Banks to confront challenges in loan impairment, derivatives, etc
Author : DNA Money Correspondent
Content : In line with global trends, India will join the league of more than 100 countries which have converged with International Financial Reporting Standards (IFRS) from April 1, 2011. The banking sector being one of the most affected by this convergence, the differences in current accounting standards with that of IFRS need to be clearly identified.
KPMG, on Friday, published a report titled 'IFRS Convergence: Challenges and implementation approaches for banks in India', highlighting the concerns of the banking sector.
Head of IFRS conversion services, KPMG, Jamil Khatri said, "In addition to the general accounting standards and practices that constitute Indian generally accepted accounting principles (GAAP), banking firms are currently required to adhere to accounting policies and principles prescribed by the Reserve Bank of India. IFRS requires a significant change in the existing policies and could have a material impact on the financial statements of financial firms."
IFRS requires an increased use of judgement and extensive use of unobservable valuation inputs and assumptions. Banking firms are subject to regulatory reviews and inspections, as well as minimum capital requirements. Additionally, application of IFRS may result in higher loan losses and impairment charges, thereby impacting available capital and capital adequacy ratios, said the KPMG report, adding that the regulatory review process will need to be adjusted to acknowledge the inherent judgements involved in the application of IFRS.
According to the report, "Fair value measurement is infrequently used under Indian GAAP and, in most cases, primarily to capture the lower cost of fair value measurement base. Under IFRS, there may be significant differences as all financial assets and liabilities will be measured at fair value. Banks will need to adopt fair value methodologies to ensure that they are updated in current market conditions. Profit planning and budgeting will need to be fine-tuned to incorporate the expected increase in income statement volatility arising out of fair value."
Under IFRS, all derivatives are recognised on the balance sheet at fair values, whereas Indian GAAP does not specifically address provisions that are difficult to apply, and hedge accounting. Also, financial assets and consolidation of entities that are not purely driven as per ownership structure will be de-recognised.