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Preparers’ Considerations For Ind-AS Implementation

Published on Fri, Nov 21,2014 | 08:20, Updated at Fri, Nov 21 at 08:20Source : Moneycontrol.com 

By: Pankaj Chadha, Partner In A Member Firm Of Ernst & Young Global

Recently, the Minister for Finance, Defence and Corporate Affairs proposed for the adoption of Ind-AS, i.e., standards converged with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), voluntarily from the financial year 2015–16 and mandatorily beginning the financial year 2016–17.

The Institute of Chartered Accountants of India (ICAI) has also issued a host of exposure drafts on new accounting areas such as financial instruments and revenue from contracts with customers, in alignment with the new standards issued by the IASB. ICAI had earlier also issued a proposed roadmap so it is only fair to assume that the final roadmap and framework for Ind-AS is likely to be soon.  In the first phase, Publicly accountable enterprises, companies with large net worth and their respective subsidiaries, associates and joint ventures (JV) are expected to be required to convert to Ind-AS as per the proposed roadmap.

Typically, it is assumed that the responsibility of applying new accounting standards is that of the finance professionals in an organization. This is not true. Ask the people who have done the IFRS financial statements for the first time in the earlier big wave in Europe in 2004 and they would be able to explain how significantly it impacts business and business strategy. Historically, finance professionals have insulated their colleagues from understanding the effort involved in implementing newly issued accounting standards. As a result, you cannot expect them to understand the challenges associated with adopting an entirely new framework.
Factors to consider for the Ind-AS implementation
In order to successfully implement these standards, financial organizations will need the assistance and insights of their colleagues from across other functions. Ind-AS provides preparers options to elect policies that best reflect the underlying business. Input from key stakeholders in the company is an absolute necessity for evaluating potential changes in company practices and ensuring that proper elections are made.

INTERNAL FACTORS

EXTERNAL FACTORS

Sponsorship by senior management

MCA final notified standards

Availability of experienced & qualified resources

Interpretations of complex accounting matters emerging from Ind-AS or IFRS

Business structure & complexity

ICAI status on Ind-AS and alignment with IFRS

Complexity of Accounting function in the company

Analysts and investors interest in Ind-AS financial information

Internal systems- level of maturity

Competitors speed of implementation

Stakeholders demand for Ind-AS information

Tax considerations and Tax Accounting Standards

Preparers would need to appreciate that in initial year, they may be audited under two or more GAAPs. These “GAAP triangles” occur when neither Ind-AS nor current Indian GAAP can be used as the basis of accounting to meet tax filing requirements.
For example, if an entity with parent company has reporting obligations in the USA or say Japan had USGAAP or Japanese GAAP reporting requirements. The company would need to prepare one set of financial information under the group reporting GAAP. Additionally, for statutory purposes in India it would prepare Ind-AS compliant financial statements and for tax purposes, it would require financial statements compliant with proposed tax accounting standards. This adds an extra dimension to the audit that can be time-consuming and complicated.
This parallel reporting will likely be a reality for most companies required to implement Ind-AS. Consider few questions that would require careful evaluation:
http://media.journalofaccountancy.com/JOA/Issues/global/blackbox.gifHow many GAAPs will you track?

http://media.journalofaccountancy.com/JOA/Issues/global/blackbox.gifAt what level will you track the GAAPs (consolidation system, local ERP or both)?

http://media.journalofaccountancy.com/JOA/Issues/global/blackbox.gifHow long will you run in parallel?
This initiative will require working closely with your information systems team to build the architecture and reporting to complete the consolidation of financial statements under the desired number of GAAPs. One observes that typically companies with multiple GAAP reporting consider tracking two GAAPs as best practice, but the bar has now been raised to track three with likely introduction of tax accounting standards. Preparers will need to work closely with company’s tax department to determine the ramifications of any changes to the basis of statutory reporting. Auditors will need to evaluate the reasonableness of their client’s interpretation of Ind-AS and related guidance, as well as the consistency of application within the client.
Although auditors cannot be involved in policy election, they can provide valuable insight regarding available accounting options, industry and firm perspectives, as well as ICAI interpretations. Ind-AS has fewer rules, so more judgment will be back in the hands of preparers and auditors. Judgment allows the preparer the flexibility to improve the transparency of the financial statements but comes with the risk of inconsistency of application. To mitigate this risk, companies should create a robust corporate accounting manual that drives consistency across business units and geographies. Audits should be based on compliance with the manual to reduce local auditor interpretations.
Ind-AS adoption is a multiyear project that requires not only strong governance, but leaders who will sustain momentum over the life of the project. Creation of a steering committee under the oversight of the audit committee can help sustain this momentum and can provide high-level organizational support for the project. The steering committee should comprise senior management representatives from accounting, tax, communications, human resources, investor relations, legal, information systems, manufacturing and sales.
For the day-to-day implementation activities, you need a core project team, headed by a talented project manager. This team must be 100% dedicated to the project. The core team will be responsible for identifying technical accounting differences, drafting the corporate accounting manual, interacting with the auditors, working with information systems to design the system reporting requirements and conducting global training programs. The core team should be supplemented with subject matter experts, who are allocated to assist with specific topic areas. These experts, who are not working full time on the project, will be responsible for validating the accounting differences, identifying process/system changes and quantifying differences. External auditors should be involved throughout the implementation process.
Ind-AS is the future of accounting and whether you are a member of the core project team or a subject expert, you should begin work early.

 
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