A

PROJECT
ON

(IMPACT ON BANKING SECTOR)

 ACKNOWLEDGEMENT
We wish to express our deep sense of gratitude to
Dr. (Mrs.) C.T.Chakraborty, Principal, Thakur
College of Science and Commerce, Kandivali –
(East), Mumbai-400101, for providing us this
opportunity to do the project on “IFRS-IMPACT ON
BANKING SECTOR”. We are thankful to Mrs. Rajshri
Soni, for giving his valuable guidance, support and
helping hand to us for completing this project
successfully.

We are also thankful to Lion Dr. Nishikant

Jha, Co-Ordinator, (I.Sci. D.C.A., D.C.P., B.Com.,
M.Com., I.C.W.A., P.G.D.B.M., NAT, Ph.D., Pursuing
D.Lit), for guiding and encouraging us through our
Group projects.
 Introduction:
The Institute of Chartered Accountants of India (ICAI) has
announced that IFRS will be mandatory in India for financial
statements for the periods beginning on or after 1 April 2011.
This will be done by revising existing accounting standards to
make them compatible with IFRS. Reserve Bank of India has
stated that financial statements of banks need to be IFRS-
compliant for periods beginning on or after 1 April 2011...
The ICAI has also stated that IFRS will be applied to companies
above Rs.1000 crore from April 2011.

 Meaning of IFRS.
International Financial Reporting Standards (IFRS) are
principles-based Standards, Interpretations and the Framework
(1989) adopted by the International Accounting Standards
Board (IASB). Many of the standards forming part of IFRS are
known by the older name of International Accounting
Standards (IAS). IAS was issued between 1973 and 2001 by the
Board of the International Accounting Standards
Committee (IASC). On 1 April 2001, the new IASB took over from
the IASC the responsibility for setting International Accounting
Standards. During its first meeting the new Board adopted
existing IAS and SICs. The IASB has continued to develop
standards calling the new standards IFRS. A set of international
accounting standards stating how particular types of transactions
and other events should be reported in financial statements. IFRS
are issued by the International Accounting Standards Board. 
IFRS are sometimes confused with International Accounting
Standards (IAS), which are the older standards that IFRS
replaced. (IAS were issued from 1973 to 2000.)  
 The goal with IFRS is to make international comparisons as
easy as possible. This is difficult because, to a large extent, each
country has its own set of rules. For example, U.S. GAAP is
different from Canadian GAAP. Synchronizing accounting
standards across the globe is an ongoing process in the
international accounting community.

 First – Time Adoption of IFRS.

IFRS 1 FIRST-TIME ADOPTION OF INTERNATIONAL

FINANCIAL REPORTING STANDARDS
HISTORY OF IFRS 1

September Project added to IASB agenda

2001

July 2002 Exposure Draft ED 1 First-time

Application of IFRSs issued

June 2003 IFRS 1 First-time Adoption of

IFRSs issued

1 January Effective date of IFRS 1 is for the first

2004 IFRS financial statements for a period
beginning on or after 1 January 2004

30 June Small amendment of IFRS 1 relating to

2005 IFRS 6
22 May IFRS 1 amended for 'Cost of a Subsidiary
2008 in the Separate Financial Statements of a
Parent on First-time Adoption of IFRSs'

25 Exposure Draft: Additional Exemptions for

September First-time Adopters issued
2008

24 Restructured version of IFRS 1 issued

November
2008

1 July Effective date of IFRS 1 (revised and

2009 restructured 2008)

23 July IFRS 1 amendment to add two additional

2009 exemptions for first-time adopters,
effective for annual periods beginning 1
January 2010.

26 Exposure Draft of a proposed limited

November exemption from comparative IFRS 7
2009 disclosures

1 January Effective date of the July 2009

2010 amendments

29 January IFRS 1 amendment to provide an

2010 exemption from comparative IFRS 7
disclosures that were adopted in March
2009

6 May IFRS 1 amended for Annual

2010 Improvements to IFRSs 2010
 1 July Effective date of the July 2009
2010 amendments

20 IFRS 1 amended for fixed transition dates

December and severe hyperinflation.
2010

1 July Effective date of May 2010 amendment to

2011 IFRS 1

IFRS - Challenges and Need for India

 INTRODUCTION

The International Financial Reporting Standards the "IFRS" aims

to make international financial reporting comparisons as easy as
possible because each country has its own set of accounting
rules. For example, U.S. GAAP is different from Canadian GAAP
and both are far apart from India GAAP. Synchronizing
accounting standards across the globe is an ongoing process in
the international accounting community.

A set of international accounting and reporting standards that will

help to harmonize company financial information, improve the
transparency of accounting, and ensure that investors receive
more accurate and consistent reports were attempted by
International Accounting Standards Board (ISAB) between 1973
and 2001 and are designated as" International Accounting
Standards". In 2001 IASB, adopted the first iteration of
International Financial Reporting Standards (IFRS) to serve as a
possible pathway for establishing uniform global accounting
standards. Since then, IFRS has been adopted or become
accepted in over 100 countries.
 CONVERSION OR ADOPTION OF IFRS BY
INDIAN COMPANY:
India today has become an international economic force. Indian
companies has surpassed in several sectors of the industry that
includes, ITES, software, pharmaceutical, auto spare part to
name a few. And to stay as a leader in the international market
India opted the changes it need to interface Indian stakeholders',
the international stakeholders' and comply with the financial
reporting  in a language that is understandable to all of them. In
response to the need several Indian companies have already
been providing their financial statements as per US GAAP and/or
IFRS on voluntary basis. But, however this is becoming more of a
necessity then just being a best practice.

In the coming years, critical decisions will need to be made

regarding the use of global accounting standards in India. Market
participants will be called upon to determine whether achieving a
uniform set of high-quality global accounting standards is
feasible, what sort of investments would be required to achieve
that outcome, and whether it is a desirable goal in the first place.
This dialogue will be critical to the future of financial reporting
and of fundamental importance to the long-term strength and
stability of the global capital markets.

Performance measures, based on Indian GAAP may need

revisiting as it may change in IFRS adoption by fair amount on
account of valuation aspect. Expectation of investor and market
will also be required to be of paramount importance to manage in
the adoption of process.
ADOPTION OR CONVERGENCE ?
The two terms though used interchangeably but there is a faint
but important difference.

Adoption- is process of adopting IFRS as issued by IASB, with or

without modifications. Modifications being, generally in the nature
of additional disclosures requirement or elimination of alternative
treatment. It involves an endorsement of IFRS by legislative or
regulatory with minor modifications done by standard setting
authority of a country.

Convergence- is harmonization of national GAAP with IFRS

through design and maintenance of accounting standards in a
way that financial statements prepared with national accounting
standards are in compliance with IFRS.

WHO WILL BE BENEFITED ?

The convergence with IFRS entails benefit to the following:

 The Investors :-The investor will be benefited in as the way

accounting information made available to them will be more
reliable, relevant, timely and most importantly the information
will be comparable across different legal framework. It will
develop better understanding and confidence among the
investors.

 The Professional :-The professional, both in practice and in

employment will get benefits as they will be able to provide
their services in various part of the world, as few years after
everybody will follow the same reporting standards.

 The Corporate world :-The Indian corporate reputation and

relationship with international finance community will elevate
because of achievement of higher level of consistency between
 reporting structure and requirements; better access to
international markets; improving confidence among the
international investors. The international comparability will also
get improve strengthening the industrial and capital markets in
the country.

CHALLENGES TO BE FACED?
Despite several benefits as may be looked out by the different
people, there will be several challenges that will be faced on the
way of IFRS convergence.

The first and far most would be from the differences between
Indian GAAP and IFRS.  The differences are wide and very deep
routed, to say a few -Plant Property and Equipment (PPE)
accounting, Financial Instruments accounting, Investment
accounting, Business combination, Share based payment, current
and non-current classification of asset and liabilities, presentation
of financial statements, all are not dealt under Indian GAAP.

Challenges on account of differences in various conceptual,

practical, legal and implementation methods.  The Indian GAAP
keeps abreast the local conditions, including the legal and
economic environment. For example AS 29 does not specifically
deal with constructive obligation whereas IAS 37 deals specifically
with this in the context of creation of a provision. The effect of
this is that in some cases provisions will be required to be
recognized at an early stage.

The regulatory and legal requirements in India will pose a

challenge unless the same is been addressed by respective
regulatory. For example the present direct tax laws do not
address any tax implications likely to arise from IFRS transitions.

Complexities of the introduction of concepts such as present

value and fair value measurement, recognition and the extent of
disclosure required under IFRS.
 COMPARISON WITH CURRENT INDIAN ACCOUNTING
STANDARD WITH THE CORRESPONDING NUMBER OF
RELEVANT IAS/IFRS:

Indian Accounting IAS/IFRS

 
Standard
AS Name of Standard IAS/ Name of Standard
No. IFR
 
S
No.
1 Disclosures of Accounting 1 Presentation of financial
 
Policies statements
2 Valuation of Inventories   2 Inventories
3 Cash Flow Statements 7 Statements of Cash
 
Flows
4 Contingencies and Events 10 Events after the
Occurring after the   Reporting Period
Balance Sheet Date
5 Net Profit or Loss for the 8 Accounting Policies,
Period, Prior Period Items Changes in Accounting
 
and Changes in Estimates and Errors
Accounting Policies
6 Depreciation No equivalent standard.
   
Included in IAS 16
7 Constructions Contracts   11 Constructions Contracts
9 Revenue Recognition   18 Revenue
10 Accounting for Fixed 16 Property, Plant and
 
Assets Equipment
11 The Effects of Changes in 21 The Effects of Changes in
 
Foreign Exchanges Rates Foreign Exchanges Rates
12 Accounting for 20 Accounting for
Government Grants Government Grants and
 
Disclosure of
Government Assistance
13 Accounting for Mainly dealt with in IAS
   
Investments 39
14 Accounting for IFRS Business Combinations
 
Amalgamations 3
15 Employee Benefits   19 Employee Benefits
16 Borrowing Costs   23 Borrowings Costs
17 Segment Reporting IFRS Operating Segments
 
8
18 Related Party Disclosures   24 Related Party Disclosures
19 Leases   17 Leases
20 Earnings Per Share   33 Earnings Per Share
21 Consolidated Financial 27 Consolidated and
Statements   Separate Financial
Statements
22 Accounting for Taxes for 12 Income Taxes
 
Income
23 Accounting for 28 Investments in
Investment in Associates Associates
 
in Consolidated Financial
Statements
24 Discontinuing Operations IFRS Non-current Assets Held
  5 for Sale and Discontinued
Operations
25 Interim Financial 34 Interim Financial
 
Reporting Reporting
26 Intangible Assets   38 Intangible Assets
27 Financial Reporting of 31 Interest in Joint Ventures
 
Interest in Joint Ventures
28 Impairment of Assets   36 Impairment of Assets
29 Provisions, Contingent 37 Provisions, Contingent
Liabilities and Contingent   Liabilities and Contingent
Assets Assets
30 Financial Instruments: 32 Financial Instruments:
Recognition and   Recognition and
Measurement Measurement
31 Financial Instruments: 39 Financial Instruments:
 
Presentation Presentation
32 Financial Instruments:   IFRS Financial Instruments:
 Disclosures 7 Disclosures

However, currently there are no corresponding Standards

available under Indian GAAP for the following IAS/IFRS:

IAS 26- Accounting and Reporting by retirement Benefit Plans

IAS 29- Financial Reporting in Hyperinflationary Economies
IAS 40- Investment Property
IAS 41- Agriculture
IFRS 1- First Time Adoption of International Financial Reporting
Standards.
IFRS 2- Share Based Payment
IFRS 4- Insurance Contracts
IFRS 6- Exploration for and Evaluation of Mineral Resources

Impact of IFRS on Banking sector:

 Background

Subsequent to the announcement of the proposal by the

Institute of Chartered Accountants of India (ICAI) to converge the
Indian accounting standards (Indian GAAP) with International
Financial Reporting Standards (IFRS) effective April 1, 2011,
there has been significant debate among the standard setters,
regulators, Corporate India and professional accounting firms, on
the roadmap to convergence and its implications. Our publication
titled ‘IFRS: Developing a Roadmap to Convergence’ (March
2008)Provided our perspective on several issues relating to this
proposed convergence. Our recent interactions with standard
setters, regulators and large companies indicate that even though
several questions relating to this convergence process remain
unanswered, all stakeholders are generally committed to achieve
the goal Of convergence.
Top five technical accounting challenges for
banks:

 Loan/investment impairment:

IFRS prescribes an impairment model that requires a case by

case (for significant exposures) assessment of the facts and
circumstances surrounding the recoverability and timing of future
cash flows relating to a credit exposure. Should there be an
expectation that all contractual cash flows would not be recovered
(or recovered without full future interest applications), an account
would be classified as impaired and impairment be measured on
present value basis using the effective interest rate of the
exposure as the discount rate. For groups of loans that share
homogenous characteristics (such as mortgage and credit card
receivables), impairment can be assessed on a collective basis.
The aim of an individual or collective assessment is to capture the
incurred loss for a specified portfolio. General provisions are
permissible only to extent that they relate to a specified risk that
can be measured reliably and for incurred losses. No provisions
are permitted for future or expected losses. For investments, a
similar analysis is conducted, the key difference being that the
fair value of the investment is also considered as an input in
addition to the financial/ credit standing of the issuer.
The bedrock of this impairment assessment is a system that
considers all the facts and circumstances and requires the use of
informe judgment. This aspect represents the most significant
difference from Indian GAAP for banks in India. Current Indian
GAAP/RBI guidelines require a limited use of judgment and are
Mechanistic in nature with prescribed provisioning rates.

 What should banks focus on to meet this challenge?

 Develop/ strengthen a data capture system to enable the

impairment assessment after determining tactically where
information will be collected. Who will make the impairment
 assessment / templates and information Gathering and storage
systems etc.
 Use and align this process of information gathering and
assessment to strengthen the risk management function and
feed into other strategic Initiatives such as internal ratings,
Basel II compliance and potential application Of internal
ratings based / advanced approaches.
 Improve and strengthen the loss forecasting mechanisms
within the Organization in parallel with fine tuning risk adjusted
pricing for fresh loans being sanctioned by the bank.
 Certain system changes would need to be made for accounting
for impairment; for example, computation of discounted future
cash flows to facilitate the booking of the required accounting
adjustments.

 Required use of fair value for more financial

Instruments:

Fair value measurement is infrequently used under Indian

GAAP and in most Cases where it is, the aim is primarily to
capture a lower of cost or fair value Measurement base. Under
IFRS, there may be a significant increase in the extent that fair
value measurement needs to be used. For instance all financial
assets and liabilities will need to be initially measured at fair
value. While in a number of instances, fair values may be
represented by transaction prices, the onus on banks will be to
prove that transaction prices represent fair value. In addition,
there will be a number of instances where unrealized gains can /
should be recognized; for example, trading instruments and those
where the ban elects the fair value option. Further, due to the
stringent criteria prescribed under IFRS, a held to Maturity (HTM)
classification, (which currently results in an amortized cost
valuation basis for a significant part of most Indian banks’
investment portfolio), is Unlikely to be available leading to fair
value measurement for a substantial part of the portfolio. Again,
this is a significant shift from current accounting treatment under
Indian GAAP.

 What should banks focus on to meet this challenge?

 Fair valuation methodologies and practices would need to be

re-examined to Ensure that they are current, up to date and
are validated and back tested in the current market conditions.

 Adequately trained personnel need to be made responsible for

this significant area of expertise and judgment.

 Profit planning and budgeting need to be fine-tuned to

incorporate the expected increase in income statement
volatility arising of the increased use of fair values as a
measurement attribute.

Derivatives and hedge accounting:

Under IFRS, all derivatives are recognized on the balance sheet
at fair values with Changes in fair values being recognized
generally in the income statement other than in the case of a
qualifying cash flow hedge relationship. Application of hedge
accounting does reduce the income statement volatility induced
by the fair value measurement of derivatives but comes with
significant strings attached in the form of documentation, hedge
effectiveness testing and ineffectiveness measurement. In
addition, embedded derivative contracts (such as equity
conversion option embedded in a convertible debenture the most
common found in India) require to be separated from their host
contracts and be accounted for separately. In contrast, current
Indian GAAP does not specifically address the more ‘difficult to
apply’ provisions of fair value and hedge accounting.

 What should banks focus on to meet this challenge?

 Derivative valuation models need to be validated and back
tested their use will be much more significant in the FRS world;

 Hedge relationships are a specialized area of accounting and it

is crucial that Organizational awareness of the rules are
enhanced. Certain process and system changes need to be
made (for example, to designate hedging relationships at a
‘gross’ level and not at a ‘net’ level given that many interest
rate, foreign exchange and liquidity positions are monitored
only on a ‘net’ basis), documentation and hedge effectiveness
testing processes need to be Incorporated.

 Certain Strategic decisions will need to be made as where and

when hedge Accounting is to be applied (even perhaps what
contracts are transacted in), Where individual banks will be
comfortable with the income statement Volatility as it does not
see value in the cost benefit analysis of applying hedge
Accounting.

 De-recognition of financial assets:

Under IFRS, de-recognition of financial assets is a complex,

multi-layered area with the de-recognition decision dependent
largely on whether there has been a Transfer of risks and
rewards. If the assessment of the transfer of risks and Rewards is
not conclusive, an assessment of control and the extent of
continuing Involvement is required to be performed. In many
cases, this cannot be restricted To qualitative assessments and
needs to be necessarily a quantitative assessment. A major area
impacted would be securitization activity most Indian
securitization Vehicles are currently structured to meet Indian
GAAP de-recognition norms. Substantially all those securitization
vehicles would collapse into the transferor’s Balance sheet and
assets would fail the de-recognition test under IFRS.
For example, securitization transactions where credit
collaterals are provided/ guarantee is provided to cover credit
losses in excess of the losses inherent in the portfolio of assets
securitized, may not meet the de-recognition principles
enunciated in IAS 39. Given that the IFRS position is significantly
different from that followed under Indian GAAP, application of
the new norms would in general lead to more Instances of
transfers failing the de-recognition criteria thereby resulting in
large Balance sheets and capital adequacy requirements, lower
return on assets and Deferral of gains/losses on such
securitization transactions.

 What should banks focus on to meet this

challenge?

Assess the impact of transactions that would fail de-recognition

and consider the potential impact on capital adequacy and ratios
such as return on assets.
• Work towards developing (in consultation with investors,
originators and legal counsel) new securitization structures that
are designed to meet the de-recognition norms under IFRS.

• Assess at a strategic level if the organization is willing to

compromise on credit Ratings for securitized pools in order to
achieve the desired capital and Accounting result of de-
recognition.

•Certain process and system changes will need to be made for

accounting for these transactions from current practice (including
for example, how an assessment of transfer of risk and rewards
will be measured and documented)

• Create an assessment model that incorporates the full cost

benefit analysis of Undertaking securitization transactions even if
they don’t meet the de-recognition Norms as a funding
alternative to raising deposits.

 Consolidation of entities:
Under IFRS, consolidation is not driven purely by the
ownership structure of an entity. Instead the focus is more on the
power to control an entity to obtain economic benefits this power
to control could be expressed as ownership of equity securities
but is not limited to it. For instance, this will include a
consideration of currently exercisable potential voting
rights/shares; management and other agreements, de facto
control and other arrangements that provide the power to control
an entity. IFRS also provides guidance on how consolidation
decisions for special purpose entities should be arrived at in a
number of ways, IFRS provides more rigorous consolidation tests
and in practice can result in the consolidation of a larger number
of entities as compared to Indian GAAP which focuses on a
narrower set of tests (majority of ownership and control Over a
majority of the composition of the board of directors or similar
body).

What should banks focus on to meet this

challenge?
Collate and inventories the full set of entities where
consolidation assessment need to be made and perform those
assessments as early as possible including a consideration of non-
shareholding related factors that impact consolidation.
• Ensure that common accounting policies are applied across the
group.
• Prepare for the impact of factors arising out of consolidation
such as how disclosures at a group level can be collated and
populated, chart of accounts, group reporting packages, reporting
timelines and
• Consider specifically how inter-company transactions and
deferred taxation Related aspects will be dealt with.
BIBLIOGRAPHY
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