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SIX MYTHS
ABOUT THE IFRS INDIA TRANSITION
companies. These are surprisingly consistent across sectors within India. Not too long ago, our member CFOs and controllers in Australia and the European Union had their own views on IFRS, very similar to ours. When they finally transitioned, most of them realized how off mark their initial perceptions were. That’s why we call them myths.
“
“
We all have our perceptions of what IFRS means for our
Treat this as a peek into the ground realities of IFRS
transition—what it really looked like for the hundreds of companies we worked with and learned from. IFRS Research Team Corporate Executive Board
Six Myths About the IFRS India Transition 1
We have a comfortable transition deadline
2
IFRS is limited to changes in accounting procedures
3
We can rely solely on auditors and consultants
4
Transition won’t be very expensive
5
Accountants are the only constituency we need to train
6
We’ll get it right the first time
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
FIGURE 1
FIGURE 2
Time Required to Complete the Transition to IFRS
Time Allocation for IFRS Implementation Activities Australia-Based Companies
More Than Three Years
15%
One Year or Less
5%
Change Management
26%
Planning
58%
9%
Internal Communication
25%
Two to Three Years
55%
One to Two Years
4%
External Communication
3%
Internal Non-Finance Staff Communication
MYTH 1 WE HAVE A COMFORTABLE TRANSITION DEADLINE Ninety-five percent of companies in Australia and in the European Union took more than a year to the complete IFRS transition, with 40% taking more than two years. The ICAI requirement to publish 2010 comparative numbers in IFRS leaves Indian companies only eight months to be IFRS–ready. In other countries, regulators released final interpretations two to three years in advance of IFRS deadline and provided step-by-step transition road maps for companies. In India, with just eight months to go, ICAI is yet to finalize the standard—increasing the confusion around standard interpretation. Indian companies must begin assessing the impact of IFRS and start planning immediately, dedicating full-time resources to the project. Companies that delay the effort expose themselves to several risks including restatement, cost overrun, reputational damage, and market risk.
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
FIGURE 3
FIGURE 4
How IFRS Impacts Functions Outside Finance
Impact of Cross-Functional Involvement on Transition Effectiveness Transition Effectiveness, Average Rating, 4.0 Scale
HR
SALES
Pension and bonus plans need to be modified.
Training coordinators and services must be purchased or developed.
PROCUREMENT
Long-term contracts that reference to India GAAP may need to be renegotiated. Loan covenants, lease agreements, supplier agreements, etc., need to be modified.
3.7
Sales and service contracts referencing India GAAP must be modified.
2.4
CORPORATE STRATEGY AND PLANNING
Revenue models, scenario plans, and budgeting processes based on India GAAP need to be reworked.
Transferred Implementation Ownership to Impact Business Units and Functions
Did Not Transfer Implementation Ownership to Impact Business Units and Functions
FIGURE 5
Impact of Cross-Functional Involvement on Implementation Time Average of Total Controller Team Time Spent on Transition
63%
IT
GL, AP, AR and other Finance IT systems need to be modified.
IFRS needs to be aligned to long-term IT strategy.
= 110%
33%
Transferred Implementation Ownership to Impact Business Units and Functions
Did Not Transfer Implementation Ownership to Impact Business Units and Functions
MYTH 2 IFRS IS LIMITED TO CHANGES IN ACCOUNTING PROCEDURES Senior management at many companies view IFRS as a Finance priority because of the required changes in accounting practices. However, the impact of IFRS is truly cross-functional, spanning divisions and business units. HR, Sales, Procurement, Legal, IT, and individual business unit (BU) owners often need to redesign key processes to accommodate IFRS. Critical third-party contracts, debt covenants, and key leadership metrics will change with the change in accounting policies. Finance must convince stakeholders of cross-functional impact and enlist transition support. Companies that actively involved impacted functions and BUs early had 55% greater transition effectiveness than companies that did not, with Finance spending 90% less time on transition.
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
FIGURE 6
FIGURE 7
The Role of Consultants in IFRS Projects Australia-Based Companies, Percentage of Respondents, 2008
IFRS Project Team Composition Percentage of Respondents; Multiple Responses Allowed
60% 55%
71%
40%
The majority of survey respondents did not involve external consultants or subcontractors extensively in the transition.
20% 14%
14%
Consultants Used Mainly to ID Process Changes
Consultants Played No Role in the IFRS Process
0%
0% Consultant Played a Major Role in the IFRS Process
Consultants Used Mainly to ID Accounting Changes
External Consultants Were Involved in an Advisory Role to Support the Project Team
Corporate Functions or Business Units Severely Impacted by the Transition Were Represented in the Relevant Subproject Team
Corporate Functions or Business Units Severely Impacted by the Transition Were Represented in the Central Project Team
External Consultants Played a Major Role (or Led) in the Project Team
Subcontractors Were Used Extensively to Implement the Proposed Changes
MYTH 3 WE CAN RELY SOLELY ON AUDITORS AND CONSULTANTS While many companies believe that auditors and consultants can take on much of the transition load, a vast majority of adopters used consultants in only a minor way during the transition—mainly to identify accounting changes. The nature of transition activities requires most work to be done in house by the internal Finance team. Given the need to have internal staff lead the transition team and efforts, companies need to invest in training the IFRS project team very early in the process. At a very early stage, companies must determine the level of external support needed in different transition stages and auditor intervention/sign-off points. Not doing so can result in unnecessary consulting spend and mid-cycle corrections to the project plan.
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
FIGURE 8
FIGURE 9
Average Number of FTEs Required for IFRS Transition
Cost Estimates for Auditor Involvement
Breakdown of FTEs
Average
Internal FTEs
16
External FTEs
3
Sub-Contractors
1
Consultants
2
On average, companies will need around 20 FTEs through the course of the transition period.
DNA Money Newspaper Tuesday, March 24, 2009 2:13 IST Mumbai: With the debate on convergence with international financial reporting standards (IFRS) heating up, audit firms have started showcasing talent to companies and pitching for business. Uncertainties with regard to convergence with IFRS—adoption of international accounting standards in India, which has so far followed Indian GAAP—continue, but audit firms are interacting with companies nonetheless. They are either conducting training programmes for companies or doing an impact analysis, wherein they are helping companies understand how their balance
…According to market sources, an impact analysis costs INR 1–5 lakh, while a fullblown audit as per IFRS would cost between INR 30 lakh and INR 1 crore…
Venkatram said, "Convergence market is potentially about 75% of the listed companies, but practically only 25% of the listed companies as a large group of Indian companies is not exposed to US GAAP”. Ram Iyer, director—accounting advisory services at KPMG, said they are conducting a lot training programmes for company workers. “We are training them on IFRS as it exists,” he said, adding, the training programmes involve identification of 5–6 areas, which are likely to be impacted by convergence with IFRS. Audit firms, however, are also warning companies on the uncertainties. “Regulators are concerned that their sovereign independence goes away if the IFRS is adopted as it is. Every country has a decision…
MYTH 4 TRANSITION WON’T BE VERY EXPENSIVE The IFRS transition is expected to cost Indian firms between Rs. 30 lakh and 1 crore1, with an average of 16 internal and three external full-time staff dedicated to the transition. Fifty percent of adopters had to implement entirely new IT systems to accommodate IFRS; only 20% of companies did not implement systems changes Costs such as auditor fees, systems changes, and reporting costs tend to overrun at the last minute. Companies can avoid this through robust planning, auditor sign-off on every accounting change, systems testing, and reporting dry runs.
Khyati Dharamsi, “Auditors start gearing up firms on IFRS,” DNA Money, 24 March 2009.
1
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
FIGURE 10
FIGURE 11
IFRS Training and Communication Challenges Percentage of Controllers Rating “Difficult”
Time Allocation for the Various Stages of Transition
Implementation
39%
Planning
31%
65%
50%
Training and Educating NonController Staff
Training and Educating Controller Staff
30%
Communication and Training Breakdown of time allocation for Communication and Training: For internal staff directly involved with the conversion—17%
For other internal staff not directly involved with the conversion—7%
For key external stakeholders (investors, analysts, etc.)—6%
MYTH 5 ACCOUNTANTS ARE THE ONLY CONSTITUENCY WE NEED TO TRAIN Once companies realize the impact of IFRS on non-accounting functions, coordinating firmwide training for functional and BU staff becomes a daunting, costly task. Sixty-five percent of controllers found it more difficult to train non-accounting staff and spent a quarter of IFRS training time on functions outside Finance. Companies cannot save time and resources by using the same training modules for all constituencies, or learnings will be inapplicable and easily forgotten. The level and scope of training needs to be tailored to meet different segments’ needs.
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
FIGURE 12
Impact of Overinvestment in Planning on Transition Effectiveness Transition Effectiveness, Average Rating, 4.0 Scale 3.8
3.0
Average for Companies Spending 53% of Their Time in the Planning Stage
Average for Companies Spending 20% of Their Time in the Planning Stage
FIGURE 13
FIGURE 14
Transitional Internal Reporting to IFRS Along with or Before External Reporting Percentage of Respondents
Approaching the Transition from a Project Management Perspective Rather Than an Accounting Change Percentage of Respondents
We Did This, and It Was Not Useful
5%
50%
We Did This, and It Was Useful
We Did This, and It Was Not Useful
5%
We Did This, and It Was Extremely Useful
We Did This, and It Was Extremely Useful
15%
5%
We Did Not Do This, and It Would Not Have Been Useful
10%
We Did Not Do This, and It Would Not Have Been Useful
20%
We Did Not Do This, and It Would Not Have Been Useful
5%
60%
We Did This, and It Was Useful
We Did Not Do This, and It Would Not Have Been Useful
25%
MYTH 6 WE’LL GET IT RIGHT THE FIRST TIME Companies that undertake the transition without extensive project planning have 25% less effective transitions. These companies are also much more likely to face auditor sign-off conflicts, restatements, and stock price falls as they come closer to the deadline. Not conducting internal and external reporting test runs has often caused companies to discover system bugs, process failures, and accounting errors too close to deadline to be fixed in time. Given the scale of its impact across functions, companies must approach adoption from a project management perspective to increase the likelihood of having a successful transition.
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
At The Corporate Executive Board Company™ we drive faster, more effective decision making for more than 120,000 business professionals worldwide. Leading corporations look to us for performance-sharpening guidance across all major disciplines and areas of business. Across markets and industries, we are the indispensable source of best practice research, decision-support tools, and executive education for the world’s top corporations and not-for-profit institutions. Discover for yourself what the best companies do.
THE CORPORATE EXECUTIVE BOARD COMPANY™ www.IFRSPortal.in www.executiveboard.com
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
ABOUT THE IFRS INDIA TRANSITION
companies. These are surprisingly consistent across sectors within India. Not too long ago, our member CFOs and controllers in Australia and the European Union had their own views on IFRS, very similar to ours. When they finally transitioned, most of them realized how off mark their initial perceptions were. That’s why we call them myths.
“
“
We all have our perceptions of what IFRS means for our
Treat this as a peek into the ground realities of IFRS
transition—what it really looked like for the hundreds of companies we worked with and learned from. IFRS Research Team Corporate Executive Board
Six Myths About the IFRS India Transition 1
We have a comfortable transition deadline
2
IFRS is limited to changes in accounting procedures
3
We can rely solely on auditors and consultants
4
Transition won’t be very expensive
5
Accountants are the only constituency we need to train
6
We’ll get it right the first time
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
FIGURE 1
FIGURE 2
Time Required to Complete the Transition to IFRS
Time Allocation for IFRS Implementation Activities Australia-Based Companies
More Than Three Years
15%
One Year or Less
5%
Change Management
26%
Planning
58%
9%
Internal Communication
25%
Two to Three Years
55%
One to Two Years
4%
External Communication
3%
Internal Non-Finance Staff Communication
MYTH 1 WE HAVE A COMFORTABLE TRANSITION DEADLINE Ninety-five percent of companies in Australia and in the European Union took more than a year to the complete IFRS transition, with 40% taking more than two years. The ICAI requirement to publish 2010 comparative numbers in IFRS leaves Indian companies only eight months to be IFRS–ready. In other countries, regulators released final interpretations two to three years in advance of IFRS deadline and provided step-by-step transition road maps for companies. In India, with just eight months to go, ICAI is yet to finalize the standard—increasing the confusion around standard interpretation. Indian companies must begin assessing the impact of IFRS and start planning immediately, dedicating full-time resources to the project. Companies that delay the effort expose themselves to several risks including restatement, cost overrun, reputational damage, and market risk.
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
FIGURE 3
FIGURE 4
How IFRS Impacts Functions Outside Finance
Impact of Cross-Functional Involvement on Transition Effectiveness Transition Effectiveness, Average Rating, 4.0 Scale
HR
SALES
Pension and bonus plans need to be modified.
Training coordinators and services must be purchased or developed.
PROCUREMENT
Long-term contracts that reference to India GAAP may need to be renegotiated. Loan covenants, lease agreements, supplier agreements, etc., need to be modified.
3.7
Sales and service contracts referencing India GAAP must be modified.
2.4
CORPORATE STRATEGY AND PLANNING
Revenue models, scenario plans, and budgeting processes based on India GAAP need to be reworked.
Transferred Implementation Ownership to Impact Business Units and Functions
Did Not Transfer Implementation Ownership to Impact Business Units and Functions
FIGURE 5
Impact of Cross-Functional Involvement on Implementation Time Average of Total Controller Team Time Spent on Transition
63%
IT
GL, AP, AR and other Finance IT systems need to be modified.
IFRS needs to be aligned to long-term IT strategy.
= 110%
33%
Transferred Implementation Ownership to Impact Business Units and Functions
Did Not Transfer Implementation Ownership to Impact Business Units and Functions
MYTH 2 IFRS IS LIMITED TO CHANGES IN ACCOUNTING PROCEDURES Senior management at many companies view IFRS as a Finance priority because of the required changes in accounting practices. However, the impact of IFRS is truly cross-functional, spanning divisions and business units. HR, Sales, Procurement, Legal, IT, and individual business unit (BU) owners often need to redesign key processes to accommodate IFRS. Critical third-party contracts, debt covenants, and key leadership metrics will change with the change in accounting policies. Finance must convince stakeholders of cross-functional impact and enlist transition support. Companies that actively involved impacted functions and BUs early had 55% greater transition effectiveness than companies that did not, with Finance spending 90% less time on transition.
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
FIGURE 6
FIGURE 7
The Role of Consultants in IFRS Projects Australia-Based Companies, Percentage of Respondents, 2008
IFRS Project Team Composition Percentage of Respondents; Multiple Responses Allowed
60% 55%
71%
40%
The majority of survey respondents did not involve external consultants or subcontractors extensively in the transition.
20% 14%
14%
Consultants Used Mainly to ID Process Changes
Consultants Played No Role in the IFRS Process
0%
0% Consultant Played a Major Role in the IFRS Process
Consultants Used Mainly to ID Accounting Changes
External Consultants Were Involved in an Advisory Role to Support the Project Team
Corporate Functions or Business Units Severely Impacted by the Transition Were Represented in the Relevant Subproject Team
Corporate Functions or Business Units Severely Impacted by the Transition Were Represented in the Central Project Team
External Consultants Played a Major Role (or Led) in the Project Team
Subcontractors Were Used Extensively to Implement the Proposed Changes
MYTH 3 WE CAN RELY SOLELY ON AUDITORS AND CONSULTANTS While many companies believe that auditors and consultants can take on much of the transition load, a vast majority of adopters used consultants in only a minor way during the transition—mainly to identify accounting changes. The nature of transition activities requires most work to be done in house by the internal Finance team. Given the need to have internal staff lead the transition team and efforts, companies need to invest in training the IFRS project team very early in the process. At a very early stage, companies must determine the level of external support needed in different transition stages and auditor intervention/sign-off points. Not doing so can result in unnecessary consulting spend and mid-cycle corrections to the project plan.
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
FIGURE 8
FIGURE 9
Average Number of FTEs Required for IFRS Transition
Cost Estimates for Auditor Involvement
Breakdown of FTEs
Average
Internal FTEs
16
External FTEs
3
Sub-Contractors
1
Consultants
2
On average, companies will need around 20 FTEs through the course of the transition period.
DNA Money Newspaper Tuesday, March 24, 2009 2:13 IST Mumbai: With the debate on convergence with international financial reporting standards (IFRS) heating up, audit firms have started showcasing talent to companies and pitching for business. Uncertainties with regard to convergence with IFRS—adoption of international accounting standards in India, which has so far followed Indian GAAP—continue, but audit firms are interacting with companies nonetheless. They are either conducting training programmes for companies or doing an impact analysis, wherein they are helping companies understand how their balance
…According to market sources, an impact analysis costs INR 1–5 lakh, while a fullblown audit as per IFRS would cost between INR 30 lakh and INR 1 crore…
Venkatram said, "Convergence market is potentially about 75% of the listed companies, but practically only 25% of the listed companies as a large group of Indian companies is not exposed to US GAAP”. Ram Iyer, director—accounting advisory services at KPMG, said they are conducting a lot training programmes for company workers. “We are training them on IFRS as it exists,” he said, adding, the training programmes involve identification of 5–6 areas, which are likely to be impacted by convergence with IFRS. Audit firms, however, are also warning companies on the uncertainties. “Regulators are concerned that their sovereign independence goes away if the IFRS is adopted as it is. Every country has a decision…
MYTH 4 TRANSITION WON’T BE VERY EXPENSIVE The IFRS transition is expected to cost Indian firms between Rs. 30 lakh and 1 crore1, with an average of 16 internal and three external full-time staff dedicated to the transition. Fifty percent of adopters had to implement entirely new IT systems to accommodate IFRS; only 20% of companies did not implement systems changes Costs such as auditor fees, systems changes, and reporting costs tend to overrun at the last minute. Companies can avoid this through robust planning, auditor sign-off on every accounting change, systems testing, and reporting dry runs.
Khyati Dharamsi, “Auditors start gearing up firms on IFRS,” DNA Money, 24 March 2009.
1
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
FIGURE 10
FIGURE 11
IFRS Training and Communication Challenges Percentage of Controllers Rating “Difficult”
Time Allocation for the Various Stages of Transition
Implementation
39%
Planning
31%
65%
50%
Training and Educating NonController Staff
Training and Educating Controller Staff
30%
Communication and Training Breakdown of time allocation for Communication and Training: For internal staff directly involved with the conversion—17%
For other internal staff not directly involved with the conversion—7%
For key external stakeholders (investors, analysts, etc.)—6%
MYTH 5 ACCOUNTANTS ARE THE ONLY CONSTITUENCY WE NEED TO TRAIN Once companies realize the impact of IFRS on non-accounting functions, coordinating firmwide training for functional and BU staff becomes a daunting, costly task. Sixty-five percent of controllers found it more difficult to train non-accounting staff and spent a quarter of IFRS training time on functions outside Finance. Companies cannot save time and resources by using the same training modules for all constituencies, or learnings will be inapplicable and easily forgotten. The level and scope of training needs to be tailored to meet different segments’ needs.
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
FIGURE 12
Impact of Overinvestment in Planning on Transition Effectiveness Transition Effectiveness, Average Rating, 4.0 Scale 3.8
3.0
Average for Companies Spending 53% of Their Time in the Planning Stage
Average for Companies Spending 20% of Their Time in the Planning Stage
FIGURE 13
FIGURE 14
Transitional Internal Reporting to IFRS Along with or Before External Reporting Percentage of Respondents
Approaching the Transition from a Project Management Perspective Rather Than an Accounting Change Percentage of Respondents
We Did This, and It Was Not Useful
5%
50%
We Did This, and It Was Useful
We Did This, and It Was Not Useful
5%
We Did This, and It Was Extremely Useful
We Did This, and It Was Extremely Useful
15%
5%
We Did Not Do This, and It Would Not Have Been Useful
10%
We Did Not Do This, and It Would Not Have Been Useful
20%
We Did Not Do This, and It Would Not Have Been Useful
5%
60%
We Did This, and It Was Useful
We Did Not Do This, and It Would Not Have Been Useful
25%
MYTH 6 WE’LL GET IT RIGHT THE FIRST TIME Companies that undertake the transition without extensive project planning have 25% less effective transitions. These companies are also much more likely to face auditor sign-off conflicts, restatements, and stock price falls as they come closer to the deadline. Not conducting internal and external reporting test runs has often caused companies to discover system bugs, process failures, and accounting errors too close to deadline to be fixed in time. Given the scale of its impact across functions, companies must approach adoption from a project management perspective to increase the likelihood of having a successful transition.
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
www.IFRSPortal.in
At The Corporate Executive Board Company™ we drive faster, more effective decision making for more than 120,000 business professionals worldwide. Leading corporations look to us for performance-sharpening guidance across all major disciplines and areas of business. Across markets and industries, we are the indispensable source of best practice research, decision-support tools, and executive education for the world’s top corporations and not-for-profit institutions. Discover for yourself what the best companies do.
THE CORPORATE EXECUTIVE BOARD COMPANY™ www.IFRSPortal.in www.executiveboard.com
© 2009 The Corporate Executive Board Company. All Rights Reserved. ADM1B26ONF
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