IFRS

https://www.in.kpmg.com/securedata/ifrs_institute/files/TaxingTimes.pdf

IFRS convergence: What stakeholders need to do

Pursuant to the roadmap announced by the Ministry of Corporate Affairs (MCA) for convergence of Indian Accounting Standards with International Financial Reporting Standards (IFRS), many Indian companies are preparing for the convergence with IFRS. The new converged standards essentially serve the same objectives as the previous standards — that of providing timely and useful financial information about companies for stakeholders to assist in decision-making.

However, there are likely to be significant changes in the recognition, measurement, disclosure and presentation of various aspects of items in the financial statements.

Various stakeholders will be impacted by the transition to IFRS. Stakeholders want to understand how this change affects them. Similarly, management of companies would also like to address the requirements of stakeholders in a smooth and meaningful manner.

Here are answers to some of the questions surrounding the impact of transition to IFRS for different stakeholders:

Who are the key stakeholders impacted by IFRS?

All stakeholders who need to understand the financial statements would be affected in one way or the other. These would be internal or external stakeholders. Internal stakeholders would include the management of the company, audit committee, board of directors (including independent directors), and employees.

Within external stakeholders, investors (current and potential shareholders) and lenders are key stakeholders. There are other stakeholders such as regulators, research analysts and credit rating agencies.

All these stakeholders use the financial statements for a variety of purposes and therefore changes in the reported financial statements due to transition to IFRS would need to be understood by them for their decision-making.

How can companies work to ensure that their stakeholders will be appropriately prepared to understand and use the financial statements under IFRS?

Understanding what external stakeholders may want to know and how they use financial statements; recognising that communication is important; identifying matters that need resolution for their understanding and providing information on a timely basis; and understand that the users of financial statements may not always be accountants and, therefore, would need to be explained the impact of implementation of IFRS in a simple language.

Why is it important for companies to communicate with stakeholders on the impact of IFRS in advance? Is it not sufficient for them to get the IFRS financial statements when they are reported as per the applicable timelines?

No surprises is the mantra here. It is highly likely that the reported profitability and other financial parameters, such as net worth, debt-equity ratio and current ratio, may be different under IFRS compared with the Indian GAAP. Setting the expectation of stakeholders for the anticipated changes would ensure that the stakeholders understand the impact in the right perspective.

For example, some of the investments may be recorded under IFRS at fair value with the movement of fair values between different periods reported in equity or the income statement. Currently, such investments may be reported at cost. While the underlying business situations continue to be the same, the fact that the movement in fair values is recorded through the income statement in the future may affect the profitability of the company. Now, the investors should understand that this is additional financial information available. Though the reported profit may be different, such situation existed even under the Indian GAAP though not reported in the same manner. Currently, it is unclear if the ability of companies to pay dividends would be dependent on the profits reported under IFRS financial statements or a different formula would be set for determining distributable profits. This may affect all investors.

It is important that the stakeholders feel confident that a company is not only effectively managing the transition to IFRS, but is also helping them to anticipate and understand the change that may arise. Not managing the expectation may lead to some kneejerk reactions. Therefore, providing effective and timely communication should help companies mitigate this risk.

When should a company communicate IFRS with all the stakeholders?

Communicate early, but not too early. Stakeholders need to know what's going on with the IFRS transition. Messages need to be direct, properly timed and appropriately comprehensive. Indian companies are fortunate that they could learn from the experience of other economies such as the European Union and Australia. Communication is most effective when the impact is clearly understood by the management and the company so that the message is clear and appropriate.

How are audit committees and the board of directors impacted by transition to IFRS?

First of all, audit committees and board of directors recommend and approve the financial statements of companies and, therefore, they need to know and understand what they are approving.

In addition, there would be several areas where there would be significant exercise of judgment by management, for example, estimating the useful life of assets, identification of significant components in assets, estimates of fair values for investments and other financial instruments, election of exemptions and accounting policies from several choices available, etc.

While approving such decisions, the directors need to be knowledgeable enough to understand the implications of each of these matters so that they make appropriate decisions.

In the current environment where financial reporting by companies is under significant scrutiny by investors, analysts and regulators, directors (especially the independent directors) have a heightened sense of responsibility for financial reporting.

How does IFRS affect employees in general? Why should the management be so concerned about the transition to IFRS?

A simple example could be employee incentives. IFRS may impact the reported profits and often a portion of employee incentives are linked to the companies profits. Other employees in the finance function would need to know IFRS implications in greater details as they need to prepare the financial statements.

Apart from the need to prepare and explain the IFRS financial statements, management also have to set up the processes, for example – IT process, MIS and budgeting process – and make changes to the processes. Understanding of IFRS would be required in their day-to-day decision making, for example, their ability to raise funds, mergers and acquisitions activity, and the structure of business contracts.

A lay investor is usually not educated about intricacies of IFRS. What should corporate India do to ensure that retail investors understand the impact of the change?

Unfortunately, the learning process could be lengthy. In the current situation, even a large number of professionals may not be fully up to speed on details of IFRS. The process of educating stakeholders about IFRS, particularly in the transition year, will prove to be challenging. A fine balance is required between management's comfort with the accuracy and completeness of information and stakeholders' requests for information.

Each company would be in the best position to educate their respective external stakeholders, helping them to make sense of what is likely to occur and why, based on each companies circumstances. As most external stakeholders would be unprepared, a company would need to anticipate difficulty in the first year of IFRS convergence due to use of a different accounting language.

It is possible that some companies may start voluntary disclosing some information and impact of IFRS on a pro-forma basis to the capital markets or investors even before the mandatory date of transition to IFRS. This could be a good start. Finally, an entity may use this IFRS transition as an opportunity to enhance ongoing stakeholder communication rather than treating it as a one-off exercise.

https://www.in.kpmg.com/securedata/ifrs_Institute/Files/IFRS_Flash_News.pdf

IFRS Briefing Sheet- 193

In an open meeting on February 24, the Commission unanimously agreed to issue a statement expressing its continued support for the development of a single set of high-quality globally accepted accounting standards. The Commission also outlined the next steps in its determination of whether to incorporate International Financial Reporting Standards (IFRS) into the financial reporting system for U.S. issuers. Further, the Commission recognized that IFRS are best positioned to be that single set of high-quality global accounting standards and emphasized the importance of the FASB’s and IASB’s convergence efforts.

In its statement, to obtain the information it needs to make a well-informed decision regarding the use of IFRS by U.S. issuers in 2011, the Commission directed the SEC staff to execute a “work plan” addressing six specific areas of concern. If in 2011 the Commission votes to incorporate the use of IFRS into the financial reporting system for U.S. issuers, the SEC staff noted that it would recommend sufficient transition time with adoption potentially occurring in 2015 or 2016.

The six key structural, operational, and transitional areas of concern to be addressed by the staff are as follows:

1. Sufficient development and application of IFRS globally

2. Independence of the global standard-setting process

3. Investor understanding and education

4. Impact on the regulatory environment

5. Impact on issuers (both large and small)

6. Human capital readiness

The staff indicated that the first two areas of concern will assist the Commission in its determination of whether to incorporate IFRS into the financial reporting system for U.S. issuers, while the remaining four areas will assist in the determination of when and how IFRS may be mandated for use. SEC Chairman Mary Schapiro noted that “the convergence projects currently underway by the FASB and [IASB], must first be successfully completed” before a Commission ruling.

The work plan does not indicate specific timelines or methods for adoption of IFRS by U.S. issuers. Rather it will be up to the Commission’s rulemaking in 2011 to set out the timeline and determine whether any adoption of IFRS will be mandatory or optional and for which U.S. issuers. 

The Commission asked for transparency of the staff’s actions and directed that frequent public progress reports be issued beginning in October 2010 and thereafter through the completion of their actions.

The impact on U.S. issuers if the SEC incorporates IFRS into the U.S. financial reporting system would be significant. U.S. issuers can follow this effort by staying informed of the FASB’s and IASB’s convergence efforts and by looking for future public progress reports from the Commission regarding updates on the staff’s work plan.

good post