Ifrs 2011
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2008-10
INITIAL REPORT On Study changes made by a firm in accounting aspects to meet IFRS-2011 SUBMITTED BY ALEX MBA (SEMESTER – I) ICFAI NATIONAL COLLEGE, HYDERABAD
ACKNOWLEDGEMENT With deep sense of pleasure and satisfaction I complete this project on topic “Study changes made by a firm in accounting aspects to meet IFRS-2011” I would like to extend my heart felt thanks to Mrs.Rajavally, Faculty, Icfai National College, and Dilsukhnagar whose invaluable guidance became a tremendous source of inspiration and helped me in completing the project. Lastly I thank to all those who have directly or indirectly helped me in accomplishing this task.
(ABHAY KUMAR)
ICFAI NATIONAL COLLEGE
Table of contents 1. Objective 2. Methodology 3. Introduction 4. Company profile 5. Findings 6. Limitation 7. Conclusion 8. Bibliography
OBJECTIVE • To know about the accounting Policy IFRS. • To know changes made to meet its guidelines. •
To know its impact on firms
METHODOLOGY Data was collected from primary as well as secondary sources. Primary Data:- Primary data is the data that is collected using methods such as surveys ,direct observations, interviews. Primary data is a reliable way to collect data. After analysis of primary data it converted into a secondary data.
Secondary data:- Secondary sources on the other hand are sources that are based upon the data that was collected from the primary source. Secondary sources take the role of analyzing, explaining, and combining the information from the primary source with additional information.
INTRODUCTION IFRS are International Financial Reporting Standards, which are issued by the International Accounting Standards Board (IASB). Nearly 100 countries use or coordinate with IFRS. These countries or groups of countries include the European Union, Australia, and South Africa. International Financial Reporting Standards (IFRS) are standards and interpretations adopted by the International Accounting Standards Board (IASB). IFRSs are considered a "principles based" set of standards in that they establish broad rules as well as dictating specific treatments. The International Accounting Standards Board (IASB) and the International Financial Reporting Standards (IFRS) that they issue are very important for the future of accounting. With businesses turning global, it is important that investors are able to compare companies under similar standards. Likewise, it is important for businesses operating in multiple countries to be able to create financial statements that are understandable in all of the countries they operate in. Two of the main advantages of adopting IFRS are those of more transparency and a higher degree of comparability. Both of these will benefit investors and are essential to achieving the goal of an integrated
global and financial market place. Companies will have greater access to world capital markets at lower costs of capital. Consumers (investors) will enjoy wider investment choice. IFRS allows a company to enhance the communication of its financial performance and position together with other performance. Another advantage of reporting under IFRS is the restructuring of internal management reporting systems which assist in financial accounting and financial statement generation and the provision of essential management information required for evaluating company and executive performance.
Challenges Faced In adopting IFRS Conversion to IFRS will often challenge fundamentally a company's existing business model. It will affect the way the company presents itself to investors and other users of its financial statements. It is vital that company managements recognize the far-reaching impact that IFRS will have on their businesses. Failure to do so could place their companies at a competitive disadvantage. IFRS conversion presents management with an opportunity to reconsider the business reporting model. For many companies, the impact of IFRS on investor relations will be considerable.
Although entities are frequently required to adopt new accounting standards under their national Generally Accepted Accounting Principles (‘GAAP’), adopting IFRS, an entirely different basis of accounting, poses a distinct set of problems: •
information may need to be collected that was not required under the previous GAAP.
• practical experience of applying a principles-based system of financial reporting standards such as IFRS does not exist in many entities. • the requirements of individual standards will often differ significantly from those under an entity's previous GAAP;
Indian accounting standards will converge fully with the International Financial Reporting Standards (IFRS) by 2011, The National Advisory Committee on Accounting Standards (NACAS) is reviewing AS-30, AS-31 and AS-32. Following this, AS-32 will become mandatory from April 2011,. It would be difficult for banks to follow IFRS
Changes made by bank to meet IFRS are Banks will have to adjust the accounting changes that are enforced by IFRS. The Following are a few areas of impact: Loan / Investment impairment Currently, banks consider provisions on loans based on RBI guidelines, which are very prescriptive and require limited use of judgment. However, IFRS require a case by case assessment (for significant exposures) of the facts and circumstances surrounding the recoverability and timing of future cash flows relating to the credit exposure. For investments, fair value is also considered as an input in addition to the financial/ credit standing of the issuer. FRS may result in higher loan losses and impairment charges, thereby impacting available capital and capital adequacy ratios Fair Value : Under IFRS, a significant percentage of the balance sheet would have to be fair valued compared to the current practice of carrying it at historical cost /lower than the cost or fair value. Accordingly, fair value 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 current market conditions. fair values would introduce additional volatility in reported capital with its consequent impact on capital adequacy.
Derivatives and hedge accounting :
Application of hedge accounting would bring down reducing income statement volatility. However, this will entail onerous and stringent documentation requirements, mandatory effectiveness tests and determination of fair value based on observable inputs. This will also call for a much heightened awareness of rules for hedge relationships and certain processes and system changes. De-recognition of financial assets : Under IFRS, de-recognition of financial assets is a complex, multi-layered area that follows the principle of transfer of risks and rewards. In the Indian context, this will impact mainly the securitisation activity. Securitsation transactions — where credit collaterals are provided or guarantee is provided to cover credit losses in excess of the losses inherent in the portfolio of assets securitised — may not meet the de-recognition principles enunciated in IAS 39. This will result in failure of de-recognition test under IFRS and lead to collapse of securitisation vehicles into the transferor’s balance sheets. Banks will need to assess the impact and consider the potential impact on capital adequacy and ratios such as return on assets.
Consolidation : Under IFRS, consolidation is not driven purely by the ownership structure of an entity but will have to focus on the power to control an entity to obtain economic benefit. IFRS provides more rigorous consolidation tests and in practice can result in the consolidation of a larger number of entities as compared to under Indian GAAP. Banks will need to perform consolidation assessments as early as possible, particularly for non-shareholding related factors that impact consolidation, to assess its impact.
COMPANY PROFILE ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest private sector bank in market capitalization and second largest overall in terms of assets. 1955 The World Bank, the Government of India and representatives of Indian industry formed ICICI Limited as a development finance institution to provide medium-term and long-term project financing to Indian businesses. 1994 ICICI established Banking Corporation as a banking subsidiary.formerly Industrial Credit and Investment Corporation of India. Later, ICICI Banking Corporation was renamed as 'ICICI Bank Limited'. ICICI founded a separate legal entity, ICICI Bank, to undertake normal banking operations - taking deposits, credit cards, car loans etc. 999 ICICI became the first Indian company and the first bank or financial institution from non-Japan Asia to list on the NYSE. 2001 ICICI acquired Bank of Madura (est. 1943). Bank of Madura was a Chettiar bank, and had acquired Chettinad Mercantile Bank (est. 1933) and Illanji Bank (established 1904) in the 1960s. 2002 The Boards of Directors of ICICI and ICICI Bank approved the reverse merger of ICICI, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, into ICICI Bank. CICI Bank has total assets of about USD 100 Billion (end-Mar 2008), a network of over 1308 branches and offices, about 3954 ATMs, and 24
million customers (as of end July 2007). ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, life and nonlife insurance, venture capital and asset management.
FINDINGS • We know about IFRS • Its advantages to firm adopting it. • Its impact on firm • It has a great impact on Banking sector
LIMITATION •
Observed data of only one bank.
•
Bank was not fully cooperative .
• Bank is not giving answer to all question.
CONCLUSION It was always clear that a first-time adoption standard driven by the desire to avoid undue cost and effort would have to include exemptions that would permit first-time adopters to apply IFRS in a practical manner. In the long run only the effect of the business combinations and 'fair value or revaluation as deemed cost' exemptions will be enduring. However, even the impact of those exemptions will be relatively insignificant compared with, for example, the huge effect an acquisition has on the comparability of financial statements from one period to another. For first-time adopters, IFRS 1 represents a marked improvement over the theoretically pure but practically unworkable SIC-8. It is therefore no surprise to see that many first-time adopters are applying IFRS 1 early. Still, some first-time adopters of IFRS will have concerns about, for example, the complexity of the firsttime adoption exemption for share-based payments. Others will complain about the
unfairness of a business combination exemption that does not allow an adjustment of goodwill for items other than intangible assets, contingencies and impairments. it would be difficult for banks to follow IFRS, since they stick to the Reserve Bank of India's standards, and the RBI is rigid about giving up its accounting procedures for the IFRS.
Bibliography 1Bank
-
ICICI
2News Paper
-
The Economics Times The Times of India
3 Internet
-
www.icicibank.com www.indiaprwire.com www.economictimes.indiatimes.com
INITIAL REPORT On Study changes made by a firm in accounting aspects to meet IFRS-2011 SUBMITTED BY ALEX MBA (SEMESTER – I) ICFAI NATIONAL COLLEGE, HYDERABAD
ACKNOWLEDGEMENT With deep sense of pleasure and satisfaction I complete this project on topic “Study changes made by a firm in accounting aspects to meet IFRS-2011” I would like to extend my heart felt thanks to Mrs.Rajavally, Faculty, Icfai National College, and Dilsukhnagar whose invaluable guidance became a tremendous source of inspiration and helped me in completing the project. Lastly I thank to all those who have directly or indirectly helped me in accomplishing this task.
(ABHAY KUMAR)
ICFAI NATIONAL COLLEGE
Table of contents 1. Objective 2. Methodology 3. Introduction 4. Company profile 5. Findings 6. Limitation 7. Conclusion 8. Bibliography
OBJECTIVE • To know about the accounting Policy IFRS. • To know changes made to meet its guidelines. •
To know its impact on firms
METHODOLOGY Data was collected from primary as well as secondary sources. Primary Data:- Primary data is the data that is collected using methods such as surveys ,direct observations, interviews. Primary data is a reliable way to collect data. After analysis of primary data it converted into a secondary data.
Secondary data:- Secondary sources on the other hand are sources that are based upon the data that was collected from the primary source. Secondary sources take the role of analyzing, explaining, and combining the information from the primary source with additional information.
INTRODUCTION IFRS are International Financial Reporting Standards, which are issued by the International Accounting Standards Board (IASB). Nearly 100 countries use or coordinate with IFRS. These countries or groups of countries include the European Union, Australia, and South Africa. International Financial Reporting Standards (IFRS) are standards and interpretations adopted by the International Accounting Standards Board (IASB). IFRSs are considered a "principles based" set of standards in that they establish broad rules as well as dictating specific treatments. The International Accounting Standards Board (IASB) and the International Financial Reporting Standards (IFRS) that they issue are very important for the future of accounting. With businesses turning global, it is important that investors are able to compare companies under similar standards. Likewise, it is important for businesses operating in multiple countries to be able to create financial statements that are understandable in all of the countries they operate in. Two of the main advantages of adopting IFRS are those of more transparency and a higher degree of comparability. Both of these will benefit investors and are essential to achieving the goal of an integrated
global and financial market place. Companies will have greater access to world capital markets at lower costs of capital. Consumers (investors) will enjoy wider investment choice. IFRS allows a company to enhance the communication of its financial performance and position together with other performance. Another advantage of reporting under IFRS is the restructuring of internal management reporting systems which assist in financial accounting and financial statement generation and the provision of essential management information required for evaluating company and executive performance.
Challenges Faced In adopting IFRS Conversion to IFRS will often challenge fundamentally a company's existing business model. It will affect the way the company presents itself to investors and other users of its financial statements. It is vital that company managements recognize the far-reaching impact that IFRS will have on their businesses. Failure to do so could place their companies at a competitive disadvantage. IFRS conversion presents management with an opportunity to reconsider the business reporting model. For many companies, the impact of IFRS on investor relations will be considerable.
Although entities are frequently required to adopt new accounting standards under their national Generally Accepted Accounting Principles (‘GAAP’), adopting IFRS, an entirely different basis of accounting, poses a distinct set of problems: •
information may need to be collected that was not required under the previous GAAP.
• practical experience of applying a principles-based system of financial reporting standards such as IFRS does not exist in many entities. • the requirements of individual standards will often differ significantly from those under an entity's previous GAAP;
Indian accounting standards will converge fully with the International Financial Reporting Standards (IFRS) by 2011, The National Advisory Committee on Accounting Standards (NACAS) is reviewing AS-30, AS-31 and AS-32. Following this, AS-32 will become mandatory from April 2011,. It would be difficult for banks to follow IFRS
Changes made by bank to meet IFRS are Banks will have to adjust the accounting changes that are enforced by IFRS. The Following are a few areas of impact: Loan / Investment impairment Currently, banks consider provisions on loans based on RBI guidelines, which are very prescriptive and require limited use of judgment. However, IFRS require a case by case assessment (for significant exposures) of the facts and circumstances surrounding the recoverability and timing of future cash flows relating to the credit exposure. For investments, fair value is also considered as an input in addition to the financial/ credit standing of the issuer. FRS may result in higher loan losses and impairment charges, thereby impacting available capital and capital adequacy ratios Fair Value : Under IFRS, a significant percentage of the balance sheet would have to be fair valued compared to the current practice of carrying it at historical cost /lower than the cost or fair value. Accordingly, fair value 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 current market conditions. fair values would introduce additional volatility in reported capital with its consequent impact on capital adequacy.
Derivatives and hedge accounting :
Application of hedge accounting would bring down reducing income statement volatility. However, this will entail onerous and stringent documentation requirements, mandatory effectiveness tests and determination of fair value based on observable inputs. This will also call for a much heightened awareness of rules for hedge relationships and certain processes and system changes. De-recognition of financial assets : Under IFRS, de-recognition of financial assets is a complex, multi-layered area that follows the principle of transfer of risks and rewards. In the Indian context, this will impact mainly the securitisation activity. Securitsation transactions — where credit collaterals are provided or guarantee is provided to cover credit losses in excess of the losses inherent in the portfolio of assets securitised — may not meet the de-recognition principles enunciated in IAS 39. This will result in failure of de-recognition test under IFRS and lead to collapse of securitisation vehicles into the transferor’s balance sheets. Banks will need to assess the impact and consider the potential impact on capital adequacy and ratios such as return on assets.
Consolidation : Under IFRS, consolidation is not driven purely by the ownership structure of an entity but will have to focus on the power to control an entity to obtain economic benefit. IFRS provides more rigorous consolidation tests and in practice can result in the consolidation of a larger number of entities as compared to under Indian GAAP. Banks will need to perform consolidation assessments as early as possible, particularly for non-shareholding related factors that impact consolidation, to assess its impact.
COMPANY PROFILE ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest private sector bank in market capitalization and second largest overall in terms of assets. 1955 The World Bank, the Government of India and representatives of Indian industry formed ICICI Limited as a development finance institution to provide medium-term and long-term project financing to Indian businesses. 1994 ICICI established Banking Corporation as a banking subsidiary.formerly Industrial Credit and Investment Corporation of India. Later, ICICI Banking Corporation was renamed as 'ICICI Bank Limited'. ICICI founded a separate legal entity, ICICI Bank, to undertake normal banking operations - taking deposits, credit cards, car loans etc. 999 ICICI became the first Indian company and the first bank or financial institution from non-Japan Asia to list on the NYSE. 2001 ICICI acquired Bank of Madura (est. 1943). Bank of Madura was a Chettiar bank, and had acquired Chettinad Mercantile Bank (est. 1933) and Illanji Bank (established 1904) in the 1960s. 2002 The Boards of Directors of ICICI and ICICI Bank approved the reverse merger of ICICI, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, into ICICI Bank. CICI Bank has total assets of about USD 100 Billion (end-Mar 2008), a network of over 1308 branches and offices, about 3954 ATMs, and 24
million customers (as of end July 2007). ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, life and nonlife insurance, venture capital and asset management.
FINDINGS • We know about IFRS • Its advantages to firm adopting it. • Its impact on firm • It has a great impact on Banking sector
LIMITATION •
Observed data of only one bank.
•
Bank was not fully cooperative .
• Bank is not giving answer to all question.
CONCLUSION It was always clear that a first-time adoption standard driven by the desire to avoid undue cost and effort would have to include exemptions that would permit first-time adopters to apply IFRS in a practical manner. In the long run only the effect of the business combinations and 'fair value or revaluation as deemed cost' exemptions will be enduring. However, even the impact of those exemptions will be relatively insignificant compared with, for example, the huge effect an acquisition has on the comparability of financial statements from one period to another. For first-time adopters, IFRS 1 represents a marked improvement over the theoretically pure but practically unworkable SIC-8. It is therefore no surprise to see that many first-time adopters are applying IFRS 1 early. Still, some first-time adopters of IFRS will have concerns about, for example, the complexity of the firsttime adoption exemption for share-based payments. Others will complain about the
unfairness of a business combination exemption that does not allow an adjustment of goodwill for items other than intangible assets, contingencies and impairments. it would be difficult for banks to follow IFRS, since they stick to the Reserve Bank of India's standards, and the RBI is rigid about giving up its accounting procedures for the IFRS.
Bibliography 1Bank
-
ICICI
2News Paper
-
The Economics Times The Times of India
3 Internet
-
www.icicibank.com www.indiaprwire.com www.economictimes.indiatimes.com
