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IFRS: ImplementationChallenges

andApproachforBanksinIndia
KPMG IN INDIA
Inlinewiththeglobaltrend,theInstituteofCharteredAccountantsofIndia(ICAI)
proposedaplanforconvergencewithInternationalFinancialReportingStandards
(IFRS)forcertaindefinedentities-includingbanks-witheffectfromApril1,2011.
ConvergencetoIFRSwouldmeanIndiawouldjoinaleagueofmorethan100
countries,whichhaveconvergedwithIFRS.

WebelievethatforIndianbanks,thefinancialimpactofconvergencewithIFRS
willbesignificant,particularlyinareasrelatingtoloanlossprovisioning,financial
instrumentsandderivativeaccounting.Wealsoexpectthatinadditiontothe
financialaccountingimpact,theconvergenceprocessislikelytoentailseveral
changestofinancialreportingsystemsandprocessesadoptedbybanksinIndia.
Thesechangeswouldneedtobeplanned,managed,testedandexecutedin
advanceoftheimplementationdate.Suchchangesarelikelytobetime
Russell Parera
consuming.Inviewofthis,banksinIndiawouldneedtostartconsideringa
ChiefExecutiveOfficer
roadmapforconvergencetoIFRS,attheearliest.
KPMGinIndia
Formanybanks,convergencewithIFRSisexpectedtohaveasignificantimpact
ontheirfinancialpositionandfinancialperformance,directlyaffectingkey
parameterssuchascapitaladequacyratiosandtheoutcomesofvaluationmetrics
thatanalystsusetomeasureandevaluateperformance.

Throughthispublicationweseektoshareourperspectivesonsomekeyfinancial
reportingimpactareasandchallengesthatwouldimpactthebankingsectorin
India.Wehavealsosharedourviewsonsomeoftheapproachesthatbankscan
adopttoaddressthesechallengesandtoensuresuccessfulimplementationof
IFRSwithintherequiredtimelines.

Formorethanadecade,wehaveprovidedIFRSimplementationservicestoover
1,400companiesglobally,includingsomeofthelargestglobalbankingand
financialservicescompanies.WehavealsoassistedseverallargeIndianbanksas
Jamil Khatri theyhaveadoptedinternationalreportingpractices.Wearecommittedto
Head–IFRSServices leveragethisexperienceasweassistbanksinIndiaindevelopingtheirroadmap
KPMGinIndia toaddressthechallengesofconvergencewithIFRS.

Russell Parera Jamil Khatri


ChiefExecutiveOfficer Head–IFRSServices
KPMGinIndia KPMGinIndia
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1. Overview

Background
SubsequenttotheannouncementoftheproposalbytheInstituteofChartered
AccountantsofIndia(ICAI)toconvergetheIndianaccountingstandards(Indian
GAAP)withInternationalFinancialReportingStandards(IFRS)effectiveApril1,
2011,therehasbeensignificantdebateamongthestandardsetters,regulators,
corporateIndiaandprofessionalaccountingfirms,ontheroadmaptoconvergence
anditsimplications.

Ourpublicationtitled‘IFRS:DevelopingaRoadmaptoConvergence’(March2008)
providedourperspectiveonseveralissuesrelatingtothisproposedconvergence.
Ourrecentinteractionswithstandardsetters,regulatorsandlargecompanies
indicatethateventhoughseveralquestionsrelatingtothisconvergenceprocess
remainunanswered,stakeholdersarecommittedtoachievethegoalof
convergence.

Specific challenges for the banking sector


Inadditiontotheseveralchallengesalongthepathtoconvergencethatare
applicabletoallcompanies,bankingcompaniesinIndiafacecertainadditional
challenges.Theseinclude:

• Inadditiontothegeneralaccountingstandardsandpracticesthat
constituteIndianGAAP,bankingcompaniesarecurrentlyrequiredtoadhereto
accountingpoliciesandprinciplesthatareprescribedbytheReserveBankof
India(RBI).Forexample,financialreportingpoliciesforprovisionforloan
lossesandinvestmentsarespecifiedbytheRBI.Ourexperienceindicatesthat
adoptionofIFRSrequiresasignificantchangetosuchexistingpoliciesand
couldhaveamaterialimpactonthefinancialstatementsofbanking
companies

• ApplicationofIFRSinareassuchasprovisionforloanlossesandimpairment
ofinvestmentsgenerallyrequiresahighlevelofjudgmentandwouldrequire
significantchangesinthefinancialreportingprocesses(forexample,to
estimatecashflowsthatwillberecoveredincludingthroughsaleofcollateral).
Ourexperienceindicatesthatbankingcompaniesthatarecurrentlyusing
accountingmodelsthatrequirelimitedjudgment(forexample,dueto
prescribedloss/provisionrates)wouldfacesignificantchallengesin
incorporatingsomeoftherevisedaccountingmodelsintothefinancial
reportingsystem
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• AssumingthatIndiaconvergeswithIFRSusingthetransitionprovisionsof
IFRS1,First-timeAdoptionofInternationalFinancialReportingStandards
(currently,thereisdiscussionregardingwhetherIFRS1wouldbeadoptedfor
transition),severalprovisionsofIFRSwouldneedtoberetroactivelyapplied,
subjecttoavailableexemptionsunderIFRS1.Currentinformationsystems
(includingITsystems)ofseveralbankingcompaniesmaynotbesufficientto
generateinformationrequiredtoretroactivelyapplythesestandards

• InternationalAccountingStandard39(IAS39)onFinancialInstruments:
RecognitionandMeasurementalongwithitsrelatedguidance,isoneofthe
mostcomplexandcomprehensiveaccountingpronouncementsunderIFRS.
Substantiallyalltheassetsandliabilitiesofbankingcompaniescomprise
financialinstrumentsthatwouldbegovernedbytheprovisionsofIAS39.Our
experienceindicatesthatthisposessignificantcomplexityandapplication
challengesandresultsinsignificantvolatilityintheincomestatement

• Similarly,IAS39requiresextensiveuseoffairvaluation.Giventheeconomic
environmentandlackofrelativelydevelopedfinancialmarketsforcertain
foreignexchangeandinterestrateinstruments,applicationoftheserequired
fairvaluationtechniquesposesadditionalimplementationchallenges

• Byvirtueofoperatinginaregulatedindustry,bankingcompaniesaresubject
toregulatoryreviewsandinspectionsandarealsosubjecttominimumcapital
requirements.Ashighlightedearlier,IFRSrequiresincreaseduseofjudgment
andextensiveuseofunobservablevaluationinputsandassumptions.The
regulatoryreviewprocesswouldneedtobeadjustedtoacknowledgethe
inherentjudgmentsinvolvedintheapplicationofIFRS.Additionally,our
experienceindicatesthatapplicationofIFRSmayresultinhigherloanlosses
andimpairmentcharges,therebyimpactingavailablecapitalandcapital
adequacyratios.Similarly,useoffairvalueswouldintroduceadditional
volatilityinreportedcapitalwithitsconsequentimpactoncapitaladequacy.

Response of the Indian banking sector


BanksinIndianeedtostartthinkingthroughsomeofthechallengeshighlighted
aboveanddeveloparoadmaptomeetthechallengesofconvergence.

ThispublicationsharessomeofourthoughtsonthekeyIFRStechnical
accountingimpactareasthatwouldaffectbanksandourthoughtsand
perspectivesonsomefrequentlyaskedquestionsthatmaybeconsideredby
bankswhiledevelopingtheirIFRSimplementationplans.Whileseveralofthese
questionsandbestpracticeswouldbeequallyapplicabletonon-banking
companies,thesizeandcomplexityofmostIndianbankswouldmakethese
questions/bestpracticesextremelyrelevant.
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2. Top five technical accounting


challenges for banks
2.1 Loan/ investment impairment
IFRSprescribesanimpairmentmodelthatrequiresacasebycase(forsignificant
exposures)assessmentofthefactsandcircumstancessurroundingthe
recoverabilityandtimingoffuturecashflowsrelatingtoacreditexposure.Should
therebeanexpectationthatallcontractualcashflowswouldnotberecovered(or
recoveredwithoutfullfutureinterestapplications),anaccountwouldbeclassified
asimpairedandimpairmentbemeasuredonpresentvaluebasisusingthe
effectiveinterestrateoftheexposureasthediscountrate.Forgroupsofloans
thatsharehomogenouscharacteristics(suchasmortgageandcreditcard
receivables),impairmentcanbeassessedonacollectivebasis.Theaimofan
individualorcollectiveassessmentistocapturetheincurredlossforaspecified
portfolio.Generalprovisionsarepermissibleonlytoextentthattheyrelatetoa
specifiedriskthatcanbemeasuredreliablyandforincurredlosses.Noprovisions
arepermittedforfutureorexpectedlosses.Forinvestments,asimilaranalysisis
conducted,thekeydifferencebeingthatthefairvalueoftheinvestmentisalso
consideredasaninputinadditiontothefinancial/creditstandingoftheissuer
etc.

Thebedrockofthisimpairmentassessmentisasystemthatconsidersallthe
factsandcircumstancesandrequirestheuseofinformedjudgment.Thisaspect
representsthemostsignificantdifferencefromIndianGAAPforbanksinIndia.
CurrentIndianGAAP/RBIguidelinesrequirealimiteduseofjudgmentandare
mechanisticnaturewithprescribedloss/provisionrates.

What should banks focus on to meet this challenge?


• Develop/strengthenadatacapturesystemtoenabletheimpairment
assessmentafterdeterminingtacticallywhereinformationwillbecollected/
whowillmaketheimpairmentassessment/templatesandinformation
gatheringandstoragesystemsetc.

• Useandalignthisprocessofinformationgatheringandassessmentto
strengthenthecreditriskmanagementfunctionandfeedintootherstrategic
initiativessuchasinternalratings,BaselIIcomplianceandpotentialapplication
ofinternalratingsbased/advancedapproaches

• Improveandstrengthenthelossforecastingmechanismswithinthe
organizationinparallelwithfinetuningriskadjustedpricingforfreshloans
beingsanctionedbythebank

• Certainsystemchangeswouldneedtobemadeforaccountingfor
impairment;forexample,computationofdiscountedfuturecashflowsto
facilitatethebookingoftherequiredaccountingadjustments.
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2.2 Required use of fair value for more financial


instruments
FairvaluemeasurementisinfrequentlyusedunderIndianGAAPandinmost
caseswhereitis,theaimisprimarilytocapturealowerofcostorfairvalue
measurementbase.UnderIFRS,theremaybeasignificantincreaseintheextent
thatfairvaluemeasurementneedstobeused.Forinstanceallfinancialassets
andliabilitieswillneedtobeinitiallymeasuredatfairvalue.Whileinanumberof
instances,fairvaluesmayberepresentedbytransactionprices,theonuson
bankswillbetoprovethattransactionpricesrepresentfairvalue.Inaddition,
therewillbeanumberofinstanceswhereunrealizedgainscan/shouldbe
recognized;forexample,tradinginstrumentsandthosewherethebankelectsthe
fairvalueoption.Further,duetothestringentcriteriaprescribedunderIFRS,a
HeldtoMaturity(HTM)classification,(whichcurrentlyresultsinanamortisedcost
valuationbasisforasignificantpartofmostIndianbanks’investmentportfolio),is
unlikelytobeavailableleadingtofairvaluemeasurementforasubstantialpartof
theportfolio.Again,thisisasignificantshiftfromcurrentaccountingtreatment
underIndianGAAP.

What should banks focus on to meet this challenge?


• Fairvaluationmethodologiesandpracticeswouldneedtobere-examinedto
ensurethattheyarecurrent,uptodateandarevalidatedandbacktestedin
thecurrentmarketconditions

• Adequatelytrainedpersonnelneedtobemaderesponsibleforthissignificant
areaofexpertiseandjudgment

• Profitplanningandbudgetingneedtobefinetunedtoincorporatethe
expectedincreaseinincomestatementvolatilityarisingoftheincreaseduse
offairvaluesasameasurementattribute.
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2.3 Derivatives and hedge accounting


UnderIFRS,allderivativesarerecognizedonthebalancesheetatfairvalueswith
changesinfairvaluesbeingrecognizedgenerallyintheincomestatementother
thaninthecaseofaqualifyingcashflowhedgerelationship.Applicationofhedge
accountingdoesreducetheincomestatementvolatilityinducedbythefairvalue
measurementofderivativesbutcomeswithsignificantstringsattachedinthe
formofdocumentation,hedgeeffectivenesstestingandineffectiveness
measurement.Inaddition,embeddedderivativecontracts(suchasequity
conversionoptionsembeddedinaconvertibledebenture–themostcommon
situationfoundinIndia)requiretobeseparatedfromtheirhostcontractsandbe
accountedforseparately.Incontrast,currentIndianGAAPdoesnotspecifically
addressthemore‘difficulttoapply’provisionsoffairvalueandhedgeaccounting.

What should banks focus on to meet this challenge?


• Derivativevaluationmodelsneedtobevalidatedandbacktested–theiruse
willbemuchmoresignificantintheIFRSworld;

• Hedgerelationshipsareaspecializedareaofaccountinganditiscrucialthat
organizationalawarenessoftherulesareenhanced.Certainprocessand
systemchangesneedtobemade(forexample,todesignatehedging
relationshipsata‘gross’levelandnotata‘net’levelgiventhatmanyinterest
rate,foreignexchangeandliquiditypositionsaremonitoredonlyona‘net’
basis),documentationandhedgeeffectivenesstestingprocessesneedtobe
incorporated

• Certainstrategicdecisionswillneedtobemadeastowhereandwhenhedge
accountingistobeapplied(evenperhapswhatcontractsaretransactedin),
whereindividualbankswillbecomfortablewiththeincomestatement
volatilityasitdoesnotseevalueinthecostbenefitanalysisofapplyinghedge
accounting.
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2.4 De-recognition of financial assets


UnderIFRS,de-recognitionoffinancialassetsisacomplex,multi-layeredarea
withthede-recognitiondecisiondependentlargelyonwhethertherehasbeena
transferofrisksandrewards.Iftheassessmentofthetransferofrisksand
rewardsisnotconclusive,anassessmentofcontrolandtheextentofcontinuing
involvementisrequiredtobeperformed.Inmanycases,thiscannotberestricted
toqualitativeassessmentsandneedstobenecessarilyaquantitative
assessment.

Amajorareaimpactedwouldbesecuritizationactivity–mostIndiansecuritization
vehiclesarecurrentlystructuredtomeetIndianGAAPde-recognitionnorms.
Substantiallyallthosesecuritizationvehicleswouldcollapseintothetransferor’s
balancesheetandassetswouldfailthede-recognitiontestunderIFRS.For
example,securitizationtransactionswherecreditcollateralsare
provided/guaranteeisprovidedtocovercreditlossesinexcessofthelosses
inherentintheportfolioofassestssecuritizedmaynotmeetthederecognition
principlesenunciatedinIAS39.

GiventhattheIFRSpositionissignificantlydifferentfromthatfollowedunder
IndianGAAP,applicationofthenewnormswouldingeneralleadtomore
instancesoftransfersfailingthede-recognitioncriteriatherebyresultinginlarge
balancesheets,capitaladequacyrequirements,lowerreturnonassetsand
deferralofgains/lossesonsuchsecuritizationtransactions.

What should banks focus on to meet this challenge?


• Assesstheimpactoftransactionsthatwouldfailde-recognitionandconsider
thepotentialimpactoncapitaladequacyandratiossuchasreturnonassets

• Worktowardsdeveloping(inconsultationwithinvestors,originatorsandlegal
counsel)newsecuritizationstructuresthataredesignedtomeetthede-
recognitionnormsunderIFRS

• Assessatastrategicleveliftheorganizationiswillingtocompromiseoncredit
ratingsforsecuritizedpoolsinordertoachievethedesiredcapitaland
accountingresultofde-recognition

• Certainprocessandsystemchangeswillneedtobemadeforaccountingfor
thesetransactionsfromcurrentpractice(includingforexample,howan
assessmentoftransferofriskandrewardswillbemeasuredanddocumented)

• Createanassessmentmodelthatincorporatesthefullcostbenefitanalysisof
undertakingsecuritizationtransactionseveniftheydon’tmeetthede-
recognitionnormsasafundingalternativetoraisingdeposits.
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2.5 Consolidation of entities


UnderIFRS,consolidationisnotdrivenpurelybytheownershipstructureofan
entity.Insteadthefocusismoreonthepowertocontrolanentitytoobtain
economicbenefits-thispowertocontrolcouldbeexpressedasownershipof
equitysecuritiesbutisnotlimitedtoit.Forinstance,thiswillincludea
considerationofcurrentlyexercisablepotentialvotingrights/shares;
managementandotheragreements,defactocontrolandotherarrangementsthat
providethepowertocontrolanentity.IFRSalsoprovidesguidanceonhow
consolidationdecisionsforspecialpurposeentitiesshouldbearrivedat.Ina
numberofways,IFRSprovidesmorerigorousconsolidationtestsandinpractice
canresultintheconsolidationofalargernumberofentitiesascomparedtoIndian
GAAPwhichfocusesonanarrowersetoftests(majorityofownershipandcontrol
overamajorityofthecompositionoftheboardofdirectorsorsimilarbody).

What should banks focus on to meet this challenge?


• Collateandinventorisethefullsetofentitieswhereconsolidationassessment
needtobemadeandperformthoseassessmentsasearlyaspossible
includingaconsiderationofnonshareholdingrelatedfactorsthatimpact
consolidation

• Ensurethatcommonaccountingpoliciesareappliedacrossthegroup

• Preparefortheimpactoffactorsarisingoutofconsolidationsuchashow
disclosuresatagrouplevelcanbecollatedandpopulated,chartofaccounts,
groupreportingpackages,reportingtimelinesand

• Considerspecificallyhowinter-companytransactionsanddeferredtaxation
relatedaspectswillbedealtwith.
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3. Questions to consider

Asdiscussedabove,IFRSimplementationislikelytohaveasignificantimpactfor
mostbanks.BasedonourexperiencewithseverallargeIFRSimplementation
projects,wehavesummarizedourthoughtsandperspectivesonsomeimportant
questionsthatyoumaywishtoconsiderwhiledevelopingaplanforIFRS
implementationatyourbank.

What are the advantages of starting early in


implementing IFRS?
Asignificantadvantageinbeinganearlyadopteristhatyouarebettersuitedto
confrontthemyriadoftacticalandstrategicdecisions(e.g.impactonexisting
operationsandinformationsystems;impactonothertechnicalorstrategic
initiativescurrentlyunderwayatyourbank)thatwouldneedtobemadeasthe
projectprogresses.Ourexperiencehasshownthatearlyadoptersaregenerally
moresuccessfulinmanagingtheoverallchangeprocess,bothwithrespecttothe
IFRSconversioneffectaswellaswithrespecttootherchangeinitiativesbeing
executedconcurrentwiththeIFRSconversion.Anaddedbenefittobeinganearly
adopteristhatdecisionsarenotundulycompromisedbytimeandresource
constraintsineffectuatingchangestocriticalprocessandsystemsactivities.

Startingearlywouldalsoenableyoutobettermanagetheexpectationsofinternal
stakeholderssuchastheBoardofDirectorsandseniormanagement,regulators
andexternalinvestorsandanalystsabouttheimpactonearningsandequity.This
canalsoenableyoutodetermineanypotentialneedforadditionalcapitalthatyou
mayneedonmandatoryadoptionofIFRSatafuturedate.

WehavealsofoundmanycompaniesinEuropeactuallywaitedtillquitelateinthe
conversiontimetabletostarttheirimplementationprojects.Thismeantthatthey
didnotleavethemselvesanyscopeforslippageintheeventthatthediagnostics
revealedaspectsthattheyhadnotfullyconsidered.Moreimportantly,they
neededtodefaulttotheuseofcertainmanualworkaroundstoeffectuate
compliance,therebylosingtheopportunitytore-designandembedfunctionality
withinexistingfinancialproductsystems.

Thereareanumberofotherkeyreasonswhystartingearlyisimportant.Oneis
theneedtocreatetimetoconsiderthetruecommercialimplicationsofalternative
accountingtreatments.Anotheristodoacompletedryrunofaccounting
systemsandtheend-to-endreportingprocessbeforetheactualconversion.Many
companiesinEuropedidnothaveenoughtimetodoadryrun.Theytherefore
introducedsignificantriskintotheirprojectsbyhavingtheirfirstrestatement
producingtheIFRSnumbersthatwouldbefirstpublishedtothemarket.
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What are the top three risks to an effective IFRS


implementation project? How should we manage them?
Thereareamultitudeofrisksthatwehaveencounteredoverourbroad
experienceofmanagingtheseengagementsglobally.Itischallengingtoseparate
outthreespecificonesbutbasedonthekeydifferentiatorsofsuccessfulandless
successfulprojects,wewouldliketohighlightthefollowingthree:

1 Sufficient dedicated internal staff –thesinglebiggestdifferentiatorof


successfulandlesssuccessfulconversionprojectsisthepresenceorabsence
offull-timeinternalstaffthatarededicatedtotheproject,particularlyinthe
projectmanagementarena.Youcannotsuccessfullymanagealargeproject
withpart-timestaff.Withintheorganisationtherehastobeacoreteamwho
donothingbutfocusontheday-to-dayprogressoftheIFRSimplementation
project.Wefindthatpart-timeresourcesinevitablygetlosttotheirdayjobs,
andthishascriticalimplicationsfortheoverallmomentumoftheproject

2 Failure to spend sufficient time and energy on ‘impact assessment’ –we


believethattheinitial‘impactassessment’isbyfarthemostcriticalphaseof
theproject.Itisessentialthatbanksplanforthisphaseandallowsufficient
timetoensurethatthegapanalysisisconductedonaline-by-linebasis
throughtheincomestatementandbalancesheet.Thegapanalysisfeedsthe
systemschanges,thetrainingprogramandtheaccountingpolicies–only
realisingthatelementsofthishavebeenmissedlaterintheconversion
proces,leadstoexpensiveunwindingofactivities

3 Failure to train staff to a sufficient standard –manyorganisationsthatwe


haveencounteredunderestimatedthelevelofinvestmentrequiredintraining
theirfinancecommunity.Acomprehensivetrainingstrategyandprogramisa
complexareaandneedstobecarefullyconsidered.Trainingshouldbetailored
totheneedsoftheorganisationwithdeliveryinarangeofdifferentwaysto
variousstakeholderswithdifferentneedsandrequirements.Thisisacomplex
aspectoftheprojectandonethatrequiresexperienceaswellasweb-enabled
technology,ifrequired.
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Should we think about freeing up resources within our


organisation to join the project and ensure they are not
being distracted by business as usual activities?
Asdiscussedabove,oneofthesinglebiggestdifferentiatorsbetweensuccessful
andlesssuccessfulprojectsistheabilitytoplacefull-timeresourcesintothecore
projectteamtoworkwithyouradvisors.Youmaywanttoconsiderbackfilling
someofyourkeylinepositionsandmovingsomeofyourbestpeoplefulltime
intotheproject.Wehaveseenorganisationsdothiseffectively,asitensuresthat
therightpeopleareworkingontheproject,receivethenecessarytrainingand
knowledgetransferandthenmovebackintothelinewiththisknowledge.
Conversely,itdoesnotmakesensetobringintemporaryresourcestoworkon
theprojectasyourbankwouldnotbenefitfromtheknowledgetransferthat
naturallyoccurs.Part-timeprojectteammemberstendtogetlostintotheirday
jobsandarethereforenotaseffective.

Who else should we be involving in this conversion


process beyond the finance team?
SinceanIFRSconversionismuchmorethananaccountingproject,wewould
expecttosee–inadditiontocoremembersofthefinancefunction–
representativesfromthefollowingareasandfunctionsofyourorganization:

• Steering committee: Playsanimportantroleinsigningoffonaccounting


optionswheretreatmentsvaryandcanhavedifferenteffectsonthebusiness
fromacommercialpointofview

• Information technology: GettingthefinancefunctionandtheITfunctionto


talktoeachotheriscriticalasaccountinganddisclosuregapdifferencesare
translatedintosystemsfunctionalitychanges

• Divisional business leads: Treasury,internalauditandbusinesssectorheads


withineachdivisionarecriticaltoensuringcommitmentandsponsorship
withineachdivisionalsub-project

• Human resources: Playsamajorroleintheglobaltrainingprogram,whichcan


beacomplexlogisticalexercisewithvariousstrategiesopentohowyou
choosetorollouttrainingtoyourfinanceandbusinesscommunity.
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What is the optimal use of external advisors and


specialists on such a project?
Thisisasignificantamountofworkandinternalspecialistresourcesaretypically
inshortsupplysoweseecompaniesusingacombinationofinternalandexternal
resourcestoaddressthespecialistneeds.Fromaninternalperspective,we
suggestusingdedicatedresourcesasmuchaspossibletomakecriticaldecisions
fortheprojectwork.Asfarasexternalresourcesareconcerned,weseethat
giventheresourceconstraintsthatexistatmanyorganisations-thereare
numerousareaswhereexternalresourceshavebeenused.

Forexample,atthebeginningoftheproject,animpactassessmentisrequired,
whichincludesconsiderationssuchas:

• Assessmentofaccountingdifferences

• Preparationofdisclosures,averysignificantexerciseformanyIFRSadopters
duetothedetailedquantitativeandqualitativeinformationrequired

• Assessmentofprocesseswhicharelikelytorequirechangeincludingmanual
workaroundsasneeded

• Reviewofspreadsheets–Howmanyspreadsheetsarecurrentlyinusethat
wouldrequireadjustments?Aretheseeasyormorechallenging?

• Evaluationofresources–whichlocationswillhavetherightpeople?

Usinganexternalspecialistadvisorprovidesanobjectivevoicetothesevery
difficultassessmentswhichareoftenunder-estimatedbytheinternalspecialists.
Ourexperiencealsosuggeststhatusinganexternalspecialistteamwith
experienceduringtheactualconversionprocessassistsinmakingyourexecution
moresuccessful.

Duringtheconversion,externaladvisorsareusedinavarietyofways;assisting
withtechnicalissueresolutionasimplementationissuesarise,bringingindustry
perspectivesonavarietyofspecialisttopics,providingback-fillingofresourcesas
specialistsaretakenoff-linetoworkonconversion,assistingwithunderstanding
themodelingoutputsandinterpretations,andassistingwiththepreparationof
therequisitedisclosureinformation,justtonameafew.Again,whatwehave
seenintheindustryisthatinternalspecialistresourcesarelimitedandneedto
continueto‘runthebusiness’whiletheconversioneffortishappening.Soa
reasonablebalanceofinternalandexternalresourceshelpsmeettheproject
objectives,ensuresspeedofknowledgetransferandofcoursekeepsthe
businessrunning.
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How do we ensure effective knowledge transfer to our


team members?
KnowledgetransferisessentialtoensureyourabilitytoembedIFRSasbusiness-
as-usual.Knowledgetransferfromexternaladvisorsandinternalspecialiststo
otherinternalteammembersshouldcontinuethroughthetermoftheconversion
project.

Trainingisakeyelementofasuccessfulconversionproject.Trainingisneededfor
internalstafftohelpensureproperunderstandingoftheIFRSguidanceandyou
shouldincorporatesignificantamountsoftraininginyourapproachandplan.
Elementsoftrainingincludeworkshop-basedtrainingformorecomplexand
specificaspectsofIFRSsuchasfinancialinstrumentsorsharebased
compensationonincometaxes,ordifferentmediasuchasWeb-enabledtraining
toreachabroaderaudience.

Anotherkeyelementtoconsideristhedifferentlevelsoftrainingfordifferent
stakeholders.Certainseniorstakeholdersonlyrequirehighlevelawarenessof
whatimpactIFRSwillhaveonthebank’sbusinessandfinancialresultsandhow
thisshouldbeexplainedtobrokersandanalysts.Morespecializedanddetailed
trainingwouldberequiredforothermembersofthefinancecommunity.

What are the IT system-related challenges to


implementing IFRS?
ChallengesrelatingtosystemschangesresultingfromIFRScanbequite
significant,especiallyinorganizationswithdisparatesourcesystemsatthelocal
entitylevel.ThemoreheterogeneousyourITsystems,themoretailoredlocal
levelsystemschangeswillberequiredtoensuretherightdataisbeingcollected
forimplementingIFRS(includingretroactiveapplicationonfirst-timeadoption).

Themappingofyourchartofaccountstotakeintoconsiderationthenewformat
ofyourreportsandaccountscanalsobeaconsiderablechallengefor
organizationsofyoursizeandcomplexity.Thisactivityshouldbekickedoffata
conceptuallevelasearlyintheprocessaspossible.

WehaveseensomeorganisationsattempttomanagetheirIFRSconversionoff-
lineatfirstusingExcelspreadsheetswithamedium-termstrategytoembed
moresustainableandrepeatablesystemssolutionsintotheorganisationoverthe
longerterm.Thiscanbeariskystrategyasoff-linespreadsheetscanbecome
cumbersomeandextremelydifficultwhenattemptingtoconsolidatealotof
information.Besuretounderstandthefunctionalityofyourconsolidationsystem
andbeclearastothedegreeofchangerequiredtomakeitfitforpurposein
relationtoIFRSconsolidationactivity.

Thekeythereforeisnottounderestimatetheinvestmentthatmaywellneedto
bemadeonthesystemssideoftheconversionprocess.Criticaltounderstanding
themagnitudeofworkinvolvedwillbeathoroughgapanalysisthattakesinto
accountthesystemsimplicationsoftheaccountingdifferencesthatarebeing
uncovered.Afrankassessmentneedstobemadeatanearlystageastowhether
thebankislookingatsystemsenhancementsoramajoroverhaul.
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What should be disclosed externally and when?


ThereisnoneedtobesecretiveabouttheresultsyouaregeneratingunderIFRS,
assumingyouarecomfortablewiththemandthatyouareabletotellasensible
storyaroundthem.InEurope,regulatorybodiesinsistedthecompaniesinserta
qualitativenoteintotheiraccountsgivinganoverviewoftheprogresstheywere
makingontheirconversioneffort.Thisgavethemarketssomecomfortthat
deadlineswouldnotbemissed.

Asageneralpractice,wewouldrecommendthatyouadoptasimilarstrategy,
whetherrequiredornot,andconsiderbeingproactiveindisclosinginformationon
theprogressyouaremakingonyourprojectassoonasitmakessenseandyou
arecomfortabletodoso.Yourprojectteamshouldalsopayverycloseattentionto
emergingguidancefromtheICAI,RBIandotherrelatedregulatorydevelopments.

Intermsofactualnumbers,wewouldsuggestgreatercaution.Itmaymake
sensetobeginearlyintheprocessmanagingexpectationsaroundtheindicative
impactonearningsandequityandwhytheremaybemovementsinthese
numbersfromIndianGAAPbasedontheconversiontoIFRS.Externalanalysts
willlikelynotunderstandIFRSintheearlystagesofconversion,andthereforeyou
maywanttoconsiderprovidinginternalawarenesssessionsforthemtoensure
theyappreciatenotonlyhowresultschange,butwhytheychange.Themoreyou
managetheirexpectations,themorelikelyitisthattheywillnotbesurprised
whenpublishednumbersarereleased.

How do we keep the internal teams and sponsors fully


apprised of project progress? How do we ensure all new
policies are implemented consistently?
Theprojectmanagerisresponsibleforestablishingaclearunderstandingofthe
typesofcommunicationchannelsthatworkwithinthebankandthenusingthese
toensuretheIFRSmessagesandprogressupdatesareclearlycommunicatedto
allrelevantstakeholders.Channelsmayinclude,butnotbelimitedto,project
newsletters,emailalerts,andadedicatedintranetsitefortheproject.Formsof
masscommunicationwillbepunctuatedwithspecificandfocusedIFRS
conferencesandlocation-basedface-to-facecommunications.

Theapplicationofnewpoliciesisacriticalchallengeandyoushouldlookto
addresstheseinseveralwaysduringtheconversionexercise.Wehaveoftenseen
thedraftingofaccountingpoliciesaccompaniedbythedevelopmentofanoverall
accountingmanualthatalsocontainsspecificsectionsrelatingtopolicy
application.
Page 14

4. How KPMG can help

Our track record


KPMGhasworkedextensivelywithseveralcompaniesacrosstheglobeonIFRS
adoptionandIFRSconversionstrategies.InIndia,wehaveworkedwithseveral
companiesthathaveadoptedIFRSeitherforthepurposesofaccessingcapitalin
overseasmarkets,forcross-bordermergersandacquisitionsactivity,tomeetthe
requirementsofinternationalinvestorsoranalysts,orforthepurposesof
reportingtooverseasparententitiesthatreportunderIFRS.Wecurrentlywork
withmorethan50companiesacrossdifferentindustrysectorsthatreportunder
IFRS.Additionally,subsequenttotheICAIdecisiontoplanforIFRSadoptionfrom
2011,severallargeIndiancompanieshaveengagedustounderstandtheimpact
ofadoptingIFRSandtodesignandimplementtheirIFRSconversionstrategies.
OurlargeclientbaseenablesustomaintainatrainedIFRSresourcepoolofmore
than100professionals.Additionally,weemployseveralseniorprofessionalswho
haveworkedinEuropeandassistedcompaniesintheEUonIFRSadoptionor
haveworkedwithourIFRStechnicalaccountinggroupinLondon.

Tested tools and methodologies


Asuccessfulconversionwilldependinequalmeasurebothon:

• gettingtheIFRStechnicalrequirementsrightand

• managingtheprocess.

Ourcoordinatedapproachisscaleable,tailoredtoindividualneedsanduses
testedmethodologiesandtools.Thesenotonlyplayakeypartinproducingfaster
andbetterresults;theyalsoaddvaluetomanagement'sdecision-makingintheir
ownright.TheglobalmethodologyusedbyusinprovidingIFRSconversionproject
assistance,revolvesaroundfiveworkstreams;

• Accountingandreporting

• Businessimpacts

• Systemsandprocesses

• Peopleissues

• Projectmanagement.
Page 15

Examplesofthetoolsweuseandthedeliverablestheycanprovideinclude:

• QuickScan-AhighlevelanalysisbyoursIFRSspecialiststhatprovidesa
qualitativeassessmentoftheimpactIFRSconversionwillhaveona
company'sbusinessactivities,resourcesandfinancialstatements.

• Accountinganddisclosuregapanalyses-inkeyareassuchashighlightingthe
differencesbetweenlocalGAAPandIFRS,peercomparisons,training
assessmentsandconversionmasterplans.

• IFRSExecutivebriefings-TailoredbriefingsonIFRSconversionwithafocus
ontheissuesthatarerelevanttoDirectorsandseniorexecutives.

• IFRSTraining-Tailoredtrainingtoreflectanorganisation'sspecific
requirementsandrecognisingthatIFRSconversionwillhavedifferentand
wide-rangingimpactforindividualorganisations.

• IFRSaudit-AuditconductedinaccordancewithInternationalStandardson
Auditing(ISA)andIFRS.

Flexible and practical approach


Asimportantastherightdeliverablesandtools,istheabilitytoprovideatailored
approach.Toanticipatechangingeventsandadjustwherevernecessaryare
equallycriticaltosuccessfulIFRSconversions.Ourpeoplewillendeavortobe
aroundwhenyouwantthemtobeandprovidecontinuingsupportforaslongas
youneedit.Wealsoadoptatotallyopenapproachtoissues,encouraging
teamworkwithourclientstosolveproblemstogether.Wehaveexperienced
trainersandIFRStrainingmaterialsthatwecanquicklyadapttotakeintoaccount
theuniqueskillsetsandknowledgerequirementswithineachclientorganisation.
ThenetresultispracticalIFRSconversionassistanceinwhichourknowledgeis
turnedintorealvalue.

Forbanksandfinancialinstitutions,selectingtherightaccountingpoliciesfor
financialinstrumentsiscrucialasitcouldaffectreportedprofitsignificantly.We
helpclientsnavigatethemazeofstandardslikeIAS39throughexperienced
professionals.Forexample,areaslikeimpairmentlossesforloans,classificationof
investments,accountingforderivativeinstruments,etc,requireknowledgeand
thecarefuluseofjudgment.Ourexperiencedprofessionalscanprovidepractical
guidanceonsuchissues.
Page 16

About KPMG in India

KPMGisaglobalnetworkofprofessionalfirmsprovidingAudit,TaxandAdvisory
services.Weoperatein145countriesandhave123,000peopleworkingin
memberfirmsaroundtheworld.TheindependentmemberfirmsoftheKPMG
networkareaffiliatedwithKPMGInternational,aSwisscooperative.EachKPMG
firmisalegallydistinctandseparateentityanddescribesitselfassuch.

TheIndianmemberfirmsaffiliatedwithKPMGInternationalwereestablishedin
September1993.Asmembersofthecohesivebusinessunittheyrespondtoa
clientserviceenvironmentbyleveragingtheresourcesofaglobalnetworkof
firms,providingdetailedknowledgeoflocallaws,regulations,marketsandcom-
petition.Weprovideservicestoover2,000internationalandnationalclients,in
India.KPMGhasofficesinIndiainMumbai,Delhi,Bangalore,Chennai,
Hyderabad,KolkataandPune.ThefirmsinIndiahaveaccesstomorethan2000
Indianandexpatriateprofessionals,manyofwhomareinternationallytrained.We
strivetoproviderapid,performance-based,industry-focusedandtechnology-
enabledservices,whichreflectasharedknowledgeofglobalandlocalindustries
andourexperienceoftheIndianbusinessenvironment.
in.kpmg.com

KPMGinIndia KPMGContacts
Mumbai Jamil Khatri
KPMG House, Kamala Mills Compound Head - IFRS Services
448, Senapati Bapat Marg Tel: +91 (80) 3980 6300
Lower Parel e-Mail: jkhatri@kpmg.com
Mumbai 400 013
Tel: +91 22 3989 6000 Manoj Kumar Vijai
Fax: +91 22 3983 6000 Executive Director - Audit
Tel: +91 (22) 3983 5121
Delhi e-Mail: mkumar@kpmg.com
4B, DLF Corporate Park
DLF City, Phase III
Gurgaon 122 002
Tel: +91 124 307 4000
Fax: +91 124 254 9101

Pune
703, Godrej Castlemaine
Bund Garden
Pune 411 001
Tel: +91 20 305 85764/65
Fax: +91 20 305 85775

Bangalore
Maruthi Info-Tech Centre
11-12/1, Inner Ring Road
Koramangala
Bangalore 560 071
Tel: +91 80 3980 6000
Fax: +91 80 3980 6999

Chennai
No.10 Mahatma Gandhi Road
Nungambakkam
Chennai 600 034
Tel: +91 44 3914 5000
Fax: +91 44 3914 5999

Hyderabad
II Floor, Merchant Towers
Road No. 4, Banjara Hills
Hyderabad 500 034
Tel: +91 40 2335 0060
Fax: +91 40 2335 0070

Kolkata
Park Plaza, Block F, Floor 6
71 Park Street
Kolkata 700 016
Tel: +91 33 2217 2858
Fax: +91 33 2217 2868

©2008KPMG,anIndianPartnershipandamemberfirm
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orentity.Althoughweendeavortoprovideaccurateandtimelyinformation,therecanbenoguaranteethatsuchinformationis affiliatedwithKPMGInternational,aSwisscooperative.
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