step up to ind-as for banks and nbfcs - ey - united...

Step up to Ind AS for Banks and NBFCs

May 2016

2 | Step up to Ind AS for Banks and NBFCs

AcknowledgementsWe thank the following people for their review and contribution:

• Amit Lodha

• Charanjit Attra

• Dolphy D’Souza

• Jennifer Rangwala

• Jigar Parikh

• Mangirish Gaitonde

• Mayur Seth

• Pankaj Chadha

• Sandip Khetan

• Sanjeev Singhal

• Santosh Maller

• Viren Mehta

• Vish Dhingra

3Step up to Ind AS for Banks and NBFCs |

Roadmap for the implementation of Ind AS ..................................................................... 4

Implementation guidance issued by the Reserve Bank of India ......................................... 6

Ind AS, IFRS and Indian GAAP: A snapshot of critical areas ............................................. 8

Transition to Ind AS by Banks and NBFCs: Key focus areas and their impacts ................. 12

Income .................................................................................................................. 13

Fair valuation ......................................................................................................... 14

Financial instruments ............................................................................................. 15

Business combinations ........................................................................................... 20

Income Taxes ........................................................................................................ 22

Employeebenefitsandsharebasedpayments ......................................................... 23

Property, plant and equipment, intangible assets and leases ..................................... 25

Presentationoffinancialstatements ........................................................................ 27

Related party disclosures ........................................................................................ 29

Segment reporting ................................................................................................. 30

Leveraging from global experience of conversion to IFRS and Ind AS ............................. 32

Ind AS conversion process ............................................................................................ 34

Appendix 1- Financial Statement Disclosures ................................................................ 38

The publication does not aim to discuss the entire complex accounting rules and implications, which may arise from implementation of the Ind AS. We recommend that our readers seek appropriate professional adviceregardinganyspecificissuestheyencounter.ThispublicationshouldnotbereliedonasasubstituteforreadingthetextofIndASstandards.BeforereachinganydecisiononhowyourspecificorganizationmaybeaffectedbytheapplicationofIndAS,youshouldfirsttakeintoconsequencespecificfactsandcircumstances, and thereafter consult EY or other professional advisors, who are familiar with your particular situation, for advice.

Contents


Roadmap for the implementation of Ind AS


The Ministry of Corporate Affairs (MCA) on 16 February 2015notified39accountingstandardsandlaiddownanIndian Accounting Standards (Ind AS) transition road map for companies. This was a welcome and long-awaited move; however,theroadmapspecificallyexcludedbanks,non-bankingfinancialcompanies(NBFCs)andinsurancecompanies.

InJanuary2016,theMCAfinallyannouncedtheIndASroadmap for scheduled commercial banks (excluding regional ruralbanks[RRBs]),insurers/insurancecompaniesandNBFCs.TheMCAclarifiedthatnotwithstandingtheIndASroadmapforcompanies, the holding, subsidiary, joint venture or associate companiesofbankswouldalsoprepareIndASfinancialstatements for accounting periods beginning 1 April 2018.

Salient features:The following are the requirements of this roadmap:

• Early adoption not permitted

• Companies not covered by the roadmap to continue to apply existing standards

• Phase I applicable from 1 April 2018 onward to:

• All commercial banks, term lending institutions, refinanceinstitutionsandinsurancecompanies

• ListedorunlistedNBFCswhosenetworthis>=INR500 crores

• Holding, subsidiaries, joint ventures or associates of these companies

• Phase 2 applicable from 1 April 2019 onward to:

• ListedNBFCswhosenetworthis<INR500crores

• UnlistedNBFCswhosenetworthis>=INR250croresbut<INR500crores

• Holding, subsidiaries, joint ventures or associates of these companies

• An overseas subsidiary, associate, joint venture and other similar entity of such company may prepare its stand-alone financialstatementsinaccordancewiththerequirementsofthespecificjurisdiction.However,forgroupreportingpurposes, it will have to report to its Indian parent under Ind AS to enable its parent to present Consolidated Financial Statements (CFS) in accordance with Ind AS.


Implementation guidance issued by the Reserve Bank of India


TheprincipalregulatorforbanksandNBFCsinIndia,theReserve Bank of India (RBI), also issued a circular in February 2016 reiterating the timeline for Ind AS implementation by banks issued by the MCA in its press release and providing further direction on critical issues that banks need to consider in their Ind AS implementation plan.

Key features of the RBI circular:

1. BanksshallcomplywithIndASforfinancialstatementsfor accounting periods beginning 1 April 2018, with comparatives for the periods ending 31 March 2018 or thereafter. Ind AS shall be applicable to both standalone financialstatementsandconsolidatedfinancialstatements.

2. Banks shall apply Ind AS only as per the above timelines and shall not be permitted to adopt Ind AS earlier.

3. The boards of the banks should have the ultimate responsibility in determining the Ind AS direction and strategy and in overseeing the development and execution of the Ind AS implementation plan.

4. Banks are advised to set up a Steering Committee headedbyanofficialoftherankofanexecutivedirector(or equivalent), comprising members from cross-functional areas of the bank to immediately initiate the implementation process.

5. The Audit Committee of the Board shall oversee the progress of the Ind AS implementation process and report to the Board at quarterly intervals.

6. BanksneedtosubmitproformaIndASfinancialstatementsto the RBI from the half-year ended 30 September 2016 onwards.


Ind AS, IFRS and Indian GAAP: A snapshot of critical areas


There are many areas of differences between Indian GAAP (the standards issued by the Institute of Chartered Accountants of India [ICAI] and the guidelines issued by the RBI) and Ind AS because current Indian GAAP is driven by “form” in a number of areas rather than “substance,” which is the focus under Ind AS. Certain critical areas that would have a transformational impact on the transition to Ind AS are summarized hereunder:

1. Fair value IndAS113wouldhaveasignificantimpactontheway

fairvalueiscomputedonfinancialassetsandliabilities.The standard may, among other things, impact the way financialinstitutionsmeasurefairvalueforportfoliosofderivativeswithoffsettingrisks.Theadjustmenttoreflectthe “own” credit risk of the entity may potentially cause hedge ineffectiveness where derivatives are used for hedging purposes.

Furthermore, new disclosures related to fair value measurements have been introduced to help users understand the valuation techniques and inputs used to develop fair value measurements, and the effect of fair valuemeasurementsonprofitorloss.Thevastmajorityofthe new disclosures will also be required to be provided in theinterimfinancialstatements.

2. Financial Instruments IndAS109wouldhaveasignificantimpactontheway

financialassetsandliabilitiesareclassifiedandmeasured,resultinginvolatilityinprofitorlossandequity.Underthe existing guidelines issued by the RBI, investments are classifiedintothefollowingcategories:heldtomaturity,available for sale and held for trading. Investments in the sharesofsubsidiariesareclassifiedundertheheldtomaturity category. According to the current guidelines, net loss in the available for sale and held for trading classificationsiscomputedcategorywiseandrecognizedintheprofitandlossaccountwhilenetgainsareignored.

AsperIndAS109,allfinancialassetswillhavetobeclassifiedatamortizedcosts,fairvaluethroughothercomprehensive income (FVOCI) or FVTPL. The above classificationwouldbebasedonthebusinessmodeltestandthecontractualcashflowtests.AllunrealizedgainsorlossesforfinancialassetsclassifiedatFVOCIincomewouldbe accounted for in the other comprehensive income and onassetsatfairvaluethroughtheprofitandlossintheprofitandlossaccount.

3. Financial instruments: impairment

Ind AS 109 requires entities to recognize and measure a credit loss allowance or provision based on an expected credit loss model. The expected loss impairment model would apply to loans, debt securities and trade receivables measured at amortized cost or at FVOCI. The model is also intended to apply to lease receivables, irrevocable loancommitmentsandfinancialguaranteecontractsnotaccounted for at FVTPL.

The new impairment model based on the expected credit losses as compared to percentage-based provisioning normswillhaveasignificantimpactonthesystemsandprocesses of entities because of its extensive requirements for forwarding - looking probabilities of default along with data and calculation.

Additionally,significantimpactisanticipatedintheareasofdebtvs.equityclassification,compoundfinancialinstruments, and derivatives and hedge accounting.

4.Consolidatedfinancialstatements

Ind AS 110 establishes a single control model for all entities (including special purpose entities, structured entities and variable interest entities). The implementation of this standard will require managements to exercise significantjudgmenttodeterminewhichentitiesarecontrolled and therefore are required to be consolidated. It changes the assessment of whether an entity is to be consolidated,byrevisingthedefinitionofcontrol.Furtherproportionate consolidation can be used only in limited cases of joint control, while joint ventures would have to be consolidated using the equity method.

This is a radical change in the Indian environment, because applyingthenew“control”definitionmaychangethegamut of entities included within a group. This standard willbesignificanttocompaniesthathavecomplexholdingstructures and have formed special purpose vehicles.

5. Business combinations Ind AS 103 will apply to all business combinations,

including amalgamations. Once Ind AS 103 is effective, all assets and liabilities acquired will be recognized at fair


value. Additionally, contingent liabilities and intangible assets not recorded in the acquiree’s balance sheet are likely to be recorded in the acquirer’s balance sheet on acquisition date. Goodwill on acquisition will not be amortized but will only be tested for impairment.

Is Ind AS the same as the IFRS issued by IASB?

Ind AS is an accounting framework based on International Financial Reporting Standards (IFRS) and has certain carve-outs to align IFRS to the business conditions prevailing in India. The following are some of the key carve-outs in Ind AS vis-à-vis IFRS as issued by IASB:

• PreviousGAAP:IFRS1definesthepreviousGAAPasthebasisofaccountingthatafirst-timeadopterusedimmediately before adopting IFRS. However, Ind AS 101 definesthepreviousGAAPasthebasisofaccountingthatafirst-timeadopterhasusedforitsreportingrequirement

in India immediately before adopting Ind AS. The change makes it mandatory for Indian entities to consider the financialstatementspreparedinaccordancewithexistingnotifiedIndianaccountingstandardsasapplicabletothemas previous GAAP when it transitions to Ind AS.

• Foreignexchangefluctuations:IndASprovidesanoptionto continue with the policy adopted for accounting for exchange differences arising from the translation of long-term foreign currency monetary items recognized in the financialstatementsfortheperiodendingimmediatelybeforethebeginningofthefirstIndASfinancialreportingperiod according to the previous GAAP. Under IFRS, such exchange differences are charged to the income statement.

• Foreign currency convertible bonds (FCCBs): Ind AS states that where the exercise price for the conversion of FCCBs isfixed,irrespectiveofanycurrency,itistobeclassifiedas equity rather than as an embedded derivative. IFRS,


on the other hand, requires that where the conversion of bondintoequitysharesisfixedbuttheexercisepriceforsuchconversionisdefinedinacurrencyotherthanthefunctional currency of the entity, the conversion aspect is to be accounted as embedded derivative.

• Straight lining of lease rentals: Keeping in mind the Indian inflationarysituation,IndASstatesthatthestraightlining of lease rentals may not be required in cases where periodicrentescalationisduetoinflation.IFRSdoesnotprovide an exception to straight lining of lease rentals whererentescalationisduetoinflation.

• Property, plant and equipment: Ind AS permits (subject to limited exceptions around change in functional currency) an entity to use carrying values of all property, plant and equipment as on the date of transition to Ind AS, in accordance with the previous GAAP, as an acceptable starting point under Ind AS. IFRS does not provide a similar optiononfirst-timeadoption.

• Gain on bargain purchase: IFRS 3 requires bargain purchase gain arising on business combination to be recognizedinprofitorloss.IndAS103requiresittobe recognized as other comprehensive income and accumulated in equity as capital reserve, unless there is no clear evidence for classifying the business combination as a bargain purchase. In this case, it is to be recognized directly in equity as capital reserve.

• Events after the reporting period: Consequent to the changes made in Ind AS 1, it has been provided in the definitionof“Eventsafterthereportingperiod”thatin case of breach of a material provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand on the reporting date, if the lender, before theapprovalofthefinancialstatementsforissue,agrees to waive the breach, it shall be considered as an adjusting event. Under IFRS, these breaches will result in classificationoftheloanascurrentinsteadofnon-current.


Transition to Ind AS by BanksandNBFCs:Keyfocus areas and their impacts


Transition to Ind AS is not just an “accounting change”

Considering the potential wide-ranging effects of the transition, the implementation effort would impact functions outside of thefinancedepartment,includingIT,legal,risk,compliance,product groups, operations, marketing, human resources, investor relations and senior management.

A number of related work streams should be considered in this effort, including:

• Accountingandfinancialreporting

• Tax

• Business processes and systems

• Change management, communication and training

In addition, it is critical to have strong project management skills to coordinate the roles of the various business functions and to keep the work-streams running smoothly and on schedule.

BanksandNBFCs(“bankingentities”)wouldhavetobepreparedforincorporatingthefollowingsignificantdifferencesin Ind AS from the existing GAAP.

IncomeKey differences

The accounting for interest income differs in many ways under Ind AS compared to the existing Indian GAAP. The differences couldhaveasignificantimpactontheinterestincome,interestexpense and the net interest income of banking entities. The differences would be mainly in the following areas:

1. Effective interest rate

Under the existing Indian GAAP, loan-processing fees are recognizedupfrontintheprofitandlossaccountandcostsrelatingtooriginationofloansaredebitedtotheprofitandloss account.

Under Ind AS, these fees will be amortized over the life of the loan using the “effective interest rate” method. Effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected lifeofthefinancialassetorfinancialliabilitytothegrosscarryingamountofafinancialassetortotheamortizedcostofafinancialliability.Whencalculatingtheeffectiveinterest rate, an entity should estimate the expected cashflowsbyconsideringallthecontractualtermsofthe

financialinstrument(e.g.,prepayment,extension,calland similar options). The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Under Indian GAAP, service charges, fees and commission income are generally recognized on due basis. However, under Ind AS, fees that are an integral part of the effective interestrateofafinancialinstrumentaretreatedasan adjustment to the effective interest rate, unless the financialinstrumentismeasuredatfairvalue,withthechangeinfairvaluebeingrecognizedinprofitorloss.In those cases, the fees are recognized as revenue or expense when the instrument is initially recognized.

Fees that are an integral part of the effective interest rate ofafinancialinstrumentinclude:

• Origination fees received on the creation or acquisitionofafinancialasset;

• Commitment fees received to originate a loan when the loan commitment is not measured at fair value throughprofitorlossanditisprobablethattheentitywillenterintoaspecificlendingarrangement;

• Originationfeespaidonissuingfinancialliabilitiesmeasured at amortized cost.

Fees that are not an integral part of the effective interest rateofafinancialinstrument:

• Feeschargedforaspecificservice;

• Commitment fees to originate a loan when the loan commitment is not measured at FVTPL and it is unlikelythataspecificlendingarrangementwillbeentered into;

• Loan syndication fees received to arrange a loan and the entity does not retain part of the loan package for itself (or retains a part at the same effective interest rate for comparable risk as other participants).

2. Interest income on non-performing assets

The RBI guidelines require interest income on non-performingassets(NPAs)toberecognizedonrealizationbasis only.

Under Ind AS 109, interest income is generally recognized on effective interest rate on the gross carrying amount of financialassetsdependingonthestageinwhichtheloanis. In the case where the loan or an asset is considered


impaired, the interest income will be accounted for at the net amount, i.e., gross carrying amount less provisions made.

3. Relevant date for recognition of gains/losses on dealing with securities

Under Indian GAAP, the RBI requires gains and losses on the sale of Government securities to be recognized on the settlement date.

Ind AS 109 allows a company to recognize gains and losses on dealing with securities on either the trade date or the settlement date. However, this policy has to be consistentlyappliedforeachcategoryoffinancialassets:amortized cost, FVOCI, FVTPL, designated at FVTPL and equity instruments designated as FVOCI. Therefore, trade date or settlement date accounting is required to be adopted at a higher level than at the level of a type of security, i.e., government securities.

4. Accounting for customer loyalty programs

Under Indian GAAP, a bank does not separately account for income from customer loyalty programs. The bank provides for liability toward these reward points by estimating the probability of redemption of customer loyalty reward points using an actuarial method by employing an independent actuary and based on certain assumptions.

Under Ind AS, award credits under customer loyalty programsareaccountedforasaseparatelyidentifiablecomponent of the transaction in which they are granted. The fair value of the consideration received in respect of the initial sale is allocated between the award credits and the other components of the sale. Income generated from customer loyalty programs is recognized as “other operating income.”

5. Sale of NPAs

The extant RBI guidelines provide for the deferment of recognition of gains/losses (sale to reconstruction companies [RCs] or securitization companies [SC]) as well as the non-recognition of gains (where sales are made to non RCs/SCs).

The accounting treatment for such sales would be governedbythede-recognitioncriteriaspecifiedunderINDAS109.Ifthecriteriaforde-recognitionismetthen,the gains would be recognized upfront.

Impact on financial reporting

The accounting for the unrealized gains or losses on investments accounted at FVTPL as per the business model adopted by the bank would also introduce some amount of volatilityintheprofitandlossaccount.

The accounting for interest income on an effective interest rate basis would have an impact on the net interest income and the corresponding interest spreads and margins reported by banking entities.

Impact on organization and its process

As a result of changes in accounting for net interest income under Ind AS, banking entities will need a clear strategy to address the effect of these changes on IT applications. Considering the huge volume of data, its manual processing maybeextremelydifficult.Keepingthisinview,itisimportantthat the banking entities modify their IT systems so that thefinancialdataproducedaccuratelyreportstherevenue.This may involve mapping of chart of accounts to take into consideration Ind AS reporting requirements.

Fair valuationKey differences

Ind AS 113 on fair value measurement provides principles on how to measure fair value. The standard neither prescribes whentomeasureatfairvaluenorisitsolelyaimedatfinancialinstruments. Rather, it applies to all assets and liabilities that are required or permitted to be measured at fair value. It also applies to all disclosures of fair value.

Thenewdefinitionoffairvalueisbasedonanexitpricenotion(i.e., the price that would be received to sell an asset or paid to transfer a liability at the measurement date).

The standard requires fair value measurements to maximize the use of observable inputs and minimize the use of unobservable inputs.

The standard also requires entities to record an adjustment tothemeasurementofliabilitiestoreflectanentity’sowndefault risk. Furthermore, the standard provides a number of clarifications,includingthefollowing:

• Market participants are assumed to transact in a manner that maximizes the value to them

• Blockage discounts are prohibited in all fair value measurements


• Guidance is provided on how to measure fair value when a market becomes less active

Fair value hierarchy

Entities need to classify and disclose fair value measurements usingafairvaluehierarchythatreflectsthesignificanceoftheinputs used in making the measurements, according to the following levels:

• Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1)

• Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (Level 2)

• Unobservable inputs for the asset or liability (Level 3)

Impact on financial reporting

The standard may, among other things, impact the way financialinstitutionsmeasurefairvalueforportfoliosofderivativeswithoffsettingrisks.Theadjustmenttoreflectthe “own” credit risk of the entity, may potentially cause hedge ineffectiveness where derivatives are used for hedging purposes.

Furthermore, new disclosures related to fair value measurements have been introduced to help users understand the valuation techniques and inputs used to develop fair value measurements and the effect of fair value measurements on profitorloss.

Impact on organization and its process

Banking entities will incur incremental cost because they will need to make system and operational changes. For example, banking entities will need to develop processes for:

• Categorizing fair value measurements within the fair value hierarchy

• Assessing market participant assumptions

• Determining the principal (or most advantageous) market for an asset or a liability

• Determining the point within the bid–ask spread that is the most representative of fair value in the circumstances

Financial instruments Key differences

Financialinstruments(includingfinancialassetsandliabilities)haveparamountimportanceinthefinancialstatementsofmostbanking entities. At present, accounting for such instruments in the banking industry in India is prescribed (to the extent applicable) by the accounting standards issued by the ICAI and notifiedbytheMCAunderCompaniesAct2013.Inaddition,the RBI also prescribes certain mandatory accounting principles that have to be followed by banking entities. For example, the RBI has prescribed accounting guidelines for investments and prudential norms for non-performing loans.

The RBI’s guidelines are based on prudence, as compared to the fair value presentation objective of Ind AS. The Report of the Working Group on the Implementation of Ind AS by Banks in India recommends the need to suitably align/withdraw the extantinstructions,suchastheclassificationofinvestmentportfolios as outlined in the Master Circular on Prudential NormsforClassification,ValuationandOperationofInvestmentPortfolio by banking entities.

The overview of the crucial accounting and disclosure requirements,pertainingtokeyaspectsoffinancialstatementsand related areas that are likely to be affected are covered in the following standards:

1. Ind AS 109 Financial Instruments

2. Ind AS 32 Financial Instruments: Presentation

3. Ind AS 107 Financial Instruments: Disclosures

4. Ind AS 113 Fair Value Measurement1

These standards deal with the presentation, recognition, measurementanddisclosureaspectsoffinancialandequityinstruments in a comprehensive manner. Pronouncements that dealwithcertaintypesoffinancialinstrumentsinextantIndianGAAP are AS 11 The Effects of Changes in Foreign Exchange Rates, guidelines and circulars issued by the RBI and ICAI’s Announcement on Accounting for Derivatives.

1 Ind AS 113 Fair Value Measurement consolidates fair value measurement guidance from across various Ind ASs into a single standard. It does not change when fair value can or should be used.


1. Classification and measurement

Classificationasdebtorequity

IndAS32requirestheissuerofafinancialinstrumentto classify the instrument as liability or equity on initial recognition, in accordance with its substance and the definitionsoftheterms.Theapplicationofthisprinciplemay require certain instruments that have the form of equitytobeclassifiedasliability.Forexample,underIndAS 32, mandatorily redeemable preference shares on whichafixeddividendispayablearetreatedasaliability.UnderextantIndianGAAP,classificationisnormallybasedon form rather than substance. In the context of banking inIndia,therecouldbeanimpactintermsofclassificationfor certain quasi equity and subordinated debt type instruments such as perpetual debt instruments (PDI) andperpetualnon-cumulativepreferenceshares(PNCPS)issued as a part of tier I or tier II capital.

Ind AS 32 sets out the requirements regarding the offset offinancialassetsandfinancialliabilitiesinthebalancesheet. The requirements include:

• A currently legally enforceable unconditional right to settle an asset and liability on a net basis

• Intentions to either settle on a net basis or to realize the asset and settle the liability simultaneously (which may be backed by past practice).

Para AG 38B of Ind AS 32 states that the right of set–off must not be contingent on a future event and must be legally enforceable in all the circumstances, i.e., normal course of business as well as in the event of insolvency, bankruptcy, etc. of the counterparties.

Accordingly, consistent with the current practice of most banking entities, very few transactions will qualify for offsetting. For example, in case of presentation of inter-bankparticipationcertificates(IBPC)withrisksharing,theissuing bank would reduce the aggregate amount of the participation for the aggregate outstanding advances. The participating bank would present the aggregate amount of such participations as part of its advances. This accounting treatment for IBPC with risk sharing may not be in line with Ind AS 32 offsetting requirements. In fact, the banking entities would need to review the terms of their participation and assess whether they comply with the de-

recognition and offsetting requirements of Ind AS 109.

IndAS32requirescompoundfinancialinstruments,such as convertible bonds, to be split into liability and equity components, and each component to be recorded separately. Extant Indian GAAP entails no split accounting, andfinancialinstrumentsareclassifiedaseitherliabilityor equity, depending on their primary nature. For instance, a bond with a 10% annual coupon rate and conversion featureatmaturity,whichentitlesinvestorswithfixednumberofequitysharesagainstfixedamountofmaturityproceeds,maygetclassifiedasacompoundfinancialinstrument under Ind AS. This may have an impact on the capital management of the bank as bond which was considered as debt obligation under the extant Indian GAAP may have some portion attributed to equity.

Classificationoffinancialassets

IndAS109containsthreeclassificationcategoriesforfinancialassets:

a) Amortized cost

b) FVOCI

c) FVTPL

Afinancialassetissubsequentlymeasuredatamortizedcost if the asset is held within a business model whose objectiveistocollectcontractualcashflowsandthecontractualtermsofthefinancialassetgiverisetocashflowsthataresolelypaymentsofprincipalandinterest(SPPI).

AfinancialassetissubsequentlymeasuredatFVOCIifitmeets the SPPI criterion and is held in a business model whose objective is achieved by both collecting contractual cashflowsandsellingfinancialassets.

Allotherfinancialassetsareclassifiedasbeingsubsequently measured at FVTPL.

At initial recognition of an equity investment that is not held for trading, an entity may irrevocably elect to present in Other Comprehensive Income (OCI) the subsequent changes in fair value.

However, under the extant RBI guidelines, the classificationcategoriescurrentlyprescribedareHeldto Maturity (HTM), Available for Sale (AFS) and Held for Trading (HFT). .


Therecouldbecomplexitiesaroundtheclassificationofloans that are originated by the bank and part of which is sub-participated to another bank. In such cases, a question arises as to whether there can be two different business models: one with the objective to hold the loan to collect thecontractualcashflowsandanotherwiththeobjectiveto originate and distribute, i.e., the intention to sell. In thefirstcase,thepartthatisheldtocollectcontractualcashflowmaybeclassifiedasamortizedcostandtheonewith the intention to sell may be categorized as FVTPL. A detailed analysis of the fact pattern may be required to arrive at a conclusion as each case may pose unique challenges in terms of the business model of the bank.

Classificationoffinancialliabilities

UnderIndAS109,allfinancialliabilitiesareclassifiedintotwocategories:FVTPLandotherfinancialliabilities.Theinitialmeasurementofallfinancialliabilitiesisatfairvalue.Subsequent to initial recognition, FVTPL liabilities are measured at fair values, with gain or loss (other than gain or loss attributable to “own credit risk”) being recognized in the income statement. Gain or loss attributable to “own credit risk” for FVTPL liabilities is recognized in equity. Otherfinancialliabilitiesaremeasuredatamortizedcostusing the effective interest rate for each balance sheet date. Under extant Indian GAAP, no accounting standard provides detailed guidance on the measurement of financialliabilities.Thecommonpracticeistorecognizethefinancialliabilityforconsiderationreceivedonitsrecognition. Subsequently, interest is recognized at the contractual rate, if any.

2. Accounting for derivatives

IndAS109definesaderivativeasafinancialinstrumentor a contract having the following three characteristics:

• Its value changes in response to the change in a specifiedinterestrate,financialinstrumentpriceetc.

• It requires no or smaller initial net investment.

• It is settled at a future date.

As per Ind AS 109, all derivatives, except those used for hedging purposes, are measured at fair value, and any gains/lossesarerecognizedinprofitorloss.

In the context of banking in India, instruments such as interest rate swaps (IRS) are accounted as per RBI circular MPD.BC.187/07.01.279/1999-2000 dated 7 July 1999. Hence, market transactions done by banking entities are marked to market (at least at fortnightly intervals), whereas those for hedging purposes could be accounted on an accrual basis. This accounting treatment for IRS under the extant circular is different from Ind AS 109, which requires all the derivatives to be categorized as FVTPL. Even the hedging accounting model under Ind AS 109 is at variance with the extant circular.

Ind AS 109 requires extensive use of fair valuation for theclassificationandmeasurementoffinancialassets.Considering the economic environment and lack of relativelydevelopedfinancialmarketforcertainforeignexchange and interest rate instruments, the application of these fair valuation techniques requires additional implementation measures to overcome the challenges.

Impactonfinancialreporting

Ind AS 109 requires balance sheet recognition for all financialinstruments(includingderivatives).Itmakesgreater use of fair values than extant Indian GAAP. All financialassetsandliabilitiesareinitiallyrecognized(inthe balance sheet) at fair value. In the case of FVTPL assets, liabilities and derivatives (other than those used for hedging) and subsequent changes in fair value arerecognizedinprofitorloss.Theuseoffairvaluessometimes causes volatility in the income statement or equity. To comply with the Ind AS 109 requirement to measure all derivatives at fair value, entities have to make use of valuation tools.

Ind AS 109 would change the measurement and presentationofmanyfinancialinstrumentsdependingontheirpurposeandnature.Forexample,financialassetscurrentlyclassifiedasavailable-for-saleoratFVTPLmay,based on their contractual characteristics and the business model within which they are held, be included in the amortized cost category.

These changes will determine whether and when amounts arerecognizedinnetprofit.Forexample,increasedprofitand loss volatility is expected as more instruments are classifiedatfairvaluethroughprofitorloss.


The introduction of the FVOCI category is of particular significanceformanybankingentitiesinrespectoftheirliquidity buffer portfolios held to fund unexpected cash outflowsarisingfromstressedscenarios.Manysuchportfolios could now be required to be measured at FVOCI, considering the levels of asset turnover expected in them. Measurement at FVOCI could have a knock-on effect on regulatory capital given the removal of the available-for-salefilterunderBASELIIIforbanks.Bankingentitiesandotherregulatedfinancialinstitutionsmayhavetorevisittheirinitialassessmentsofhowtheclassificationandmeasurements of Ind AS 109 may apply to them.

In order to extract the necessary data to prepare the new disclosures, entities (in particular, banking entities) may need to modify management information systems and internal controls, including linking their credit systems to accounting systems.

3. De-recognition

BecauseofthestrictcriteriaforderecognizingfinancialassetsinIndAS109,somefinancialassetdisposaltransactions (particularly during the sale of loans or trade receivables)maybereclassifiedasguaranteedloans.

4. Comprehensive disclosures

Ind AS 107 requires very comprehensive disclosures regardingfinancialinstrumentsandriskstowhichanentity is exposed, as well as the policies for managing such risks. Comprehensive information on the fair value of financialinstrumentswouldenhancethetransparencyandaccountabilityoffinancialstatements.

Impact on an organization and its processes

Banking entities, based on the business model they adopted, may have to modify or develop data-capture systemsforclassificationoftheirinvestmentandadvances portfolio. For example, in case the investments areclassifiedatamortizedcost,theywouldneedtosatisfy the solely for payment of principal and interest (SPPI) criterion. To make this SPPI assessment, banking entities may have to develop tools or undertake system

enhancements. Similarly, for determining the own credit risksonfinancialliabilitiesatFVTPL,bankingentitiesmayhave to make changes to their source systems so as to capture external attributes such as benchmark interest rate. Certain changes to the process may be required: for instance, corporate banking teams may have to assess the contracts and identify if there are any embedded derivativesintheformofindexationtoafinancialinstrument price, interest rate or any other variable without a close link with the host contract.

5. Impairment

Oneofthelessonsfromthefinancialcrisisof2008wasthat the pre-crisis accounting model for impairment waited for the impairment to be incurred before requiring a loss allowance thereon and was criticized for being a “too little, too late” approach. Hence, to address this issue, Ind AS 109 has introduced a new “expected credit loss” (ECL) modelfortheimpairmentoffinancialassets.ItappliestofinancialassetsthatarenotmeasuredatFVTPL,includingcertain bank deposits, loans, lease and trade receivables, debtsecurities,andspecifiedfinancialguaranteesand loan commitments issued. The model uses a dual measurement approach, under which the loss allowance is measured as either 12-month expected credit losses or lifetime expected credit losses. These requirements represent a paradigm shift from the current practice in the Indian banking industry, which follows the income recognition,assetclassificationandprovisioning(IRACP)norms as prescribed by the RBI.

Under the extant IRACP norms, the provisioning is based onobjectivecriteriafixedbytheRBI,whicharebasedonthe 90-day past-due concept for banks and 180-day past dueconceptforNBFCs.Theprovisioningrequirementsarebased on the period for which the asset has remained non-performing and the security available.

However, the Expected Credit Loss (ECL) model needs to be appliedtoallthefinancialinstrumentsthataresubjecttoimpairmentaccounting.Theseinstrumentsincludefinancialassetsclassifiedasamortizedcostandfairvaluethroughothercomprehensive income, lease receivables, trade receivables, andcommitmentstolendmoneyandfinancialguaranteecontracts.


Initiallyonoriginationorpurchaseofafinancialinstrument,the entity is required to recognize a credit loss allowance based on12-monthexpectedlossesintheprofitandlossaccount(stage 1). Twelve-month expected credit losses are the portion of lifetime expected credit losses that represent the expected creditlossesfromdefaulteventsonafinancialinstrumentthat are possible within 12 months of the reporting date. This serves as a proxy for the initial expectations of credit losses. Forfinancialassets,interestrevenueiscalculatedonthegrosscarrying amount (i.e., without adjustment for expected credit losses).

Subsequently,ifthecreditriskincreasessignificantlysinceinitialrecognitionofafinancialinstrument,thecreditlossallowance would be based on full lifetime expected credit losses (stage 2). Lifetime expected credit losses are an expected present value measure of losses that arise if borrowers defaultsontheirobligationthroughoutthelifeofthefinancialinstrument. They are the weighted average credit losses with the probability of default as the weight. The calculation of interestrevenueonfinancialassetsremainsthesameasforstage 1.

Similarly,ifthecreditriskofafinancialassetincreasestothepoint that it is considered credit-impaired, interest revenue is calculated based on the amortized cost (i.e. the gross carrying amount adjusted for the loss allowance). Financial assets in this stage will generally be individually assessed. Lifetime expected creditlossesarestillrecognizedonthesefinancialassets(stage3).

The banking entities may consider the following for measuring expected credit losses:

a) The probability-weighted outcome

b) The time value of money: expected credit losses should be discounted to the reporting date

c) Reasonable and supportable information that is available without undue cost or effort

Although the model is forward-looking, historical information is always considered to be an important anchor or base from which to measure expected credit losses. However, historical data should be adjusted on the basis of current observable data toreflecttheeffectsofcurrentconditionsandforecastsoffuture conditions.


Moving from the extant percentage-based IRACP norms for provisioningasspecifiedbytheRBItoanexpectedcreditlossmodel will require more judgment in considering information related not only to the past and present, but also to the future. The extant norms are based on the 90-day past-due concept, which ensures consistent application across the banking system. The provisioning requirements are based on the period for which the asset has remained non-performing and the security available. As a prudent measure to build a cushion againstthebuild-upofNPAs,theRBIhasalsoprescribeda provision on standard assets. As a measure of macro prudentialtoolformanagementofNPA,theRBIalsoprescribesmaintaining the provisioning coverage ratio (PCR). The surplus PCR provisions over actual requirements may be used as a counter cyclical provisioning buffer that the RBI may allow banks to draw down during systemic downturns. The transition fromarule-basedregulator-specifiedcriteriaapproachthatensures consistency of application across the system to an ECL framework based on management judgment, is data intensive, necessitates fairly sophisticated credit modeling skills and represents an enormous challenge not only for banking entities, but also for auditors, regulators, the Government etc.

The expected credit losses model will likely result in earlier recognition of credit losses because it will require the recognition of either a 12-month or lifetime expected credit loss allowance or provision that includes not only credit losses that have already occurred, but also losses that are expected in the future.

The proposals may increase the credit loss allowance or provision recorded by many banking entities. The extent of the increase, however, will very much depend on the nature of the credit exposures and current percentage-based provisioning. The credit loss expense is also likely to be more volatileasexpectationschange.Giventhesignificantimpacton accounting and credit-risk processes, and the scale of the financialandregulatorycapitalimpact,severalbankingentitiesshould begin high-level impact assessments and simulations.


Impact on organizations and processes

Banking entities may have to design and implement new systems, databases and related internal controls. Banks that plan to use expected credit loss data already captured for regulatory capital requirement calculations under the Basel frameworks will need to identify differences between the two sets of requirements.

Business combinationsKey differences

1. Ind AS 103 Business Combinations applies to most business combinations, including amalgamations (where the acquiree loses its existence) and acquisitions (where the acquiree continues its existence). Under current Indian GAAP, there is no comprehensive standard dealing with all business combinations. AS 14 Accounting for Amalgamations applies only to amalgamations — i.e., when the acquiree loses its existence — and AS-10 Accounting for Fixed Assets applies when a business is acquired on a lump-sum basis by another entity.

2. Ind AS 103 requires all business combinations within its scope to be accounted under the purchase method, excluding business combinations of entities or businesses under common control, which are to be accounted using the pooling of interest method. Current Indian GAAP permits both the purchase method and the pooling of interest method in the case of amalgamation. However, the pooling of interest method is allowed only if the amalgamationsatisfiescertainspecifiedconditions.

3. Ind AS 103 permits the net assets taken over, including contingent liabilities and intangible assets, to be recorded at fair value. Indian GAAP permits the recording of net assets at carrying value. The contingent liabilities of the acquiree are not recorded as liabilities under Indian GAAP.

4. 4. Ind AS 103 prohibits amortization of goodwill arising on business combinations, and requires it to be tested for impairment annually. Indian GAAP requires amortization of goodwill in the case of amalgamations. Indian GAAP provides no guidance on goodwill arising on acquisition through equity.

5. Under Ind AS 103, acquisition accounting is based on substance. Reverse acquisition is accounted assuming the legal acquirer is the acquiree. In Indian GAAP, acquisition accounting is based on form. Indian GAAP does not deal with reverse acquisitions.

6. Ind AS 103 requires that contingent consideration in a business combination be measured at fair value at the date of acquisition, and that this is recognized in the computation of goodwill/negative goodwill. Subsequent changes in the value of contingent consideration depend on whether they are equity instruments, assets or liabilities. If they are assets or liabilities, subsequent changes are generally recognized inprofitorlossfortheperiod.UnderIndianGAAP,AS14requires that where the scheme of amalgamation provides for an adjustment to the consideration contingent on one or more future events, the amount of the additional payment is included in the consideration and consequently goodwill, if payment is probable and a reasonable estimate of the amount can be made. In all other cases, the adjustment isrecognizedassoonastheamountisdeterminable.Noguidance is available for contingent consideration arising under other types of business combinations.

7. IndAS103specificallydealswithaccountingforpre-existing relationships between the acquirer and the acquiree, and for re-acquired rights by the acquirer in a business combination. Indian GAAP does not provide guidance for such situations.

8. Ind AS 103 provides an option to measure any non-controlling (minority) interest in an acquiree at its fair value, or at the non-controlling interest’s proportionate shareoftheacquiree’snetidentifiableassets.UnderIndianGAAP,AS21doesnotprovidethefirstoption.Itrequiresa minority interest in a subsidiary to be measured at the proportionate share of net assets at book value.

9. Ind AS 103 requires that, in a business combination achieved in stages, the acquirer remeasures its previously held equity interest in the acquiree at its acquisition date fair value. The acquirer is to recognize the resulting gain or loss, ifany,inprofitorloss.ThereisnosuchrequirementunderIndian GAAP. Under AS 21, if two or more investments are made in a subsidiary over a period of time, the equity of the subsidiary at the date of investment is generally determined on a step-by-step basis.



The changes brought in by Ind AS 103 are going to affect all stages of the acquisition process — from planning to the presentation of the post-deal results. The implications primarily involve providing greater transparency and insights into what has been acquired, and allowing the market to evaluate the management’s explanations of the rationale behind a transaction. The key impacts of Ind AS 103 are summarized below:

• Depiction of more appropriate value of an acquisition

Followinganacquisition,financialstatementswilllookverydifferent. Assets and liabilities will be recognized at fair value. Contingent liabilities and intangible assets that are not recorded in the acquiree’s balance sheet are likely to be recorded at fair value in the acquirer’s balance sheet. In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition date fair value. The acquirer shall also have an option to measure non-controlling interest at fair value. These changes in the recognition of net assets, and the measurement of previously held equity interests andnon-controllinginterests,willsignificantlychangethevalueofgoodwillrecordedinfinancialstatements,whichwill project the actual premium paid by the entity for the acquisition.

• Greater transparency

Significantnewdisclosuresarerequiredregardingthecostof the acquisition, the values of the main classes of assets andliabilities,andthejustificationfortheamountallocatedto goodwill. All stakeholders will be able to evaluate the actual worth of an acquisition and its impact on the future cashflowoftheentity.

• Significant impact on post-acquisition profits

Under Indian GAAP, net assets taken over are normally recorded at book value, and hence, the charges to the profitandlossaccountforamortizationanddepreciationexpenses are based on carrying value. However, net assets taken over will be recorded at fair value under Ind AS 103. Thiswillresultinachargetotheprofitandlossaccountforamortization and depreciation based on fair value, which is the true price paid by the acquirer for those assets. Goodwill is not required to be amortized, but is required

to be tested annually for impairment under Ind AS 103. Negativegoodwillisrequiredtobecreditedtocapitalreserve under Ind AS 103. In a business combination achieved in stages, the previously held equity interest in the acquiree is measured at its acquisition date fair value. Theresultinggainorloss,ifany,isrecognizedintheprofitand loss account. These items will increase volatility in the income statement.

• Accounting for business combinations vis-à-vis High Court order

In India, “law overrides accounting standards” is an accepted principle. Hence, accounting is based on the treatment prescribed by the High Court in its approval, even though it may not be in accordance with accounting standards.However,theCompaniesAct2013specificallyrequires accounting treatment prescribed in the amalgamation or demerger schemes to be in accordance with accounting standards. Going forward, entities to which Ind AS will be applicable will need to ensure that schemes filedwiththeHighCourtdonotprescribeanytreatment,or that the treatment prescribed is in accordance with Ind AS 103.


• Use of experts

The acquisition process should become more rigorous, from planning to execution. More thorough evaluation of targets and structuring of deals will be required to withstand greater market scrutiny. As a result, expert valuation assistance may be needed to establish values for items such as new intangible assets and contingent liabilities.

• Purchase price allocation

Under Indian GAAP, no emphasis was given to purchase price allocation, as net assets were generally recorded based on the carrying value in the acquiree’s balance sheet.IndAS103placessignificantimportanceonthepurchasepriceallocationprocess.Allidentifiableassetsofthe acquired business must be recorded at their fair values.


Many intangible assets that would previously have been includedwithingoodwillmustbeseparatelyidentifiedandvalued. Explicit guidance is provided for the recognition of such intangible assets. Contingent liabilities are also required to be fair valued and recognized in the acquirer’s balance sheet.

• Deal terms

A closer scrutiny of contingent payments to employees or selling shareholders in a business combination may be required to assess if they would form part of the acquisition consideration or were payments in lieu or compensation for future employment and hence needed to be expensed. NodetailedguidanceiscurrentlyavailableinthecurrentIndian standards for such an evaluation.

Income taxesKey differences

1. AS 22 Accounting for Taxes on Income is based on the income statement liability method, which focuses on timing differences. Ind AS 12 Income Taxes is based on the balance sheet method, which focuses on temporary differences. One example of the temporary vs. timing differenceapproachisrevaluationoffixedassets.UnderIndian GAAP, no deferred tax is recognized on upward revaluationoffixedassetswheresuchrevaluationiscredited directly to the revaluation reserve. Under Ind AS, companies will recognize deferred tax on revaluation component if the other recognition criteria are met.

2. Ind AS 12 requires the recognition of deferred taxes in case of business combinations. Under Ind AS, the cost of a businesscombinationisallocatedtotheidentifiableassetsacquired and liabilities assumed by reference to their fair values. However, if no equivalent adjustment is allowed for tax purposes, it would give rise to a temporary difference. Under Indian GAAP, business combinations (other than amalgamation) will not give rise to such deferred tax adjustment.

3. Where an entity has a history of tax losses, the entity recognizes a deferred tax asset arising from unused tax lossesortaxcreditsonlytotheextentthatithassufficienttaxable temporary differences, or there is other convincing

evidencethatsufficienttaxableprofitwillbeavailableunder Ind AS. Under Indian GAAP, if the entity has carried forward tax losses or unabsorbed depreciation, all deferred tax assets are recognized only to the extent that there is virtual certainty supported by convincing evidence that sufficientfuturetaxableincomewillbeavailableagainstwhich such deferred tax assets can be realized. Ind AS 12 does not lay down any requirement for consideration of virtual certainty in such cases.

4. Under Ind AS, an entity should recognize a deferred tax liabilityinconsolidatedfinancialstatementsforalltaxabletemporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures—e.g.,undistributedprofits—excepttotheextentthat the parent, investor or venturer is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Under Indian GAAP, deferred tax is not recognized on such differences.

5. Under Ind AS, deferred taxes are recognized on temporary differencesthatarisefromtheeliminationofprofitsandlosses resulting from intra-group transactions. Deferred tax is not recognized on such eliminations under Indian GAAP. The deferred taxes in the CFS are a simple aggregation of the deferred tax recognized by various group entities.

6. Disclosure required for income taxes is likely to increase significantlyontransitiontoIndAS.Thefollowingareexamples of certain critical disclosures mandated in Ind AS: an explanation of the relationship between tax expense (income)andaccountingprofit;anexplanationofchangesin the applicable tax rate(s) compared to the previous accounting period; and the amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is recognizedinthestatementoffinancialposition.


• Deferred tax accounting for the group

Till date, the deferred taxes in the CFS are a simple aggregation of the deferred tax recognized by various group entities. On transition to Ind AS, deferred taxes in theCFSwillbesignificantlydifferentfromthoseunderIndian GAAP. This is because of the GAAP differences explained above, especially with respect to undistributed


profitsofsubsidiaries,associatesandjointventuresandintra-group transactions.

• Acquisitions

Deferred tax is recognized on the fair value adjustment of acquired assets, liabilities and contingent liabilities recorded as part of business combination accounting. Goodwill under Ind AS is determined accordingly. Reversal of deferred tax asset/liability in future years affects the tax expense or income of those years. Therefore, the effect of acquisitiondeferredtaxesonfuturefinancialstatementswilldiffersignificantlyunderIndASandIndianGAAP.

• Entities in tax losses

Due to the strict principle of virtual certainty under Indian GAAP, only in very rare cases can entities recognize deferred tax assets, where they have carried forward losses and unabsorbed depreciation. The “convincing evidence” principle under Ind AS is less stringent in comparison. Hence, the probability of recognizing deferred tax asset on carried forward tax losses and unabsorbed depreciation is higher under Ind AS.


Ind AS 12 implementation requires accounting personnel to work effectively with the tax department to:

• Monitor and calculate tax bases of assets and liabilities

• Monitor tax losses and tax credits of all components in the group

• Assess recoverability of deferred tax assets

• Determine possible offsets between deferred tax assets and liabilities

• Monitor changes in tax rates and collect applicable tax rates to determine the amount of deferred tax in the event of asset disposal

• Understand the implications of double tax treaty, where there are foreign operations

• Prepare more detailed disclosures — tax reconciliation

Tax teams should be involved, both at the group and the subsidiary level. If no tax specialists are available at the subsidiary level, tools (e.g., accounting and tax manuals, including checklists that enable group entities to accurately

determine tax bases) and appropriate training should be provided to ensure quality reporting. The group needs to do a thorough review of existing tax planning strategies to test alignment with any organizational changes created by Ind AS conversion.

Employeebenefitsand share-based paymentsKey differences

1. IndAS19EmployeeBenefitsrequirestheimpactofremeasurementinnetdefinedbenefitliability(asset)to be recognized in other comprehensive income. Remeasurementofnetdefinedliability(asset)comprisesactuarial gains or losses, return on plan assets (excluding interest on net asset/liability) and any change in effect of asset ceiling. Indian GAAP currently requires such impacts tobetakentotheprofitandlossaccount.

2. UnderIndAS,theliabilityforterminationbenefitshasto be recognized based on constructive obligation. Indian GAAP requires it to be recognized based on legal obligation.

3. IndAS19hassignificantlyenhanceddisclosurerequirementsfordefinedbenefitplans.Newdisclosuresmandated under Ind AS are information that explains thecharacteristicsofitsdefinedbenefitplansandrisksassociatedwiththem.Thesealsoreflectasensitivityanalysisforeachsignificantactuarialassumptionasoftheendofthereportingperiod,showinghowthedefinedbenefitobligationwouldhavebeenaffectedbychangesin the relevant actuarial assumption that were reasonably possible at that date. The fair value of the plan assets should be disaggregated into classes that distinguish the nature and risks of those assets, subdividing each class of plan asset into those that have a quoted market price in an active market and those that do not.

4. Under Ind AS, employee share-based payments should be accounted for using the fair value method. In contrast, Indian GAAP permits an option of using either the intrinsic value method or the fair value method. This even applies to share-based payment to non-employees.

5. Ind AS provides detailed guidance on accounting for group andtreasurysharetransactions.Nosuchguidanceisprovided in Indian GAAP.



• Reduced volatility in income statement on account of actuarial differences

Actuarial gains and losses arise due to changes in actuarial assumptions, such as with respect to the discount rate, increase in salary, employee turnover and mortality rate. The requirement to account for actuarial gains and losses in other comprehensive income will reduce volatility in the income statement arising on account of actuarial differences.

• Timing of recognition of termination benefits

UnderIndAS,terminationbenefitsarerequiredtobe provided when the scheme is announced and the management is demonstrably committed to it. Under IndianGAAP,terminationbenefitsarerequiredtobeprovided for based on legal liability when an employee signs up for the voluntary retirement scheme (VRS) rather than constructive liability. This is generally a timing issue for creating a provision.

• True value of ESOP

Indian GAAP permits entities to account for employee stock ownership plans (ESOPs), either through the fair value method or the intrinsic value method though disclosureisrequiredtobemadeoftheimpactonprofitor loss of applying the fair value method. It is observed that most Indian entities prefer to adopt the intrinsic value method. The drawback of this method is that it does not factor in option and time value when determining compensation cost. Under Ind AS, the accounting for ESOPs will have to be remeasured using the fair value method. This may result in increased charges for ESOPs formanyentities,andwillhaveasignificantimpactonkeyindicators such as earnings per share.

• Accounting for share-based payments to non-employees

In recent times, it has been observed that many entities are enteringintoprofit-sharingpartnershipagreementswiththeir vendors. This mode of payment is considered as an incentive tool intended to encourage vendors to complete efficientandqualitywork.UnderIndianGAAP,AS10requiresafixedassetacquiredinexchangeforsharestobe recorded at its fair market value or the fair market value of the shares issued, whichever is more clearly evident.

For other goods and services, there is no guidance on recognizingthecostofprovidingsuchbenefitstovendorsin lieu of goods or services received. Different accounting policies are being followed by Indian entities, ranging from no-charge to accounting as per principles of IFRS 2 Share-based Payment. On transition to Ind AS, an entity will have toaccountforsuchbenefitsunderthefairvaluemethodlaid down in Ind AS 102.

• Accounting for group ESOPs

In India, a subsidiary normally does not account for ESOPs issued to its employees by its parent entity, contending that clear-cut guidance is not available and it does not have any settlement obligation. Under Ind AS 102, such ESOPs will have to be accounted as per principles laid down in Ind AS 102, i.e., either as equity-settled or as cash-settled plans,dependingonspecificcriteria.AsperIndAS102,areceiving entity whose employees are being provided ESOP benefitsbyaparentwillhavetoaccountforthecharge.Thiswillreflectthetruecompensationcostofreceivingemployeebenefits.


• Ind AS 19 and Ind AS102 are likely to have a major impact on many organizations. Additional liabilities arising from the adoption of Ind AS102 will negatively impact financialresultsandratios.Insomesituations,theabilityto pay dividends may be affected and there may also be implications from restrictive covenants in existing debt/equity agreements. As a result, entities should carry out a comprehensive review of their rewards and recognition mechanisms in order to ensure that these continue to support business strategies in a cost-effective manner. Along with cash cost, accounting cost also needs to be considered. The impact on key stakeholders (senior management, employees, potential recruits, trade unions, pension trustees and rating agencies) needs to be understood. While Ind AS 102 may have a negative effect, Ind AS 19 may have the opposite effect, since actuarial losses are allowed to be recognized in other comprehensive income.

Seniormanagement,andfinance,operationalandhumanresource personnel will need to work closely with each other, their actuaries and their external advisors to ensure a full


understanding of the accounting and business impact of alternativeemployeebenefitsandofemergingbestpracticesinan IFRS environment.

• Actuarial principles under Ind AS 19 are different from those under AS 15. Entities need to engage with their actuaries and ensure that the actuarial report, going forward, is in accordance with revised principles laid down in Ind AS 19. Actuaries should also be asked to furnish detailed information required under Ind AS 19.

Property,plantandequipment,intangible assets and leasesKey differences

Property, plant and equipment:

1. Ind AS 16 Property, Plant and Equipment mandates component accounting, whereas AS 10 recommends but does not require it. However, the Companies Act will require companies following AS 10 to apply component accountingmandatorilyfromfinancialyearscommencing1 April 2015.

2. Major repairs and overhaul expenditure are capitalized under Ind AS 16 as replacement costs, if they satisfy the recognition criteria. In most cases, Indian GAAP requires thesetobechargedofftotheprofitandlossaccountasincurred.

3. ThereisnospecificguidanceunderIndianGAAPforassetspurchasedondeferredsettlementterms.Costoffixedassets generally includes the purchase price for deferred paymentterm,unlesstheinterestelementisspecificallyidentifiedinthearrangement.However,underIndAS,thedifference between the purchase price under normal credit terms and the total amount incurred would be recognized asinterestexpenseovertheperiodofthefinancing.

4. ThereisnospecificguidanceunderIndianGAAPon whether the cost of an asset includes costs of its dismantlement, removal or restoration, the obligation for which an entity incurs as a consequence of installing the item.UnderIndAS,thecostofanassetwouldspecificallyinclude such a cost and would have to be added to the purchase price at initial recognition.

5. Under Indian GAAP, an entity has an option to recognize unrealized exchange differences on translation of certain long-term monetary assets/liabilities as adjustment to the cost of an asset. Such an amount shall be depreciated over the balance useful life of the asset. Under Ind AS, all foreign exchange differences shall generally be charged totheprofitandlossaccount.However,thetransitionalrelief under Ind AS allows companies to continue with the capitalization of foreign exchange differences for long-term monetary items that were recognized under Indian GAAP.

6. Ind AS 16 requires estimates of useful lives, depreciation method and residual values to be reviewed at least at the endofeachfinancialyear.IndianGAAPdoesnotmandatean annual review of these, but recommends a periodic review of useful lives.

7. Any change in the depreciation method is treated as an accounting policy change under Indian GAAP, whereas it is treated as a change in estimate under Ind AS.

8. Both Ind AS and Indian GAAP permit the revaluation model for subsequent measurement. If an asset is revalued, Ind AS 16 mandates a revaluation for the entire class of the property, plant and equipment to which that asset belongs, and the revaluation to be updated periodically. In Indian GAAP, revaluation is not required for all the assets of the givenclass.Itissufficientthattheselectionoftheassetsto be revalued is made on a systematic basis, e.g., an entity may revalue a class of assets of one unit and ignore the same class of assets at other location. Also, there is no need to regularly update the revaluation under Indian GAAP.

Intangible assets:

1. UnderIndAS38,intangibleassetscanhaveindefiniteuseful lives. Such assets are required to be tested for impairment and are not amortized. Under Indian GAAP, thereisnoconceptofindefiniteusefullifeofintangibleassets. Indian GAAP contains a rebuttable presumption that the life of intangibles should not exceed 10 years, which is absent in Ind AS.

2. Ind AS allows the revaluation model for accounting of an intangible asset, provided an active market exists. Indian GAAP does not contain any such revaluation model for subsequent measurement of intangible assets.


Leases:

1. IndAS17dealsspecificallywithlandleases.Landleasesareclassifiedasfinanceoroperatingleasesbasedonthe general criteria laid down in the standard. When a lease includes both land and building elements, an entity assessestheclassificationofeachelementasafinancelease or an operating lease separately. Under Indian GAAP, no accounting standard deals with land leases. According to an Expert Advisory Committee (EAC) opinion, long-term landleasemaybetreatedasfinancelease.

2. Ind AS 17 requires an entity to determine whether an arrangement — comprising a transaction or a series of related transactions — that does not take the legal form of a lease but conveys a right to use an asset in return for a payment or series of payments is a lease. Under Appendix C of Ind AS 17 Determining whether an Arrangement contains a Lease, such a determination shall be based on the substance of the arrangement, e.g., automated teller machine (ATM) and outsourcing contracts may have the substance of a lease. Indian GAAP does not provide any guidance for such arrangements.


• Component accounting

Under Ind AS16, a component of an item of property, plantandequipmentwithacostthatissignificantinrelation to the total cost of the item shall be separately depreciated. Hence, entities need to divide the cost of an assetintosignificantpartsiftheirusefullifeisdifferent,and depreciate them separately. This will require entities torestructuretheirfixedassetregisterandrecomputedepreciation. Also, the requirement of estimating residual value is likely to change the depreciation of many assets, as Indian entities normally presume 5% of the value of assets as their residual value rather than making any estimate of the residual value. It may be noted that component accounting is a requirement under the Companies Act 2013, and even companies that continue to follow Indian GAAP will have to carry out component accounting.

• Revaluationoffixedassets

Indianentities,whichhaveselectivelyrevaluedfixedassetsorintendtorevaluethefixedassets,willhavetodeterminewhether they want to continue with the revaluation model

or not. This decision is crucial for an entity if it wants to continue with the revaluation model. It will have to:

• Adopt the revaluation model for the entire class of assets that cannot be restricted to some selective location

• Update such revaluation on regular basis

• Take a depreciation charge in the income statement based on revalued amounts

• Intangible assets

Unlike Indian GAAP, amortization will not be required under Ind AS for an intangible asset for which there is no foreseeable limit on the period over which the asset isexpectedtogeneratenetcashinflowfortheentity.However, annual impairment testing will be required for suchanasset.Thiscancreatevolatilityinprofitandloss.Also,theentitywillbeabletoreflectintangibleassetsat their fair value, provided there is an active market for them. This will help the entity project the real value of its intangible assets in the balance sheet.

• Service contracts

UnderINDAS,servicecontracts,suchasATMcontracts,waste management contracts and outsourcing contracts, may have to be accounted for as leases, if the use of the specificassetisessentialtotheoperationsandsatisfiescertain conditions. In such cases, the lease is analyzed in lightofINDAS17Leasestodetermineitsclassification.Such contracts are currently not assessed for identifying leases under Indian GAAP, though there is no restriction on doing so. This can have a substantial impact, as the service provider may be required to derecognize the asset from its booksifitsatisfiesthefinanceleaseclassification.

Impact on organization and its processes

Several provisions of Ind AS 16, Ind AS 40 and Ind AS 17 may require entities to transfer responsibilities, previously assumed bythefinancefunction,tooperationalpersonnelforthepurpose of:

1. Validating costs of parts of property, plant and equipment items (including determination of of directly attributable costs)anddefiningrelevantcomponents

2. Identifying investment properties


3. Validating useful lives and depreciation methods for items of property, plant and equipment (according to component)

4. Regularly reviewing useful lives, depreciation methods, residual values and valuation of unused property, plant and equipment

5. Reviewing various arrangements to identify lease arrangement

Themaintenanceofafixedassetregisterwillbeacumbersomeexercise: it will now have to be more granular to include components and major repairs that are capitalized. It will bedifficult,ifnotimpossible,tomaintainthemmanually;therefore, appropriate ERP packages need to be implemented ortheexistingonesneedtobemodifiedtocapturesuchinformation.

The purchase department needs to be trained on identifying leases in a service contract. This will ensure that service contracts, which are in substance leases, are properly accounted for as leases in accordance with Ind AS 17.

PresentationoffinancialstatementsKey differences

Thecurrentfinancialreportingframeworkforbanksisbasedonthe requirements of the Banking Regulation Act, 1949 (Section 29 read with the Third Schedule) (BR Act), supplemented by instructions issued by the RBI from time to time and the accounting standards issued by the ICAI.

Instead of being prescriptive, Ind AS 1 Presentation of Financial Statements provides minimum requirements for the presentationoffinancialstatements,includingitscontentandguidelines for their structure.

1. IndAS1issignificantlydifferentfromthecorrespondingAS 1. While Ind AS 1 sets out the overall requirements forthepresentationoffinancialstatements,guidelinesfor their structure and minimum requirements for their content, AS 1 does not offer any standard outlining overallrequirementsforthepresentationoffinancialstatements. The format and disclosure requirements are set out under Schedule III to the Companies Act, 2013. The RBI recommended to the MCA a roadmap for the implementation of Ind AS by banks from 2018–19

onwardsandbyNBFCsinaphasedmanner(2018–19and 2019–20). Considering developments around the implementation of new accounting standards, the RBI has constituted a Working Group to look into the issues in the implementation of Ind AS by banks. The Working Group has givenitsrecommendationsonthepresentationoffinancialstatements and disclosure.

2. Ind AS 1 requires the presentation of a statement of comprehensiveincomeaspartoffinancialstatements.This statement presents all items of income and expense recognizedinprofitorloss,togetherwithallotheritemsofincomeandexpense(includingreclassificationadjustments)thatarenotrecognizedinprofitorlossas required or permitted by other Ind ASs. An entity is requiredtopresentasinglestatementofprofitorlossandother comprehensive income presented in two sections. Thesectionswillbepresentedtogether,withtheprofitorlosssectionpresentedfirstfolloweddirectlybytheother comprehensive income. The concept of “other comprehensive income” does not currently exist under Indian GAAP; however, information relating to movement in reserves etc. is generally presented in reserves and surplus in the balance sheet.

3. Ind AS 1 requires the presentation of all transactions with equity holders in their capacity as equity holders in the statement of changes in equity (SOCIE). The SOCIE is consideredtobeanintegralpartoffinancialstatements.The concept of SOCIE is not there under current Indian GAAP; however, information relating to appropriation of profits,movementincapitalandreservesetc.ispresentedonthefaceoftheprofitandlossaccountandinthecaptions share capital and reserves and surplus in the balance sheet. Under the Companies Act, SOCIE is required to be prepared only if applicable. Furthermore, under Ind AS 1, minority interest (referred to as non-controlling interest) is presented as a component of equity, while under the current Indian GAAP it is presented separately from liabilities and equity.

4. Ind AS 1 requires disclosure of:

a) Critical judgments made by management in applying accounting policies

b) Key sources of estimation uncertainty that have a significantriskofcausingamaterialadjustmenttothecarrying amounts of assets and liabilities within the nextfinancialyear


c) Informationthatenablesusersoffinancialstatementsto evaluate the entity’s objectives, policies and processes for managing capital

5. Ind AS 1 prohibits any item to be presented as an extraordinary item, either on the face of the income statementorinthenotes,whileAS5NetProfitorLossforthe Period, Prior Period Items and Changes in Accounting PoliciesinIndianGAAPspecificallyrequiresdisclosureofcertain items as extraordinary items.

6. Ind AS 1 requires a third balance sheet as at the beginning of the earliest comparative period — where an entity applies an accounting policy retrospectively or makes aretrospectiverestatementofitemsinitsfinancialstatements,orwhenitreclassifiesitemsinitsfinancialstatements—tobeincludedinacompletesetoffinancialstatements. AS 5 requires the impact of material changes inaccountingpoliciestobeshowninfinancialstatements.There is no requirement to present an additional balance sheet.

7. Ind AS 1 requires dividends recognized as distributions to owners and related amounts per share to be presented in the statement of changes in equity or in the notes. The presentationofsuchdisclosuresinthestatementofprofitand loss is not permitted. Under Indian GAAP, a proposed dividendisshownasappropriationofprofitintheprofitand loss account.

8. UnderIndAS1,anentitywhosefinancialstatementscomply with Ind AS is required to make an explicit and unreserved statement of such compliance in the notes. Such requirement is not there in current Indian GAAP.

9. 9Under Ind AS 107, an entity needs to make disclosures thatenabletheusersoffinancialstatementstoevaluate:

• Thesignificanceoffinancialinstrumentsfortheentity’sfinancialpositionandperformance

• Thenatureandextentofrisksarisingfromfinancialinstruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks

These Ind AS 107 disclosures pertain to both qualitative (narrative) disclosures and quantitative (numerical) disclosures. The qualitative disclosures should be provided for each type of riskarisingfromfinancialinstrumentsandshouldspecifyits

objectives, policies and processes for managing and measuring that risk. The quantitative on the other hand should provide disclosures with respect to credit risk, liquidity risk and market risk.

Credit risk disclosures include:

• Themaximumexposuretocreditriskatthebalancesheetdate, before taking account of any collateral or other credit enhancements

• Collateral and credit enhancements held

• Informationaboutthecreditqualityofdebtsthatremainwithin their credit period

• Thecarryingamountofanyassetsthatwouldhavebecome impaired.

Liquidity risk disclosures include:

• Ananalysisofmaturitiesforfinancialliabilities

• Adescriptionofhowliquidityriskismanaged

Market risk disclosures include:

A sensitivity analysis for each type of market risk (currency, interest rate and other price risk) to which an entity is exposed at the reporting date.

Please refer Appendix I — Financial Instrument Disclosures for a detailed discussion on disclosures.


Ind AS 1 essentially sets out overall requirements for presentationoffinancialstatements.IndAS1significantlyimpactsthepresentationoffinancialstatements.Theseeffectsare covered under the following broad parameters:

• Enhanced transparency and accountability

The disclosure of information required by Ind AS 1 — with reference to critical judgments made by the management in applying accounting policies and to key sources of estimationuncertaintythathaveasignificantriskofcausing a material adjustment to the carrying amounts ofassetsandliabilitieswithinthenextfinancialyear—isnotonlylikelytobringimprovedtransparencyinfinancial


statements, but also expected to put additional onus on entities to ensure that the estimates and judgments madearejustifiable,consideringthattheyarepubliclyaccountable for them.

• Better presentation of financial statements

Under Ind AS 1, each entity should present its balance sheet using the current and non-current assets and liabilitiesclassificationsonthefaceofthebalancesheet, except, when a presentation based on liquidity provides information that is reliable and more relevant. Furthermore, SOCIE is mandatory.


Till now, we have discussed the impact of Ind AS convergence onfinancialreporting.However,theimpactonanorganizationimplementing Ind AS may be very different from what can be understoodonlybysolelyanalyzingtheimpactonfinancialreporting.

Although Ind AS 1 will be unlikely to have any bottom line impact on entities, they will be required to review and modify, if necessary, their organization and processes to ensure that information to comply with all disclosure requirements of Ind AS 1 is collected.

Many entities, particularly those not subject to any externally imposed capital requirements, may not have well-documented and formally established objectives, policies and processes for managing capital. To comply with the Ind AS 1 requirement for making disclosures regarding capital, such entities will need to formalize and document their objectives, policies and processes for managing capital. This will involve personnel, not only from the entity’s accounts department, but also from other functions suchasfinanceandtreasury.

Related party disclosuresRelated party transactions cover transactions with certain definedparties,regardlessofwhetheranypriceischargedornot. It is common for every entity to enter transactions with related parties. Therefore, the differences between Indian GAAP and Ind AS will impact many entities.

Key differences

1. IndAS24hasanenhanceddefinitionofrelatedpartythan AS 18. Under Ind AS 24, Key Management Personnel (KMP )of holding company, associate or joint venture of a member of a group of which the other entity is a member, another joint venture of the same third party, one entity is a joint venture of a third entity and the other entity is anassociateofthethirdentity,post-employmentbenefitplanforthebenefitofemployeesofeitherthecompanyor an entity related to the company results in related party relationship.

2. According to Ind AS 24, an entity discloses that the terms of related party transactions are equivalent to those that prevail in arm’s length transactions only if such terms can be substantiated. AS 18 has no such stipulation on substantiation of related party transactions when they are disclosed to be on an arm’s length basis.

3. Ind AS 24 requires disclosure of key management personnel’scompensationintotalandforcertainspecifiedcategories,suchasshort-termemployeebenefitsandpost-employmentbenefits.AS18doesnothavesucharequirement.


• Identifying related parties

Entities will be required to reassess the list of related parties for enhanced relationships, which gets covered underthescopeofdefinitionofrelatedpartyinIndAS24. It should be noted that approval requirements under SEBI Clause 49 for related party transactions will also get triggered for transactions with a related party within the scope of Ind AS 24.


Entities will need to strengthen/change their reporting processes and information technology systems to map new related parties covered in Ind AS 24 and track transactions with specificrelatedparties.


Segment reporting Key differences

1. Ind AS108 adopts a management reporting approach to identify operating segments. It is likely that in many cases, the structure of operating segments will be the same under Ind AS 108 as under AS 17 Segment Reporting. This is because AS 17, like Ind AS 108, considers reporting segments as the organizational units for which information is reported to key management personnel for the purpose of performance assessment and future resource allocation. When an entity’s internal structure and management reporting system is not based on either product lines or geography, AS 17 requires the entity to choose one as its primary segment reporting format. Ind AS 108, however, does not impose this requirement to report segment information on a product or geographical basis and in some cases, this may result in different segments being reported under Ind AS108 as compared with AS 17.

2. AnentityisfirstrequiredtoidentifyalloperatingsegmentsthatmeetthedefinitioninIndAS108.Oncealloperatingsegmentshavebeenidentified,theentitymustdeterminewhich of these operating segments are reportable. Reportable segments must be separately disclosed. This approach is the same as that required by AS 17, except that it does not require the entity to determine a “primary” and a “secondary” basis of segment reporting.

3. Ind AS108 requires that the amount of each segment item reported is the measure reported to the chief operating decision maker (CODM) in internal management reports, even if this information is not prepared in accordance with the Ind AS accounting policies of the entity. This may result in differences between the amounts reported in segment information and those reported in the entity’s primaryfinancialstatements.Incontrast,AS17requiresthe segment information to be prepared in conformity with theentity’saccountingpoliciesforpreparingitsfinancialstatements.

4. UnlikeAS17,IndAS108doesnotdefinetermssuchas”segmentrevenue,””segmentprofitorloss,””segmentassets” and ”segment liabilities.” As a result, diversity of reporting practices will increase.

5. AsIndAS108doesnotdefinesegmentsaseitherbusiness or geographical segments and does not require measurement of segment amounts based on an entity’s

Ind AS accounting policies, an entity must disclose how it determined its reportable operating segments, along with the basis on which disclosed amounts have been measured. These disclosures include reconciliations of the total key segment amounts to the corresponding entity amountsreportedinIndASfinancialstatements.

6. Ameasureofprofitorlossandassetsforeachsegmentmust be disclosed. Additional line items, such as interest revenue and interest expense, are required to be disclosed if they are provided to the CODM (or included in the measureofsegmentprofitorlossreviewedbytheCODM).AS17,incontrast,specifiestheitemsthatmustbedisclosed for each reportable segment.

7. Under Ind AS, disclosures are required when an entity receives more than 10% of its revenue from a single customer. In such instances, an entity must disclose this fact, the total amount of revenue earned from each such customer and the name of the operating segment that reports the revenue. This is not required by AS 17.


• Change in segment reporting approach

OnadoptionofIndAS108,theidentificationofanentity’ssegments may change from the position under AS 17. Ind AS108requiresoperatingsegmentstobeidentifiedonthebasis of internal reports on components of the entity that are regularly reviewed by the CODM, in order to allocate resources to the segment and to assess its performance. AS 17 requires an entity to identify two sets of segments — business and geographical — using a risk-and-reward approach,withtheentity’s”systemofinternalfinancialreporting to key management personnel” serving only as thestartingpointfortheidentificationofsuchsegments.

• Goodwill impairment

Ind AS 36 requires goodwill to be allocated to each CGU or to groups of CGUs. The relevant CGU or group of CGUs must represent the lowest level within the entity at which the goodwill is monitored for internal management purposes — it may not be larger than an operating segment. If different segments are reported under Ind AS 108 than were reported under AS 17, it follows that there will be differences between the CGUs that make up an Ind AS 108 segment and those that made up an AS 17 segment. As a result, the CGUs supporting goodwill may


no longer be in the same segment under Ind AS 108 as under AS 17. It may, therefore, be necessary to reallocate goodwill associated with CGUs that are affected by the change from AS 17 to Ind AS 108. It is possible that this reallocation of goodwill could “expose” CGUs for which the carrying amount, including the allocated goodwill, exceeds the recoverable amount, thereby giving rise to an impairment loss.

• Customer concentration

On adoption of Ind AS, entities will be required to furnish a disclosure of customer concentration, which will enable investors to assess the risks faced by a company. The company will have to compile information of revenue generated by each customer to furnish disclosures required by Ind AS 108.

Impact on organization and its processes

• Reconciliation of management information system with financialstatement

Ind AS 108 requires segment reporting to be made based on information furnished to chief decision makers. If the policies followed for computing information for management information system do not match with those usedinfinancialstatements,anentitywillneedtofurnishreconciliation. Hence, entities need to devise or upgrade systems to prepare reconciliation between the MIS and the accounting system.

• IdentificationofCODM

Reporting under Ind AS 108 is based on information furnishedtotheCODM.ThetermCODMdefinesafunctionratherthananindividualwithaspecifictitle.Thefunctionof the CODM is to allocate resources and assess operating results of the segments of an entity. The CODM could eitherbeanindividual,suchasthechiefexecutiveofficerandthechiefoperatingofficer,agroupofexecutivessuchas the board of directors or a management committee. Entities should review their management structure to identify the CODM.


Leveraging from global experience of conversion to IFRS and Ind AS


Global experience of conversion to IFRSCurrently, there are more than 100 countries across the world where entities are required or permitted to speak a common financialaccountinglanguage,suchasIFRS.Indiawilljointhislist albeit with the convergence model. Adopting IFRS in the financialstatementsincreasesthecomparabilityofentitieswithin the country as well as with their global counterparts. IFRS is also looked upon as a reliable framework by users of

financialstatements.Ithelpsentitiesgaincross-bordercapitallisting and it also helps the management, which may be based in another country, to follow uniform systems of reporting across the group in entities with worldwide presence.

Most countries in the EU adopted IFRS for accounting periods beginning on or after 1 January 2005. All these entities have undergone the conversion exercise from their local GAAP to IFRS. Below are some of the issues encountered and the key lessons that can be learned from their experiences:

Issues identified Key lessons learned

The scale and complexity of the project and the time frame needed were underestimated

Conducting a thorough impact assessment followed by a detailed planning exercise up front is crucial for a successful transition. Conversions could entail functional changes as well as technical accounting changes.

The project lacked adequate buy-in from senior management early on in the project

The tone at the top is an important driver of change. Board sponsorship of a project is crucial.

Projects suffered from poor project management Theimportanceofhavingaproperprojectmanagementofficefunctioncapable of coordinating project activities and a well- structured conversion methodology cannot be overemphasized.

Marginalaccountingdifferencescanhaveasignificanteffectonfinancialresults

A methodical approach to review accounting differences is essential to assessfinancialeffects.

Unfamiliarity of “numbers” and principles arising from changes

Technical training will be a critical component of the conversion, especially for business unit heads that may not be familiar with the implications of changes that new standards will bring. Investor relations will also need a strong educational grounding to communicate the impact to investors.

There was poor communication between project team and business units regarding the effects of changes

Invest the time necessary to roll out business process changes such as accounting practices, updated control mechanisms and changes in reporting requirements to the wider organization.

Changes were often not fully embedded in back officesandgeneralledgersystems.Asaresult,stand-alone manual workarounds were created, including “spreadsheet accounting”

EU companies that used manual workarounds to meet short deadlines are now redesigning processes and augmenting their systems to eliminate the inefficienciestheseworkaroundscreated.Indiancompaniesshouldalsouse the time available to proactively address these changes.

Top-side solutions did not work Top-sidesolutionsdonotallowtheorganizationtoadjust,andthefinancegroup feels “all the pain.” It is important to “push down” the conversion to the transaction level throughout the organization as early as possible.

Tax personnel were frequently underrepresented in the conversion process

Tax implications of the conversion process may extend beyond accounting effects. Involving tax personnel early in the process may mitigate the potentialforunexpectedresults.Companieswillbenefitfromsufficientresources and adequate lead time to address tax issues and to make necessary changes to tax processes and technology.


Ind AS conversion process


What is an Ind AS conversion?In an Ind AS conversion, an entity undertakes to change its financialreportingfromitscurrentGAAPtoIndAS.Obviously,differences between the Indian GAAP treatment and IFRS will be one of the key inputs to the conversion process in case ofIndianentities.Thesedifferencesmayvarysignificantlyfrom one entity to another depending on the industry and the current accounting policies chosen under Indian GAAP. However, the magnitude of an Ind AS conversion project will not depend solely on the magnitude of the GAAP differences, but willbeinfluencedbyotherfactorssuchas:

• Thequalityandflexibilityoftheexistingfinancialreportinginfrastructure

• The size and complexity of the organization

• The effect of GAAP changes on the business

Ultimately, the purpose of an Ind AS conversion is to put entities in a position where they are able to report, unaided and reliably, and are able to recognize the Ind AS dimension of their actions. However, before the actual start of the conversion project, an initial diagnostic phase should put companies in a position where they are aware of:

• The differences between Ind AS and the entity’s current accounting policies

• TheimpactofthechangetoIndASonfinancialstatements

• The impact of the change to Ind AS on tax, business IT and process

• The impact of Ind AS on future business decisions

• An understanding of the approach underlying the formulation of Ind AS

Need for conversion methodologyMany entities perceive conversion projects purely as a technical accounting exercise. With a major underlying difference of principle — as embodied in Ind AS — this is a grave mistake. Ind AS conversions, if not properly planned, are likely to lead to a number of unfortunate results, such as:

• Failure to involve all people with the required knowledge, business decisions taken in ignorance of consequences offinancialreportingandunreliabilityandslownessinproducingIndASfinancialstatements

• Gross underestimation of the time required to convert

Conversion to Ind AS will be an exercise in change management. Adopting Ind AS may affect many facets of an organizationbeyonditsfinancialreporting.Everyaspectofacompanyaffectedbyfinancialinformationhasthepotentialforchange (for example, key performance indicators, employee and executive compensation plans, management’s internal reporting, investor relations and analyst information). Both the process and the implications of the conversion can vary widely among companies based on a number of variables, such as levels of expertise, degree of centralization of accounting processes and data collection, and the number of existing accounting methods currently being used. Often, information and data not currently collected and/or warehoused may be needed to produce the required Ind AS information.

The conversion to Ind AS will entail a business-wide change management exercise and should be approached using a structured methodology encompassing best practices of project management. Such a methodology ensures that conversion assignments are properly planned and executed. The methodology also ensures that the typical pitfalls for the inexperienced conversion team are avoided by:

• Promoting the reuse of knowledge

• Avoiding costly dead-ends resulting from poor planning and coordination

• Ensuringefficientuseofstafftime

• Allowing a mix of experienced and less experienced staff, thereby facilitating knowledge transfer

• Improving the quality of work

To take full advantage of the opportunities arising from the conversion to Ind AS, the conversion methodology needs to be flexibleandcustomizedtotheneedsofanentity.Aswithanymajorfinancetransformationproject,thefullsupportoftheboard and senior management will be critical to the success of the conversion effort. The board should pay close attention to details of the management’s proposed approach to the Ind AS conversion to satisfy itself that it covers all appropriate areas and is based on sound project management principles. While the management will be responsible for the conversion execution,theboardneedtobeconfidentofthemanagement’splan, thoroughness and diligence. The management should inform the board and the audit committee on a regular basis regarding its plan and progress. As such, audit committees should generally include a standing Ind AS agenda update item at their periodic meetings.


Post-implementationImplementationDesign and planningDiagnostic Solutionsdevelopment

Workstreams

Accounting and reporting Tax Business process

and systemsRegulatory and

industry

Change management, communication and

training

Program execution / project management

The processA sample methodology for Ind AS conversion is shown above.

The methodology takes, as a starting point, the fact that an Ind AS conversion project needs to address more than just accountingissuesandthataconversionprojectissufficientlycomplicated to warrant professional project management. It is forthesereasonsthatthemethodologycomprisesfivephases—eachofwhichdealswithaspecificpartoftheconversion.This is to facilitate the involvement of specialists on a need basis. It is, however, important to recognize that these phases can overlap one another and entities need not wait for the completion of one phase to end before beginning another. Moreover, a clear breakdown of all the activities by work stream is not always possible as a mandatory allocation of activities by phase. Therefore, this methodology should be tailored accordingtoprojectspecificities,startingpointandthein-placeproject structure.

Key goals and outputs of each phase

• Diagnostic

Thisphaseinvolveshigh-levelidentificationofaccountingand reporting differences and its consequences to the business, IT, processes and tax. The major outcome

management expected from this phase includes an impact assessment report, which provides implications on the above areas. It also entails determining a high-level road map for future phases of the conversion. This phase will also help the management identify potential interdependence between the Ind AS conversion project and current or planned organization-wide initiatives (for example, new accounting system implementations such as ERPandfinancetransformations)andanassessmentofwhether the company has adequate resources to complete a conversion.

• Design and planning

This phase involves setting up the project infrastructure and the project management function, including a conversion roadmap and a change management strategy. The aim of this phase is to set up a core Ind AS team, framing conversion time-tables and deciding on a detailed way forward. The typical outputs from this phase are formation of the project structure, project charter, communication plan, training plan and expanded conversion roadmap.

• Solution development

The objective of this phase is to identify solutions to variousissuesidentifiedinrelationtoaccountingandreporting, tax, business process and system changes. The typical output from this phase comprises Ind AS accounting manuals, group reporting packages, Ind AS skeleton accounts, group accounting policies and technical papers


on Ind AS accounting issues, as well as crystallizing the impact on current and deferred tax, developing solutions for tax functions and identifying processes that need to be re-designed,modifiedordeveloped.

• Implementation

This phase involves the roll out of the solutions developed in the previous phase. The company will conduct a process ofdryrunoffinancialstatementstoensurethatitisgeareduptoprepareIndASfinancialstatementsbeforethe reporting deadline. Following dry-run accounts, thecompanywillrolloutthefinaldeliverables,i.e.,theopeningIndASbalancesheetandthefirstIndASfinancialstatements. All business and process solutions developed will also be implemented to facilitate the transition to the new reporting framework.

• Post-implementation

This phase involves an assessment of how various solutions developed work in the implementation phase and the identificationofanyissuesintheoperationalmodel.Theseissues are tackled in this phase to ensure successful on-going functioning of systems and processes in the IFRS reporting regime. Ongoing update training is provided to ensure that the company’s personnel are updated with latest Ind AS developments, and changes are made in systems and processes. IFRS manuals will also need to be regularly updated for changes in IFRS.

Concluding remarks

Ind AS conversion date for banking entities in India is 2018–19 with comparative 2017–18. Experience tells us that major European companies took about 18–24 months to convert from national GAAP to IFRS. The right time to start thinking and convertingtoIndASis”NOW”.Thisprocesscannotbedelayedany further. More importantly, there are no disadvantages to getting a start on the process, but the advantages include:

• Securing the right people, whether by engaging a third party to provide assistance or by hiring them directly

• Reducingtheburdenonvaluableaccounting,financialreporting and IT resources as the conversion date approaches

• Getting more time to train employees on Ind AS and to have them become comfortable with the standards and interpretations

• DiscussingfinancialreportingeffectsofconversiontoIndASwithanalyststoprovidethemwithconfidencethatthissignificantundertakingiswellinhand.

• Ensuringthatalongwiththefinancefunction,theinvolvement of other functions such as treasury, internal audit, business units and human capital can be planned well in advance. This would be critical for ensuring commitment and sponsorship within each function for the success of the Ind AS conversion process, considering that it is much more than an accounting change.


Appendix 1: Financial statement disclosures


Ind AS 107 requires very comprehensive disclosures regarding financialinstrumentsandriskstowhichanentityisexposed,as well as the policies for managing such risks. Ind AS 107 isdividedintwodistinctsections.Thefirstsectioncovers

Disclosures

Classes of financial instruments and level

of disclosures

Balance sheet Income statement

Other disclosures

Quantitative disclosures

Qualitative disclosures

Significance of financial instruments and level

of disclosure

Nature and extent of risks arising from

financial instruments

quantitative disclosures about the numbers in the balance sheet and the income statement. The second section deals with risk disclosuresthatreflectthewaythemanagementperceivesmeasures and manages the risks.

Qualitative disclose needs to be provided for each type of risk:

• Exposures to risks and how they arise

• Objectives, policies and processes for managing the risks

• Methods used to measure the risks

• Any changes in these from the previous period

Banking entities shall disclose information that enables users oftheirfinancialstatementstoevaluatethenatureandextentofrisksarisingfromfinancialinstrumentstowhichbankingentities are exposed at the end of the reporting period. The disclosuresrequirefocusontherisksthatarisefromfinancialinstruments and how they have been managed. These risks typically include, but are not limited to, credit risk, liquidity risk and market risk. Providing qualitative disclosures in the context of quantitative disclosures enables users to link related disclosures and hence form an overall picture of the nature and extentofrisksarisingfromfinancialinstruments.

Quantitative disclosures:Credit riskItistheriskthatonepartytoafinancialinstrumentwillcauseafinanciallossfortheotherpartybyfailingtodischargeanobligation;

• Maximum exposure to credit risk at the end of the reporting period

• Description of collateral held as security and other credit enhancementsandtheirfinancialeffects

• Informationaboutthecreditqualityoffinancialassetsthatare neither past due nor impaired

• Ageinganalysisforfinancialassetsthatarepastdueorimpaired

• Disclosures regarding collateral and other credit enhancements obtained

Potential impact:

IndAS107requiresfinancialinstitutionstodiscloseananalysisoftheageoffinancialassetsthatarepastdueatthereportingdatebutnotimpaired.Afinancialassetispastduewhenacounterparty has failed to make a payment when contractually due.Therefore,pastdueincludesallfinancialassetsthatareone or more days overdue. Although Ind AS 107 requires risk disclosures that are based on the information provided to key management personnel, there are also some minimum disclosurerequirementsdefinedbystandardthatshallbealways disclosed, irrespective of how the management monitors the risk. Bank may take the way management monitors financialassetsintoaccountwhendefiningtheappropriatetime bands used in the credit risk table.


Liquidity risk:

Liquidityriskistheriskthatanentitywillencounterdifficultyinmeetingobligationsassociatedwithfinancialliabilitiesthataresettledbydeliveringcashoranotherfinancialasset.

Disclosures:

• Amaturityanalysisforfinancialliabilitiesthatshowstheremaining contractual maturities

• A description of how it manages the liquidity risk inherent in the above requirement

• Disclosure of contractual maturities, i.e., undiscounted futurecashflowsarisingfromthefinancialinstruments

Potential impact:

Banking entities need to provide additional quantitative information based on how the management manages liquidity risk.Forexampleiftheoutflowofcashcouldoccursignificantlyearlier than indicated in the data (e.g., a bond that is callable by the issuer in 2 years but has a remaining contractual maturity of 12 years).

Inaddition,ifthecashoutflowcouldbeforasignificantlydifferent amount from that indicated in the maturity table, this should also be disclosed.

Market risks

Marketriskistheriskthatthefairvalueorfuturecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinmarket prices. It includes interest rate risk, foreign currency risk and other price risk.

Disclosures:

• Sensitivity analysis for each type of market risk

• Market risk sensitivity analysis includes the effect of “a reasonably possible change” in risk variables in existence at the balance sheet date if applied to all risks in existence at that date

• Reasonably possible change in the relevant risk variable. But such possible change should not include remote or worst-case scenarios or stress tests

• Effectonprofitorlossandequity

• Methods and assumptions used in the analysis

• Changes for the previous period

• Reason for the change

Potential impact:

Ind AS 107 requires a sensitivity analysis to show the effect reasonably possible changes in the relevant risk variable have onprofitorlossandequity.Bankingentitiesshouldjudgewhata reasonably possible change is; however, assessments may differ from one bank to another.

When providing such sensitivity information, banking entities will generally be disclosing potential reasonably possible changes over the next year. It would therefore make sense that historical annual movements over a similar period be considered over as many historical periods as possible in an effort to minimize extremes.

There are inherent weaknesses in using historical data to predict future returns; any changes in the fundamental structure, risk and returns of the relevant markets from where the risks arise should also be considered when basing future movements on historical sensitivities. Irrespective of what methodology is adopted, it should be consistently applied andsufficientlydescribedsothattheuserofthefinancialstatements has an understanding of how the sensitivity analysis has been derived.

Disclosures related to fair value measurements have been introduced to help users understand the valuation techniques and inputs used to develop fair value measurements, and the effectoffairvaluemeasurementsonprofitorloss.Thevastmajority of the disclosures will also be required to be provided intheinterimfinancialstatements.


Notes:


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