experience of indian corporates in implementation of ifrs ray.pdf · scenarios for transition...
TRANSCRIPT
© Infosys Technologies Limited 2007-08
Experience of Indian Corporates in
implementation of IFRS
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Global developments
Global developments in the past:
• In December 2007, the United States Securities Exchange Commission
(SEC) proposed to allow foreign private issuers (Companies like Infosys,
Siemens, Wipro, etc.) to submit their financial statements in accordance
with International Financial Reporting Standards as issued by the
International Accounting Standards Board (“IFRS”) without reconciliation
to generally accepted accounting principles as used in the United
States. (“U.S. GAAP”).
• The companies could adopt IFRS regardless of whether its previous
financial statements were prepared in accordance with U.S. GAAP or in
accordance with the requirements of their home country regulations.
• The Institute of Chartered Accountants of India (“ICAI”) had issued a
Concept Paper on Convergence with IFRS in India which laid down the
roadmap to convergence by 2011.
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Background of the Company..
Infosys has always set high standards in financial reporting and corporate
governance and has been on the fore front of innovation and change ..
• First Indian Company to complete public offering of ADSs in the United
States
• First Indian Company to be Sarbanes-Oxley compliant
• First Indian Company to file its XBRL statements under the SEC‟s
voluntary filing program
• First Indian Company to be a part of the major global indices like
NASDAQ-100 Index
• First Indian Company to file our primary financial statements in
compliance with International Financial Reporting Standards.
Scenarios for transition
Transition options available to a company adopting IFRS:
• Company filed its last Form 20-F (Annual Report) with SEC in
accordance with U.S. GAAP – It could transition to IFRS from
U.S. GAAP.
• Company filed its last Form 20-F (Annual Report) with SEC in
accordance with requirements of its home country regulations
– It could transition to IFRS from its local GAAP.
Selection of Previous GAAP required considerable thought as
IFRS 1, First time adoption of IFRS could be adopted only once
and certain benefits/ exemptions available under IFRS 1 could
be utilised only once.
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Issues faced by Infosys upon transition
Selection of Previous GAAP:
• Historically, Infosys had provided its Indian shareholders financialstatements prepared in accordance with Indian GAAP and its holders ofits American Depositary Shares financial statements prepared inaccordance with U.S. GAAP.
• Adoption of U.S. GAAP as its Previous GAAP could have led to aproblem when India transitioned to IFRS in 2011. It could have resultedin a potential non-compliance for Indian statutory purposes on thepresumption that ICAI permitted only Indian GAAP to be adopted as theprevious GAAP
• As India has made a conscious decision to adopt IFRS it was prudent forthe Company to choose Indian GAAP as its Previous GAAP.
However the problem lied as there was no precedence to the same…
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Issues faced by Infosys upon transition
Detailed discussions were held with the SEC and they agreed with the rationale provided by Infosys.
SEC suggested disclosure of certain additional information during the first year of our transition:
• Unaudited interim U.S. GAAP financial statements in compliance with SEC Regulations including the relevant footnotes in the interim quarterly reports.
• Reconciliations between U.S. GAAP and Indian GAAP in addition to the required reconciliations between Indian GAAP and IFRS.
Infosys has adopted IFRS for the fiscal year ending March 31, 2009 with a transition date of April 1, 2007. All interim filings (i.e. quarters ending June 30, 2008, September 30, 2008 and December 31, 2008) with the SEC have also been in compliance with IFRS.
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Key exemptions availed by Infosys upon
First -Time Adoption
• Business combinations exemption - Non-application of IFRS 3,
Business Combinations, to business combinations consummated
prior to April 1, 2007.
• Goodwill stated at carrying value as per Previous GAAP
• Intangible Assets remaining subsumed in Goodwill and were not
recognized separately.
• Share-based payment transaction exemption - Application of IFRS 2,
Share Based Payment, only to grants made after November 7, 2002
and that remained unvested as at the date of transition.
• Vesting of all stock options under the 1998 and 1999 were
accelerated on March 12, 2007.
• Share based payment charges for only stock options granted to IBPO
employees on March 12, 2007 was required to be recognized.
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Approach taken for IFRS adoption
• Transactions affecting equity were analyzed since 1999 under U.S.GAAP, Indian GAAP and IFRS.
• A complete equity balance break up was drawn up upto the date oftransaction under IFRS by giving effect of appropriate transactions at thehistoric rate where exemptions were not available.
• IFRS 1, required only an equity reconciliation. Our approach was tocarry out a complete reconciliation of each asset and liability to provide afull picture and detailed explanation to the investors.
• Two way reconciliation as required by SEC i.e. Indian GAAP to IFRS andU.S. GAAP to Indian GAAP provided complete transparency toinvestors.
• Condensed approach not adopted even for the Interim FinancialStatements. Full disclosures as applicable to an Annual Report wereprovided.
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Recent Developments in India
• A high level task force was set up in India to expedite the convergence
process India
• 2 Committees were constituted
Technical Committee
CFO Sub Group
• Extensive Research and surveys were carried out to understand the state of
readiness of the companies on adoption of IFRS.
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Status of Sensex 30 and Nifty Companies
• The survey results depicted that the majority of the SENSEX 30 and Nifty 50
companies were already in a state of readiness and most of them had
completed pilot phase
• Initiatives had been taken by Organizations like Indian Banking Association
and Insurance Regulatory and Development Authority (IRDA) to ensure that
the banking Companies and the Insurance Companies are geared up for
IFRS Adoption.
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Status of Readiness of SME
• Concerns were raised in survey by the Small and Medium Scale
Enterprises as the new concepts under IFRS were unclear to them.
• Fair Valuation led to apprehensions within small scale community.
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The Approach taken on Convergence
MCA wide Press Release dated 22nd January 2010, issued the proposed time lines
for convergence of IFRS. Details are given below:
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Questions which arose consequent to the Circular
• What would be the transition date for companies who have already adopted
IFRS?
• If, subsequent to the adoption, the company does not meet the IFRSadoption criteria, should it discontinue IFRS?
• What is included in the „Net worth‟ and how to determine that?
• Is there any option to choose the IFRS v/s Indian converged accounting
standards where differences exist?
• Does the Conversion Road Map make it mandatory for all companies,including unlisted companies to prepare CFS?
• What about changes required for other laws and regulations (i.e.) TaxationLaws, SEBI & RBI Regulations, etc.?
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Exposure Drafts issued by ICAI
• ICAI has issued 38 exposure drafts which are in line with the IFRS together
with IFRICs and SICs.
• The Major areas of impact in Indian GAAP are :
Business Combination
Income Taxes
Share Based Payments
Consolidation
Property, Plant and Equipment
Revenue
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Major Exemptions granted for First Time Adoption
• Business Combination
• Share Based Payments
• Property, Plant and Equipment
• Cumulative Translation Differences
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Changing Roadmap of IFRS
The IFRS scenario is constantly changing even as we speak..
• Highlights of the Staff Draft “Financial Statement Presentation”
released jointly by the IASB and FASB:
• Presentation of cohesive set of financial statements i.e. aligning
each line items, its description and order of presentation across
the statement of financial position, comprehensive income
statement and cash flow statement.
• Mandatory preparation of Direct Cash flows
• Disaggregation Principle
• Sample Statement of financial position on adoption of this
standard would look like-
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Changing Roadmap of IFRS
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As at
BUSINESS
Operating
Short-term assets
Total short-term assets -
Long-term assets
Total long-term assets -
Short-term liabilities
Total short-term liabilities -
Long-term liabilities
Total long-term liabilities -
Net operating assets -
Investing
Assets
Total investing assets -
NET BUSINESS ASSETS -
FINANCING
Assets
Total financing assets -
NET FINANCING ASSETS -
INCOME TAXES
NET INCOME TAX ASSETS -
NET ASSETS -
EQUITY
Share capital
Retained earnings
Other components of equity
TOTAL EQUITY -
Exposure Draft on Employee Benefits
Salient Features of the Exposure Draft
• Mandatory immediate recognition of all actuarial gains and
losses through OCI
• Classification of interest costs net of gains as Finance Costs.
• Measurement of Interest on Plan Assets at the discount rate
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Need of the hour..
Corporates need to gear themselves for constant updation and
not only for the first time adoption:
• Keep track of changes at IASB
• Broadening the pool of trained resources, both in the industry
and the audit firms.
• Active participation in the standard setting process by
commenting on the Exposure Drafts and Staff Drafts
• Management would need to spend significant time and efforts
in order to educate the investors, lenders, analysts , Board of
Directors, regarding the impact of IFRS on the financial
position and performance .
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Questions?
© Infosys Technologies Limited 2007-08 21
Thank you
www.infosys.com
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Additional Information
Major differences between IFRS and Indian GAAP
IFRS Indian GAAP
Form and components of
financial statements
• Balance sheet
• Income statement
• Statement of changes in equity
• Statement of cash flows
The Companies Act does not
prescribe preparation of
statement of changes in equity.
Further, preparation of a cash
flow statement is not mandatory
for all companies.
Consolidated financial
statements
An entity having a subsidiary
must present consolidated
financial statements.
There is no mandatory
requirement under the
Companies Act, 1956 for an
entity to present consolidated
financial statements.
The fair value approach is
followed while calculating the
goodwill at the time of preparing
consolidated financial
statements.
Goodwill/Capital reserve is
calculated by computing the
difference between the cost to
the parent of its investment in
the subsidiary and the parent‟s
portion of equity in the
subsidiary.
Property, plant and
equipment
Depreciation is based on useful
life of assets.
Depreciation is based on higher
of useful life or Schedule VI
rates.
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Major differences between IFRS and Indian GAAP
IFRS Indian GAAP
Events after the Balance
Sheet date
Non-adjusting events are
required to be disclosed in the
financial statements.
Non-adjusting events are not
required to be disclosed in
financial statements but are
required to be disclosed in the
Director‟s report as per Section
217 of the Companies Act, 1956.
Accounting for taxes on
income
Deferred taxes are based on
temporary differences in i.e.
difference between carrying
amount and tax base of assets
and liabilities.
Deferred taxes are based on
timing differences. Timing
difference is a term with a
narrower meaning than
temporary differences.
Deferred tax assets and
liabilities are classified net as
non-current with supplement
disclosures for: a) components
of temporary differences and, b)
amounts expected to be
recovered within 12 months and
more than 12 months of the
balance sheet date.
Deferred tax assets, net are
disclosed after „Net Current
assets‟, whereas deferred tax
liabilities, net are disclosed after
„Unsecured Loans‟.
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Major differences between IFRS and Indian GAAP
IFRS Indian GAAP
Interim Financial reporting IFRS does not require public
entities to furnish interim
financial statements, though it
encourages interim reporting.
The listing agreement in India
requires all listed companies to
furnish interim financial results
on a quarterly basis.
Employee benefits In IFRS, IAS 19, provides an
option with regard to recognition
of actuarial gains and losses i.e.
in equity or profit and loss
account.
AS 15 Revised does not provide
any option with regard to
recognition of actuarial gains and
losses. It requires such gains
and losses to be recognized
immediately in the statement of
profit and loss.
Share-based payments Share- based payments are
accounted as per Fair Value
method.
Share- based payments are
accounted as per the Guidelines
issued by SEBI and the
Guidance note on accounting for
employee share-based
payments both of which permit
the use of Intrinsic Value method
as an alternate to the Fair value
method.
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Major differences between IFRS and Indian GAAP
IFRS Indian GAAP
Accounting policies, errors
and estimates
Accounting policy changes and
corrections of prior period errors
are accounted for retrospectively
by restating equity and
comparatives, unless
impracticable.
There is no concept of re-
statement of comparatives except
in financial statements prepared for
certain specific purposes like public
offers.
Business combination Business combination has a wider
scope and are accounted using
the purchase accounting method.
Indian GAAP deals only with
amalgamations and there is liberal
use of pooling of interests method
which in not permitted under IFRS.
Inventories IFRS requires same cost formula
to be used for all inventories
having a similar nature and use.
Where inventories have a different
nature and use, different cost
formulas may be justified.
Indian GAAP provides that the
cost of inventories should be
assigned by using FIFO, or
weighted average cost formula.
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Major differences between IFRS and Indian GAAP
IFRS Indian GAAP
The Effects of Changes in
Foreign Exchange Rates
An entity measures its assets,
liabilities, revenues and
expenses in its functional
currency, i.e. the currency of the
primary economic environment
in which the entity operates.
Functional currency of an entity
may be different from the local
currency.
In Indian GAAP, there is no
concept of functional currency.
Financial statements need to be
in Indian Rupees only.
Related party
transactions
IFRS provides for including non-
executive director under key
management personnel.
A non-executive director of a
company should not be
considered as a key
management person by virtue of
merely his being a director
unless he has the authority and
responsibility for planning,
directing and controlling the
activities of the enterprise.
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Reconciliations- Indian GAAP- IFRS
STATEMENTOF FINANCIAL POSITION
April 1, 2007 March 31, 2008
Indian GAAP IFRS Indian GAAP IFRS
Goodwill 137 152 172 174
Intangibles - - - 11
Equity 2,611 2,722 3,448 3,916
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April 1, 2007
• Goodwill of $4 million• Deferred purchase agreement entered with the minority shareholders of Infosys BPO in February
2007, to purchase equity shares of Infosys BPO by February 2008 did not qualify as an investmentunder Company Law.
• The same was recognized in IFRS as the risks and rewards of ownership were considered transferredin February 2007 itself.
• Goodwill Offset of $11 million- Gains from changes in proportionate share of subsidiary resulting fromissuance of stock by subsidiary was offset against goodwill under Previous GAAP was grossed up in equity
in IFRS.
• Retained Earnings $101- Liability for dividends (incl. corporate dividend tax) declared and approved after
the reporting period are not recognized in IFRS.
Indian GAAP- IFRS
March 31, 2008
• Intangible assets of $11 million - Customer contract upon acquisition was included in
goodwill under Previous GAAP, have been recognized separately under IFRS.
• Retained earnings of $456 million - Liability for dividends (incl. corporate dividend tax)
declared and approved after the reporting period, are not recognized under IFRS.
• Share-based compensation of $3 million - Share based compensation for grants made to
IBPO employees was recognized in IFRS.
• INCOME STATEMENT- No significant impact
• Share-based compensation of $3 million for grants made to IBPO employees was
recognized in IFRS.
• CASH FLOWS- Minor presentational impacts
• Interest and dividends received may be classified as operating, investing or financing
activities under IFRS. However, Indian GAAP mandates the classification of such cash flows
under Investing activities.
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Reconciliations- U.S. GAAP- Indian GAAP
STATEMENTOF FINANCIAL POSITION
April 1, 2007 March 31, 2008
US GAAP Indian GAAP US GAAP Indian GAAP
Goodwill 128 137 172 172
Intangibles 20 - - -
Equity (including minority) 2,717 2,611 3,448 3,448
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April 1, 2007
• Goodwill of $4 million
• Deferred purchase agreement entered with the minority shareholders of Infosys BPO in
February 2007, to purchase equity shares of Infosys BPO by February 2008 did not qualify as
an investment under Company Law.
• The same was recognized in U.S. GAAP as the risks and rewards of ownership were
considered transferred in February 2007 itself.
• Goodwill Offset of $11 million: Gains from changes in proportionate share of subsidiary resulting
from issuance of stock by subsidiary was offset against goodwill under Indian GAAP which had
been presented in equity in U.S. GAAP.
• Intangible Assets of $20 million net of amortization - Intangible assets acquired as a part of
business combination are not permitted to be recognised under Indian GAAP and included in
Goodwill.
Reconciliations- U.S. GAAP-
Indian GAAP
April 1, 2007
• Retained Earnings $101 million- Liability for dividends (incl. corporate dividend tax) declared and approved after the reporting period are not recognized in U.S. GAAP.
• Retained Earnings $48 million- Share based payment charges were recognized only in U.S. GAAP as the grants were made at an intrinsic value of zero.
March 31, 2008
• Goodwill Offset of $11 million- Gains from changes in proportionate share of subsidiary resulting from issuance of stock by subsidiary was offset against goodwill under Indian GAAP . The same has been included in equity in U.S. GAAP.
• Intangible Assets of $25 million net of amortization- Intangible assets acquired as a part of business combination are not permitted to be recognized under Indian GAAP and are included in Goodwill.
• Retained earnings of $456 million- Liability for dividends (incl. corporate dividend tax) declared and approved after the reporting period, are not recognized in U.S. GAAP.
• Share Premium-Share-based compensation of $51 million- Share based payment charges were recognized only in U.S. GAAP as the grants were made at an intrinsic value of zero.
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Reconciliations- U.S. GAAP- Indian GAAP
INCOME STATEMENT
• Share-based compensation of $3 million- Share-based
compensation for grants made to IBPO employees was
recognized in U.S. GAAP but not in Indian GAAP.
• Amortization of Intangible Assets of $8 million- Intangible
assets subsumed in Goodwill were never amortized in Indian
GAAP.
CASH FLOWS- Only presentational impacts
• Interest and dividends received are classified under operating
activities in U.S. GAAP. However, Indian GAAP mandates the
classification of such cash flows under Investing activities.
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