Mumbai: Indian banks are hiring consultants to train their employees in International Financial Reporting Standards (IFRS) as they take the lead in ensuring compliance with the new global accounting standard that kicks in from 2011.
Part of the reason is practical: Banking, more than any other business, will feel the impact of the new rules the most as banking operations involve multiple financial instruments that face the brunt of the changeover.
Indian firms are required to maintain their accounts under the new standard, starting April 2011. However, a comparative figure for the previous year has also to be provided, effectively advancing the transition to April 2010.
Smooth transition: IBA chairman M.V. Nair says the IFRS working group of RBI and IBA will meet in 10-12 days to discuss the guidelines. Abhijit Bhatlekar / Mint
With barely six months to go, banks are setting up internal cells dedicated to IFRS accounting, according to bankers, although banking regulator Reserve Bank of India (RBI) is yet to clarify its position on the new accounting standard.
To come up with the guidelines on the new accounting norm, a working group committee has been formed by the Indian Banks’ Association (IBA), the apex bankers’ lobby in the country, and RBI.
According to IBA chairman M.V. Nair, who is also the chairman of Union Bank of India, the working group committee will meet shortly to discuss the guidelines shortly.
“The IFRS working group of RBI and IBA will meet in 10-12 days to discuss about the new guidelines. A lot of issues have to be addressed and we have to adopt IFRS suitably to fit India’s need,” Nair said.
Nair said his bank is also gearing up for switching over to IFRS and a top management committee of his bank met on Wednesday to come with a diagnostic study of the IFRS accounting by October this year.
“We hope to come up with a parallel balance sheet based on IFRS by 31 March 2010,” said Nair.
Bank of Baroda chairman M.D. Mallya also said his bank has created an internal cell of top management executives for implementation of IFRS in the bank.
“The committee will guide us for a smooth transition to IFRS and when we are required, we will be ready with IFRS compliant accounts,” said Mallya, also the deputy chairman of IBA.
Meanwhile, audit firms such as PricewaterhouseCoopers (PwC), KPMG, and Ernst and Young are working with banks to help them meet the deadline
“From an initiative perspective, banks are more forthcoming than others because IFRS impacts them the most,” said Shrenik Baid, executive director of Price Waterhouse, a unit of PwC, one of the four big accounting firms globally.
Jamil Khatri, head of accounting advisory services at KPMG in India, said his firm was “not only training most major banks on understanding IFRS but also doing a lot of work on a project management basis”.
The new standard will drastically change the way banks report their financials. If implemented fully, it will give them space to keep accounts as per their own business experience, rather than the blanket industry-wide rules advocated by RBI.
For example, while calculating receivables from a loan, a bank will now be allowed to insert its own assessment on the credit history of the debtor, and decide whether to provide for a possible default. RBI rules currently do not permit banks to make different allowances for different companies.
“IFRS is not difficult to adopt, but it requires a very high (level of) judgement. The quantum and quality of impact will be severe if there is an error in judgement,” said Khatri of KPMG.
Since IFRS provides for internal provisioning, RBI’s NPA (non-performing asset or bad loan) norms may also become redundant. Currently, banks have to provide for 10% of the loan if the borrower fails to service his/her loan for 91 days; this can go up to 20-50% and be finally written off after three years even if the bank can recover the loan.
According to banks, RBI could issue new NPA norms that conform to IFRS standards to make sure that banks stick to one standard of NPA classification. At the same time, experts say, subjectivity and discretion will be the key issue. Because of the subjectivity involved, IFRS would mean higher provision norms for Indian banks.
“Overall, the provisioning requirement is generally much more than the RBI requirement,” said Dolphy D’Souza, partner and national leader (IFRS practice) for Ernst and Young. “Conservative banks with a better loan loss coverage don’t have to bother much about higher provisioning, but banks who have just maintained their loan loss coverage at the regulatory minimum will be highly impacted by the implementation of IFRS.”
IFRS norms also call for higher disclosures, for which bank staff will need to be trained. According to consultants, the physical size of the annual report will rise by at least 50-60%.
Consequently, banks will need better-trained staff for preparing disclosure as well as internally auditing those. Since IFRS allows for a lot of assumptions related to future cash flow rather than historical price accounting, these will have to be explained with the reports.
Auditors and bankers said that while RBI wants IFRS to be implemented, there is no clarification yet on the extent of this adoption since it comes with the risk of diluting regulatory control.
“IFRS will enable you to account the way you do your business. Whether RBI will be interested in giving a free hand to banks for financial reporting purpose remain a big question mark,” said Baid of Price Waterhouse.
V.K.R. Agrawal, chief financial officer of Bank of India, said IFRS rules will likely not be thrust upon Indian banks suddenly.
“It is likely that the existing system will continue parallel with IFRS once it is introduced, just as what happened while transitioning from Basel I to Basel II,” he said. Basel norms are international accounting norms for calculating banks’ capital adequacy. CFOs and accountants are waiting for RBI clarifications on IFRS, due soon.
RBI is expected to come with clarifications on how IFRS will be implemented in India. The regulator is a member of a committee convened by the ministry of corporate affairs to finalize IFRS rules that will be applicable in India.
“There is not much time left to switch over to IFRS. Any clarification on this issue should come right now,” said D’Souza of Ernst and Young. “Regulator has to quickly act on the clarification part as a lot of change have to be done by the companies.”
According to Baid of Price Waterhouse, about 30-35% of the changes will be purely technical accounting rules. However, “the biggest challenge is change (in the) management itself because it will not only impact the finances but will affect the entire organization”, he said.
According to a senior official at a mid-sized public sector bank, the change involving IFRS is not easy to cope with, given the available time.
“I don’t think IFRS can be fully implemented in India. It’s not just accounting, it’s change of an entire approach,” this official said, speaking on condition of anonymity. “I don’t think that RBI, being the regulator, will allow the full implementation of IFRS in the country.”
However, accountants say if IFRS is not fully implemented, it will defeat the entire purpose of bringing India’s accounting standards at par with the global practice so that international investors can understand Indian financial disclosures better. And given that foreign investors’ appetite for Indian bank stocks is on the rise, banks may have no option but to adapt to the new accounting environment.