This is the first of three posts which give you a quick guide to reading the three key financial statements – the income statement, balance sheet and statement of cash flows. This post deals with the income statement, with the other two coming over the next few weeks.
The Income Statement
An income statement presents the results of a company’s operations for a given period—usually a year. The income statement presents a summary of the revenues, expenses, profit or loss of an entity for the period. This statement is similar to a moving picture of the entity’s operations during the time period specified. Along with the balance sheet and the statement of cash flows, the income statement is one of the primary means of reporting financial performance. The key item listed on the income statement is the profit or loss.
Within the income statement there’s a good bit of information. If you’re knowledgeable about reading financial statements, in a company’s income statement you’ll find information about return on investment, risk, financial flexibility, and operating capabilities.
The current view of the income statement (in line with International Financial Reporting Standards (IFRS)) is that income should reflect all items of profit and loss recognised during the accounting period. The following summary income statement illustrates the format under IAS 1 – Presentation of Financial Statements (image from www.accaglobal.com):
This example above is fairly typical of the income statement of a large public company. I’ll explain some items below.
Some terms on the income statement explained
Revenue
According to the IASB’s IAS 18, revenue is defined as “the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an entity (such as sales of goods, sales of services, interest, royalties, and dividends)”. This means that revenue is typically the figure for sales of goods or provision of services for the period of the income statement.
Cost of sales.
The cost of sales figure includes all expenses incurred in buying to making the product or service which generates revenue.
Other Income
This is income from sources like interest or investment income.
Expenses
Expenses are classified as either distribution cost, administrative expenses, other expenses or finance costs. No further detail is needed.
Share of profit of associates
This figure is the share of the profits made in an associate company – one where 20-49% is owned by the company (or group of companies) the income statement is prepared for.
The final item in the example above represents a loss made in a section of a business which is discontinued. This separate disclosure is required by accounting standards. Additionally, IAS1 also requires a short statement of comprehensive income, which shows unrealised gains (like unrealised asset revaluations, or currency gains/loses on translation). I don’t include it here, but it is usually no more than a few lines.
Tuesday, November 23, 2010
Govt to notify converged accounting norms for IFRS by December
NEW DELHI: The government on Tuesday said it will notify the new accounting norms in sync with international practice IFRS for India Inc by the end of this year, and ensured that the April, 2011 deadline will not be missed.
Speaking at an Assocham conference on International Financial Reporting Standards (IFRS), Corporate Affairs Secretary R Bandyopadhayay said the accounting standards are almost ready and all issues, including the tax implications for the convergence, will also be resolved.
"By the end of December, we will notify the converged accounting norms...all issues are almost resolved and we are confident that by the next fiscal, that is April, 2011, Indian companies will prepare their accounts books as per the IFRS," Bandyopadhayay said.
The taxation committee of Institute of Chartered Accountants of India (ICAI), which is helping the government with preparing the IFRS convergence, is almost ready with the recommendations, said Corporate Affairs Joint Secretary Renuka Kumar.
Another issue that needs a re-look is projecting value of an asset in account books. While some are in favour of arriving at the value in terms of historical cost, others believe in the fair value concept.
In accounting, fair value is defined as an estimate of the potential market price of a good or service, taking into consideration factors like acquisition, production and distribution costs and replacement costs.
However, the historical cost does not consider these factors and instead, is calculated at the initial value.
Soon after the issues are resolved, the National Advisory Committee on Accounting Standards (NACAS), the final recommending body for IFRS, will notify all the 37 standards.
In the ongoing winter session of Parliament, the government is also expected to come out with an amendment to the Companies Act, 1956 to pave way for the convergence of the Indian accounting norms with the IFRS.
According to the roadmap laid out by the Ministry of Corporate Affairs , companies with a networth of over Rs 1,000 crore, will have to prepare their account books as per the IFRS from April, 2011.
Further, while scheduled commercial banks and urban cooperative banks will adopt it from April 1, 2013, all insurance companies will convert their opening balance sheets with IFRS from April, 2012.
Listed large non-banking finance companies (NBFCs) will converge their opening books of accounts with IFRS norms from April 1, 2013.
Speaking at an Assocham conference on International Financial Reporting Standards (IFRS), Corporate Affairs Secretary R Bandyopadhayay said the accounting standards are almost ready and all issues, including the tax implications for the convergence, will also be resolved.
"By the end of December, we will notify the converged accounting norms...all issues are almost resolved and we are confident that by the next fiscal, that is April, 2011, Indian companies will prepare their accounts books as per the IFRS," Bandyopadhayay said.
The taxation committee of Institute of Chartered Accountants of India (ICAI), which is helping the government with preparing the IFRS convergence, is almost ready with the recommendations, said Corporate Affairs Joint Secretary Renuka Kumar.
Another issue that needs a re-look is projecting value of an asset in account books. While some are in favour of arriving at the value in terms of historical cost, others believe in the fair value concept.
In accounting, fair value is defined as an estimate of the potential market price of a good or service, taking into consideration factors like acquisition, production and distribution costs and replacement costs.
However, the historical cost does not consider these factors and instead, is calculated at the initial value.
Soon after the issues are resolved, the National Advisory Committee on Accounting Standards (NACAS), the final recommending body for IFRS, will notify all the 37 standards.
In the ongoing winter session of Parliament, the government is also expected to come out with an amendment to the Companies Act, 1956 to pave way for the convergence of the Indian accounting norms with the IFRS.
According to the roadmap laid out by the Ministry of Corporate Affairs , companies with a networth of over Rs 1,000 crore, will have to prepare their account books as per the IFRS from April, 2011.
Further, while scheduled commercial banks and urban cooperative banks will adopt it from April 1, 2013, all insurance companies will convert their opening balance sheets with IFRS from April, 2012.
Listed large non-banking finance companies (NBFCs) will converge their opening books of accounts with IFRS norms from April 1, 2013.
Wednesday, July 7, 2010
Investors throughout the world demand more transparency from private companies – Grant Thornton
Investors (as well as financial regulators) demand more and more transparency from private companies’ financial accounts. At the same time, more than a half of business owners are sure that increased transparency is one of the main advantages. Those are the results of Grant Thornton International’s business survey for 2010 which was carried out between 7400 entrepreneurs from 36 counties, including Russia.
The survey’s results demonstrate obvious enthusiasm of entrepreneurs who call for more transparency of financial information, which in their opinion is the main factor of successful competition with rivals. Among other advantages of financial accountancy (as it is) business owners named: cutting expenses, decreasing general difficulties, easier access to capital markets, more simple conditions for international trade and, finally, easier conditions for M&As. Here’s how their votes were distributed (it was possible to name more than one options):
Advantages of financial accountancy (global picture)
* Increased transparency – 52%
* Cutting expenses – 44%
* Easier access to capital markets – 37%
* Decreasing general difficulties – 33%
* More simple conditions for international trade – 17%
* Easier conditions for mergers and acquisitions – 12%
Russian business owners answered in a bit different way.
Advantages of financial accountancy (Russia only)
* Increased transparency – 42%
* Cutting expenses – 36%
* Easier access to capital markets – 16%
* Decreasing general difficulties – 26%
* More simple conditions for international trade –7%
* Easier conditions for mergers and acquisitions – 3%
Besides, while doing the research this time, GT’s experts tried to link traditional affairs with a more important event that took place almost 1 year ago (meaning publication of simplified IFRSs - “IFRSs for SMEs”, for small business entities and private companies). Mikhail Frolov, Grant Thornton’s chief of audit in Russia reminds that this document is in fact a separate set of accounting standards, 10 times smaller than the original one (300 different disclosures instead of 3000). From this point of view, even beginners are able to work with IFRSs, which increases their capabilities on the international level.
Business owners were asked whether they were acquainted with “IFRSs for SMEs”. It appears that the most informed businesses are in the European Union (67%); least informed – in Asian-Pacific region (30%).
Surprisingly, Russia is very informed on that subject: 75% of respondents said that they knew perfectly well about introduction of the new version of IFRSs. A record-breaking number of respondents comes not even from Moscow, but from Novosibirsk (92.4%). Moscow is the second with 82%, while Nizhny Novgorod is the third (80.4%). Saint-Petersburg (76%) and Yekaterinburg (41.5%) are doing well, but could be better.
According to Mr. Frolov, small and medium enterprises are offered a whole bunch of simplifications. “Which is why it will be much easier to prepare financial accounting and carry out its audit, whatever company employs “IFRSs for SMEs” for its own good”, - he said.
The survey’s results demonstrate obvious enthusiasm of entrepreneurs who call for more transparency of financial information, which in their opinion is the main factor of successful competition with rivals. Among other advantages of financial accountancy (as it is) business owners named: cutting expenses, decreasing general difficulties, easier access to capital markets, more simple conditions for international trade and, finally, easier conditions for M&As. Here’s how their votes were distributed (it was possible to name more than one options):
Advantages of financial accountancy (global picture)
* Increased transparency – 52%
* Cutting expenses – 44%
* Easier access to capital markets – 37%
* Decreasing general difficulties – 33%
* More simple conditions for international trade – 17%
* Easier conditions for mergers and acquisitions – 12%
Russian business owners answered in a bit different way.
Advantages of financial accountancy (Russia only)
* Increased transparency – 42%
* Cutting expenses – 36%
* Easier access to capital markets – 16%
* Decreasing general difficulties – 26%
* More simple conditions for international trade –7%
* Easier conditions for mergers and acquisitions – 3%
Besides, while doing the research this time, GT’s experts tried to link traditional affairs with a more important event that took place almost 1 year ago (meaning publication of simplified IFRSs - “IFRSs for SMEs”, for small business entities and private companies). Mikhail Frolov, Grant Thornton’s chief of audit in Russia reminds that this document is in fact a separate set of accounting standards, 10 times smaller than the original one (300 different disclosures instead of 3000). From this point of view, even beginners are able to work with IFRSs, which increases their capabilities on the international level.
Business owners were asked whether they were acquainted with “IFRSs for SMEs”. It appears that the most informed businesses are in the European Union (67%); least informed – in Asian-Pacific region (30%).
Surprisingly, Russia is very informed on that subject: 75% of respondents said that they knew perfectly well about introduction of the new version of IFRSs. A record-breaking number of respondents comes not even from Moscow, but from Novosibirsk (92.4%). Moscow is the second with 82%, while Nizhny Novgorod is the third (80.4%). Saint-Petersburg (76%) and Yekaterinburg (41.5%) are doing well, but could be better.
According to Mr. Frolov, small and medium enterprises are offered a whole bunch of simplifications. “Which is why it will be much easier to prepare financial accounting and carry out its audit, whatever company employs “IFRSs for SMEs” for its own good”, - he said.
How is your IFRS conversion progressing? What do you need to be doing in the 2010 transition year to help ensure your enterprise makes a successful changeover to IFRS?
http://www.kpmg.com/Ca/en/WhatWeDo/Industries/IndustrialMarkets/PublishingImages/IFRS-Timeline-2-EN.gif
Need to Stay on Track through 2010?
Does your enterprise have IFRS conversion well in hand? If your answer is yes, most likely you have completed your 2010 transition year opening IFRS balance sheet; your comparative Q1 2010 IFRS financial statements are underway; your required systems changes are being implemented; you have a clear strategy for external communications to stakeholders; and your key business impacts are well understood and being addressed.
But, even a carefully planned journey can encounter unexpected challenges. Do keep a close eye on your key deadlines. If you encounter difficulties, always remember that KPMG can help.
Need to Accelerate Your Conversion Project?
In moving through the 2010 transition year, some entities are not feeling happy about their current position. If your enterprise waited too long to get started, or underestimated how much work was required, you may well want to accelerate your IFRS conversion project.
Critically examine your current progress—and if you need to move more quickly, take action now. If you need help, make arrangements to obtain it sooner rather than later. The ultimate deadline is a very real one—don’t put your enterprise or its reputation at risk.
Need to Stay on Track through 2010?
Does your enterprise have IFRS conversion well in hand? If your answer is yes, most likely you have completed your 2010 transition year opening IFRS balance sheet; your comparative Q1 2010 IFRS financial statements are underway; your required systems changes are being implemented; you have a clear strategy for external communications to stakeholders; and your key business impacts are well understood and being addressed.
But, even a carefully planned journey can encounter unexpected challenges. Do keep a close eye on your key deadlines. If you encounter difficulties, always remember that KPMG can help.
Need to Accelerate Your Conversion Project?
In moving through the 2010 transition year, some entities are not feeling happy about their current position. If your enterprise waited too long to get started, or underestimated how much work was required, you may well want to accelerate your IFRS conversion project.
Critically examine your current progress—and if you need to move more quickly, take action now. If you need help, make arrangements to obtain it sooner rather than later. The ultimate deadline is a very real one—don’t put your enterprise or its reputation at risk.
The alternatives to audits
Should the Companies Act go ahead most companies will no longer require an audit, MoneywebTax looks at the alternatives.
The anticipated commencement date for the new Companies Act 2008 (Act No. 71 of 2008), is expected to be October 1 2010.
If the draft regulations are promulgated as they stand then most companies will no longer require an audit.
The new Act distinguishes between two types of companies, namely profit and non-profit companies, with the former comprising public, private and state owned companies, and with a few exceptions, only public, state owned, certain non-profit and private companies holding assets in a fiduciary capacity will be subject to an annual audit.
But what of the companies that do not fall into these categories? What alternatives are there to a mandatory audit?
Companies which do not fall into the above-mentioned categories would be subject to either an independent compilation, independent review in accordance with ISRE 2400 (International Standard on Review Engagements) or an independent review in accordance with ISRS4400 (International Standard on Related Services).
Independent Compilations
The Draft Regulations give no guidelines as to the scope of procedures for an independent compilation, nor do they specify a formal financial reporting framework (such as IFRS for SMMEs). Accordingly, there is concern that this will result in inconsistencies amongst compilers, and, since only registered auditors are subject to regulation by IRBA, there will be little regulation as to the standards and quality of financial statements prepared in terms of an independent compilation outside of those prepared by registered auditors.
Independent Review in accordance with ISRE2400
A review under ISRE2400 requires that the auditor or independent profession accountant (IPA) properly plans the engagement and obtains sufficient knowledge of the business so as to determine the extent and nature of the review procedures. The procedures performed would typically include inquiries of management, high level balance sheet and income statement analytical procedures and limited high level substantive procedures (such as inspection of reconciliations, aged analysis's and review of minutes and company records).
So while the extent of the procedures might be less than those of an audit, the implicit cost savings are likely to be largely offset by the use of higher level resources by the auditor or IPA. Accordingly, it is not likely that there will be significant cost savings for companies subject to this type of engagement under the new Act, when compared with an audit.
Independent Review in accordance with ISRS4400
An ISRS4400 engagement will require typical audit type procedures, such as inquiry and analysis, observation, recalculation and obtaining confirmations and the scope of these procedures to be performed will be agreed upon between the auditor/IPA and client. As such, it is difficult to compare the cost thereof to an audit in general and such a comparison will have to be done on an individual engagement basis, depending on the scope of procedures agreed upon to be performed.
Whilst there has been no indication yet that these and other key aspects of the Act itself will be reviewed before being affected, there have been a number of submissions made to address what appear to be onerous elements of the Draft Regulations. How this will be addressed and the final outcome, remains to be seen.
*Andrew Pitt, director at Moore Stephens South Africa
The anticipated commencement date for the new Companies Act 2008 (Act No. 71 of 2008), is expected to be October 1 2010.
If the draft regulations are promulgated as they stand then most companies will no longer require an audit.
The new Act distinguishes between two types of companies, namely profit and non-profit companies, with the former comprising public, private and state owned companies, and with a few exceptions, only public, state owned, certain non-profit and private companies holding assets in a fiduciary capacity will be subject to an annual audit.
But what of the companies that do not fall into these categories? What alternatives are there to a mandatory audit?
Companies which do not fall into the above-mentioned categories would be subject to either an independent compilation, independent review in accordance with ISRE 2400 (International Standard on Review Engagements) or an independent review in accordance with ISRS4400 (International Standard on Related Services).
Independent Compilations
The Draft Regulations give no guidelines as to the scope of procedures for an independent compilation, nor do they specify a formal financial reporting framework (such as IFRS for SMMEs). Accordingly, there is concern that this will result in inconsistencies amongst compilers, and, since only registered auditors are subject to regulation by IRBA, there will be little regulation as to the standards and quality of financial statements prepared in terms of an independent compilation outside of those prepared by registered auditors.
Independent Review in accordance with ISRE2400
A review under ISRE2400 requires that the auditor or independent profession accountant (IPA) properly plans the engagement and obtains sufficient knowledge of the business so as to determine the extent and nature of the review procedures. The procedures performed would typically include inquiries of management, high level balance sheet and income statement analytical procedures and limited high level substantive procedures (such as inspection of reconciliations, aged analysis's and review of minutes and company records).
So while the extent of the procedures might be less than those of an audit, the implicit cost savings are likely to be largely offset by the use of higher level resources by the auditor or IPA. Accordingly, it is not likely that there will be significant cost savings for companies subject to this type of engagement under the new Act, when compared with an audit.
Independent Review in accordance with ISRS4400
An ISRS4400 engagement will require typical audit type procedures, such as inquiry and analysis, observation, recalculation and obtaining confirmations and the scope of these procedures to be performed will be agreed upon between the auditor/IPA and client. As such, it is difficult to compare the cost thereof to an audit in general and such a comparison will have to be done on an individual engagement basis, depending on the scope of procedures agreed upon to be performed.
Whilst there has been no indication yet that these and other key aspects of the Act itself will be reviewed before being affected, there have been a number of submissions made to address what appear to be onerous elements of the Draft Regulations. How this will be addressed and the final outcome, remains to be seen.
*Andrew Pitt, director at Moore Stephens South Africa
Accounting firms foresee high sales due to IFRS
Korea’s big three accounting firms were projected to report higher sales for fiscal year 2009, primarily due to a decision to adopt the International Financial Reporting Standards.
According to industry sources yesterday, Deloitte Anjin LLC, the Korean unit of Deloitte Touche Tohmatsu, was estimated to see the biggest rise of 13.8 percent from a year earlier to post estimated sales of 237.7 billion won ($194 million) in fiscal year 2009, which ran from April 2009 to March 2010.
Samil PricewaterhouseCoopers, the local unit of PricewaterhouseCoopers, was projected to see a 9 percent rise on-year to estimated sales of 428.9 billion won. Samjong KPMG Inc., a Korean unit of the global service firm KPMG, was expected to tally 174.4 billion won in sales, up 7.4 percent from a year earlier.
“Demand for IFRS-related services has gone up for the last two years,” said an official at Deloitte Anjin. “Most large firms already completed their preparations earlier last year, while a lot of small and midsized firms began preparatory procedures for adoption of IFRS [in the second half of 2009].”
Accounting firms generate sales through four main services: audit and assurance; financial advisory services; performance and process improvement; and tax. According to major accounting firms, the introduction of IFRS has especially boosted demand in the former two categories.
Experts from the accounting industry believe domestic companies will be ready to adopt IFRS by 2011. Jung Do-sam, executive director at Samil, said, “Firms that are not yet prepared for the new system are mostly small and midsize ones, but those companies would take a shorter period of time, probably around two to three months.”
According to industry sources yesterday, Deloitte Anjin LLC, the Korean unit of Deloitte Touche Tohmatsu, was estimated to see the biggest rise of 13.8 percent from a year earlier to post estimated sales of 237.7 billion won ($194 million) in fiscal year 2009, which ran from April 2009 to March 2010.
Samil PricewaterhouseCoopers, the local unit of PricewaterhouseCoopers, was projected to see a 9 percent rise on-year to estimated sales of 428.9 billion won. Samjong KPMG Inc., a Korean unit of the global service firm KPMG, was expected to tally 174.4 billion won in sales, up 7.4 percent from a year earlier.
“Demand for IFRS-related services has gone up for the last two years,” said an official at Deloitte Anjin. “Most large firms already completed their preparations earlier last year, while a lot of small and midsized firms began preparatory procedures for adoption of IFRS [in the second half of 2009].”
Accounting firms generate sales through four main services: audit and assurance; financial advisory services; performance and process improvement; and tax. According to major accounting firms, the introduction of IFRS has especially boosted demand in the former two categories.
Experts from the accounting industry believe domestic companies will be ready to adopt IFRS by 2011. Jung Do-sam, executive director at Samil, said, “Firms that are not yet prepared for the new system are mostly small and midsize ones, but those companies would take a shorter period of time, probably around two to three months.”
Monday, June 21, 2010
Financial Accounting Theory and Analysis – FARS Research (Part II)
According to statement No.128, Earnings per share, a draft of statement of principles was issued by the IASC in October 1993 for public to comment. Due to the extensive use of earnings per share in financial statistics, the IASC’s goal was to commence as to the presentation and determination of EPS in which global comparisons would be permitted. Even with limitations in EPS data, earnings were determined differently in different national methods. The FASB and the IASC believe that in international financial reporting, a consistent determined denominator will be a significant improvement to accomplish international harmonization of the accounting standards for computing earnings per share. The board pursued its EPS project in conjunction with the IASC. The project focused on EPS calculation denominator in spite of the issues concerning earning purpose. IAS 33 Earnings per Share, was issued by the IASC at the same time as the issuance of this statement. The standard provisions are the same as the statement.
The goal of the project was international harmonization, so the presentation by the FASB in its initial decisions on the income statement and earnings per share to the IASC Steering Committee and the IASC Board in September 1996 was considered a preliminary conclusion. The board finally decided to keep the required presentation dual in the exposure draft. The Boards believes it is necessary to attain international harmonization in all phases with the IASC because the difference is only one of display and not one of a conceptual nature.
International Financial Reporting Standard No.5 was recently issued by The International Accounting Standards Board on Non-current Assets Held for Sale and Discontinued Operations (IFRS 5). The most recent idea of discontinued operation exposure by the international standard setters provided the EITF with a chance to develop harmonization internationally and remove a major issue that was creating a disagreement between international standards and US.
The goal of the project was international harmonization, so the presentation by the FASB in its initial decisions on the income statement and earnings per share to the IASC Steering Committee and the IASC Board in September 1996 was considered a preliminary conclusion. The board finally decided to keep the required presentation dual in the exposure draft. The Boards believes it is necessary to attain international harmonization in all phases with the IASC because the difference is only one of display and not one of a conceptual nature.
International Financial Reporting Standard No.5 was recently issued by The International Accounting Standards Board on Non-current Assets Held for Sale and Discontinued Operations (IFRS 5). The most recent idea of discontinued operation exposure by the international standard setters provided the EITF with a chance to develop harmonization internationally and remove a major issue that was creating a disagreement between international standards and US.
Searching for clarity in uncertain tax positions This paper spotlights uncertain tax positions (UTPs) under IFRS. It provides insights
This paper spotlights uncertain tax positions (UTPs) under IFRS (pdf, 1.4mb). It provides insights into the diversity of practices that have developed in the financial reporting and disclosure of UTPs, given the lack of direct guidance IAS 12 (Income Taxes) has in this area.
Bridging the IFRS GAAP
There are significant differences, both in terms of accounting principles as well as additional disclosure requirements, between IFRS and the Indian GAAP. The disclosures are expected to improve the quality of financial information. Although there are a host of disclosure requirements under IFRS, the focus is on key disclosures relating to financial instruments as envisaged under IFRS 7. IFRS 7 requires an entity to disclose information—market and liquidity risk—that enables the users to evaluate the nature and extent of risk, given the firm’s current exposure to financial instruments.
Most enterprises in India are exposed to foreign currency risk and interest rate risk, which fluctuate over time. Such entities are required to disclose the effect of a reasonable expected variation in the foreign exchange rate or interest rates for domestic/foreign currency borrowings. Internal preparation to put into place a system for obtaining the desired data to facilitate the disclosure is required. This may become quite critical for large entities that are highly geared or have significant exposures to foreign currencies and active treasury operations. Generally, entities hedge their foreign currency and interest rate risks through derivative products. This poses an additional challenge as the entity will have to ask the dealer, with whom the derivative is contracted, for the impact of the sensitivity test on these products.
In addition, an entity is also required to disclose how it manages its significant risks, e.g. credit, liquidity or capital. Therefore, it is imperative for an entity to have an approved risk management policy that deals with monitoring debt-equity, managing liquidity risk to overcome impediments in meeting short-term and long-term obligations.
Furthermore, IFRS 7 also requires the disclosure of fair value of each financial instrument beside its carrying value, hence providing better information on financial instruments to their users. This entails determination of fair value of each component at every balance sheet date. There is no doubt that IFRS would catapult India, Indian entities and its finance and accounting professionals to much greater heights. Given that it is a new subject with a host of new requirements that corporate India was ignorant of, only proper planning, laying down a detailed conversion plan and putting the required systems in place, will ensure a smooth convergence with IFRS.
Most enterprises in India are exposed to foreign currency risk and interest rate risk, which fluctuate over time. Such entities are required to disclose the effect of a reasonable expected variation in the foreign exchange rate or interest rates for domestic/foreign currency borrowings. Internal preparation to put into place a system for obtaining the desired data to facilitate the disclosure is required. This may become quite critical for large entities that are highly geared or have significant exposures to foreign currencies and active treasury operations. Generally, entities hedge their foreign currency and interest rate risks through derivative products. This poses an additional challenge as the entity will have to ask the dealer, with whom the derivative is contracted, for the impact of the sensitivity test on these products.
In addition, an entity is also required to disclose how it manages its significant risks, e.g. credit, liquidity or capital. Therefore, it is imperative for an entity to have an approved risk management policy that deals with monitoring debt-equity, managing liquidity risk to overcome impediments in meeting short-term and long-term obligations.
Furthermore, IFRS 7 also requires the disclosure of fair value of each financial instrument beside its carrying value, hence providing better information on financial instruments to their users. This entails determination of fair value of each component at every balance sheet date. There is no doubt that IFRS would catapult India, Indian entities and its finance and accounting professionals to much greater heights. Given that it is a new subject with a host of new requirements that corporate India was ignorant of, only proper planning, laying down a detailed conversion plan and putting the required systems in place, will ensure a smooth convergence with IFRS.
Friday, June 11, 2010
C&AG Of India Bags Award as External Auditor of WFP
The Executive Board of World Food Programme has approved the appointment of the Comptroller and Auditor General of India as the External Auditor of WFP for the period of 1 July 2010 to 30 June 2016 on 8th of June 2010. The process started in October 2009 with the issue of request for proposals (RFP) by the WFP.
India, Netherlands, Philippines, Pakistan and South Africa were the five countries who submitted their proposals. The proposals were evaluated on the basis of staff qualifications, training and experience, audit approach, quality control and communication process. Two candidates, India and South Africa emerged as clear front runners and were subsequently short-listed and invited to WFP Headquarters for formal presentation and interview.
The interviews and oral presentations took place at WFP Headquarters on 10 March 2010. On the basis of all elements of the process (technical scores, financial proposals and oral presentations) the Panel made its final evaluation and agreed unanimously that the best overall bid was that of the Comptroller and Auditor General of India.
The appointment is in the light of the CAG’s broad understanding of the operational environment of WFP, its qualified human resources, expertise in IT Audits and knowledge of various accounting frameworks including International Financial Reporting Standards (IFRS) and knowledge of International Public Sector Accounting Standards (IPSAS). The CAG of India also has rich experience in the audit of foodgrains management, which is the core area of operations of WFP.
With the appointment as external auditor of WFP, the Comptroller and Auditor General of India has added a new organization to its list of UN/ International organizations which it is currently auditing. The UN organizations are World Health Organization, World Tourism Organization, and International Maritime Organization, while other international organizations are International Organization for Migration and International Thermo Nuclear Reactor Organization. The CAG of India had earlier been the External Auditor of United Nations (UN) from1993 to 1999, Organization for Prohibition of Chemical Weapons (OPCW) from 1997 to 2003, International Centre for Genetic Engineering and Biotechnology (ICGEB) from 1996 to 2004 and Food and Agriculture Organization (FAO) from 2002 to 2008.
The Comptroller and Auditor General of India is also a key member of the International Organization of Supreme Audit Institutions (INTOSAI), which is the apex organization for the Auditors General (or their equivalents) worldwide. He chairs the important INTOSAI Committee on Knowledge Sharing and Knowledge Services and is closely associated with the work related to setting and revising standards, establishing audit best practices and preparation of audit guidance. He is also the Chairman of the Working Group on IT Audit (WGITA) of INTOSAI in recognition of his credentials in the audit of IT systems. Domestically over 350 audits of IT systems of diverse platforms and databases including ERP applications have been conducted. Internationally, the CAG has conducted audit of SAP and Oracle based ERP systems in World Health Organization, Food and Agricultural Organization and International Maritime Organization. The UN Panel of External Auditors has invited the CAG of India to share audit procedures on ERP implementations.
At the Asian level, the CAG of India was the Secretary General of Asian Organization of Supreme Audit Institutions (ASOSAI) till recently and continues to be a member of its Governing Board. He is closely associated with ASOSAI’s training, research and publication activities in the area of public auditing.
The CAG is also a member of the select group of Auditors’ General called the Global Working Group, which comes together every year to address current and emerging audit issues of concern that have surfaced in the wake of new challenges such as globalization, privatization and growth of Information Technology.
India, Netherlands, Philippines, Pakistan and South Africa were the five countries who submitted their proposals. The proposals were evaluated on the basis of staff qualifications, training and experience, audit approach, quality control and communication process. Two candidates, India and South Africa emerged as clear front runners and were subsequently short-listed and invited to WFP Headquarters for formal presentation and interview.
The interviews and oral presentations took place at WFP Headquarters on 10 March 2010. On the basis of all elements of the process (technical scores, financial proposals and oral presentations) the Panel made its final evaluation and agreed unanimously that the best overall bid was that of the Comptroller and Auditor General of India.
The appointment is in the light of the CAG’s broad understanding of the operational environment of WFP, its qualified human resources, expertise in IT Audits and knowledge of various accounting frameworks including International Financial Reporting Standards (IFRS) and knowledge of International Public Sector Accounting Standards (IPSAS). The CAG of India also has rich experience in the audit of foodgrains management, which is the core area of operations of WFP.
With the appointment as external auditor of WFP, the Comptroller and Auditor General of India has added a new organization to its list of UN/ International organizations which it is currently auditing. The UN organizations are World Health Organization, World Tourism Organization, and International Maritime Organization, while other international organizations are International Organization for Migration and International Thermo Nuclear Reactor Organization. The CAG of India had earlier been the External Auditor of United Nations (UN) from1993 to 1999, Organization for Prohibition of Chemical Weapons (OPCW) from 1997 to 2003, International Centre for Genetic Engineering and Biotechnology (ICGEB) from 1996 to 2004 and Food and Agriculture Organization (FAO) from 2002 to 2008.
The Comptroller and Auditor General of India is also a key member of the International Organization of Supreme Audit Institutions (INTOSAI), which is the apex organization for the Auditors General (or their equivalents) worldwide. He chairs the important INTOSAI Committee on Knowledge Sharing and Knowledge Services and is closely associated with the work related to setting and revising standards, establishing audit best practices and preparation of audit guidance. He is also the Chairman of the Working Group on IT Audit (WGITA) of INTOSAI in recognition of his credentials in the audit of IT systems. Domestically over 350 audits of IT systems of diverse platforms and databases including ERP applications have been conducted. Internationally, the CAG has conducted audit of SAP and Oracle based ERP systems in World Health Organization, Food and Agricultural Organization and International Maritime Organization. The UN Panel of External Auditors has invited the CAG of India to share audit procedures on ERP implementations.
At the Asian level, the CAG of India was the Secretary General of Asian Organization of Supreme Audit Institutions (ASOSAI) till recently and continues to be a member of its Governing Board. He is closely associated with ASOSAI’s training, research and publication activities in the area of public auditing.
The CAG is also a member of the select group of Auditors’ General called the Global Working Group, which comes together every year to address current and emerging audit issues of concern that have surfaced in the wake of new challenges such as globalization, privatization and growth of Information Technology.
Five IFRS issues that merit boards’ attention
From the perspective of corporate boards, what are the most important IFRS (International Financial Reporting Standards) issues that merit attention? When posed this question, N. Venkatram, IFRS Country Leader, Deloitte Haskins & Sells, Mumbai comes up with a list of five issues, viz. set the tone and develop an oversight plan; take a holistic view; determine timing and resource needs; understand the risks; and determine the need for board education.
“The board of directors needs to take a high-level overview role in the crucial phases during the process of convergence over the coming months, as the board along with the audit committee can help shape an organisation’s IFRS direction and strategy,” reasons Mr. Venkat during a recent telephonic interaction with Business Line.
Excerpts from the interview.
On setting the tone and developing an oversight plan.
The board has to champion the cause of establishing IFRS as an important initiative the organisation must prepare for. This helps provide appropriate buy-in from functions and business units.
Raising key questions early may ultimately determine the optimal adoption approach and help establish the proper tone at the top. The board should have an oversight plan for IFRS adoption, including the implementation process.
On the need for a holistic view.
The board should take a holistic approach to the conversion and ensure that the management analyses the potential effects of IFRS throughout the organisation, focusing not only on the impacts to accounting and systems, but also devoting attention to such areas as income taxes, sales contracts, loan agreements, and employee compensation arrangements.
The board should consider short- and long-term planning issues to determine what the organisation needs to do now versus later. The board should be mindful of opportunities in the IFRS conversion process that could translate into longer-term benefits, such as increased standardisation and centralisation of statutory reporting.
On the importance of determining the timing and resource requirements.
Early on, the board members should focus on overseeing the organisation’s approach, timeline, and budget for transition. The amount of time and resources companies have for preparation may be less than many would expect, and a thoughtful approach to conversion can help in controlling costs.
The board, along with the management, will have to assess whether there are sufficient internal resources available to engage in all aspects of the projects, else authorise management to identify and appoint suitable external providers.
On the imperative of understanding the risks.
Boards will have to be aware of potential risks, including the implications of waiting too long to develop a plan. Also, because IFRS is more principles-based than rules-based, it requires an increased use of professional judgment. The board should understand how management will ensure that IFRS is applied consistently throughout the organisation and how financial statement disclosures will be consistent with other industry participants.
On the tricky topic of board education.
The board will have to assess its educational needs and goals. If the board does not have a sufficient understanding of IFRS to exercise the appropriate level of oversight, it could result in the adoption of inappropriate policy elections.
IFRS provides an opportunity to reconsider accounting policy elections and implementation. Boards must understand and oversee policy elections, with a focus on achieving greater transparency and improved financial reporting
The board should develop a plan that outlines timely education for all members. Building proficiency will allow board members to lead a productive dialogue and provide useful insights in IFRS planning discussions.
What are the transition issues that organisations are likely to face?
The date that IFRS reporting becomes an external reality for many entities is April 1, 2011. The general focus on the changeover date of ‘April 1, 2011’ does, however, gloss over the fact that it is the financial reporting system (along with its collateral activities such as financing, contracting, processing, etc.) that is being converted and not simply the financial statements.
To get from here to there with minimum disruption and to reduce the risk of untimely completion will require an intelligent and systematic approach, which recognises the fact that certain components of an implementation plan will have early deadlines and that these would have to be adhered to, to avoid a last minute scramble to issue the initial set of financial statements prepared under IFRS.
IFRS-compliant data may have consequences for the organisation’s contracting and business practices. In particular, if the adoption of IFRS could have consequences for an organisation’s business condition, such as from contractual or tax consequences, prudent risk management would dictate that the organisation is aware of such consequences in advance of the date the consequences become real.
Finding solutions, or at least minimising adverse consequences, by amending or replacing arrangements prior to IFRS becoming effective may accelerate deadlines for completion of all or some of the changeover components before April 1, 2011.
Finally, the conversion experience of other jurisdictions indicates that there is an increased likelihood of errors in the initial implementation of IFRS. Since IFRSs are not static and keep on evolving, any further changes in IFRSs may challenge implementation capabilities. The best preventive mechanism would be to provide sufficient time for reflection and quality review prior to publication.
“The board of directors needs to take a high-level overview role in the crucial phases during the process of convergence over the coming months, as the board along with the audit committee can help shape an organisation’s IFRS direction and strategy,” reasons Mr. Venkat during a recent telephonic interaction with Business Line.
Excerpts from the interview.
On setting the tone and developing an oversight plan.
The board has to champion the cause of establishing IFRS as an important initiative the organisation must prepare for. This helps provide appropriate buy-in from functions and business units.
Raising key questions early may ultimately determine the optimal adoption approach and help establish the proper tone at the top. The board should have an oversight plan for IFRS adoption, including the implementation process.
On the need for a holistic view.
The board should take a holistic approach to the conversion and ensure that the management analyses the potential effects of IFRS throughout the organisation, focusing not only on the impacts to accounting and systems, but also devoting attention to such areas as income taxes, sales contracts, loan agreements, and employee compensation arrangements.
The board should consider short- and long-term planning issues to determine what the organisation needs to do now versus later. The board should be mindful of opportunities in the IFRS conversion process that could translate into longer-term benefits, such as increased standardisation and centralisation of statutory reporting.
On the importance of determining the timing and resource requirements.
Early on, the board members should focus on overseeing the organisation’s approach, timeline, and budget for transition. The amount of time and resources companies have for preparation may be less than many would expect, and a thoughtful approach to conversion can help in controlling costs.
The board, along with the management, will have to assess whether there are sufficient internal resources available to engage in all aspects of the projects, else authorise management to identify and appoint suitable external providers.
On the imperative of understanding the risks.
Boards will have to be aware of potential risks, including the implications of waiting too long to develop a plan. Also, because IFRS is more principles-based than rules-based, it requires an increased use of professional judgment. The board should understand how management will ensure that IFRS is applied consistently throughout the organisation and how financial statement disclosures will be consistent with other industry participants.
On the tricky topic of board education.
The board will have to assess its educational needs and goals. If the board does not have a sufficient understanding of IFRS to exercise the appropriate level of oversight, it could result in the adoption of inappropriate policy elections.
IFRS provides an opportunity to reconsider accounting policy elections and implementation. Boards must understand and oversee policy elections, with a focus on achieving greater transparency and improved financial reporting
The board should develop a plan that outlines timely education for all members. Building proficiency will allow board members to lead a productive dialogue and provide useful insights in IFRS planning discussions.
What are the transition issues that organisations are likely to face?
The date that IFRS reporting becomes an external reality for many entities is April 1, 2011. The general focus on the changeover date of ‘April 1, 2011’ does, however, gloss over the fact that it is the financial reporting system (along with its collateral activities such as financing, contracting, processing, etc.) that is being converted and not simply the financial statements.
To get from here to there with minimum disruption and to reduce the risk of untimely completion will require an intelligent and systematic approach, which recognises the fact that certain components of an implementation plan will have early deadlines and that these would have to be adhered to, to avoid a last minute scramble to issue the initial set of financial statements prepared under IFRS.
IFRS-compliant data may have consequences for the organisation’s contracting and business practices. In particular, if the adoption of IFRS could have consequences for an organisation’s business condition, such as from contractual or tax consequences, prudent risk management would dictate that the organisation is aware of such consequences in advance of the date the consequences become real.
Finding solutions, or at least minimising adverse consequences, by amending or replacing arrangements prior to IFRS becoming effective may accelerate deadlines for completion of all or some of the changeover components before April 1, 2011.
Finally, the conversion experience of other jurisdictions indicates that there is an increased likelihood of errors in the initial implementation of IFRS. Since IFRSs are not static and keep on evolving, any further changes in IFRSs may challenge implementation capabilities. The best preventive mechanism would be to provide sufficient time for reflection and quality review prior to publication.
Wednesday, June 2, 2010
The challenges of IFRS convergence for Indian Banks
Summary
The implementation of International Financial Reporting Standards (IFRS) for Indian Banks has been postponed to April 2012. In spite of extended timeline, the implementation challenges for convergence with IFRS for the banks in India would be daunting. The financial impact on the balance sheet and P&L account of banks would also be significant on account of convergence with IFRS particularly in areas relating to loan provisioning and fair value accounting of financial Instruments.
Analysis
Due to banking industry operating in a highly regulated environment, banking companies are subject to regulatory supervision and also require to maintain minimum capital adequacy requirements. IFRS requires increased use of management judgment and extensive use of fair valuation inputs & assumptions. The regulatory review & control process needs to be adjusted to factor in the inherent judgments involved in the application of IFRS. Additionally, application of IFRS may also result in higher loan impairment losses, thereby adversely impacting the available capital and capital adequacy ratios of banks.
Major Accounting Changes under IFRS:
In addition to the accounting changes between IFRS and Indian GAAP that have to be generally addressed by all companies along the path to convergence, banks in India face the following major additional accounting challenges.
Loan Impairment Losses:
IFRS prescribes an impairment model that requires a case by case assessment of the individual facts and circumstances surrounding the recoverability and timing of future cash flows for all major credit exposures. Based on the assessment of the facts of individual loan accounts, if there is an expectation that all contractual cash flows towards repayment or contracted full applicable interest would not be recovered, a loan account would be classified as impaired and impairment loss is to be measured on present value basis using the effective interest rate of the loan account as the discount rate. As per IFRS, provisions are permitted only to the extent that they relate to specified impairment losses that can be measured reliably and incurred. No general provisions are permitted for future or expected losses.
Hence under IFRS, loan losses are to be calculated based on an objective impairment assessment of the specific facts & circumstances of the credit exposures and based on the use of informed judgment. However under the current Indian GAAP / RBI guidelines, loan losses are provided for the non performing assets based on prescribed provisioning rates in a mechanical manner, without any such impairment assessment.
Fair value accounting of financial Instruments:
Under Indian GAAP, fair value accounting is rarely used. As per RBI guidelines, the entire investment portfolio of banks is to be classified under three categories, Held to Maturity, Available for Sale and Held for Trading. The investments under the Available for Sale and Held for Trading categories should be marked to market at prescribed intervals. The investments under the Held to Maturity category need not be marked to market.
Under IFRS, Held to Maturity classification, (which is currently valued at amortized cost) is unlikely to be available leading to fair value measurement for this substantial category of investment portfolio also, resulting in more volatility in the income statements of banks. Further fair values may be represented by market transaction prices, but the onus will be on the banks to prove that market prices represent fair values.
Derivatives Accounting:
Under IFRS, all derivatives are to be recognized on the balance sheet at fair values with changes in fair values being recognized in the profit & loss account, leading to more volatility in the income statements of banks. However if hedge relationship for the qualifying cash flows can be established, fair value measurement need not be applied to such derivatives.
Banks in India need to beef up their IT systems train their staff across all departments, re engineer their processes and take certain strategic decisions to minimize the volatility of income statements for seamless convergence to IFRS.
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
This author consults with leading institutions through GLG
Questions for the author
Engage this author or other Accounting & Financial Analysis experts
Contributed by a Member of the GLG Accounting & Financial Analysis Councils
The implementation of International Financial Reporting Standards (IFRS) for Indian Banks has been postponed to April 2012. In spite of extended timeline, the implementation challenges for convergence with IFRS for the banks in India would be daunting. The financial impact on the balance sheet and P&L account of banks would also be significant on account of convergence with IFRS particularly in areas relating to loan provisioning and fair value accounting of financial Instruments.
Analysis
Due to banking industry operating in a highly regulated environment, banking companies are subject to regulatory supervision and also require to maintain minimum capital adequacy requirements. IFRS requires increased use of management judgment and extensive use of fair valuation inputs & assumptions. The regulatory review & control process needs to be adjusted to factor in the inherent judgments involved in the application of IFRS. Additionally, application of IFRS may also result in higher loan impairment losses, thereby adversely impacting the available capital and capital adequacy ratios of banks.
Major Accounting Changes under IFRS:
In addition to the accounting changes between IFRS and Indian GAAP that have to be generally addressed by all companies along the path to convergence, banks in India face the following major additional accounting challenges.
Loan Impairment Losses:
IFRS prescribes an impairment model that requires a case by case assessment of the individual facts and circumstances surrounding the recoverability and timing of future cash flows for all major credit exposures. Based on the assessment of the facts of individual loan accounts, if there is an expectation that all contractual cash flows towards repayment or contracted full applicable interest would not be recovered, a loan account would be classified as impaired and impairment loss is to be measured on present value basis using the effective interest rate of the loan account as the discount rate. As per IFRS, provisions are permitted only to the extent that they relate to specified impairment losses that can be measured reliably and incurred. No general provisions are permitted for future or expected losses.
Hence under IFRS, loan losses are to be calculated based on an objective impairment assessment of the specific facts & circumstances of the credit exposures and based on the use of informed judgment. However under the current Indian GAAP / RBI guidelines, loan losses are provided for the non performing assets based on prescribed provisioning rates in a mechanical manner, without any such impairment assessment.
Fair value accounting of financial Instruments:
Under Indian GAAP, fair value accounting is rarely used. As per RBI guidelines, the entire investment portfolio of banks is to be classified under three categories, Held to Maturity, Available for Sale and Held for Trading. The investments under the Available for Sale and Held for Trading categories should be marked to market at prescribed intervals. The investments under the Held to Maturity category need not be marked to market.
Under IFRS, Held to Maturity classification, (which is currently valued at amortized cost) is unlikely to be available leading to fair value measurement for this substantial category of investment portfolio also, resulting in more volatility in the income statements of banks. Further fair values may be represented by market transaction prices, but the onus will be on the banks to prove that market prices represent fair values.
Derivatives Accounting:
Under IFRS, all derivatives are to be recognized on the balance sheet at fair values with changes in fair values being recognized in the profit & loss account, leading to more volatility in the income statements of banks. However if hedge relationship for the qualifying cash flows can be established, fair value measurement need not be applied to such derivatives.
Banks in India need to beef up their IT systems train their staff across all departments, re engineer their processes and take certain strategic decisions to minimize the volatility of income statements for seamless convergence to IFRS.
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
This author consults with leading institutions through GLG
Questions for the author
Engage this author or other Accounting & Financial Analysis experts
Contributed by a Member of the GLG Accounting & Financial Analysis Councils
Tuesday, June 1, 2010
India Clarifies IFRS Convergence Issues , by Robin Pilgrim, LawAndTax-News.com, London
The 'Core Group', constituted by the Indian Ministry of Corporate Affairs, to manage convergence of Indian Accounting Standards with the International Financial Reporting Standards (IFRS) from the year 2011, has published certain clarifications of earlier announcements about the changeover, as follows:
Companies covered in Phase I will prepare their financial statements for 2011-12 in accordance with converged accounting standards but will show previous years’ figures as per non-converged accounting standards.
However, there will be an option to add an additional column to indicate converged accounting standards figures, had these been applied in that previous year. Companies which make this additional disclosure will, for this purpose, convert their opening balance sheet as at the date on which this previous year commences and, in that case, a further conversion of the opening balance sheet for the year for which the financial statements are prepared will not be necessary.
Companies covered in 2nd / 3rd phase will have an option to apply converged accounting standards only for the financial year commencing on April 1, 2011 or thereafter.
Phase I companies (other than banking companies, insurance companies and non-bank financial companies), converting their opening balance sheet as at April 1, 2011 to converged accounting standards will be determined according to criteria pertaining on balance sheet dates as at March 31, 2009 or the next balance sheet prepared after that date. This applies to:
* Companies which are part of the NSE – Nifty 50;
* Companies which are part of the BSE – Sensex 30;
* Companies whose shares or other securities are listed on stock exchanges outside India; and
* Companies, whether listed or not, which have a net worth in excess of INR10bn (USD222m).
As per the proposed roadmap for Banks and NBFCs, in phase I, converting their opening balance sheet as at April, 1, 2013 to converged accounting standards will be determined according to criteria pertaining on balance sheet dates as at March 31, 2011 or the next balance sheet prepared after that date. This applies to:
* Banks - i.e. all scheduled commercial banks and those urban co-operative banks which have a net worth in excess of INR3bn (USD66m);
* NBFCs - i.e. finance companies which are part of NSE – Nifty 50;
* companies which are part of BSE – Sensex 30;
* and companies, whether listed or not, which have a net worth in excess of INR 10bn (USD222m).
With regard to parent companies covered in any one of the three phases for the changeover to converged accounting standards, having subsidiaries, joint ventures or associates not covered under the same phasing plan, the consolidated financial statements are to be prepared with converged accounting standards in accordance with the same timetable as the parent company.
When one or more companies in a group fall in a phase other than the phase applicable to the parent company, they can continue to prepare stand-alone accounts according to the phase applicable to them, but the parent may need to make convergence amendments to these accounts for the purposes of consolidation. Such subsidiaries, joint ventures or associate companies may opt for early adoption of converged accounting standards.
Once a company starts following converged accounting standards on the basis of the eligibility criteria, it will be required to follow such accounting standards for all the subsequent financial statements even if any of the eligibility criteria does not subsequently apply to it.
For the purpose of calculation of qualifying net worth of companies, the following rules will apply:
* The net worth will be calculated as per the audited balance sheet of the company as at March 31, 2009 or the first balance sheet for accounting periods which end after that date;
* The net worth will be calculated as the Share Capital plus Reserves less Revaluation Reserve, Miscellaneous Expenditure and Debit Balance of the Profit and Loss Account;
* For companies which are not in existence on March 31, 2009, the net worth will be calculated on the basis of the first balance sheet ending after that date.
The rules for calculation of qualifying net worth to be recommended to the scheduled commercial Banks/ urban cooperative Banks/ NBFCs are as follows:
* The net worth will be calculated as per the audited balance sheet of the scheduled commercial Banks/ urban co-operative Bank/NBFC as at March 31, 2011 or the first balance sheet for accounting periods which ends after that date;
* The net worth will be calculated as the Share Capital plus Reserves less Revaluation Reserve, Miscellaneous Expenditure and Debit Balance of the Profit and Loss Account;
* For scheduled commercial Banks/ urban co-operative Banks/NBFCs which are not in existence on March 31, 2011, the net worth will be calculated on the basis of the first balance sheet ending after that date;
Despite the intention to converge Indian standards with IFRSs, the Core Group accepts that some deviations will remain. When the notified converged accounting standard is not fully consistent with the IAS/IFRS as issued by the IASB, Indian companies will continue to follow converged accounting standards as notified by the Government of India and not adopt IFRS.
Companies covered in Phase I will prepare their financial statements for 2011-12 in accordance with converged accounting standards but will show previous years’ figures as per non-converged accounting standards.
However, there will be an option to add an additional column to indicate converged accounting standards figures, had these been applied in that previous year. Companies which make this additional disclosure will, for this purpose, convert their opening balance sheet as at the date on which this previous year commences and, in that case, a further conversion of the opening balance sheet for the year for which the financial statements are prepared will not be necessary.
Companies covered in 2nd / 3rd phase will have an option to apply converged accounting standards only for the financial year commencing on April 1, 2011 or thereafter.
Phase I companies (other than banking companies, insurance companies and non-bank financial companies), converting their opening balance sheet as at April 1, 2011 to converged accounting standards will be determined according to criteria pertaining on balance sheet dates as at March 31, 2009 or the next balance sheet prepared after that date. This applies to:
* Companies which are part of the NSE – Nifty 50;
* Companies which are part of the BSE – Sensex 30;
* Companies whose shares or other securities are listed on stock exchanges outside India; and
* Companies, whether listed or not, which have a net worth in excess of INR10bn (USD222m).
As per the proposed roadmap for Banks and NBFCs, in phase I, converting their opening balance sheet as at April, 1, 2013 to converged accounting standards will be determined according to criteria pertaining on balance sheet dates as at March 31, 2011 or the next balance sheet prepared after that date. This applies to:
* Banks - i.e. all scheduled commercial banks and those urban co-operative banks which have a net worth in excess of INR3bn (USD66m);
* NBFCs - i.e. finance companies which are part of NSE – Nifty 50;
* companies which are part of BSE – Sensex 30;
* and companies, whether listed or not, which have a net worth in excess of INR 10bn (USD222m).
With regard to parent companies covered in any one of the three phases for the changeover to converged accounting standards, having subsidiaries, joint ventures or associates not covered under the same phasing plan, the consolidated financial statements are to be prepared with converged accounting standards in accordance with the same timetable as the parent company.
When one or more companies in a group fall in a phase other than the phase applicable to the parent company, they can continue to prepare stand-alone accounts according to the phase applicable to them, but the parent may need to make convergence amendments to these accounts for the purposes of consolidation. Such subsidiaries, joint ventures or associate companies may opt for early adoption of converged accounting standards.
Once a company starts following converged accounting standards on the basis of the eligibility criteria, it will be required to follow such accounting standards for all the subsequent financial statements even if any of the eligibility criteria does not subsequently apply to it.
For the purpose of calculation of qualifying net worth of companies, the following rules will apply:
* The net worth will be calculated as per the audited balance sheet of the company as at March 31, 2009 or the first balance sheet for accounting periods which end after that date;
* The net worth will be calculated as the Share Capital plus Reserves less Revaluation Reserve, Miscellaneous Expenditure and Debit Balance of the Profit and Loss Account;
* For companies which are not in existence on March 31, 2009, the net worth will be calculated on the basis of the first balance sheet ending after that date.
The rules for calculation of qualifying net worth to be recommended to the scheduled commercial Banks/ urban cooperative Banks/ NBFCs are as follows:
* The net worth will be calculated as per the audited balance sheet of the scheduled commercial Banks/ urban co-operative Bank/NBFC as at March 31, 2011 or the first balance sheet for accounting periods which ends after that date;
* The net worth will be calculated as the Share Capital plus Reserves less Revaluation Reserve, Miscellaneous Expenditure and Debit Balance of the Profit and Loss Account;
* For scheduled commercial Banks/ urban co-operative Banks/NBFCs which are not in existence on March 31, 2011, the net worth will be calculated on the basis of the first balance sheet ending after that date;
Despite the intention to converge Indian standards with IFRSs, the Core Group accepts that some deviations will remain. When the notified converged accounting standard is not fully consistent with the IAS/IFRS as issued by the IASB, Indian companies will continue to follow converged accounting standards as notified by the Government of India and not adopt IFRS.
IFRS for SMEs: Eine Alternative für den Einzelabschluss aus Sicht des deutschen Mittelstandes?
-- The objective of the IFRS for SMEs is to provide SMEs an attractive accounting alternative according to international standards. The paper analyses the differences compared to the German-GAAP and highlights the consequences for medium-sized entities in Germany.
Derivatives | Convergence Of Ifrs, Us Gaap And Indian Gaap And Its Impact On
Consistent, comparable and understandable financial information is the lifeblood of commerce and investing. Presently, there are two sets of accounting standards that are accepted for international use–the U.S. Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) issued by the London-based International Accounting Standards Board (IASB). Foreign subsidiaries of U.S. multinationals use U.S. GAAP. Many foreign companies, attracted to listing in the U.S. have to confront various problems like compliance with U.S. GAAP and the onerous Sarbanes-Oxley Act.
In search of a new financial order: one global standard for financial reporting makes sense. Accounting Standards in India will undergo significant change from 1st April 2011, when the IFRS (International Financial Reporting Standards) come into force as per the recent proposal of The Institute of Chartered Accountants of India. Countries of the European Union, Australia, New Zealand and Russia have already adopted IFRSs for listed enterprises. China has decided to adopt IFRS from 2008 and Canada from 2011.
If 2011 is the year when we would be totally aligning our standards with the IFRS, then what would happen in terms of inter-period comparisons because the numbers that would emerge after convergence to IFRS would be based on different accounting principles than those based on Indian GAAP ?. In order to breathe meaning in the numbers and enable inter-period comparison, it is essential that similar accounting principles should have been used from one period to another. Besides, you would need IFRS-trained professionals in India for which the Institute of Chartered Accountants of India would need to impart special training to its students and members alike.
In India, the accounting standards or accounting-related requirements are issued not only by the ICAI(Institute of Chartered Accountants of India) but also by various other regulatory bodies, such as SEBI (Securities and Exchange Board of India), RBI (Reserve Bank of India) and the IRDA (Insurance Regulatory and Development Authority). They now not only need to be consistent with each other but also with the IFRS.
The Central Government in pursuance of Section 211 of the Companies Act 1956 has issued a notification prescribing accounting standards for companies, and these standards direct us to the Accounting Standards issued by the ICAI. Since ICAI is now leaning on implementing IFRS with effect from 1st April 2011, the Government would find it essential to treat complying with IFRS as satisfactory compliance with Section 211 of the Companies Act 1956.
Closing the GAAP
The demise of U.S. GAAP has accelerated this decade. While the SEC currently looks to FASB to set U.S. GAAP, it is the SEC that retains ultimate responsibility. U.S. GAAP has been extensively used since the 1930s, and until recently was widely used around the world. However, its shortcomings are also well known, including approximately 200 pieces of fragmented U.S. GAAP on revenue recognition, some of which are not based on consistent concepts.
U.S. GAAP has evolved over the years to become overly complex and onerous as evidenced by the large number of countries and companies abandoning it. One recent example is
NEC Corporation, the Japanese electronics giant. NEC announced on September 21, 2007, “that it was not able to complete a U.S. GAAP-required analysis relating to software, maintenance, and service revenues.” In essence, the company said it simply cannot figure out U.S. GAAP revenue recognition rules and will stop trying, resulting in suspended trading on the NASDAQ.
It is possible that companies listed in the U.S. could be allowed to report their financial results using standards set by IASB instead. Giving companies a choice of accounting standards might create an opportunity for forum shopping.
In India, one of the big impediments to implementation of IFRS in India is in the case of Mergers and Acquisitions where the High Court approval is required. The High Court has got the authority to stay application of accounting standards or to prescribe accounting requirements in the case of merger and amalgamation situations. All this would deter smooth transition to IFRS in India.
Besides, deferral of VRS cost or ESOP accounting being based on intrinsic method, though a departure from IFRS is essential bearing in mind the needs and requirements of the Indian economy.
In addition, Schedule VI of the Companies Act, 1956 is also not in complete compliance with the IFRS and they need to be reconciled as well.
The RBI also prescribes accounting requirements for banks, such as accounting for derivatives or provision for non-performing assets, and these requirements of the RBI are currently at variance with the IFRS.
Managements compensation, stock options, debt covenants, tax liability and distributable profits are all based on Indian GAAP and AS (Accounting Standards) at present. Now all the salary structure, compensation structure will have to be renegotiated by most senior employees who have variable methods of compensation. For example, the variable pay component of most TCS employees is about 30 % of the total compensation package and this variable pay being based on items of Profit/Loss Account which will be defined differently under IFRS, the entire compensation package will need to be revised.
Recently, the SEC (Securities and Exchange Commission) of the US eliminated the GAAP reconciliation requirement as a part of Form 20-F for foreign issuers. Almost simultaneously, the Commission issued a Concept Release that would enable U.S. issuers to drop GAAP and use International Financial Reporting Standards.
Statements of financial position, comprehensive income and cash flows
Perhaps the biggest potential change is a different look to financial statements. Although nothing has been decided, the IASB and FASB are striving to create a cohesive presentation of financial information that will likely do away with a single net income number, or “bottom-line.” Instead, the working proposal would require three separate statements: a statement of financial position, a statement of comprehensive income, and a statement of cash flows.
In search of a new financial order: one global standard for financial reporting makes sense. Accounting Standards in India will undergo significant change from 1st April 2011, when the IFRS (International Financial Reporting Standards) come into force as per the recent proposal of The Institute of Chartered Accountants of India. Countries of the European Union, Australia, New Zealand and Russia have already adopted IFRSs for listed enterprises. China has decided to adopt IFRS from 2008 and Canada from 2011.
If 2011 is the year when we would be totally aligning our standards with the IFRS, then what would happen in terms of inter-period comparisons because the numbers that would emerge after convergence to IFRS would be based on different accounting principles than those based on Indian GAAP ?. In order to breathe meaning in the numbers and enable inter-period comparison, it is essential that similar accounting principles should have been used from one period to another. Besides, you would need IFRS-trained professionals in India for which the Institute of Chartered Accountants of India would need to impart special training to its students and members alike.
In India, the accounting standards or accounting-related requirements are issued not only by the ICAI(Institute of Chartered Accountants of India) but also by various other regulatory bodies, such as SEBI (Securities and Exchange Board of India), RBI (Reserve Bank of India) and the IRDA (Insurance Regulatory and Development Authority). They now not only need to be consistent with each other but also with the IFRS.
The Central Government in pursuance of Section 211 of the Companies Act 1956 has issued a notification prescribing accounting standards for companies, and these standards direct us to the Accounting Standards issued by the ICAI. Since ICAI is now leaning on implementing IFRS with effect from 1st April 2011, the Government would find it essential to treat complying with IFRS as satisfactory compliance with Section 211 of the Companies Act 1956.
Closing the GAAP
The demise of U.S. GAAP has accelerated this decade. While the SEC currently looks to FASB to set U.S. GAAP, it is the SEC that retains ultimate responsibility. U.S. GAAP has been extensively used since the 1930s, and until recently was widely used around the world. However, its shortcomings are also well known, including approximately 200 pieces of fragmented U.S. GAAP on revenue recognition, some of which are not based on consistent concepts.
U.S. GAAP has evolved over the years to become overly complex and onerous as evidenced by the large number of countries and companies abandoning it. One recent example is
NEC Corporation, the Japanese electronics giant. NEC announced on September 21, 2007, “that it was not able to complete a U.S. GAAP-required analysis relating to software, maintenance, and service revenues.” In essence, the company said it simply cannot figure out U.S. GAAP revenue recognition rules and will stop trying, resulting in suspended trading on the NASDAQ.
It is possible that companies listed in the U.S. could be allowed to report their financial results using standards set by IASB instead. Giving companies a choice of accounting standards might create an opportunity for forum shopping.
In India, one of the big impediments to implementation of IFRS in India is in the case of Mergers and Acquisitions where the High Court approval is required. The High Court has got the authority to stay application of accounting standards or to prescribe accounting requirements in the case of merger and amalgamation situations. All this would deter smooth transition to IFRS in India.
Besides, deferral of VRS cost or ESOP accounting being based on intrinsic method, though a departure from IFRS is essential bearing in mind the needs and requirements of the Indian economy.
In addition, Schedule VI of the Companies Act, 1956 is also not in complete compliance with the IFRS and they need to be reconciled as well.
The RBI also prescribes accounting requirements for banks, such as accounting for derivatives or provision for non-performing assets, and these requirements of the RBI are currently at variance with the IFRS.
Managements compensation, stock options, debt covenants, tax liability and distributable profits are all based on Indian GAAP and AS (Accounting Standards) at present. Now all the salary structure, compensation structure will have to be renegotiated by most senior employees who have variable methods of compensation. For example, the variable pay component of most TCS employees is about 30 % of the total compensation package and this variable pay being based on items of Profit/Loss Account which will be defined differently under IFRS, the entire compensation package will need to be revised.
Recently, the SEC (Securities and Exchange Commission) of the US eliminated the GAAP reconciliation requirement as a part of Form 20-F for foreign issuers. Almost simultaneously, the Commission issued a Concept Release that would enable U.S. issuers to drop GAAP and use International Financial Reporting Standards.
Statements of financial position, comprehensive income and cash flows
Perhaps the biggest potential change is a different look to financial statements. Although nothing has been decided, the IASB and FASB are striving to create a cohesive presentation of financial information that will likely do away with a single net income number, or “bottom-line.” Instead, the working proposal would require three separate statements: a statement of financial position, a statement of comprehensive income, and a statement of cash flows.
IASB - Request for comment on FASB Financial Instruments Exposure Draft
On May 26, 2010, the US Financial Accounting Standards Board (FASB) released a proposed Accounting Standards Update that contains proposals for a new comprehensive standard on financial instruments. Under the FASB’s proposals, many financial assets and financial liabilities would be measured at fair value in the primary financial statements. This is different from the mixed measurement model that is used in IFRS 9 Financial Instruments for financial assets. The appendix to the FASB exposure draft contains a high level comparison of the boards’ respective approaches. The IASB is asking its constituents to submit comment letters on the FASB proposal. Because this project is part of the global convergence project, it is important for the FASB to receive feedback on the proposed model from the international community.
Sound Corporate Governance Vital for MENA's Insurance Industry
May 31, 2010 (Al-Bawaba via COMTEX) --
Under the patronage of HE Sultan Bin Saeed Al Mansoori, the UAE Minister of Economy, Hawkamah, the Institute for Corporate Governance today held a Workshop focused on corporate governance best practices in the Middle East and North Africa's (MENA) insurance industry. Under the theme 'The Changing Landscape in the Insurance Industry', the Workshop explored the main challenges facing the insurance sector and the governance practices that can build trust and credibility in the industry. Speakers at the Workshop stressed on the need for implementing sound corporate governance in line with international standards in order to realise the MENA insurance industry's vast potential for growth. Delivering the Key Note Address, HE Sultan Bin Saeed Al Mansoori, the UAE Minister of Economy said the insurance and financial sector should be at the forefront of adopting modern corporate governance and transparency measures. "From a wide perspective, the insurance sector is where the public puts their faith in. It is their hedge against the uncertainties in the world. The insurance sector is a critical pillar in the overall functioning of the market. A strong insurance sector implies robust economic fundamentals," he said. He said the Securities and Commodities Authority issued the Regulation for Corporate Governance and Institutional Discipline Standards for public joint stock companies in April 2007 as part of its efforts to raise transparency and disclosure. "This was based on the Authority's commitment to its mission of developing the markets, in line with the global emphasis on corporate governance standards. The regulation took into consideration the UAE market realities too, and also derived synergies from the learning of other countries in corporate governance practices," he said. The Minister further added that the Authority outlined a transitional period of three years for making the implementation of these standards obligatory for all concerned companies. Delivering the Welcome Note at the Workshop, HE Ahmed Humaid Al Tayer, Governor of DIFC called on "lawmakers, regulators, companies, and stakeholders in the MENA region's insurance industry to express a firm commitment to raising standards of corporate governance." All key players need to participate in and support the development of higher standards," he stressed. He further said that MENA insurance companies need to harmonise their understanding and implementation of corporate governance with international standards and vigilantly monitor compliance. "The management of insurance companies should build strong corporate governance frameworks that create an empowered Board of Directors, a solid control environment, increased levels of transparency and disclosure and well-defined shareholders," he added. Speaking about DIFC's support for corporate governance development, HE Ahmed Humaid Al Tayer said: "Here in DIFC, we clearly recognise the vast potential of the insurance industry and the role of robust regulations and corporate governance in driving its growth. Accordingly, we have created a clear and transparent legal and regulatory regime that supports strong corporate governance. DIFC's world-class prudential rules for insurers, re-insurers and captives are in line with the highest international standards of regulation and supervision. Dr. Nasser Saidi, Executive Director of Hawkamah and Chief Economist of the DIFC Authority called on insurance regulators and commissioners in the Middle East and North Africa region to implement corporate governance reform. Regulators, he said, should work to ensure the development of well-regulated insurance markets and provide ongoing supervision. He urged regulators to encourage companies to adopt the corporate governance principles outlined by the International Association of Insurance Supervisors (IAIS) for insurance companies and to adopt uniform insurance corporate governance standards and guidelines. He also called on regulators in the region to upgrade insolvency laws. At an industry level, he said the region's insurance sector should take efforts to ensure that accounting, actuarial and auditing standards are comprehensive, documented, transparent and consistent with international standards. He stressed on the importance of the insurance industry to adopt International Financial Reporting Standards (IFRS); the guidelines of the Islamic Financial Services Board (IFSB); and the standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) for Shari'a compliant insurance. This Workshop formed part of Hawkamah's wider initiative to raise corporate governance standards in the insurance sector in the MENA region. In 2007, Hawkamah established a MENA Corporate Governance Task Force with a mandate to develop a set of corporate governance guidelines for the insurance sector and build the corporate governance capacity of the industry. The Task Force, comprised of members of the Arab Forum of Insurance Regulatory Commissions (AFIRC) and private sector representatives, has contributed significantly to identifying the corporate governance challenges of the insurance industry in the region and provided vital recommendations for industry development. In March 2009, the Task Force issued the Hawkamah-AFIRC Policy Brief on Corporate Governance for the Insurance Industry, which outlined basic corporate governance standards for the insurance sector in MENA. Key issues that were discussed at the Workshop included the role of regulators; corporate governance reform; duties and liabilities of directors and officers; Risk Governance, Roles and Responsibilities of the Board and the Risk Culture; and the role of corporate governance in preventing financial crime, including money laundering, terrorism financing, market abuse and fraud.. The workshop was designed to be of particular relevance to directors, senior managers, compliance officers and insurance professionals in the MENA region.(C) 2010 Al Bawaba (www.albawaba.com)
Under the patronage of HE Sultan Bin Saeed Al Mansoori, the UAE Minister of Economy, Hawkamah, the Institute for Corporate Governance today held a Workshop focused on corporate governance best practices in the Middle East and North Africa's (MENA) insurance industry. Under the theme 'The Changing Landscape in the Insurance Industry', the Workshop explored the main challenges facing the insurance sector and the governance practices that can build trust and credibility in the industry. Speakers at the Workshop stressed on the need for implementing sound corporate governance in line with international standards in order to realise the MENA insurance industry's vast potential for growth. Delivering the Key Note Address, HE Sultan Bin Saeed Al Mansoori, the UAE Minister of Economy said the insurance and financial sector should be at the forefront of adopting modern corporate governance and transparency measures. "From a wide perspective, the insurance sector is where the public puts their faith in. It is their hedge against the uncertainties in the world. The insurance sector is a critical pillar in the overall functioning of the market. A strong insurance sector implies robust economic fundamentals," he said. He said the Securities and Commodities Authority issued the Regulation for Corporate Governance and Institutional Discipline Standards for public joint stock companies in April 2007 as part of its efforts to raise transparency and disclosure. "This was based on the Authority's commitment to its mission of developing the markets, in line with the global emphasis on corporate governance standards. The regulation took into consideration the UAE market realities too, and also derived synergies from the learning of other countries in corporate governance practices," he said. The Minister further added that the Authority outlined a transitional period of three years for making the implementation of these standards obligatory for all concerned companies. Delivering the Welcome Note at the Workshop, HE Ahmed Humaid Al Tayer, Governor of DIFC called on "lawmakers, regulators, companies, and stakeholders in the MENA region's insurance industry to express a firm commitment to raising standards of corporate governance." All key players need to participate in and support the development of higher standards," he stressed. He further said that MENA insurance companies need to harmonise their understanding and implementation of corporate governance with international standards and vigilantly monitor compliance. "The management of insurance companies should build strong corporate governance frameworks that create an empowered Board of Directors, a solid control environment, increased levels of transparency and disclosure and well-defined shareholders," he added. Speaking about DIFC's support for corporate governance development, HE Ahmed Humaid Al Tayer said: "Here in DIFC, we clearly recognise the vast potential of the insurance industry and the role of robust regulations and corporate governance in driving its growth. Accordingly, we have created a clear and transparent legal and regulatory regime that supports strong corporate governance. DIFC's world-class prudential rules for insurers, re-insurers and captives are in line with the highest international standards of regulation and supervision. Dr. Nasser Saidi, Executive Director of Hawkamah and Chief Economist of the DIFC Authority called on insurance regulators and commissioners in the Middle East and North Africa region to implement corporate governance reform. Regulators, he said, should work to ensure the development of well-regulated insurance markets and provide ongoing supervision. He urged regulators to encourage companies to adopt the corporate governance principles outlined by the International Association of Insurance Supervisors (IAIS) for insurance companies and to adopt uniform insurance corporate governance standards and guidelines. He also called on regulators in the region to upgrade insolvency laws. At an industry level, he said the region's insurance sector should take efforts to ensure that accounting, actuarial and auditing standards are comprehensive, documented, transparent and consistent with international standards. He stressed on the importance of the insurance industry to adopt International Financial Reporting Standards (IFRS); the guidelines of the Islamic Financial Services Board (IFSB); and the standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) for Shari'a compliant insurance. This Workshop formed part of Hawkamah's wider initiative to raise corporate governance standards in the insurance sector in the MENA region. In 2007, Hawkamah established a MENA Corporate Governance Task Force with a mandate to develop a set of corporate governance guidelines for the insurance sector and build the corporate governance capacity of the industry. The Task Force, comprised of members of the Arab Forum of Insurance Regulatory Commissions (AFIRC) and private sector representatives, has contributed significantly to identifying the corporate governance challenges of the insurance industry in the region and provided vital recommendations for industry development. In March 2009, the Task Force issued the Hawkamah-AFIRC Policy Brief on Corporate Governance for the Insurance Industry, which outlined basic corporate governance standards for the insurance sector in MENA. Key issues that were discussed at the Workshop included the role of regulators; corporate governance reform; duties and liabilities of directors and officers; Risk Governance, Roles and Responsibilities of the Board and the Risk Culture; and the role of corporate governance in preventing financial crime, including money laundering, terrorism financing, market abuse and fraud.. The workshop was designed to be of particular relevance to directors, senior managers, compliance officers and insurance professionals in the MENA region.(C) 2010 Al Bawaba (www.albawaba.com)
ACCA calls on G20 to drive reform of the global financial agenda
KUALA LUMPUR, Monday 31 May 2010 (Bernama) -- As the Group of Twenty nations (G20) prepare to meet in Toronto next month, the Association of Chartered Certified Accountants (ACCA) are putting forward recommendations for global policy-makers.
Around 1,500 delegates, including heads of state, will convene for two-days, beginning June 26, to discuss the global financial crisis and assess the progress made on the road to recovery.
ACCA Chief Executive Helen Brand said the association was asking world leaders to deliver on promises made at previous summits and go further in their efforts towards financial sector reform, robust accounting standards and strong sustainable growth.
"A repetition of a catastrophe on this scale is something neither governments, the public nor the global business community could countenance.
"We feel the crisis has provided both an incentive and an opportunity for the wholesale financial reform which will lead to a sustainable global economy," she said.
In a paper themed, "Recovery and New Beginnings", the ACCA commended the pledges made by the G20 to date, but said further action was required in several areas.
It said the G20 should turn its stated commitment to integrity in financial institutions into reality by encouraging moves to instil ethical business codes and better risk management functions in the financial and corporate sectors.
Brand said the G20 must seriously consider separatig retail and investment banking.
"The G20 should now take concrete steps towards the implementation of International Financial Reporting Standards (IFRS) and ensure accounting standards are free from undue political influence.
"Sustainability and tackling climate change should be embedded in the G20's agenda and ingrained in business practice through the use of a global carbon reporting standard," she added.
Though the G20 has existed since the financial crisis in Asia in 1999, it was only at last year's Pittsburgh summit that it was designated the premier forum for international economic cooperation.
Clearly, Brand said there remained much to do.
Given the leadership it has shown thus far, Brand said ACCA was calling for the G20 to be made a permanent fixture with broader global governance role.
Meanwhile, the President of ACCA Malaysia Advisory Committee Datuk Mohd Nasir Ahmad was quoted in the statement as saying that Malaysia should take an interest in the progress although it was not part of the group.
"Their actions will have an impact on global financial recovery and will affect our conditions as well," he added.
However, Mohd Nasir questioned the structure of the forum itself, saying that it was unclear how the interests of smaller economies were represented at the table.
"While the G20 may be more inclusive than the G8, some introspection is needed to make sure it is truly representative and avoid accusations that it is an exclusive club," he said.
Around 1,500 delegates, including heads of state, will convene for two-days, beginning June 26, to discuss the global financial crisis and assess the progress made on the road to recovery.
ACCA Chief Executive Helen Brand said the association was asking world leaders to deliver on promises made at previous summits and go further in their efforts towards financial sector reform, robust accounting standards and strong sustainable growth.
"A repetition of a catastrophe on this scale is something neither governments, the public nor the global business community could countenance.
"We feel the crisis has provided both an incentive and an opportunity for the wholesale financial reform which will lead to a sustainable global economy," she said.
In a paper themed, "Recovery and New Beginnings", the ACCA commended the pledges made by the G20 to date, but said further action was required in several areas.
It said the G20 should turn its stated commitment to integrity in financial institutions into reality by encouraging moves to instil ethical business codes and better risk management functions in the financial and corporate sectors.
Brand said the G20 must seriously consider separatig retail and investment banking.
"The G20 should now take concrete steps towards the implementation of International Financial Reporting Standards (IFRS) and ensure accounting standards are free from undue political influence.
"Sustainability and tackling climate change should be embedded in the G20's agenda and ingrained in business practice through the use of a global carbon reporting standard," she added.
Though the G20 has existed since the financial crisis in Asia in 1999, it was only at last year's Pittsburgh summit that it was designated the premier forum for international economic cooperation.
Clearly, Brand said there remained much to do.
Given the leadership it has shown thus far, Brand said ACCA was calling for the G20 to be made a permanent fixture with broader global governance role.
Meanwhile, the President of ACCA Malaysia Advisory Committee Datuk Mohd Nasir Ahmad was quoted in the statement as saying that Malaysia should take an interest in the progress although it was not part of the group.
"Their actions will have an impact on global financial recovery and will affect our conditions as well," he added.
However, Mohd Nasir questioned the structure of the forum itself, saying that it was unclear how the interests of smaller economies were represented at the table.
"While the G20 may be more inclusive than the G8, some introspection is needed to make sure it is truly representative and avoid accusations that it is an exclusive club," he said.
Friday, May 28, 2010
Principles and not rules are the way to encourage business to be ethical
TOMORROW, the Financial Reporting Council will announce the first part of its new code of conduct for corporate governance. It is a welcome step towards ensuring that businesses behave in a responsible way, but more is needed.
It has been striking in recent times that the public and policymakers have blamed business’s failures on ethical lapses. Accounting scandals at Enron and WorldCom, financial crises partly built on questionable financial behaviour and bumper bank bonuses have all been criticised as not just a corporate failures, but moral ones. Bodies like the FRC have a role in encouraging ethical behaviour in business, but other stakeholders do too, not least professional bodies.
But before we look at how they can encourage ethical behaviour, it’s helpful to look at the basics. Ethics in a business context have been defined by Paul Makosz, a former consultant on ethical issues to the World Bank and blue-chip North American corporations, as “principles or norms of behaviour regarded as desirable by the majority of society”. Even if we accept this, it doesn’t help a lot. The second you go any further and actually implement this concept of ethics in real life, everything gets rather complicated.
For a start, we’re immediately confronted with a problem: how do we enforce those ethics? Broadly speaking, there are two approaches to enforcing ethics in business: a rules-based and a principles-based approach.
In a rules-based system, everyone – the regulated, the regulator, and the public – knows exactly what is permitted, and all stakeholders have to do is to follow the rules. Historically-speaking, the rules-based approach has been the most popular. When things have “gone wrong”, the usual response of an authority has been to issue new rules or regulations.
But this system has two problems. Firstly, new rules create new compliance costs for business, which means companies must work harder to increase revenues to cover those costs. Chasing the extra revenue can make companies more willing to bend rules. And that is the second problem: rules can be bent. Rules define what is and isn’t allowed, but there are always plenty of things that are allowed because they aren’t covered by the rules. Worse, “acting within the rules” can allow companies to justify what could otherwise be considered unethical behaviour. Acting within the letter, but not the spirit of the rules can lead to trouble.
BALANCE SHEET
Take, for example, the use of Repo 105 accounting by Lehman Brothers. The investment bank was able to make assets disappear off its balance sheet, simply by picking and choosing which legal jurisdictions it got its legal opinions and accounting standards from. But Lehman never broke the rules. ACCA was one of the first to note that rules-based corporate governance frameworks were an accident waiting to happen. Every bank that failed in the crisis complied with corporate governance requirements.
Anthony Belchambers, chief executive of the Futures and Options Association, argues that “ethics has been replaced by observance of rules. People have outsourced their sense of behavioural responsibility to compliance with external rules”. This is something that the Walker Review noted too, but Walker’s proposed solution is more regulations for banks to comply with.
The alternatives to rules are principles. Importantly, while you can dodge a rule, you can’t dodge a principle. Again, though, there are problems. While rules make sure you know exactly what is and what isn’t allowed, principles leave grey areas. Often, only hindsight clarifies whether something was right or wrong.
Then there’s the fact that principles only work well in a principled environment. In an environment where the prevailing culture is to comply with the letter but not the spirit of the law, and even then only when someone is looking, principles may be a normative aim too far. Besides, according to whose principles should businesses conform?
Expectations of ethical conduct in business must acknowledge that businesses exist to make a profit, and that they have to behave in a way that maximises value for their shareholders. In that case, you could argue that businesses should be allowed to operate in a way that places pure business interest above the public interest. According to Makosz, that would make such behaviour unethical. Social usefulness is paramount. Businesses are a part of society, and cannot be allowed to behave in ways that undermine it.
The International Federation of Accountants (IFAC) certainly takes this view and places the public interest in a position of utmost importance in its code of conduct: “A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest”. Businesses must therefore behave in a way that would be considered ethical by society at large. But this returns us to our earlier conundrum: a rules-based or principles-based approach?
As strong supporters of International Financial Reporting Standards (IFRS), we at ACCA are naturally inclined to support a principles-based approach; principles cannot be avoided, as rules can be.
It is encouraging that the Financial Reporting Council’s proposed UK Corporate Governance Code places an emphasis on principles rather than rules. However, there is still the issue that principles work best in a principled environment. Environments are shaped by those that inhabit them. It is the principles of CEOs, CFOs, and other finance professionals that will decide whether a principled approach works or not.
You can’t force people to be ethical, but you can certainly help them. This is why, in 2007, at ACCA we overhauled our syllabuses to place ethics and professionalism at the heart of our qualification. It is up to us and other accountancy bodies to create principled accountants – the CEOs and CFOs of tomorrow – who will place ethical behaviour and the public interest at the top of their priorities.
Ethics and professionalism are assessed in 11 of the 16 ACCA qualification syllabuses. We have an online ethics module – the first of its kind – which takes students and members through various ethical dilemmas to raise their awareness of ethical values, and aims to make it easier for our students and members to exercise good judgement in the future.
Any ACCA affiliate wanting to become an ACCA member must have completed this module. We are committed to training not just people that are good accountants, but accountants who are good people. With principled accountants, a principles-based approach to the enforcement of ethical behaviour can work.
Paul Moxey is head of corporate governance and risk management at ACCA, the Association of Chartered Certified Accountants
It has been striking in recent times that the public and policymakers have blamed business’s failures on ethical lapses. Accounting scandals at Enron and WorldCom, financial crises partly built on questionable financial behaviour and bumper bank bonuses have all been criticised as not just a corporate failures, but moral ones. Bodies like the FRC have a role in encouraging ethical behaviour in business, but other stakeholders do too, not least professional bodies.
But before we look at how they can encourage ethical behaviour, it’s helpful to look at the basics. Ethics in a business context have been defined by Paul Makosz, a former consultant on ethical issues to the World Bank and blue-chip North American corporations, as “principles or norms of behaviour regarded as desirable by the majority of society”. Even if we accept this, it doesn’t help a lot. The second you go any further and actually implement this concept of ethics in real life, everything gets rather complicated.
For a start, we’re immediately confronted with a problem: how do we enforce those ethics? Broadly speaking, there are two approaches to enforcing ethics in business: a rules-based and a principles-based approach.
In a rules-based system, everyone – the regulated, the regulator, and the public – knows exactly what is permitted, and all stakeholders have to do is to follow the rules. Historically-speaking, the rules-based approach has been the most popular. When things have “gone wrong”, the usual response of an authority has been to issue new rules or regulations.
But this system has two problems. Firstly, new rules create new compliance costs for business, which means companies must work harder to increase revenues to cover those costs. Chasing the extra revenue can make companies more willing to bend rules. And that is the second problem: rules can be bent. Rules define what is and isn’t allowed, but there are always plenty of things that are allowed because they aren’t covered by the rules. Worse, “acting within the rules” can allow companies to justify what could otherwise be considered unethical behaviour. Acting within the letter, but not the spirit of the rules can lead to trouble.
BALANCE SHEET
Take, for example, the use of Repo 105 accounting by Lehman Brothers. The investment bank was able to make assets disappear off its balance sheet, simply by picking and choosing which legal jurisdictions it got its legal opinions and accounting standards from. But Lehman never broke the rules. ACCA was one of the first to note that rules-based corporate governance frameworks were an accident waiting to happen. Every bank that failed in the crisis complied with corporate governance requirements.
Anthony Belchambers, chief executive of the Futures and Options Association, argues that “ethics has been replaced by observance of rules. People have outsourced their sense of behavioural responsibility to compliance with external rules”. This is something that the Walker Review noted too, but Walker’s proposed solution is more regulations for banks to comply with.
The alternatives to rules are principles. Importantly, while you can dodge a rule, you can’t dodge a principle. Again, though, there are problems. While rules make sure you know exactly what is and what isn’t allowed, principles leave grey areas. Often, only hindsight clarifies whether something was right or wrong.
Then there’s the fact that principles only work well in a principled environment. In an environment where the prevailing culture is to comply with the letter but not the spirit of the law, and even then only when someone is looking, principles may be a normative aim too far. Besides, according to whose principles should businesses conform?
Expectations of ethical conduct in business must acknowledge that businesses exist to make a profit, and that they have to behave in a way that maximises value for their shareholders. In that case, you could argue that businesses should be allowed to operate in a way that places pure business interest above the public interest. According to Makosz, that would make such behaviour unethical. Social usefulness is paramount. Businesses are a part of society, and cannot be allowed to behave in ways that undermine it.
The International Federation of Accountants (IFAC) certainly takes this view and places the public interest in a position of utmost importance in its code of conduct: “A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest”. Businesses must therefore behave in a way that would be considered ethical by society at large. But this returns us to our earlier conundrum: a rules-based or principles-based approach?
As strong supporters of International Financial Reporting Standards (IFRS), we at ACCA are naturally inclined to support a principles-based approach; principles cannot be avoided, as rules can be.
It is encouraging that the Financial Reporting Council’s proposed UK Corporate Governance Code places an emphasis on principles rather than rules. However, there is still the issue that principles work best in a principled environment. Environments are shaped by those that inhabit them. It is the principles of CEOs, CFOs, and other finance professionals that will decide whether a principled approach works or not.
You can’t force people to be ethical, but you can certainly help them. This is why, in 2007, at ACCA we overhauled our syllabuses to place ethics and professionalism at the heart of our qualification. It is up to us and other accountancy bodies to create principled accountants – the CEOs and CFOs of tomorrow – who will place ethical behaviour and the public interest at the top of their priorities.
Ethics and professionalism are assessed in 11 of the 16 ACCA qualification syllabuses. We have an online ethics module – the first of its kind – which takes students and members through various ethical dilemmas to raise their awareness of ethical values, and aims to make it easier for our students and members to exercise good judgement in the future.
Any ACCA affiliate wanting to become an ACCA member must have completed this module. We are committed to training not just people that are good accountants, but accountants who are good people. With principled accountants, a principles-based approach to the enforcement of ethical behaviour can work.
Paul Moxey is head of corporate governance and risk management at ACCA, the Association of Chartered Certified Accountants
Mining Industry in Next Phase of the Boom, Although Short-Term Volatility Remains, Finds New Report from PricewaterhouseCoopers
mmodity prices in the second half as the global economic recovery began to take hold."
"It was a recovering year for commodity prices and global mining giants had to contend with improving their financial strength and operating results – all while managing around a very challenging economic environment that spanned the globe," Ralbovsky continued. "For success moving forward, it is essential that lessons from the past be learned so that the industry can identify potential uncertainties and respond accordingly, allowing the industry to fully extract the benefits of being back to the boom."
The report notes that although the total number of mining deals increased 16 percent from the prior year, activity was largely focused on smaller scale deals of less than $250 million, with average deal values of $52 million, down nearly $72 million from 2008. And while some companies had the resources to execute potential transactions, opportunity gave way to caution and no major deals were consummated.
"With no significant transactions completed during the year, we believe that some companies that had the financial resources available may have potentially missed opportunities to acquire assets," added Ralbovsky. "Although the window was small, it was open. As a result, Chinese investment was at the forefront of transactions and made up 22 percent of all global mining M&A activity and 30 percent of the Top 10 deals by value."
Indications of the Next Phase of the Boom
Despite approximately $200 billion of capital expenditure over the past three years, production remained flat across most commodities. Exploration spending by the top 40 declined significantly, given its discretionary nature. As reserve replacement becomes more challenging, the lack of spend on exploration poses the question of when and where the next world-class mines will be found. Add to that the strong fundamentals on the demand side over the medium and long-term, largely attributed to continued growth from China and other developing nations, and the industry may be in the next phase of the boom, the report found.
What's on the minds of industry CEOs?
While views may differ, almost without exception the number one agenda item is the global economy. Fundamental to success will be the ability to understand the lead demand indicators, particularly obtaining a good read on China and other developing nations. Today's CEO is more focused on other macroeconomic factors, such as foreign exchange rates, the cost of energy and the impact potentially unsustainable government budget deficits will have on interest rates, tax regimes, and the global economy. However, operating cost remains a key value differentiator.
Commodity Prices
Metal prices continued on a downward trend for the first six months of 2009, but recovered sharply along with most commodities in the second half. The upward trend in commodity prices continued into 2010 in many cases. The turnaround in copper prices has been most notable with the 2009 year-end spot price reaching $7,342 per ton. In both iron ore and metallurgical coal markets there has been a recent trend towards short-term contracts, driven by the big miners. Gold, on the back of 7 percent production increases and a 12 percent increase in average price, saw its share of total industry revenue increase from 10 percent to 14 percent in 2009.
After a hiatus, the future is looking bright again for the industry. Although significant short-term volatility remains – the long-term demand fundamentals will drive this cycle.
For a copy of the "Mine-Back to the Boom" report, visit www.pwc.com/mining.
About "Mine-Back to the Boom"
PwC analyzed 40 of the largest listed mining companies by market capitalization. The analysis includes major companies in all parts of the world whose primary business is mining.
The results aggregated in this report have been sourced from the latest publicly available information, primarily annual reports and financial reports available to shareholders. Where 2009 information was unavailable at the time of data collation, these companies have been excluded. Companies have different year-ends and report under different accounting regimes, including International Financial Reporting Standards (IFRS), US Generally Accepted Accounting Principles (US GAAP), Canadian GAAP, and others.
Information has been aggregated for the financial years of individual companies and no adjustments have been made to take into account different reporting requirements and year-ends. As such, the financial information shown for 2009 covers reporting periods from April 1, 2008 to December 31, 2009, with each company's results included for the 12-month financial reporting period that falls into this timeframe
"It was a recovering year for commodity prices and global mining giants had to contend with improving their financial strength and operating results – all while managing around a very challenging economic environment that spanned the globe," Ralbovsky continued. "For success moving forward, it is essential that lessons from the past be learned so that the industry can identify potential uncertainties and respond accordingly, allowing the industry to fully extract the benefits of being back to the boom."
The report notes that although the total number of mining deals increased 16 percent from the prior year, activity was largely focused on smaller scale deals of less than $250 million, with average deal values of $52 million, down nearly $72 million from 2008. And while some companies had the resources to execute potential transactions, opportunity gave way to caution and no major deals were consummated.
"With no significant transactions completed during the year, we believe that some companies that had the financial resources available may have potentially missed opportunities to acquire assets," added Ralbovsky. "Although the window was small, it was open. As a result, Chinese investment was at the forefront of transactions and made up 22 percent of all global mining M&A activity and 30 percent of the Top 10 deals by value."
Indications of the Next Phase of the Boom
Despite approximately $200 billion of capital expenditure over the past three years, production remained flat across most commodities. Exploration spending by the top 40 declined significantly, given its discretionary nature. As reserve replacement becomes more challenging, the lack of spend on exploration poses the question of when and where the next world-class mines will be found. Add to that the strong fundamentals on the demand side over the medium and long-term, largely attributed to continued growth from China and other developing nations, and the industry may be in the next phase of the boom, the report found.
What's on the minds of industry CEOs?
While views may differ, almost without exception the number one agenda item is the global economy. Fundamental to success will be the ability to understand the lead demand indicators, particularly obtaining a good read on China and other developing nations. Today's CEO is more focused on other macroeconomic factors, such as foreign exchange rates, the cost of energy and the impact potentially unsustainable government budget deficits will have on interest rates, tax regimes, and the global economy. However, operating cost remains a key value differentiator.
Commodity Prices
Metal prices continued on a downward trend for the first six months of 2009, but recovered sharply along with most commodities in the second half. The upward trend in commodity prices continued into 2010 in many cases. The turnaround in copper prices has been most notable with the 2009 year-end spot price reaching $7,342 per ton. In both iron ore and metallurgical coal markets there has been a recent trend towards short-term contracts, driven by the big miners. Gold, on the back of 7 percent production increases and a 12 percent increase in average price, saw its share of total industry revenue increase from 10 percent to 14 percent in 2009.
After a hiatus, the future is looking bright again for the industry. Although significant short-term volatility remains – the long-term demand fundamentals will drive this cycle.
For a copy of the "Mine-Back to the Boom" report, visit www.pwc.com/mining.
About "Mine-Back to the Boom"
PwC analyzed 40 of the largest listed mining companies by market capitalization. The analysis includes major companies in all parts of the world whose primary business is mining.
The results aggregated in this report have been sourced from the latest publicly available information, primarily annual reports and financial reports available to shareholders. Where 2009 information was unavailable at the time of data collation, these companies have been excluded. Companies have different year-ends and report under different accounting regimes, including International Financial Reporting Standards (IFRS), US Generally Accepted Accounting Principles (US GAAP), Canadian GAAP, and others.
Information has been aggregated for the financial years of individual companies and no adjustments have been made to take into account different reporting requirements and year-ends. As such, the financial information shown for 2009 covers reporting periods from April 1, 2008 to December 31, 2009, with each company's results included for the 12-month financial reporting period that falls into this timeframe
FASB releases fair value proposal
The US accounting standard setter has released it’s fair value standard, which strives to simplify rules surrounding financial instruments, but jars with international accounting rules, used by it’s neighbouring economies.
The Financial Accounting Standards Board (FASB) waited until US markets closed to release its long awaited reforms to financial instrument accounting, which will expand the use of fair value in a bid to increase transparency.
AdvertisementThe fair value principle forces financial institutions, to measure the value of their assets at market prices, rather than their original purchase price. The provides greater transparency for investors, but has been criticised by regulators, as increasing volatility.
The issue made headlines as the crisis took hold towards the end of 2008, as asset prices plummeted in illiquid markerts.
Under FASB’s proposal, most financial instruments would be measured at fair value in financial statements, but amortised cost would also be disclosed in some instances.
The rule, however, differs, to the International Accounting Standards Board’s (IASB) mixed-measurement model, which allows some assets to be valued at amortised cost.
The issue represents a challenge as both board move towards a June 2011 deadline to converge their accounting codes.
FASB said it would have ideally preferred to issue the proposal jointly with the IASB.
“However, each Board has faced different imperatives that have resulted in different approaches for accounting for certain types of financial instruments, resulting in different timetables for the project,” FASB said in its exposure draft.
“FASB’s main objective is to develop accounting standards that represent an improvement to U.S. financial reporting. What may be considered an improvement in jurisdictions with less developed financial reporting systems applying International Financial Reporting Standards (IFRS) may not be considered an improvement in the United States.”
The standard comes days after Sir David Tweedie, IASB chairman, told a San Diego audience both the FASB and IASB models could be reconciled.
“Say we both stick to our same positions [on classification and measurement], maybe we need to put out something that would say ‘if you want to get the same other comprehensive income as FASB, you have to add this on, which would be the fair value’” he said.
“FASB would do the opposite. If you want to get the FRS number, you deduct this. There are ways to do it.”
The Financial Accounting Standards Board (FASB) waited until US markets closed to release its long awaited reforms to financial instrument accounting, which will expand the use of fair value in a bid to increase transparency.
AdvertisementThe fair value principle forces financial institutions, to measure the value of their assets at market prices, rather than their original purchase price. The provides greater transparency for investors, but has been criticised by regulators, as increasing volatility.
The issue made headlines as the crisis took hold towards the end of 2008, as asset prices plummeted in illiquid markerts.
Under FASB’s proposal, most financial instruments would be measured at fair value in financial statements, but amortised cost would also be disclosed in some instances.
The rule, however, differs, to the International Accounting Standards Board’s (IASB) mixed-measurement model, which allows some assets to be valued at amortised cost.
The issue represents a challenge as both board move towards a June 2011 deadline to converge their accounting codes.
FASB said it would have ideally preferred to issue the proposal jointly with the IASB.
“However, each Board has faced different imperatives that have resulted in different approaches for accounting for certain types of financial instruments, resulting in different timetables for the project,” FASB said in its exposure draft.
“FASB’s main objective is to develop accounting standards that represent an improvement to U.S. financial reporting. What may be considered an improvement in jurisdictions with less developed financial reporting systems applying International Financial Reporting Standards (IFRS) may not be considered an improvement in the United States.”
The standard comes days after Sir David Tweedie, IASB chairman, told a San Diego audience both the FASB and IASB models could be reconciled.
“Say we both stick to our same positions [on classification and measurement], maybe we need to put out something that would say ‘if you want to get the same other comprehensive income as FASB, you have to add this on, which would be the fair value’” he said.
“FASB would do the opposite. If you want to get the FRS number, you deduct this. There are ways to do it.”
Thursday, May 27, 2010
How starter kits meet IFRS - IAS 31
IAS 31 applies in accounting for interests in joint ventures and the reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors. This blog focuses on how joint-ventures should be included in the consolidated statements.
Proportionate consolidation or equity method
Principles
Joint-ventures (entities that are jointly controlled by the parent and other venturers) are included in the consolidated statements using either proportionate consolidation or the equity method. For more details about the equity method, please refer to the blog dedicated to IAS 28.
As regards proportionate consolidation, the venturer may combine its share of each of the assets, liabilities, income and expenses of the jointly controlled entity with the similar items, line by line, in its financial statements (option 1). Alternatively, the venturer may include separate line items for its share of the assets, liabilities, income and expenses of the jointly controlled entity in its financial statements (option 2).
In the starter kit
In the starter kit, both methods (proportionate consolidation and equity method) are available. As regards proportionate consolidation, the group's share of each item of assets, liabilities, income and expenses is included line by line in the financial statements (option 1 above).
Internal transactions
Principles
IAS 31's requirements are as follows: "when a venturer contributes or sells assets to a joint venture, recognition of any portion of a gain or loss from the transaction shall reflect the substance of the transaction. While the assets are retained by the joint venture, and provided the venturer has transferred the significant risks and rewards of ownership, the venturer shall recognize only that portion of the gain or loss that is attributable to the interests of the other venturers. When a venturer purchases assets from a joint venture, the venturer shall not recognize its share of the profits of the joint venture from the transaction until it resells the assets to an independent party".
IAS 31 is silent when it comes to operations between joint-ventures or between subsidiaries and joint-ventures.
In the starter kit
Automatic rules described in blog # 5 (IAS 27) for subsidiaries apply to joint-ventures. Elimination is weighted with the joint-venture's consolidation rate or with the lowest consolidation rate when transactions take place between joint-ventures.
Changes in investor's ownership interest
Loss of joint control
Principles described in IAS 27 for loss of control over a subsidiary apply when a parent loses joint control over a joint-venture. When the remaining interest, if any, gives significant influence, same principles apply as for a subsidiary becoming an associate (see blog # 6 - loss of control).
Increase / decrease in interest rate
Principles
If a parent increases its interest in a joint-venture without achieving control (which means that the acquiree remains a joint-venture afterwards), IFRSs do not specify how to deal with this operation in the consolidated financial statements.
As regards a decrease in interest rate, IAS 31 states that "if an investor's ownership interest in a jointly controlled entity is reduced, but the investment continues to be a jointly controlled entity, the investor shall reclassify to profit and loss only a proportionate amount of the gain or loss previously recognized in other comprehensive income". It is inferred that a gain or loss should be recognized in the income statement on a partial disposal of a joint-venture.
In the starter-kit
The new interest rate and the new integration rate in the joint-venture (which changes as a consequence) are taken into account with the impact of change posted on flow F04. Additional manual entries are left up to the user (same as for associates, see blog #8).
What's next?
In the next blog, we will focus on IFRS 3 "Business combinations".
Proportionate consolidation or equity method
Principles
Joint-ventures (entities that are jointly controlled by the parent and other venturers) are included in the consolidated statements using either proportionate consolidation or the equity method. For more details about the equity method, please refer to the blog dedicated to IAS 28.
As regards proportionate consolidation, the venturer may combine its share of each of the assets, liabilities, income and expenses of the jointly controlled entity with the similar items, line by line, in its financial statements (option 1). Alternatively, the venturer may include separate line items for its share of the assets, liabilities, income and expenses of the jointly controlled entity in its financial statements (option 2).
In the starter kit
In the starter kit, both methods (proportionate consolidation and equity method) are available. As regards proportionate consolidation, the group's share of each item of assets, liabilities, income and expenses is included line by line in the financial statements (option 1 above).
Internal transactions
Principles
IAS 31's requirements are as follows: "when a venturer contributes or sells assets to a joint venture, recognition of any portion of a gain or loss from the transaction shall reflect the substance of the transaction. While the assets are retained by the joint venture, and provided the venturer has transferred the significant risks and rewards of ownership, the venturer shall recognize only that portion of the gain or loss that is attributable to the interests of the other venturers. When a venturer purchases assets from a joint venture, the venturer shall not recognize its share of the profits of the joint venture from the transaction until it resells the assets to an independent party".
IAS 31 is silent when it comes to operations between joint-ventures or between subsidiaries and joint-ventures.
In the starter kit
Automatic rules described in blog # 5 (IAS 27) for subsidiaries apply to joint-ventures. Elimination is weighted with the joint-venture's consolidation rate or with the lowest consolidation rate when transactions take place between joint-ventures.
Changes in investor's ownership interest
Loss of joint control
Principles described in IAS 27 for loss of control over a subsidiary apply when a parent loses joint control over a joint-venture. When the remaining interest, if any, gives significant influence, same principles apply as for a subsidiary becoming an associate (see blog # 6 - loss of control).
Increase / decrease in interest rate
Principles
If a parent increases its interest in a joint-venture without achieving control (which means that the acquiree remains a joint-venture afterwards), IFRSs do not specify how to deal with this operation in the consolidated financial statements.
As regards a decrease in interest rate, IAS 31 states that "if an investor's ownership interest in a jointly controlled entity is reduced, but the investment continues to be a jointly controlled entity, the investor shall reclassify to profit and loss only a proportionate amount of the gain or loss previously recognized in other comprehensive income". It is inferred that a gain or loss should be recognized in the income statement on a partial disposal of a joint-venture.
In the starter-kit
The new interest rate and the new integration rate in the joint-venture (which changes as a consequence) are taken into account with the impact of change posted on flow F04. Additional manual entries are left up to the user (same as for associates, see blog #8).
What's next?
In the next blog, we will focus on IFRS 3 "Business combinations".
IASB Chairman Outlines Approach for Reconciling IASB and FASB
International Accounting Standards Board Chairman Sir David Tweedie on Tuesday outlined a possible approach for reconciling the divergent IASB and FASB models for financial instruments accounting. With FASB’s comprehensive exposure draft on financial instruments expected any day, Tweedie said during a JofA exclusive interview at the AICPA Council meeting in San Diego that public comments on the boards’ proposals will play a key role in getting their two approaches closer together.
Speaking later to the AICPA Governing Council, Tweedie thanked the AICPA for its longstanding support of the IASB even before international standards were popular. To understand Tweedie’s approach to fixing the financial instruments problem requires some background on where the standards setters diverged. As a result of the subprime mortgage collapse, accounting for loans and securities derived from loans was widely criticized. When the financial crisis started in 2008, this project was already on the active agendas of both standard setters, but the crisis put enormous political pressure on the IASB and FASB to improve their standards as soon as possible.
In a move that was not followed by FASB, the IASB split its project to replace IAS 39, Financial Instruments: Recognition and Measurement, into three parts to deal separately with classification and measurement; impairment; and hedging. FASB decided to deal with all three aspects of financial instruments in a single project and plans to issue its comprehensive exposure draft by the end of this month. Despite intense joint deliberations, FASB and the IASB were unable to agree on a common approach for classification and measurement. The IASB published its approach on Nov. 12, 2009, with the release of IFRS 9, Financial Instruments. IFRS 9 may be adopted early but is not effective until Jan. 1, 2013.
Under what is expected to be the proposed FASB model:
* Most instruments would be measured on the statement of financial position at fair value with changes in fair value reflected in net income, or net income and other comprehensive income;
* A limited amortized cost option would be available for financial liabilities; and
* No reclassification would be permitted between categories.
Under the IASB model (IFRS 9):
* The scope of the standard is limited to assets only;
* Amortized cost is used when it matches the entity’s business model and cash flow characteristics of the asset;
* Fair value is used for equity instruments, most derivatives and some hybrid instruments; and
* Bifurcation of embedded derivatives is not permitted.
To read the complete coverage please visit http://www.journalofaccountancy.com/Web/20102960.htm
Sponsor: Cambridge Consulting Group provides cost containment and risk management services to CFOs at major Fortune 500 Companies. With experience in Corporate Finance and Commercial Real Estate, Cambridge provides specific programs that reduce real estate and operational expenses. For more information please visit their website at www.ccgiweb.com
Speaking later to the AICPA Governing Council, Tweedie thanked the AICPA for its longstanding support of the IASB even before international standards were popular. To understand Tweedie’s approach to fixing the financial instruments problem requires some background on where the standards setters diverged. As a result of the subprime mortgage collapse, accounting for loans and securities derived from loans was widely criticized. When the financial crisis started in 2008, this project was already on the active agendas of both standard setters, but the crisis put enormous political pressure on the IASB and FASB to improve their standards as soon as possible.
In a move that was not followed by FASB, the IASB split its project to replace IAS 39, Financial Instruments: Recognition and Measurement, into three parts to deal separately with classification and measurement; impairment; and hedging. FASB decided to deal with all three aspects of financial instruments in a single project and plans to issue its comprehensive exposure draft by the end of this month. Despite intense joint deliberations, FASB and the IASB were unable to agree on a common approach for classification and measurement. The IASB published its approach on Nov. 12, 2009, with the release of IFRS 9, Financial Instruments. IFRS 9 may be adopted early but is not effective until Jan. 1, 2013.
Under what is expected to be the proposed FASB model:
* Most instruments would be measured on the statement of financial position at fair value with changes in fair value reflected in net income, or net income and other comprehensive income;
* A limited amortized cost option would be available for financial liabilities; and
* No reclassification would be permitted between categories.
Under the IASB model (IFRS 9):
* The scope of the standard is limited to assets only;
* Amortized cost is used when it matches the entity’s business model and cash flow characteristics of the asset;
* Fair value is used for equity instruments, most derivatives and some hybrid instruments; and
* Bifurcation of embedded derivatives is not permitted.
To read the complete coverage please visit http://www.journalofaccountancy.com/Web/20102960.htm
Sponsor: Cambridge Consulting Group provides cost containment and risk management services to CFOs at major Fortune 500 Companies. With experience in Corporate Finance and Commercial Real Estate, Cambridge provides specific programs that reduce real estate and operational expenses. For more information please visit their website at www.ccgiweb.com
IASB - User questionnaire for Fair Value Option
The International Accounting Standards Board (IASB) has produced a questionnaire for financial statement users on its May 2010 exposure draft “Fair Value Option for Financial Liabilities.” This questionnaire is targeted at analysts and forms part of a comprehensive program of outreach activities to IFRS constituents. Comments are requested from all parties, including users of financial statements, by July 16, 2010. (Read the IASB Web announcement and submit a response to the Exposure Draft User Questionnaire.)
The future of UK GAAP: ACCA costs the change
ACCA (the Association of Chartered Certified Accountants) today publishes the first detailed comparison to date of the differences between UK Generally Accepted Accounting Standards (UK GAAP) and the International Financial Reporting Standard for Small and Medium-sized Enterprises (IFRS for SMEs).
ACCA’s new report, entitled The new UK GAAP: how would the numbers look? explores the potential impact on reported profits of companies who currently use UK GAAP and will be affected by proposals issued by the UK Accounting Standards Board (ASB) in 2009. The report can be found at this link: http://www.accaglobal.com/pubs/general/activities/library/financial_reporting/other/tech-afb-nug.pdf
These proposals will result in UK GAAP evolving to reflect the IFRS for SMEs as published by the International Accounting Standards Board (IASB). ACCA’s report focuses on those differences between the two standards which could make reported profits larger or smaller, and the extent to which this would alter the tax payable.
“The intention is that the IFRS for SMEs should replace the current UK accounting standards perhaps from 2012,’” says Richard Martin, ACCA head of financial reporting and the report’s author.
“This report identifies over 50 potential differences between current UK accounting and the international standard. In each case, we have tried to identify whether this might mean that profits would be larger or smaller and if this means paying more or less tax on them.
“Any individual company will not be affected by all of the differences, but we recommend that accountants check to see whether they or their clients might be impacted.”
ACCA’s new report, entitled The new UK GAAP: how would the numbers look? explores the potential impact on reported profits of companies who currently use UK GAAP and will be affected by proposals issued by the UK Accounting Standards Board (ASB) in 2009. The report can be found at this link: http://www.accaglobal.com/pubs/general/activities/library/financial_reporting/other/tech-afb-nug.pdf
These proposals will result in UK GAAP evolving to reflect the IFRS for SMEs as published by the International Accounting Standards Board (IASB). ACCA’s report focuses on those differences between the two standards which could make reported profits larger or smaller, and the extent to which this would alter the tax payable.
“The intention is that the IFRS for SMEs should replace the current UK accounting standards perhaps from 2012,’” says Richard Martin, ACCA head of financial reporting and the report’s author.
“This report identifies over 50 potential differences between current UK accounting and the international standard. In each case, we have tried to identify whether this might mean that profits would be larger or smaller and if this means paying more or less tax on them.
“Any individual company will not be affected by all of the differences, but we recommend that accountants check to see whether they or their clients might be impacted.”
KPMG International > Financial Reporting Matters - 11 May 2010
Financial Reporting Matters - 11 May 2010 IASB releases exposure draft of updates to IAS 19 employee benefits. ASB tentatively proposes delay in adoption of IFRS for SMEs in the UK.
Credible financial statements
When the phased implementation of the International Financial Reporting Standards (IFRS) begins next year, the small and medium enterprises (SME) will be exempt. But large Indian companies will have to compulsorily prepare their financial statements in compliance with IFRS. By 2014, listed companies across all sectors including banking and non-banking financial services will have to cast their accounts as per the IFRS requirement.
The roadmap notified by the government states that the globally-accepted, and rigorous, accounting standards may be adopted by smaller businesses on an optional basis. Given the complexities and costs involved in implementing the new standard, the natural response of the SME sector would be to delay its adoption till it becomes compulsory.
Besides, there is no apparent incentive to adopt IFRS, especially when it involves huge expenditure in training people and overhauling the company's operational and information technology processes. That apart, there are concerns that new accounting standards would depress valuation of businesses.
Yet, that should not deter the SME sector from embracing an accounting standard that is globally accepted and is more rigorous than those followed now. In any case, the International Accounting Standards Board has prescribed a lighter version of IFRS for the SME sector, mostly companies that do not have capital market exposure but need to give users, such as lenders, of their financial statement a fair view of the company's short-term cash flows, liquidity and solvency.
Voluntary adoption of the new accounting standard would make financial statements of the SME sector comparable with those of similar entities elsewhere and more transparent. This would be particularly useful when partnerships are sought to be forged with entities overseas or when businesses need to raise funds.
The rigorous requirements of the IFRS, both the full and lighter version, would also serve to improve a company's credibility, and that could help them access funds at lower cost. Rather than wait for the government to take a view, small businesses with big ambitions should follow the larger companies in adopting the new accounting standard.
The roadmap notified by the government states that the globally-accepted, and rigorous, accounting standards may be adopted by smaller businesses on an optional basis. Given the complexities and costs involved in implementing the new standard, the natural response of the SME sector would be to delay its adoption till it becomes compulsory.
Besides, there is no apparent incentive to adopt IFRS, especially when it involves huge expenditure in training people and overhauling the company's operational and information technology processes. That apart, there are concerns that new accounting standards would depress valuation of businesses.
Yet, that should not deter the SME sector from embracing an accounting standard that is globally accepted and is more rigorous than those followed now. In any case, the International Accounting Standards Board has prescribed a lighter version of IFRS for the SME sector, mostly companies that do not have capital market exposure but need to give users, such as lenders, of their financial statement a fair view of the company's short-term cash flows, liquidity and solvency.
Voluntary adoption of the new accounting standard would make financial statements of the SME sector comparable with those of similar entities elsewhere and more transparent. This would be particularly useful when partnerships are sought to be forged with entities overseas or when businesses need to raise funds.
The rigorous requirements of the IFRS, both the full and lighter version, would also serve to improve a company's credibility, and that could help them access funds at lower cost. Rather than wait for the government to take a view, small businesses with big ambitions should follow the larger companies in adopting the new accounting standard.
Wednesday, May 26, 2010
PHBs look for greater transparency in financial reporting: Grant Thornton
Years of investor and regulator demands for greater transparency in financial reporting amongst listed companies is now affecting attitudes in the world of privately held businesses. More than half of leaders of privately held businesses (PHBs) globally (52%) believe that greater transparency is a key benefit of financial reporting according to latest research from the Grant Thornton International Business Report (IBR) 2010). The research covers the opinions of over 7,400 business owners across 36 economies. In India, around 350 PHBs were surveyed across 6 cities. (Bangalore, Chennai, Delhi, Kolkata, Mumbai and Pune)
Businesses in Ireland, the Philippines and Taiwan were most enthusiastic about greater transparency with 85% of businesses citing greater transparency as a key benefit. 57% of Indian businesses believe that financial reporting would bring about greater transparency in the system followed by 54% who feel this would also lead to easier access to capital.
Said Sai Venkateshwaran , Head - IFRS at Grant Thornton India, “These results indicate that even though PHBs are often under no obligation to report information about their financial results or legal structures, business leaders are increasingly recognising that in order to compete and grow they need to be more transparent and more readily comparable with competitors.”
At the same time, business owners were also asked if they had heard of International Financial Reporting Standards for Small and Medium sized Enterprises (IFRS for SMEs). IFRS for SMEs provides a substantially simplified set of internationally recognised accounting principles specifically for PHBs. "The adoption of IFRS for SMEs will allow PHBs to be more transparent and directly comparable with similar businesses around the world - a global solution to their increasing desire for greater transparency", voices Sai Venkateshwaran.
53% of businesses owners globally said they were aware of IFRS for SMEs. 68% of businesses in India are unaware about IFRS for SMEs compared to 32% who are aware of it.
Asia Pacific is the only area where the percentage of businesses who have never heard about IFRS for SMEs (58%) is higher than the percentage who has heard about these standards (30%). Ireland, Spain and Finland are the countries where businesses are most aware of IFRS for SMEs, 86%, 79% and 78% respectively. On the other end of the scale, 82% in Thailand, 65% in Taiwan and 64% in mainland China have never heard about IFRS for SMEs.
Where business owners were already aware of IFRS for SMEs, they were asked if they would like their country to adopt the standard. Globally 52% of business owners said they would like their country to adopt IFRS for SMEs with businesses in India (79%) that were supportive of adopting the standard. Mexico (89%), the Philippines (85%) and Chile (84%) were most supportive. In some countries plans are already in place to adopt the standard, while in others (including the Philippines) the standard has since been adopted. On the other end of the scale, Finnish businesses have the least enthusiasm to adopt IFRS for SMEs at 62%, followed by Japan (57%) and New Zealand (50%).
Businesses globally, recognise that financial reporting will help them reduce cost (44%) and grow their business with 37% citing easier access to capital as a key benefit. India stands at 28% in terms of reduced cost being a benefit. In Ireland, 89% of businesses cited reduced cost as a benefit, the highest proportion of all countries, followed by Malaysia (85%) and Denmark (80%). Japan (3%) and Botswana (11%) are the least likely to say that reduced cost is a benefit of financial reporting.
Easier access to capital is cited by 37% of businesses globally as a benefit of financial reporting. However only 28% of Indian businesses (less than the global figure) share the same view.
Businesses in Ireland, the Philippines and Taiwan were most enthusiastic about greater transparency with 85% of businesses citing greater transparency as a key benefit. 57% of Indian businesses believe that financial reporting would bring about greater transparency in the system followed by 54% who feel this would also lead to easier access to capital.
Said Sai Venkateshwaran , Head - IFRS at Grant Thornton India, “These results indicate that even though PHBs are often under no obligation to report information about their financial results or legal structures, business leaders are increasingly recognising that in order to compete and grow they need to be more transparent and more readily comparable with competitors.”
At the same time, business owners were also asked if they had heard of International Financial Reporting Standards for Small and Medium sized Enterprises (IFRS for SMEs). IFRS for SMEs provides a substantially simplified set of internationally recognised accounting principles specifically for PHBs. "The adoption of IFRS for SMEs will allow PHBs to be more transparent and directly comparable with similar businesses around the world - a global solution to their increasing desire for greater transparency", voices Sai Venkateshwaran.
53% of businesses owners globally said they were aware of IFRS for SMEs. 68% of businesses in India are unaware about IFRS for SMEs compared to 32% who are aware of it.
Asia Pacific is the only area where the percentage of businesses who have never heard about IFRS for SMEs (58%) is higher than the percentage who has heard about these standards (30%). Ireland, Spain and Finland are the countries where businesses are most aware of IFRS for SMEs, 86%, 79% and 78% respectively. On the other end of the scale, 82% in Thailand, 65% in Taiwan and 64% in mainland China have never heard about IFRS for SMEs.
Where business owners were already aware of IFRS for SMEs, they were asked if they would like their country to adopt the standard. Globally 52% of business owners said they would like their country to adopt IFRS for SMEs with businesses in India (79%) that were supportive of adopting the standard. Mexico (89%), the Philippines (85%) and Chile (84%) were most supportive. In some countries plans are already in place to adopt the standard, while in others (including the Philippines) the standard has since been adopted. On the other end of the scale, Finnish businesses have the least enthusiasm to adopt IFRS for SMEs at 62%, followed by Japan (57%) and New Zealand (50%).
Businesses globally, recognise that financial reporting will help them reduce cost (44%) and grow their business with 37% citing easier access to capital as a key benefit. India stands at 28% in terms of reduced cost being a benefit. In Ireland, 89% of businesses cited reduced cost as a benefit, the highest proportion of all countries, followed by Malaysia (85%) and Denmark (80%). Japan (3%) and Botswana (11%) are the least likely to say that reduced cost is a benefit of financial reporting.
Easier access to capital is cited by 37% of businesses globally as a benefit of financial reporting. However only 28% of Indian businesses (less than the global figure) share the same view.
New norms may hit India Inc's valuations
from direct loss in business, companies also suffer from a loss in intangibles like R&D, intellectual property, loyal customers and customer relations. The modern accounting norms also find it impossible to value such items.
“It’s high-time people realise that valuation of companies have shifted out of the tangibles. Testing the valuation of intangibles is different under IFRS-3. Even Western companies are grappling with the concept and it’s already showing in the way Vodafone wrote down the valuation of its Indian subsidiary,” said Unni Krishnan, MD of Brand Finance, a brand evaluation consultancy.
While Indian accounting norms have also pressed for reporting such impairment, many Indian companies typically took refuge under a small provision in the Companies Act that allows such change in valuations to be adjusted against Reserves. “Also, boards of many companies need to take a call on whether any drop in valuations is typical to that industry,” said KH Viswanathan, an executive director with audit firm RSM Astute.
“If the steel industry, which is a cyclical sector, is going through a low phase, that factor needs to be considered before making any impairment. Such calls are also made by an independent expert,” he said. Aditya Birla group’s Hindalco, that made a big ticket acquisition in 2007 by buying Canada-based Novelis for $6 billion, faced similar prospects when the recession compounded the slowing market situation and exposed a faulty price ceiling contract. This forced Novelis to sell its final products to a select customer at a lower price.
The contract, which existed for three years, affected Novelis’s profitability. In February last year, Novelis posted a net loss of $1.8 billion for the December quarter of 2008 due to asset impairment charge and derivative losses. While the Canadian company has since completed the restrictive price ceiling contract tenure, a Hindalco official said that they are continuing with the audit procedure and can’t comment any further. Hindalco is scheduled to announce its earnings on June 4.
A Novelis statement said: “In accordance with FASB 142 (Financial Accounting Standards Board), we evaluate the carrying value of goodwill for potential impairment annually during the fourth quarter of each fiscal year or on an interim basis if an event occurs or circumstances change that indicate that the fair value of a reporting unit is likely to be below its carrying value.”
The company said that no additional impairment was identified at March 31, 2009, nor in the nine months ended December 31, 2009.
Shareholders and investors in Indian companies are yet to know that there are differences between IFRS and Indian accounting norms. The Indian norms permit reversal of impairment of goodwill when certain conditions are met. This is not there under IFRS. There is also a difference in the types of assets to be tested, with the Indian GAAP including all intangible assets with a useful life of more than 10 years. Under IFRS, only intangible assets with indefinite useful life are taken. However, it also needs to be mentioned that impairment charges don’t necessarily mean a cash drain. It’s only a fallout of stringent accounting rules, say auditors.
“It’s high-time people realise that valuation of companies have shifted out of the tangibles. Testing the valuation of intangibles is different under IFRS-3. Even Western companies are grappling with the concept and it’s already showing in the way Vodafone wrote down the valuation of its Indian subsidiary,” said Unni Krishnan, MD of Brand Finance, a brand evaluation consultancy.
While Indian accounting norms have also pressed for reporting such impairment, many Indian companies typically took refuge under a small provision in the Companies Act that allows such change in valuations to be adjusted against Reserves. “Also, boards of many companies need to take a call on whether any drop in valuations is typical to that industry,” said KH Viswanathan, an executive director with audit firm RSM Astute.
“If the steel industry, which is a cyclical sector, is going through a low phase, that factor needs to be considered before making any impairment. Such calls are also made by an independent expert,” he said. Aditya Birla group’s Hindalco, that made a big ticket acquisition in 2007 by buying Canada-based Novelis for $6 billion, faced similar prospects when the recession compounded the slowing market situation and exposed a faulty price ceiling contract. This forced Novelis to sell its final products to a select customer at a lower price.
The contract, which existed for three years, affected Novelis’s profitability. In February last year, Novelis posted a net loss of $1.8 billion for the December quarter of 2008 due to asset impairment charge and derivative losses. While the Canadian company has since completed the restrictive price ceiling contract tenure, a Hindalco official said that they are continuing with the audit procedure and can’t comment any further. Hindalco is scheduled to announce its earnings on June 4.
A Novelis statement said: “In accordance with FASB 142 (Financial Accounting Standards Board), we evaluate the carrying value of goodwill for potential impairment annually during the fourth quarter of each fiscal year or on an interim basis if an event occurs or circumstances change that indicate that the fair value of a reporting unit is likely to be below its carrying value.”
The company said that no additional impairment was identified at March 31, 2009, nor in the nine months ended December 31, 2009.
Shareholders and investors in Indian companies are yet to know that there are differences between IFRS and Indian accounting norms. The Indian norms permit reversal of impairment of goodwill when certain conditions are met. This is not there under IFRS. There is also a difference in the types of assets to be tested, with the Indian GAAP including all intangible assets with a useful life of more than 10 years. Under IFRS, only intangible assets with indefinite useful life are taken. However, it also needs to be mentioned that impairment charges don’t necessarily mean a cash drain. It’s only a fallout of stringent accounting rules, say auditors.
With only 7 months remaining, half of public companies are less than 60% through their IFRS conversions
Changes in financial reporting will require companies to explain possible changes in earnings per share and increases in pension liabilities
TORONTO, May 26 /CNW/ - With just over a half a year to go before converting to International Financial Reporting Standards (IFRS), many Canadian companies are making good progress, but others continue to lag behind, in a race to meet the January 1, 2011 deadline, according to a survey by the Canadian Financial Executives Research Foundations (CFERF), the research institute of FEI Canada, sponsored by PricewaterhouseCoopers (PwC).
The conversion to IFRS could result in some significant changes. For example, 28% of Canadian companies anticipate a decrease in reported net income, 22% expect earnings per share to fall and 28% expect an increase in pension liabilities in the first year of adoption. CFOs' communication with management, shareholders, analysts and other stakeholders will need to be robust during the next seven months to explain these changes to financial reporting and the transition process.
Canadian firms that are closer to completion include larger public companies and those in rate regulated sectors. Of executives responding from public companies, over half (53%) said their status of completion was 60% or higher. (This compares to last June where 80% of public companies remained short of the halfway mark in their overall conversion process.) Out of the top four industries responding to the survey who say they are more than 60% complete, utilities is the furthest ahead, with 73%, followed by the insurance sector (63%), mining and oil extraction companies (50%) and manufacturing (46%).
According to Diane Kazarian, PwC Canada's National IFRS leader, "The size of the company usually plays a big role in terms of expertise and available resources. Chief Financial Officers in smaller companies often have fewer personnel who are specifically dedicated to the conversion. Larger companies also started earlier due to the complexities of the transition process for them." Additionally, the survey indicates that nearly 30% of companies with revenues of less than $49 million said they did not have the resources required to implement the conversion.
The survey also shows that all respondents with annual revenues of more than $20 billion were more than 60% complete, compared to 41% in the $50-$249 million range who were more than 60% complete. One-third of private companies that will adopt IFRS had completed 60% or more of the transition. "Given that there is not a lot of time left, a number of companies may be challenged to meet the conversion date," adds Kazarian.
As IFRS is a new language of financial reporting, the adoption will directly impact the look and content of the financial statements. "As we move into the latter stages of the conversion, companies will need to spend more time to communicate the key changes," says Ramona Dzinkowski, Executive Director, CFERF. "The numbers, formats and notes that analysts and shareholders will see on financial statements will change and CFOs will have to make communication their priority," she says.
Overall, 51% of respondents say the new reporting will show a change in their company's asset values - either a decrease or an increase. "Under IFRS, greater volatility in financial statements is expected," according to Kazarian.
When asked what external stakeholders had been contacted to discuss the potential impacts of the IFRS conversion, only 23% of respondents said they had spoken to analysts. (A PwC survey of chartered financial analysts in 2009 also found that 74% of respondents to that survey had a poor to fair knowledge of IFRS.) "Clearly, this will have to be a communications priority in the coming months for CFOs and investor relations executives," adds Kazarian.
The survey further indicates that tax departments within respondent companies have begun to consider the potential impacts of IFRS on tax. Overall, 53% have considered the implications of IFRS on Canadian income tax compliance, 24% have looked at foreign income tax compliance, and 39% have discussed tax planning and 23% have considered transfer pricing.
On initial adoption, one year of comparative data is required to be presented on an IFRS basis. Accordingly, the majority of finance executives (61%) expect their preliminary IFRS opening balance sheet to be complete by the end of the second quarter of their 2010 fiscal year.
The survey also shows that close to two-thirds of respondents believe that IFRS conversion will leverage End User Computing (EUC) solutions (i.e. spreadsheets) on a more substantial basis. While spreadsheets can be a viable solution, risks associated with the use of spreadsheets must be understood and managed accordingly.
An important issue facing all companies is the consideration of key debt covenants impacted as a result of IFRS adoption. The survey showed that only 6% of respondents did not have awareness of the IFRS implications on their debt covenants. This included 31% of respondents who said they were extremely aware of the impacts, showing a good knowledge of how IFRS can impact a key external stakeholder group such as lenders.
"Overall, the survey results show that while considerable progress has been made in working towards January 2011 implementation, there is still work to be done with seven months remaining. IFRS can have significant implications on IT systems, processes within the finance department, and many other areas, such as training, communications and the business. Companies need to leave enough time in the transition timetable to prepare for contingencies should they run into unanticipated issues as they move to the conversion date of January 1, 2011," says Kazarian.
The study is a third in a series covering conversion activities in Canada. The results are based on responses from 146 senior financial executives across Canada who completed the survey in March and April of this year.
TORONTO, May 26 /CNW/ - With just over a half a year to go before converting to International Financial Reporting Standards (IFRS), many Canadian companies are making good progress, but others continue to lag behind, in a race to meet the January 1, 2011 deadline, according to a survey by the Canadian Financial Executives Research Foundations (CFERF), the research institute of FEI Canada, sponsored by PricewaterhouseCoopers (PwC).
The conversion to IFRS could result in some significant changes. For example, 28% of Canadian companies anticipate a decrease in reported net income, 22% expect earnings per share to fall and 28% expect an increase in pension liabilities in the first year of adoption. CFOs' communication with management, shareholders, analysts and other stakeholders will need to be robust during the next seven months to explain these changes to financial reporting and the transition process.
Canadian firms that are closer to completion include larger public companies and those in rate regulated sectors. Of executives responding from public companies, over half (53%) said their status of completion was 60% or higher. (This compares to last June where 80% of public companies remained short of the halfway mark in their overall conversion process.) Out of the top four industries responding to the survey who say they are more than 60% complete, utilities is the furthest ahead, with 73%, followed by the insurance sector (63%), mining and oil extraction companies (50%) and manufacturing (46%).
According to Diane Kazarian, PwC Canada's National IFRS leader, "The size of the company usually plays a big role in terms of expertise and available resources. Chief Financial Officers in smaller companies often have fewer personnel who are specifically dedicated to the conversion. Larger companies also started earlier due to the complexities of the transition process for them." Additionally, the survey indicates that nearly 30% of companies with revenues of less than $49 million said they did not have the resources required to implement the conversion.
The survey also shows that all respondents with annual revenues of more than $20 billion were more than 60% complete, compared to 41% in the $50-$249 million range who were more than 60% complete. One-third of private companies that will adopt IFRS had completed 60% or more of the transition. "Given that there is not a lot of time left, a number of companies may be challenged to meet the conversion date," adds Kazarian.
As IFRS is a new language of financial reporting, the adoption will directly impact the look and content of the financial statements. "As we move into the latter stages of the conversion, companies will need to spend more time to communicate the key changes," says Ramona Dzinkowski, Executive Director, CFERF. "The numbers, formats and notes that analysts and shareholders will see on financial statements will change and CFOs will have to make communication their priority," she says.
Overall, 51% of respondents say the new reporting will show a change in their company's asset values - either a decrease or an increase. "Under IFRS, greater volatility in financial statements is expected," according to Kazarian.
When asked what external stakeholders had been contacted to discuss the potential impacts of the IFRS conversion, only 23% of respondents said they had spoken to analysts. (A PwC survey of chartered financial analysts in 2009 also found that 74% of respondents to that survey had a poor to fair knowledge of IFRS.) "Clearly, this will have to be a communications priority in the coming months for CFOs and investor relations executives," adds Kazarian.
The survey further indicates that tax departments within respondent companies have begun to consider the potential impacts of IFRS on tax. Overall, 53% have considered the implications of IFRS on Canadian income tax compliance, 24% have looked at foreign income tax compliance, and 39% have discussed tax planning and 23% have considered transfer pricing.
On initial adoption, one year of comparative data is required to be presented on an IFRS basis. Accordingly, the majority of finance executives (61%) expect their preliminary IFRS opening balance sheet to be complete by the end of the second quarter of their 2010 fiscal year.
The survey also shows that close to two-thirds of respondents believe that IFRS conversion will leverage End User Computing (EUC) solutions (i.e. spreadsheets) on a more substantial basis. While spreadsheets can be a viable solution, risks associated with the use of spreadsheets must be understood and managed accordingly.
An important issue facing all companies is the consideration of key debt covenants impacted as a result of IFRS adoption. The survey showed that only 6% of respondents did not have awareness of the IFRS implications on their debt covenants. This included 31% of respondents who said they were extremely aware of the impacts, showing a good knowledge of how IFRS can impact a key external stakeholder group such as lenders.
"Overall, the survey results show that while considerable progress has been made in working towards January 2011 implementation, there is still work to be done with seven months remaining. IFRS can have significant implications on IT systems, processes within the finance department, and many other areas, such as training, communications and the business. Companies need to leave enough time in the transition timetable to prepare for contingencies should they run into unanticipated issues as they move to the conversion date of January 1, 2011," says Kazarian.
The study is a third in a series covering conversion activities in Canada. The results are based on responses from 146 senior financial executives across Canada who completed the survey in March and April of this year.
MCA note clarifies IFRS road map
Even as the Institute of Chartered Accountants of India (ICAI) finalises accounting standards, the ministry of corporate affairs (MCA) has come up with clarifications on IFRS road map in India.
An MCA note titled released on May 4, responds to several clarifications sou-ght by the industry.
Questions had been raised on the presentation of comparative financial information by Phase 1 companies in the first year of adopting the converged accounting standards. The MCA has now clarified that the opening balance sheet prepared on April 1, 2011 and the financial statements for the year ending March 31, 2012 shall be in accordance with the converged accounting standards; but comparative period figures (i.e., for the year ending March 31, 2011) shall continue to be reported as per the non-converged accounting standards.
A company may choose to report comparative period figures as per the converged accounting standards as an additional column in the financial statements. The opening balance sheet for companies in such a case shall be at April 1, 2010.
An MCA note titled released on May 4, responds to several clarifications sou-ght by the industry.
Questions had been raised on the presentation of comparative financial information by Phase 1 companies in the first year of adopting the converged accounting standards. The MCA has now clarified that the opening balance sheet prepared on April 1, 2011 and the financial statements for the year ending March 31, 2012 shall be in accordance with the converged accounting standards; but comparative period figures (i.e., for the year ending March 31, 2011) shall continue to be reported as per the non-converged accounting standards.
A company may choose to report comparative period figures as per the converged accounting standards as an additional column in the financial statements. The opening balance sheet for companies in such a case shall be at April 1, 2010.
BMO warns on impact of new accounting rules
An interesting note in Bank of Montreal’s financial statements Wednesday points out that the new International Financial Reporting Standards that public companies have to adopt could impact the bank’s capital ratios.
This is an issue that markets should be keeping an eye on, because the new rules could ultimately require Canadian banks to park many loans that are currently held off-balance sheet (because they’ve been sold or securitized) on their balance sheets.
It’s been a long haul for big banks as they prepare to adopt IFRS. The preparation has been costly and time-consuming, bankers say. BMO’s statements give some clues as to why.
Canadian public companies are required to start preparing their financial statements inline with IFRS for fiscal years beginning on or after January 1, 2011.
In order to get ready, BMO set up a bank-wide project led by a new executive steering committee to implement a three-phase transition plan. (The bank will adopt IFRS effective Nov. 1, 2011, the start of its fiscal year. So its first quarter reporting under the new rules will be the first quarter that ends Jan. 31, 2012).
The bank says the “implementation activities” have been organized into 25 individual work streams based on key areas that the new rules could affect, such as leases and stock-based compensation. (The rules will require companies to account for leases in a way that more closely resembles the way they account for mortgages, a change that could have a big impact on retail chains and other businesses with substantial leases). BMO has nearly finished seven work streams, and so far it hasn’t found any major differences to the way it’s already accounting for these items.
But “based on our analysis to date, the main accounting changes due to adopting IFRS are expected to be in the areas of asset securitization, consolidation, and pension and other employee future benefits,” the bank said. In those areas, the changes to the bank’s accounting regime are expected to be significant enough that they could change the bank’s financial results and capital ratios, it warned. (When it says “consolidation,” it’s referring to the potential need to include results from variable interest entities with its own statements).
It noted that the banking regulator is giving banks some leeway on their asset-to-capital multiple by allowing them to keep mortgages that were sold through CMHC programs (such as the Canada Mortgage Bonds program) before March 31, 2010 off their balance sheets as they adopt the changes. The regulator is also giving them some other relief, allowing them to phase in certain changes to their retained earnings over five quarters.
Interestingly, bankers say that corporate loan departments have also been helping clients determine the impact that IFRS will have on their financial statements. That’s because the new rules could potentially impact debt to equity ratios, triggering loan covenants.
This is an issue that markets should be keeping an eye on, because the new rules could ultimately require Canadian banks to park many loans that are currently held off-balance sheet (because they’ve been sold or securitized) on their balance sheets.
It’s been a long haul for big banks as they prepare to adopt IFRS. The preparation has been costly and time-consuming, bankers say. BMO’s statements give some clues as to why.
Canadian public companies are required to start preparing their financial statements inline with IFRS for fiscal years beginning on or after January 1, 2011.
In order to get ready, BMO set up a bank-wide project led by a new executive steering committee to implement a three-phase transition plan. (The bank will adopt IFRS effective Nov. 1, 2011, the start of its fiscal year. So its first quarter reporting under the new rules will be the first quarter that ends Jan. 31, 2012).
The bank says the “implementation activities” have been organized into 25 individual work streams based on key areas that the new rules could affect, such as leases and stock-based compensation. (The rules will require companies to account for leases in a way that more closely resembles the way they account for mortgages, a change that could have a big impact on retail chains and other businesses with substantial leases). BMO has nearly finished seven work streams, and so far it hasn’t found any major differences to the way it’s already accounting for these items.
But “based on our analysis to date, the main accounting changes due to adopting IFRS are expected to be in the areas of asset securitization, consolidation, and pension and other employee future benefits,” the bank said. In those areas, the changes to the bank’s accounting regime are expected to be significant enough that they could change the bank’s financial results and capital ratios, it warned. (When it says “consolidation,” it’s referring to the potential need to include results from variable interest entities with its own statements).
It noted that the banking regulator is giving banks some leeway on their asset-to-capital multiple by allowing them to keep mortgages that were sold through CMHC programs (such as the Canada Mortgage Bonds program) before March 31, 2010 off their balance sheets as they adopt the changes. The regulator is also giving them some other relief, allowing them to phase in certain changes to their retained earnings over five quarters.
Interestingly, bankers say that corporate loan departments have also been helping clients determine the impact that IFRS will have on their financial statements. That’s because the new rules could potentially impact debt to equity ratios, triggering loan covenants.
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