Analysis of MCA’s clarifications on IFRS Roadmap in India

The Core Group constituted by MCA for convergence of Indian Accounting Standards
with the International Financial Reporting Standards (IFRS) had announced the approach
and timelines for achieving convergence with IFRS on 22 January 2010 and a separate
approach on 31 March 2010 for the convergence of Indian Accounting Standards by the
Banking companies, Insurance companies and Non-Banking Finance Companies. As is
inevitable with such large policy announcements, clarifications were sought from MCA
on several implementation issues arising from the Announcement. In response to the
requests, MCA has published a ‘Consolidated statement on clarifications on the roadmap
for application of converged IndianAccounting Standards by companies’ on 4 May 2010.

The summary of the clarifications sought from and made by MCA along with our
preliminary views are captured below:

Applicability and applicable date / comparatives

1.Presentation of comparatives by companies in the Phase 1: Questions had arisen on the

presentation of comparative financial information by Phase 1 companies in the first year
that they adopt the converged accounting standards. The MCA has clarified that the
opening balance sheet prepared at 1 April 2011 and the financial statements for the year
ending 31 March 2012 shall be in accordance with the converged accounting standards;
but comparative period figures (i.e., for the year ending 31 March 2011) shall continue to
be reported as per the non-convergedaccounting standards.

A company may, however, voluntarily choose to report comparative period figures (i.e.,
for the year ending 31 March 2011) as per the convergedaccounting standards as an
additional column in the financial statements. The opening balance sheet (and therefore
transition adjustments) for companies in such a case shall be at 1 April 2010.

Our comments

This is an important clarification. As expected, the Government will not require

companies to present comparative financial information prepared as per the converged
accounting standards but will permit a company to do. This means that for companies
covered in Phase 1, the date of transition to the converged accounting standards could
either be 1 April 2010 (for companies that choose to present comparatives as per the
converged accounting standards) or 1 April 2011 (for companies that do not present
comparatives on a similar basis).

2. The MCA has also addressed the question of whether companies covered in Phases 2
and 3 can voluntarily opt to apply the converged accounting standards for the accounting
year beginning on 1 April 2011. The MCA has clarified that companies will have an
option to early adopt the converged accounting standards commencing on or after 1 April
2011. The specific clarification is as follows:

- Such companies will have an option for application of the first set of accounting
standards (i.e., the converged accounting standards) only for the financial year
commencing on 1 April 2011 or thereafter.’

Our comments

This statement provides clarity that Phase 2 and Phase 3 companies can
early adopt and choose to present comparatives as long as the comparatives
are for a period after 1 April 2011, it is unclear from this clarification if
companies that are a part of Phase 2 or Phase 3 and which choose to
early adopt the converged statements from 1 April 2011, can present
comparative statements (i.e. for the year ending 31 March 2011) on a
similar basis as companies that are in Phase 1 and choose to do so. This
confusion is caused by the given the wording used - “ only for the
financial year commencing 1 April 2011 or thereafter…”. We believe that
it is unlikely to have been the MCA’s intention to restrict the ability of
such companies to present comparative financial information if they early
adopt for the year ending 31 March 2012, but given the manner the
announcement is worded, this may require further clarification.

3. Clarification was sought from the MCA as to whether an entity, after convergence,
could discontinue following converged accounting standards if it no longer meets the
criteria set forth under the MCA Announcement. The MCA clarified that once a company
follows the converged accounting standards it shall continue preparing financial
statements in accordance with the converged accounting standards. It shall not revert to
the non-converged accounting standards.

Our comments :-We welcome this clarification as it is intended to prevent abuse of the
transition period provisions.

Applicability to Group Entities

The converged accounting standards would require the preparation of consolidated

financial statements by covered companies and many of these covered companies would
have holding companies, subsidiaries, joint ventures and associates (group entities). It is
possible that while the parent company may be covered in a particular phase, other group
entities are covered only in subsequent phases or are not required to follow the
convergedaccounting standards. Clarification was sought as to

- whether the determination of phases for an entity would be based on stand- alone or
consolidated financial statements
- whether group entities not covered in the same phase as parent company can voluntarily
adopt converged accounting standards.

The MCA has clarified that the criteria for determination of various phases shall be based
on the stand-alone financial statements of various entities.

The MCA has also clarified that companies having subsidiaries, joint ventures and
associates or covered in any of the phases shall prepare consolidatedfinancial statements
in accordance with the converged accounting standards .Group companies (subsidiaries,
joint ventures or associates) not covered in the phases similar to the parent company shall
continue to prepare stand-alonefinancial statements according to the phases applicable.

However, such companies may voluntarily adopt the converged accounting standards.
For example, if a parent company is covered in Phase 1 (1 April 2011), it shall prepare
consolidated financial statements for the year ending 31 March 2012 in accordance with
the converged accounting standards.If the subsidiaries of the parent company are covered
in Phase 2, (1 April 2013) they shall prepare standalone financial statements for the year
ending 31 March 2012, in accordance with the non-converged accounting standards.
However, these subsidiaries may voluntarily adopt converged accounting standards from
1 April 2011 in line with the parent company.

1.The previous Announcement of the MCA did not elaborate on how ‘net – worth’ shall
be determined for the purpose of determining what was the applicability of the IFRS
convergence phases to individual companies. Clarifications were sought on the rules for
determination of net worth relating to date, method (stand alone or consolidated) and
components of net worth to be considered for this purpose.

2. Net-worth shall comprise of share capital plus reserves minus revaluation reserves
minus miscellaneous expenditure minus debit balance in the profit and loss account.

The MCA has clarified that, for companies, net worth shall be determined based on the
audited balance sheet on 31 March 2009.. For financial institutions net worth shall be
determined based on the audited balance sheet on 31 March 2011. Net-worth shall be
determined based on the stand-alone financial statements of the company.

Our Comments

As covered in our previous update on this matter, the cut off date has been determined as
31 March 2009 and 31 March 2011 respectively. While this provides certainty in terms
ofthe MCA’s views on this matter, it does throw up some situations that require careful
consideration such as:

- if an entity is an entity that met the criteria for Phase 1 on 31 March 2009 but then
ceases to do so by 1 April 2011, it will still be covered in Phase 1 eg. An entity that had
FCCBs that were listed overseas but whose FCCBs are either bought back, redeemed or
converted before 1 April 2011
- if an entity did not meet the criteria on 31 March 2009 but meets the criteria for Phase 1
on 1 April 2011; it is unclear when, if at all, it will be required to follow the
convergedaccounting standards . While it may appear logical that such entities should be
covered in Phase 1; the current clarifications do not address this issue

For NBFCs and insurance companies that are subsidiaries or equity affiliates of Phase 1
entities in India, there is likely to be a period of two years i.e. the year ending 31 March
2012 and 31 March 2013 when they will need to prepare financial statements under both
converged accounting standards (for the purposes of consolidation) and non converged
standards (for the standalone/entity level financial statements). This could be further
complicated by the consideration of how transition adjustments will be recorded, given
the two separate dates of transition and the inability for such an entity to early adopt
converged standards based on how the MCA announcements are worded.

The clarification that net-worth is likely to be computed at a stand-alone level and not at a
consolidated level is an important one. It is likely to mean that certain unlisted holding
companies may no longer be covered in the IFRS convergence program as their
standalone net worth based on historical cost of their investments may not be in excess of
the relevant thresholds even though it might exceed the thresholds on a consolidated
basis.

For a number of companies that are currently unlisted and therefore not in the practice of
preparing consolidated financial statements under Indian GAAP, the MCA clarification
represents a relatively important relief that has been provided by the MCA by not
requiring to consider net worth on a consolidated basis.

The definition of net worth includes items such as preference shares (which would be
treated as liabilities under the converged accounting standards) and will be helpful in
bringing consistency in practice in this area.

Option to choose the IFRS v/s Indian converged accounting standards where
differences exist

While the converged Indian accounting standards are expected to be based on IFRS; there
may be carve-outs in certain areas when compared with IFRS as issued by the IASB.
Clarification was sought on whether companies would follow the converged accounting
standards or may choose IFRS standards as issued by IASB.

The MCA has clarified that companies shall need to follow the converged accounting
standards and not IFRS as issued by IASB.

Our comments

Companies should note that the early adoption option that SEBI has provided in the
amendments to the listing agreements require reporting as per IFRS as issued by the
IASB. In case there are deviations between those standards and the converged Indian
accounting standards, there will be diversity in practice in terms of reporting. We would
encourage the MCA and SEBI to find a way to ensure consistency and ideally avoid
deviations from the IFRS issued by the IASB as the aim of convergence in India is to
ensure consistency not only in India but also globally and having differences/carve outs
will only increase the need for reconciliations and costs of compliance for companies in
India.