The deadline for banks, non-banking finance companies and insurance firms in India to shift to new accounting norms -- International Financial Reporting Standards (IFRS) -- may be delayed beyond April 1, 2011.
YH Malegam, chairman of the National Advisory Committee on Accounting Standards (NACAS), said the panel had sent its recommendations to the Ministry of Corporate Affairs.
The ministry would unveil the new date soon, Malegam said at the IFRS summit organised by the Confederation of Indian Industry (CII) here today.
“Under IFRS, there will be changes in treating certain aspects of assets and liabilities like treatment of redeemable preference shares and depreciation provisions. But, mainly the terminologies will change and other provisions will not affect tax treatments and cash profit calculations,” he said.
“IFRS will consist of two parts initially for organisations with more than Rs 500 crore net worth and the rest having less than Rs 500 crore net worth with a difference of reporting disclosures by both,” Malegam added.
Referring to challenges in rolling out IFRS in banks, Simon Fernandes, IFRS project director at State Bank of India, said fair value measurement was used infrequently under Indian accounting standards. Under IFRS, a significant portion of assets and liabilities will be measured at fair value.
Movements in the fair value could cause volatility in income statements and affect capital adequacy ratios. At present, the country does not have a stable platform for fair valuation. Certain investments are not actively traded. Valuation methodologies needed to be put in place at industry level, SBI official said.
A senior official working with the Indian Banks’ Association said there was a need to collect detailed information of the preparedness of banks to comply with and guide on various aspects of IFRS.
Among other challenges, the erosion in loan and investments is crucial. Banks would need to build models to assess facts and circumstances on the recoverability and timing of future cash flows from credit exposure. They will have to strengthen systems for capturing data to assess impairment and spruce up their loss-forecasting mechanism.
Another aspect concerns derecognition of a financial asset. It is a complex process under IFRS and depends on whether there has been a transfer of risks and rewards. This could impact securitisation of assets, since most special purpose vehicles are structured to meet the Indian norms.
Banks will have to grapple with consolidation of entities for financial purposes. Under IFRS, this is not driven purely by the ownership structure. Instead, the focus is on the power to control the entity to get economic benefits. This power could be expressed by ownership of an equity stake, but not limited to it. Global norms provide much more rigorous consolidation tests, while the Indian GAAP focuses on narrower set of tests such as majority ownership and composition of board of directors.
