IFRS convergence in India: Cos opt for wait and watch

Companies covered in phase 1 for IFRS convergence in India have chosen to manage both iGAAP and IFRS to avoid litigation.

Excluding a few Indian MNCs, most companies in India have chosen to wait and watch, even as the deadline for implementing International Financial Reporting Standards (IFRS) convergence nears. In its first phase, 600 Indian companies will have to comply with IFRS norms by April 1, 2011.

“Around 50% of the companies have carried out impact assessment for IFRS convergence in India,” informs Mandar Joshi, director - advisory services at KPMG. These companies are waiting for more clarity to emerge on IFRS convergence and also expect the deadline in India to be pushed ahead by one year. For instance, machine components maker Bharat Forge Ltd has completed the first step of impact assessment for IFRS convergence.

“The second step of an IFRS convergence exercise involves planning and designing. Apparently, companies will undertake it only after they are clear about the government’s roadmap for IFRS convergence in India,” informs Joshi.

Spends on IFRS convergence

The total expenditure on IFRS convergence efforts by an Indian company is estimated to range from Rs 10 lakh to Rs 5 crore. The spending depends on the way a company structures and classifies it.

For instance, if a company combines its IFRS conversion efforts with other IT projects, the investment may escalate. Otherwise, mere changes to the existing processes may translate to an expenditure of Rs 20 lakh, approximately.

IFRS convergence: Different approaches

The CIOs of large Indian companies are looking at IFRS convergence as an opportunity to unify projects and are trying to streamline their IT systems.

As of now, most Indian companies are prepared for manual intervention in the first year if the deadline for IFRS convergence in India remains unchanged. On the other hand, large companies are rolling out all the stages of IFRS convergence including planning, design, and implementation. According to Joshi, the large companies do not want to depend on manual interventions even for a quarter.

For IFRS convergence, the companies in India using in-house systems will have to carry out manual intervention wherever needed. On the other hand, the companies using ready products from brands such as SAP, Oracle, or Baan, can simply upgrade the existing packages. For instance, many Indian companies, such as Jet Airways and Hero Honda Motors, have upgraded SAP R/3 version 4 to ECC6.0, as part of their IFRS convergence initiatives.

“At Hero Honda, we are currently making changes to our SAP system to be able to do system-based recasting of accounts,” informs Vijay Sethi, VP - IS & CIO, Hero Honda Motors.

Ambiguity about taxation

Even though IFRS convergence is being made mandatory in India , its impact on taxation is unclear. For instance, in the new IFRS compliance regime, if the point of revenue recognition for sales tax changes, the point of tax may also change.

“Owing to the ambiguity surrounding IFRS convergence, most companies in India have opted for parallel accounting, i.e. maintaining Indian Generally Accepted Accounting Principles (iGAAP) and IFRS Converged Standards, even though it means additional complexity for their IT systems,” explains Joshi.

Different companies have taken different approaches to parallel accounting. While small companies have opted for a pure play parallel accounting, i.e. maintaining both the books separately, the large companies have taken a consolidated approach at the group level.

Read more on CW500 and IT leadership skills