Financial Closing and Reporting

Challenges in the Forward Path Yoogma Business Services Conclave
February 10, 2011 Dr. Paritosh C. Basu

Discussion Flow
 Accounting and Reporting in Changing Environment  Challenges in forward path  Sustainability Management – The Emerging Fourth Dimension of Reporting

Accounting and Reporting in Changing Environment

Path to the Pinnacle?

Challenges, risks and sustenance

What is the frequency?

Ideal - Monthly + many more one-offs

What are the Frameworks?

Conceptual, Institutional, Regulatory, Legal

For whom it is done? What do we do?

Stakeholders, Governance Group and Management

Transaction > Measure > Recognise > Record > Report

Let us revisit each question in every step of forward path

Accounting and Reporting in Changing Environment .. 2
Relevance and Time value of Corporate Financial Information
Time Scale (Fortnight from period end)
Value and Relevance (%)
120 100 80 60 40 20

Internal Value External Value

0
1 2 3 4 5 6

Global

Span and perspective of Corporate financial reporting
    Stakeholders Capital / Debt Market Transactions Multiple Regulators Relevance

Country

Entity Division

Challenges in Forward Path

Convergence to IFRS

Countries that have already adopted IFRS are shaded with blue Countries in the process of adoption of IFRS are shaded in grey (Source. www.iasb.org)

 No blackout period expected from IASB in transition course up to 2014  Substantial changes expected in Standards - Revenue, Consolidation Deferred Tax, Lease, Financial Liabilities  Uncertainties about schedule in the USA albeit expected by 2014 / 15  Implementation challenges – Scarce resources and IT solution  Change in mindset of all concerned - Substance over Form
6

Challenges in Forward Path
 Information content  Protective confidentiality vs. complete transparency  Completeness vs. Invasion by analysts  More volatility in Income Statement  Relevance for stakeholders  Recognition and transaction processing with flexibility for  Corporate reporting – Substance over Form, lesser prescriptive  Tax Accounts and Return – Historical Cost vs. Fair Valuation  Least possible application of Regulatory framework of accounting  Test of ‘Functional Currency’  Unlearning and relearning – Research, Reading, Benchmarking  Guidance of EAC of ICAI – Replaced by IFRIC, SIC and IndAs  Schedule VI and Regulatory Provisions – IAS 1

 Revenue recognition – Retail, Automobile, Construction, Airlines, etc.

Challenges in Forward Path

…2

 Mandatory tests and measurements  Covenant compliance  Classification of Current liabilities  Test of Going concern  Fixed and Intangible Assets  Componentisation  Residual Life  Impairment  Take or pay arrangements  Debt and Interest - in Preference Shares and Quasi Equity Instruments  Modeling and valuation of Options and other Derivative contracts  ERP System under new standards  Automated process vs. Worksheets in excel with associated risks  Handling of GAAP differences for conversion  Annual Business Plan preparation under converged IFRS Standards  Emerging needs of Direct Tax Code and Goods and Service Tax

GAAP Conversion – Brawl out Challenges at Each Step
Know your Financial Statements (FSs) more under IGAAP • • • • Study FSs under local GAAP in details for last three years Identify critical and major transactions including one-off kind List accounting under regulatory requirements Trace back all work sheets and valuations for measurement

Identify work content, assess time and resources

• Identify GAAP differences vis-à-vis IFRS • List items to be done / redone with owners for each work group • Transactions, Measurements, Disclosures, Sensitivity Table • Assess requirements, efforts in-house capabilities and external support with Plan B if required • Brief top management and operating team for support required

Actions, Execution, and Monitoring

• Identify a Mentor and set up a Steering Committee • Prepare and monitor ‘Action Taken Report’ • Job description, Information inputs, Dependency, Timeline • Review progress with focus for critical items • Review draft accounts with iterative perfections

Sustainability Management The Emerging Fourth Dimension of Reporting

Sustainability Management – What to measure
 Measurement of Sustainability emanates from Natural Capitalism  Measure development and utilisation of four types of Capitals
 Financial  Manufacturing *  Natural **  Human * Material resources and energy used in manufacturing ** Stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into future, e. g., trees, water bodies
‘Triple P Bottom Line’ is the imperative for Decision Management Process

CFO’s Questions
in Planning and Budgeting Process

What are the plans, action points, capital and revenue expenditure for  Reducing material intensity  Utility audit and reducing consumption of power, fuel, steam, water, etc.  Optimisation and substitution of raw natural resources  Minimising dispersion of toxic substances  Green logistics for renewable and used products  Recycling of scrap, wastage and spoilage  Prolonging product life at minimum differential price

 Increasing service intensity to reduce frequency
CXOs to ensure viability and growth after absorbing all these expenditure

Similar points are also to be ensured by vendors

Criteria for Measurement
 Social Criteria*

 Socially desirable  Culturally acceptable  Psychologically nurturing
* To a certain extent subjective measurement  Financial Criteria

 Economically sustainable  Technologically feasible  Operationally viable within life cycle
 Environmental Criteria

 Environmentally robust  Utility positive  Generationally sensitive  Capable of continuous learning

Compulsive Regulations – A Quick Survey
 Qualifying criteria for projects in certain geographies especially Europe
 Major disclosure requirements worldwide on sustainability  Regulatory Bodies Europe: France, UK, Sweden, Germany, Norway, Denmark, European Commission Austral-Asia: Malaysia, China, Indonesia, Japan, Australia The USA  Stock Exchanges Revised listing requirements for disclosure of ESG data or created socially responsible investment (SRI) indices London, Johannesburg, Sao Paulo, Shanghai Shenzhen, Tel Aviv

Status of Sustainability Reporting India and Emerging Economies

Report on Sustainability Management - Status
Emerging Economies (No. of Cos.)
Source – Study by E&Y, India

World Report (Source - CRRA, 2010)

140 120 100 80 60 40 20 0 Brazil

2007 China

2008 2009 Russia South Africa India

India – It is estimated that there are about fifty published reports now
Prominent Corporate Houses, who have published the reports so far are ITC, Jubilant Organosis, L&T, Mahindra, RIL,SAIL, SRF, Tata Motors, TCS, Tata Tea, Wipro (Illustrative list)

Guidelines for report preparation
G3 Guidelines on Content, Quality and Boundary http://www.globalreporting.org/ReportingFramework/G3Guidelines/#1

Learning Points
 Sustainable development will be how the world will function  The imperative is to ingrain ‘Sustainability Management’ in corporate decision management process  The clarion call is to monitor drivers and investments for sustainable value generation  Reduce, reduce and reduce resource intensity for ultimate survival

 Sustainability management is possible only through optimisation of values of all stakeholders
 Regulated measures for accounting and reporting must be the fourth dimension of corporate reports

Let us fulfill our commitment for coming generations

Further thoughts

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Thank you