Published on Mon, Apr 13,2015 | 18:06, Updated at Mon, Apr 13 at 18:06Source : Moneycontrol.com
IND-AS conversion: key considerations for board & audit committee members
By: Sandip Khetan & Jigar Parikh, Partners with India member firm of EY Global
On 20th February 2015, the Ministry of corporate affairs (MCA) notified the set of companies which are required to transition to Indian Accounting Standards "IND-AS" in a phased manner along with all the accounting standards to be followed by such companies. IND-AS will be applicable for both standalone and consolidated financial statements of the Company. IND-AS represent the Indian version of International financial reporting standards (IFRS) as issued by International Accounting Standard Board (IASB).
During phase 1, companies with a net worth of more than INR 500 crore is required to transition from April 1, 2016 with a comparative for the year ended March 31, 2016. During phase 2 all remaining listed companies along with any other company with a net worth of INR 250 crore and above is required to transition from April 1, 2017 with a comparative for the year ended March 31, 2017. Further Holding, Subsidiary, Joint Venture and Associate companies of the Company which is required to prepare IND-AS financial statement is also required to prepare the IND-AS from the respective dates of transition. Companies in financial services sector i.e. banking, insurance and non-banking financial services companies are not currently required to transition to IND-AS.
Converting to IND-AS will be one of the most fundamental changes that Indian companies will have to deal with over the coming years. Such a momentous change will bring with it both significant risks and opportunities. Management in every company will be responsible for the operational planning and implementation of the IND-AS transition, but ultimate responsibility lies with those charged with governance. A company's board of directors, particularly its audit committee, will play a key oversight role. It is crucial for directors to have a general understanding of what transition to IND-AS means for their organization. Members of audit committee will greater insight about the implications of IND-AS to prepare them for the upcoming conversions.
Audit committees need to be sufficiently educated and knowledgeable about IND-AS to enable them to fulfil their duties and discharge their responsibilities. This includes being able to pass judgment on management's analysis of accounting alternatives and the selection of accounting policies.
Some of the issues which will require the attention of the board and audit committee members are outlined below.
Key Pitfalls Or Risks Related To IND-AS Conversion Projects
A conversion to Ind-AS would be one of the most fundamental changes in financial reporting in Indian history. The potentially pervasive nature of the changes at the accounting, functional, transactional and internal control levels increases the risk of misstatement. Further, today's financial reporting environment has little tolerance for mistakes, and it will be important for all companies to get the conversion right the first time. Misstatements, as well as missed reporting deadlines, present a significant risk to companies that are converting.
A robust system of internal control is a company's best method of ensuring reporting integrity and minimizing the risk of misstatement. To maintain effective internal control over financial reporting, management will need to consider the effects that changes to financial accounting and reporting may have on internal control. A period of change, such as one encountered during an accounting conversion, could lead to unintended consequences in the design and/or effectiveness of existing internal controls, hence increasing risk. As a result, risk management functions will need to be engaged in the conversion process to mitigate the risks involved.
There are many risks associated with a conversion to IND-AS that will have to be addressed by management. Examples of potentially significant risk areas include:
• Failure to communicate the effects and results to stakeholders, including boards, audit committees, investors and analysts
• Accounting and reporting under multiple accounting frameworks during the transition period
• Maintaining consistency in the manner in which the various IND-AS principles are applied throughout the organization, including the potential to have to rethink accounting policy decisions made by subsidiaries who already have adopted IFRS or their equivalents
• Retention of key employees
• Excessive costs brought on by ineffective planning, project management and/or rework
• Unreasonable or excessive work levels, brought on by inappropriate planning or unreasonable expectations
• Missed deadlines in the conversion timetable
• Inability of CEO/CFO to conclude and certify on the effectiveness of the company's internal control over financial reporting as required under clause 49 of the Listing Agreement
Planning The Transition
Converting to Ind-AS will entail a business wide change management exercise and should be approached using a structured methodology encompassing the best practices of project management. As with any major finance transformation project, the full support of the board and senior management will be critical to the success of the conversion effort.
Boards should pay close attention to the details of management's proposed approach to the IND-AS conversion and satisfy themselves that it covers all appropriate areas and is based on sound project management principles. Whereas management will be responsible for the conversion execution, boards need to be confident in management's plan, thoroughness and diligence. Management should inform the board and the audit committee on a regular basis as to its plan and progress. As such, audit committees should generally include a standing IND-AS agenda update item at their periodic meetings.
Any Ind-AS conversion project should commence with some form of impact assessment, diagnostic activity or scoping exercise. This will allow management and boards of directors to visualize the extent and complexity of the conversion and allow them to make better decisions about how to plan, structure and resource the project and determine the next steps. Typically, the CFO would be the sponsor. Board members should review the output at every stage of transition which can easily be categorized into three buckets so to say, Diagnostic, Solution development and Implementation. They should assign timelines for each of the phases and do the planned review of the same against the set timelines.
Review Of All Existing Contractual Arrangement
Accounting under IND-AS principles will be lot more substance driven as compared to the existing Indian Generally Accepted Accounting Principles ("Indian GAAP"). For example any obligation made under a customer contracts needs to be evaluated carefully for determining the timing and the extent of impact on the revenue recognition and its presentation. Some of the instruments which are currently classified as part of share capital may require to be presented as part of debt and will impact the leverage ratio of the Company. Some of the off balance sheet items like right to use and service concession arrangements may need to be presented onto the balance sheet as compared to the current practice. Some shareholders arrangement may result in a company being consolidated whereas some may result in deconsolidation of an existing consolidated subsidiary.
Investment In Building Processes And Technology Platforms
Every company will be required to plan the whole transition from existing accounting platform to the new accounting platform in a careful manner. Most important is to start early so that all aspects of transition can be addressed in a planned manner. Companies will be required to enable the financial reporting processes and the technology platform to deal with this change. Most of the technology platforms allowed the use of dual ledgers and companies will be required to plan the use of the same in a timely manner to ensure that change is codified in its reporting system.
First Time Transition
Ind AS 101, prescribes the methodology for transitioning from existing Indian GAAP to IND-AS. At this stage several decisions are required to be made among various alternatives which can have very long term impact in terms of any company financial reporting and its practices. For example a policy election in relation to transition of property plant and equipment to IND-AS should not only be driven with reference to the ease of transition but also with reference to the long term agenda of the Company. Whether to do fair value accounting for past business combination or not should be driven by its impact on the financial statements and relevant ratios of the Company.
Dry Run Exercise
Ind AS 101, requires the Companies to present the reconciliation from existing Indian GAAP to IND-AS of all the key financial statement components like profitability, cash flows and stock holders' equity in the year of transition. Accordingly every company who is required to transition in phase 1 is required to present this analysis for the year ended March 31, 2016. Board members of the Company should keep a close watch on such reconciliation as disclosed by the Company as it will help them understand the impact of such change.
Communication With All Stakeholders
Board members of Companies should closely evaluate management strategy of communication with all stakeholders about the change. For example if the results of the diagnostic indicates that there could be significant impact on the reported revenues or the leverage ratio of the Company may change than it will be useful for such companies to engage with the stakeholders in advance to avoid any surprise at the time of actual reporting.
Building The Capacity
Board members should review the plans of their respective companies in creating internal capacity in dealing with this change. Companies will be required to train not only the finance and accounting professionals but also other members of the organization. For example, sales team may needs to be trained about the impact of the existing practice in terms of the accounting and the need for change in the sales process if any. The Human resource professionals may need to be trained to know about the accounting impact of the existing employee's compensation programs. Accordingly a comprehensive training program is required to be designed to ensure that every internal stakeholder is made aware of the change and is capable of dealing with the change in a sustainable manner. Further the Board members are required to ensure that all the companies which are associated with them are also doing the planning and implementation to ensure the change management at the overall level.
Keeping Pace With The Change
Financial accounting and reporting in future will be very dynamic and will ever be changing. For example IASB comes with improvement of all its IFRS on an annual basis and thus companies will be required to keep a watch of all changes as introduced by IASB as MCA is also likely to adopt majority of such changes if not all. Accounting for leasing is likely to change in near term and Companies will be required to consider the impact of the same in near future. Considering the fact that IND-AS is implemented at such a large scale, MCA through Institute of Chartered Accountants of India (ICAI) will come out with resolution of several implementation challenges and companies will be required to have a close watch on the same. Companies will be required to continuously invest in building a strong team of professionals and processes to deal with this change on an ongoing basis.
Key Takeaways
Board members will be well served to guide the company management throughout this process of change management. They need to themselves upgrade with knowledge of IND-AS along with a robust planning and monitoring of the execution of the same. They need to communicate with all stakeholders in a timely basis to avoid any surprises and focus on building the capacity to sustain this change for times to come as well.
