended 30 June 2011 in accordance with IFRS. Application of IFRS from 1 April 2010 will allow XYZ to be prepared for robust quarterly reporting under IFRS starting from 30 June 2011.
- Strictly, under the IFRS framework, IFRS number for 2011-12 will actually be the comparative information for 2012-13. Under IFRS 1, the comparative information (2011-12) is prepared using the same accounting policies as those applied in 2012-13. This means that when 2012-13 first IFRSfinancial statements are prepared, the comparative information (2011-12) may undergo a change. This would effectively translate into an unnecessary hardship. To avoid this hardship, when preparing 2011-12 IFRSfinancial statements, IFRS comparatives for 2010-11 should also be provided.
Continuing the previous scenario, consider that XYZ Limited decides to prepare its opening balance sheet as at 1 April 2010. In such a scenario, can it present IFRS numbers for 2010-11 (with Indian GAAP comparative for 2009-10) in its March 2011 financial statements, without preparing Indian GAAP number for 2010-11?
This is also a complex issue requiring detailed guidance from the MCA and/or the core group. We believe that the response to this issue will, amongst other things, depend upon whether the government carries out company law changes before 31 March 2011, whether it notifies all IFRS before that date, and what are the requirements regarding early adoption. However, for the reasons given in response to the previous issue, it may not be advisable for XYZ to present IFRS numbers for 2010-11 with Indian GAAP comparative for 2009-10.
MNO Limited is a listed company having net worth of less than INR 500 crore and, therefore, covered in phase 3 of the roadmap applicable from 1 April 2014. PQR Limited is an unlisted company having net worth of less than INR 500 crore and therefore, is not covered under the roadmap. Both the companies intend to apply IFRS from 1 April 2011 on a voluntary basis. Are they permitted do so?
The roadmap is clear that a company which is not covered under any of the phases may adopt IFRS on a voluntary basis. We believe that similarly, a company covered in later phases should be allowed to apply IFRS early. Since the issue is an important one, MCA should provide guidance on the matter as soon as possible.
Company X is not included in either the NSE Index or the BSE Sensex indices. It also does not satisfy the net worth criteria for Phase I. Company X had previously issued debentures outside India that were listed on the Singapore Stock Exchange. The company redeemed all of the debentures prior to 31 March 2009. Is company X covered in Phase I?
No, since X is no longer listed on the Singapore Stock Exchange. However, it may adopt IFRS voluntarily.
Calculation of net worth
What is the meaning of the term "net worth" for deciding applicability of IFRS?
The roadmap does not specifically define the term net worth." However, it may be noted that the said term is defined section 2(29A) of the Companies Act, 1956, as below:
"29A. net worth' means the sum total of the paid-up capital and free reserves after deducting the provisions or expenses as may be prescribed.
Explanation. For the purposes of this clause, "free reserves" means all reserves created out of the profits and share premium account but does not include reserves created out of revaluation of assets, write back of depreciation provisions and amalgamation."
We recommend that the core group provides clear guidance on the definition of net worth" to be used for deciding the applicability of IFRS. For example, the definition above does not specifically deal with a debit balance in the profit and loss account that is shown on the asset side of Indian GAAP balance sheet. We believe that such debit balance should be deducted in arriving at net worth."
Is net worth for determining applicability of IFRS to be calculated in accordance with the requirements of Indian GAAP or IFRS?
Practically, a company will first decide the applicability and then only start applying IFRS. This implies that net worth calculated in accordance with Indian GAAP shall be used to determine the applicability of IFRS.
Is net worth to be calculated as per the standalone financial statements (SFS) or consolidated financial statements (CFS)?
Although this issue is not specifically addressed in the roadmap, it uses the words "companies having net worth in excess of …" and there is no reference to the net worth of the group. This indicates that the roadmap requires net worth of an individual company to be considered for determining applicability of IFRS.
Net worth for which balance sheet date should be considered to determine applicability of IFRS?
This issue is not specifically addressed in the roadmap. In absence of any guidance, various options seem possible. To illustrate a few:
- Net worth should be based on financial year ending before the date of press release. This implies that companies with a 31 March year end shall consider net worth as at 31 March 2009 and those having 31 December year end shall consider net worth as at 31 December 2009.
- Net worth should be based on financial year ending immediately after the date of press release. This implies that all companies having 31 March year end shall consider net worth as at 31 March 2010 and those having 31 December end shall consider net worth as at 31 December 2010.
- Net worth at year end before the implementation date shall decide IFRS applicability, for example, net worth as at 31 March 2011, will decide applicability of IFRS for year beginning 1 April 2011.
It is highly unlikely that (ii) or (iii) will apply for practical reasons. It is suggested that the core group clarify that (i) is applicable.
Discontinuing use of IFRS
Consider that XYZ Limited is an unlisted company having net worth of more than INR 1,000 crore. Accordingly, it started applying IFRS from 1 April 2011. However, in the year 2015, due to continuous losses and significant business restructurings, its net worth decreased to
INR300 crore. Is XYZ Limited still required to apply IFRS? Can it choose to revert to Indian GAAP?
We recommend that the core group provide guidance on this issue. The most logical view is that once IFRS applies reverting to Indian GAAP subsequently will not be allowed. This may be true for even those entities that have adopted IFRS voluntarily.
Consolidated financial statements
Does the conversion roadmap make it mandatory for all companies, including unlisted companies, to prepare CFS?
This issue is not specifically addressed in the roadmap. In our view, changes to the Companies Act should specifically address this issue. We understand that the Companies Act will be amended to mandate consolidation for all companies in accordance with IFRS irrespective of their listing status. In the meantime, it may be noted that IAS 27 Consolidated and Separate Financial Statements requires all companies to prepare CFS, with an exemption in very few cases, subject to certain conditions.
Entities that are subsidiaries, joint ventures or associates of companies covered under the conversion roadmap
Consider that DEF Limited is a 60% owned subsidiary of ABC Limited covered in Phase I of IFRS conversion roadmap. DEF Limited does not satisfy any criteria for application of IFRS. Is DEF Limited required to apply IFRS?
The conversion roadmap does not require an entity to adopt IFRS merely for the reason that it is a subsidiary, joint venture or associate of the company covered under the roadmap. Accordingly, DEF Limited has an option to either use IFRS in its standalone statutory financial statements or to continue using Indian GAAP. Since DEF will be required to prepare IFRS accounts for group reporting and consolidation purposes, it may consider using IFRS even for standalone statutory financial reporting. We believe that the matter is not beyond doubt and hence MCA guidance is necessary.
Preparation of CFS for a parent that is covered in Phase III of IFRS conversion roadmap but whose subsidiary is required to apply IFRS in Phase I.
Consider that Parent Limited is a listed company having net worth of less than INR 500 crore. Thus, the company is covered in Phase III. However, its subsidiary, S Limited, is covered in Phase I and therefore applies IFRS from 1 April 2011. The management of Parent is evaluating various options regarding preparation of its CFS, particularly, whether it can consolidate Subsidiary's IFRS financial statement with its standalone Indian GAAP financial statements.
Paragraph 3 of the current AS 21 Consolidated Financial Statements states that in the preparation of CFS, other accounting standards also apply in the same manner as they apply to the separate financial statements." Thus, it may be noted that in the CFS, though AS 21 permits different accounting policies they nevertheless have to be those that are acceptable under the same set of accounting standards. There are numerous differences in the requirements of IFRS and Indian GAAP. Keeping this in view, Parent Limited cannot consolidate IFRS financial statements of S Limited in its Indian GAAP financial statements. If the Parent is required to prepare CFS in accordance with the existing Indian GAAP, it shall also require Indian GAAP information of the subsidiary.
Considering the practical difficulties of the above situation, we believe that if IFRS becomes applicable to one entity in the group, it may be better for the entire Group to adopt IFRS on a voluntary basis. We believe that the matter is not beyond doubt and hence MCA guidance is required.
Under IFRS, preparation of CFS is compulsory and there is no mandatory requirement to prepare SFS. Are Indian companies therefore required to prepare SFS at all or, alternatively, is it permissible to prepare SFS in accordance with Indian GAAP?
We believe that preparation of SFS will be required to comply with the requirements of the Companies Act, tax laws, calculation of distributable reserves, etc. Furthermore, IFRS will be notified in the Companies
(Accounting Standards) Rules and hence will be the applicable standards for the preparation of SFS.
Consider that Operating Limited is a wholly owned subsidiary of S Limited. S Limited is a shell company listed on LSE and does not have any independent operations. Operating Limited does not meet any criteria for application of IFRS on its own. However, could it be argued that, in substance, Operating Limited is listed on LSE through S, and is therefore required to apply IFRS in accordance with the roadmap?
The roadmap refers to listing of the company itself and not the parent company. Therefore Operating Limited is not required to prepare its own financial statements in accordance with IFRS. However, it will be required to provide IFRS-based information to S through a group reporting package for consolidation purposes. Therefore, it may be more efficient for Operating Limited to prepare its own financial statements also under IFRS.
First-time adoption
Consider that UK Limited is an Indian company listed on LSE as well as the Bombay Stock Exchange (BSE). The company prepares two sets of financial statements: the first in accordance with Indian GAAP to satisfy the local reporting requirements and a second in accordance with IFRS to comply with LSE reporting requirements. For the purposes of reporting in India, is the company required to apply IFRS 1 to its Indian GAAP financial statements and prepare the opening balance sheet again?
Is the answer to the above question different if UK Limited is not listed outside India and instead its parent is listed on LSE? UK Limited prepares IFRS financial statements only for submission to its parent for use in consolidation and these are not publicly available.
The roadmap does not specifically deal with a situation where the company is already preparing two sets of financial statements: one in accordance with local requirement and the other to comply with foreign
listing requirements. However, in accordance with IFRS 1 First-time Adoption of IFRS, an entity cannot apply IFRS 1 twice. Thus, in the first scenario, UK Limited is not a first-time adopter. In other words, UK limited will discontinue reporting under Indian GAAP and the IFRS financial statements that are filed in the LSE will also be used for reporting in India.
In the second scenario, UK Limited is not preparing IFRS financial statements for public use. Thus, it shall be a first-time adopter. In other words, UK limited will have to apply IFRS 1 to its Indian GAAP financial statements in order to prepare its first IFRS financial statements.
Removal of options
Will the government continue to notify IFRS under the Companies (Accounting Standards) Rules or will companies be able to apply IFRS as issued by the IASB?
In accordance with the roadmap, the government shall continue to notify accounting standards under the Companies (Accounting Standards) Rules. It is expected that these standards shall be in full compliance with IFRS with no carve-ins or carve-outs, including interpretation and subsequent changes. Thus, it is expected that compliance with these standards may also ensure compliance with IFRS as issued by the IASB. However, MCA should clarify this matter to enable companies commencing convergence projects to know the exact standards that would apply to them.
However, it is possible that in notifying the standards, certain alternative accounting treatments allowed under IFRS may be eliminated. For example, under IFRS there are different accounting treatments in respect of actuarial gains and losses on long term employee benefit plans. It is likely that when these standards are notified some of the optional treatments may be eliminated. Companies therefore have to keep this in mind whilst starting to prepare themselves for IFRS conversion. That uncertainty will be eliminated once all the IFRS standards are notified in the rules.
What happens if the ICAI or government makes certain changes in the standards vis-Ã -vis IFRS?
If the government modifies certain standards such that they are not entirely consistent with IFRS as issued by IASB, Indian companies may not be able to claim compliance with IFRS as issued by IASB. However, as we understand it this situation is very unlikely.
Others
Is IFRS applicable to venture capital funds (VCFs) and mutual funds (MFs)?
The roadmap applies to companies only. We believe that for VCFs and MFs, the SEBI shall lay down conversion roadmap separately.
What about changes needed to other laws and regulations, e.g., taxation laws, SEBI and RBI regulations, for IFRS convergence?
The roadmap deals only with changes required in the Companies Act 1956, including schedules thereto. It is expected that changes needed to other laws and regulations, such as, taxation laws, SEBI and RBI regulations, shall be addressed separately by the respective regulators.
The global experience of IFRS adoption indicates that it is preferable to carry out appropriate changes in tax laws simultaneously; however, there are a few countries which have not changed tax laws with IFRS adoption. To illustrate, in countries such as Germany and France, local GAAP is still applicable for tax purposes.
Is interim financial information required to be IFRS compliant?
Preparation or presentation of interim financial information is governed by Clause 41 of the Listing Agreement. Thus, this aspect will get addressed clearly as part of changes to the SEBI regulations. However, we believe that it is natural, if a company is using IFRS for annual financial statements, it will use the same standards for quarterly reporting also.
[Source: Taxguru]
Regards,
Siddharth Rutiya
(sidsharth@gmail.com)
(www.sidrutiya.blogspot.com)
