Capstone Sandeep

CAPSTONE Report on IFRS IN INDIAN BANKING – CHALLENGES, IMPLICATIONS & REPERCUSSION Under the guidance of Mr Sharad Jha Faculty, ITM IFM Submitted in the partial fulfillment of the requirement for the award of degree of Master of Business Administration By Sandeep Agrawal

INSTITUTE FOR TECHNOLOGY & MANAGEMENT NAVI MUMBAI -410210

STUDENTS’ DECLARATION

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I hereby declare that the project report titled “IFRS IN INDIAN BANKING – CHALLENGES, IMPLICATIONS & REPERCUSSION” Submitted in the partial fulfillment of the requirement for the award of degree of MBA is my original work. This has not been submitted in part or full towards any other degree or diploma.

Name: Sandeep Agrawal Roll No.: 59 INSTITUTE FOR TECHNOLOGY AND MANAGEMENT NAVI MUMBAI

ACKNOWLEDGEMENT

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A work is never a work of an individual. I owe a sense of gratitude to the Co-operation of those people who had been so easy to let me understand what I needed from time to time for completion of this exclusive project.

I am greatly indebted to Prof. Sharad Jha, my faculty guide, ITM IFM who has sincerely supported me with the valuable insights into the completion of this project.

I am also grateful to Dr. K S Murthy, Director, ITM IFM for permitting me to undertake this study.

I thank all my faculties and friends for their support and feedbacks.

My several well-wishers helped me directly or indirectly; I virtually fall short of words to express my gratefulness to them. Therefore I am leaving this acknowledgement incomplete in their reminiscence.

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Table of Contents

1. INTRODUCTION......................................................................................................................6
1.1 SCOPE AND OBJECTIVE OF THE STUDY................................................................................... 7 1.2 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) - BACKGROUND.........8

2. CONVERGENCE TO IFRS..................................................................................................... 9
2.1 REASONS FOR GLOBAL CONVERGENCE TO IFRS.................................................................. 9 2.2 ROADMAP TO CONVERGENCE.................................................................................................. 10 2.3 MANNER OF ACHIEVING CONVERGENCE............................................................................. 12 2.4 CHALLENGES IN THE WAY OF GLOBAL CONVERGENCE.................................................. 12

3. CHALLENGES IN ADOPTION OF IFRS........................................................................... 13
3.1 GLOBAL SCENARIO..................................................................................................................... 13 3.2 INDIAN SCENARIO........................................................................................................................ 14 3.3 BANKING SECTOR........................................................................................................................ 16

4. MATTERS FOR CONSIDERATION DURING CONVERGENCE..................................18
4.1 Applicability to ‘group’ entities........................................................................................................ 18 4.2 Applicability to entities other than companies................................................................................. 18 4.3 Applicability based on ‘shares/other securities listed on stock exchanges outside India’ criteria...18 4.4 Comparatives and first-time transition exemptions.......................................................................... 19 4.5 Tax and other regulations.................................................................................................................. 19

5. DIFFERENCES BETWEEN INDIAN GAAP AND IFRS.................................................. 21
5.1 CONCEPTUAL DIFFERENCES..................................................................................................... 21 5.2 BANKING SECTOR........................................................................................................................ 24

6. STUDY ON FINANCIAL INSTRUMENTS......................................................................... 27
6.1 IFRS -9.............................................................................................................................................. 28 6.2 ANALYSIS AND FINDINGS ON FINANCIAL INSTRUMENT................................................. 31

7. LOANS AND ADVANCES.....................................................................................................35
7.1 CHALLENGES................................................................................................................................ 37

8. ADVANTAGES AND DISADVANTAGES OF IFRS..........................................................38
8.1 POTENTIAL BENEFITS OF CONVERGENCE TO IFRS............................................................ 38 8.2 DISADVANTAGES OF IFRS......................................................................................................... 39

9. EUROPEN BANKS’ EXPERIENCE.....................................................................................42 10. CONCLUSION...................................................................................................................... 44 REFERENCES............................................................................................................................45

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IFRS IN INDIAN BANKING – CHALLENGES, IMPLICATIONS & REPERCUSSION

EXECUTIVE SUMMARY:
With the opening of world economies and cross border investments, the need for uniformity in accounting practice was felt necessary. This has led to the development of IFRS as a universal financial reporting language. ICAI has also announced the convergence to IFRS in India to start in a

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phased manner from April 2011. Convergence process in Banking Industry is to start from April 2013. In addition to the general accounting standards and practices that constitute Indian GAAP, banking companies are currently required to adhere to accounting policies and principles that are prescribed by the Reserve Bank of India (RBI). Adoption of IFRS requires a significant change to such existing policies and could have a material impact on the financial statements of banking companies. In the present study the general differences between Indian GAAP and IFRS are highlighted. Convergence to IFRS is a big task in front of Indian Banks. It is evident from the rescheduling of convergence date from 2011 to 2013. Banking regulations will undergo a substantial change at the time of convergence. One of the most important areas will be Financial Instruments, where a complete new set of standards have been issued. The new standard specifies more of fair value accounting and recognises both depreciation and appreciation, which is not the case at present. This will impact the reported profit and there are views that P&L A/c is going to be more volatile than ever before with unrealised gains and losses. The current study consists of a detailed analysis of financial instruments and compares their treatment as per current and new norms. It could be arrived at the conclusion that as per IFRS there won’t be much change in measurement of the instrument but the classification would be impacted due to more stringent norms. Loans and advances too will be impacted due to more subjective analysis than the current objective approach suggested by RBI. The difficulty in convergence process is not only restricted to understanding of IFRS standards but also includes training of staff for it. At the time of convergence it is also estimated that the cost of convergence would be very high, probably would be second or third highest cost incurred in that year by the company. It is very essential for the banks to gear up for the change early and conduct a trial run before actual implementation.

1.

INTRODUCTION

Banking is the backbone of Indian economy. It is the home for the execution of all the economic decisions. Anything which impacts the banks may impact the entire economy. In the coming year due to convergence to IFRS there is going to be major change in the financial statements of the

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banks. This is of greater importance as all decision by the investors is dependent on those statements. This convergence process would be the most difficult and challenging task for the banks as well as the regulators and the accounting standard setter. This is evident from the push back of previous date from April 2011 to April 2013. It is very clear that banks were not yet ready for convergence and also time required for preparation was not sufficient. The present study on,” IFRS in Indian Banking – Challenges, Implications and repercussion” is taken because it is a contemporary topic and of great importance. Today there are many articles on IFRS and its impact. Every industry is concerned about the issues affecting their industry. Lots of research is being carried out on IFRS. ICAI along with RBI has formed a panel to discuss the likely effect of convergence in banks and the statutory roadblocks that would be encountered. Also IFRS task force has also been formulated to examine various issues involved in the convergence process. There are also talks that 70 % of convergence cost would be in the field of IT. Financial instruments which form the major portion of banks’ balance sheet will have a substantial change in its classification and measurement. There would be more use of fair value in the measurement. Lot of subjectivity would be involved in accounting than ever before. All this has encouraged me to take up such a challenging topic, where lot of time and money is at stake and come out with its likely impact. The emergence of transnational corporations in search of money, not only for stimulating growth, but to maintain on-going activities has demanded flow of capital from all parts of the globe. This has brought millions of new investors into the capital markets whose interests are not constrained by national boundaries. Each country has its own set of rules, regulations and reporting standards. When an entity decides to raise capital from the markets other than the country in which it is located, the rules and regulations of the host country will apply. This will require that the enterprise is in a position to understand the differences between the rules governing financial reporting in the foreign country as compared to its own country. Translations of financial statements to the users’ local standards are of extreme importance in a rapidly globalizing world, to make investment decisions.

1.1

SCOPE AND OBJECTIVE OF THE STUDY

In the era of globalization, India cannot insulate itself from the developments taking place worldwide. Institute of Chartered Accountants of India (ICAI) has announced the convergences to

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IFRS, starting in a phased manner from April 2011. The objective of this report is to find out the regulatory problems that would be encountered during the convergence process and suggest measures to overcome them. Scope of the study is to show major differences between Indian GAAP and IFRS, with special reference to banking sector. It also includes detailed analysis of Investment portfolio of banks and major changes and problems that it would encounter during convergence. The detailed analysis presented restricts itself with financial assets as per IFRS-9(excluding hedge and derivatives).

1.2 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BACKGROUND
With the opening of world economies and cross border investments the need for adoption of uniform accounting standards, while preparing financial statements, was felt, prompting various accounting bodies to setup a board to produce accounting standards. It was in the year 1973 that accounting bodies of nine countries by mutual consent created International Accounting Standards Committee (IASC) with an object to create and publish accounting standards to be followed worldwide while presenting financial statements. International Federation of Accountants representing 100 countries became members of IASC from 1982.The new agenda for IASC was not only to produce accounting standards but also to persuade governments, standard setting bodies, regulatory authorities and business community to follow International Accounting Standards (IAS) while preparing financial statements. Initially the IASC produced some basic accounting standards which were worded broadly and having different alternative treatments to accommodate the existence of different accounting practices around the world. Due to criticism of the world community and non adoption of these standards for their ineffectiveness in fulfilling the basic objective of bringing uniformity in financial statements, a new project was started in the year 1987 by IASC to reproduce improved standards to deal with different situations in a strict manner and without many choices to deal with. The work thus carried was so effective and appreciated by the world community prompting worldwide Accounting Standard setting and regulatory bodies to come forward and take active interest in accounting standards-setting process. IASC and the International Organization of Securities Commission (IOSCO) worked together from 1990 onwards and in the year 1993 the technical committee of IOSCO endorsed IASC standards for cross-border listing and capital-raising purposes around the world and identified certain standards required to be completed by IASC. IASC during its existence issued forty one standards commonly

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known as International Accounting Standards (IAS) along with Framework for the Preparation and Presentation of Financial Statements. Out of these forty one standards few were withdrawn and the rest are still in force. In addition to these standards some interpretations issued by IASC’s Standing Interpretation committee (SIC) are still in force. Year 2001, saw a complete overhauling of international accounting standard-setting process by making it more independent, legitimate to come out with improved and quality standards. IASC board was replaced by the International Accounting Standards Board (IASB) to achieve the desired objectives. IASB adopted all the outstanding IAS issued by IASC as it own standards. These standards continued to remain in force unless amended or withdrawn by IASB. IASB came out with additional standards commonly known as International Financial Reporting Standards (IFRS) after 2001.

2.
2.1

CONVERGENCE TO IFRS
REASONS FOR GLOBAL CONVERGENCE TO IFRS

The main objectives of IASB were to identify opportunities to improve the present set of standards by adding explanatory guidance and eliminate inconsistencies and choices. In general terms, ‘convergence’ means to achieve harmony in relation to IFRS; in precise terms, convergence can be considered “to design and maintain national accounting standards in a way that financial statements prepared in accordance with national accounting standards draw unreserved statement of compliance with IFRS”. International analysts and investors would like to compare financial statements based on similar accounting standards, and this has led to the growing support for an internationally accepted set of accounting standards for cross-border filings. A strong need was felt

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by IASB to bring about uniformity, comparability, transparency and adaptability in financial statements. Having multiplicity of accounting standards around the world is against the public interest. It creates confusion, encourages error and facilitates fraud. The cure for these ills is to have a single set of high quality global standards. The goal of the IFRS is to create single set of accounting standards that can be applied anywhere in the world, allowing investors to compare the performance of business entities across geographic boundaries. Currently accounting for the same events and information produces divergent financial statements due to adoption of different set of accounting standards. This is likely to create confusion among the investors and also make their investment decision difficult. This is increasingly making accounting discredited in the eyes of investors. The harmonization of financial reporting around the world will help to raise confidence of investors in the information they are using to make their financial decisions. Also for the companies with multiple listings in both domestic and foreign country, the convergence is very much essential because their statements will be assessed by the stakeholders in different countries.

2.2

ROADMAP TO CONVERGENCE

A meeting of the Core Group composed of officials from Ministry of Finance, SEBI, RBI, IRDA, C&AG, PFRDA, ICAI, Industry representatives and other experts, constituted by the Ministry of Corporate Affairs, Government Of India, for convergence of Indian Accounting Standards with International Financial Reporting Standards (IFRS) from the year 2011 was held on 29th March, 2010 under the chairmanship of Shri R. Bandyopadhyay, Secretary, Ministry of Corporate Affairs. The Core Group referred to the Roadmap for Convergence agreed to by it in its meeting held on 11th January, 2010 in respect of companies, other than insurance companies, banking companies and Non-Banking Finance Companies. Such Roadmap was brought to the knowledge of all stakeholders through the Press Release issued by this Ministry on 22nd January, 2010.

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In the meeting held on 29th March, 2010, the Core Group deliberated and approved the Roadmap recommended by Sub-Group I in respect of insurance companies, banking companies and nonbanking finance companies. The Roadmap recommended by Sub-Group I for such classes of companies is as under:1.1.1 Insurance companies

All insurance companies will convert their opening balance sheet as at 1st April, 2012 in compliance with the converged Indian Accounting Standards. 1.1.2 (a) Banking companies All scheduled commercial banks and those urban co-operative banks (UCBs) which have

a net worth in excess of Rs. 300 crores will convert their opening balance sheet as at 1st April, 2013 in compliance with the first set of Accounting Standards (i.e. the converged Indian Accounting Standards). (b) Urban co-operative banks which have a net worth in excess of Rs. 200 crores but not exceeding Rs. 300 crores will convert their opening balance sheets as at 1st April, 2014 in compliance with the first set of Accounting Standards (i.e. the converged Indian Accounting Standards). (c) Urban co-operative banks which have a net worth not exceeding Rs. 200 crores and Regional Rural banks (RRBs) will not be required to apply the first set of Accounting Standards i.e. the converged Indian Accounting Standards (though they may voluntarily opt to do so) and need to follow only the existing notified Indian Accounting Standards which are not converged with IFRSs. 1.1.3 Non-Banking Financial companies

(a) The following categories of non-banking financial companies (NBFCs) will convert their opening balance sheet as at 1st April, 2013 if the financial year commences on 1st April (or if the financial year commences on any other date, then on the date immediately following 1st April, 2013) in compliance with the first set of Accounting Standards (i.e the converged Indian Accounting Standards). These NBFCs are:-

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a. Companies which are part of NSE – Nifty 50 b. Companies which are part of BSE - Sensex 30 c. Companies, whether listed or not, which have a net worth in excess of Rs.1,000 crore. (b) All listed NBFCs and those unlisted NBFCs which do not fall in the above categories and which have a net worth in excess of Rs. 500 crores will convert their opening balance sheet as at 1 st April 2014 if the financial year commences on 1st April (or if the financial year commences on any other date, then on that date following 1st April 2014) in compliance with the first set of Accounting standards (i.e converged Indian Accounting Standards). (c) Unlisted NBFCs which have a net worth of Rs. 500 crores or less will not be required to follow the first set of accounting standards (i.e the converged Indian accounting standards), though they may voluntarily opt to do so, but need to follow only the notified Indian accounting standards which are not converged with the IFRSs.

2.3

MANNER OF ACHIEVING CONVERGENCE

There will be two separate sets of Accounting Standards under Section 211(3C) of the Companies Act, 1956. The first set would comprise the Indian Accounting Standards, which are converged with the IFRS (IFRS converged standards) and which shall be applicable to the specified class of companies in a phased manner. The second set would comprise the existing Indian Accounting Standards (existing accounting standards) and would be applicable to other companies, including Small and Medium Companies (SMC).

2.4

CHALLENGES IN THE WAY OF GLOBAL CONVERGENCE

IFRS poses a great challenge to the drafters of financial statements and auditors. The major challenge at the time of convergence to IFRS will be to have in-depth knowledge of all IFRS. Cultural, legal, and political obstacles may exist in the convergence path. With the assistance of the appropriate authorities, these intricacies can be minimized. Legislators, regulators, and standard setting bodies need to be aware of the technical faults in the current convergence process and, where

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appropriate, they should take action to ensure reasonable progress. Reconciliation and restatement of financial statements is costly, not only in monetary terms but also in terms of resources. Moreover there are disagreements in some countries with the requirements of certain specific items under the IFRS. The complicated nature of some IFRS is perceived as a barrier to convergence in many countries. IFRS leaves very little or no scope for diversion to present financial statements. Any minute change will be viewed seriously as it comes to notice in the disclosures provided. No matter the fundamentals of the book writing and drawing of the financial statements are the same but alternatives which we use to follow are either gone or reduced to almost none. Any material departure from the IFRS will have to be explained by the management with its impact on the financial statements. This will make the preparation of financial reports difficult one.

3.

CHALLENGES IN ADOPTION OF IFRS

3.1

GLOBAL SCENARIO

The use of IFRS as a universal financial reporting language is gaining momentum across the world. Every major nation is moving towards adopting IFRS to some extent. Large number of authorities requires public companies to use IFRS for stock-exchange listing purposes, and in addition, banks, insurance companies and stock exchanges may use them for their statutorily required reports. Therefore, over the next few years, thousands of companies will adopt the international standards. The increased use of IFRS is not limited to public company listing requirements or statutory reporting. Many regulatory and government bodies are looking to IFRS to fulfill local financial reporting obligations related to financing or licensing. IFRS are used in many parts of the world, including the European Union, Australia, South Africa and Russia. More than 100 countries have required or permitted the use of IFRS since 2001 and the number is expected to increase to 150 by 2011. The Group of 20 leader countries (G20) reaffirmed their commitment to global convergence in

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accounting standards in September 2009 in a meeting held at Pittsburgh (United States), calling on ‘international accounting bodies to redouble their efforts to achieve a single set of high-quality, global accounting standards within the context of their independent standard-setting process, and complete their convergence project by June 2011’. Some of the major countries that are seeking to converge with IFRS by 2011 include Canada, Korea, India and Brazil.

3.2

INDIAN SCENARIO

India also has to gear up for the changes taking places around the world. High quality financial reporting is fundamental for an effective integrated capital market. Few Indian companies are already listed on overseas stock exchanges and many more are in the process of getting themselves listed. Also, the recent stream of overseas acquisitions by Indian companies makes a compelling case for adoption of high quality standards to convince foreign enterprises about the financial standing of Indian acquirers. Thus there is an alarming need for convergence to IFRS. Convergence with IFRS would require several changes in Indian laws and decision processes. In India, the Institute of Chartered Accountants of India (ICAI) is on the way towards convergence of its Accounting Standards (AS) with global reporting standards. The Accounting Standards Board (ASB) was established by the ICAI in 1977 to frame high quality accounting standards in India in line with the international expectations. The ICAI, being a member of the International Federation of Accountants (IFAC) has considered the IFRS and tried to integrate them, to the extent possible, in the light of the laws, customs, practices and business environment prevailing in the country. Today, accounting standards issued by the Institute have come a long way. As the world continues to globalize, discussion on convergence of national accounting standards with IFRS has increased significantly. At present, the ASB of ICAI formulates the AS based on IFRS. However, these standards remain sensitive to local conditions, including the legal and economic environment. AS issued by ICAI depart from the corresponding IFRS in order to ensure consistency with legal, regulatory and economic environment of India. Recognizing the growing need of full convergence of Indian Accounting Standards with IFRS, the ICAI has constituted a Group in liaison with government and regulatory authorities and this group has constituted separate core groups to identify inconsistencies between IFRS and various relevant acts. The ICAI has already started the process of issuing IFRS equivalent AS and revising the existing standards and Guidance Notes to bring them at

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par with IFRS. ASB has, so far, issued thirty two Accounting Standards. In total, seventeen existing standards are under revision in line with IAS/IFRS, out of which, exposure drafts of ten revised standards are still open for public. IFRS Task Force has also been formulated to examine various issues involved in the convergence process. The Task Force has proposed for adoption of IFRS, in a phased manner, for listed entities and public interest entities from accounting periods commencing on or after April 1, 2011. The ICAI has also classified IFRS into four broad categories as part of its convergence strategy, which can be detailed as follows:  First category describes IFRS which can be adopted immediately or in the immediate future in view of no or minor differences (for example, construction contracts, borrowing costs, inventories).  Second category includes IFRS which may require some time to reach a level of technical preparedness by the industry and professionals, keeping in view the existing economic environment and other factors (for example, share-based payments).  Third category includes IFRS which have conceptual differences with the corresponding Indian Accounting Standards and where further dialogue and discussions with the IASB may be required (consolidation, associates, joint ventures, provisions and contingent liabilities).  Last category comprises of IFRS which would require changes in laws/regulations because compliance with such IFRS is not possible until the regulations/laws are amended (for example, accounting policies and errors, property and equipment, first-time adoption of IFRS). In our country, IFRS convergence is subject to direct or indirect control of several regulators, such as National Advisory Committee on Accounting Standards (NACAS) established by the Ministry of Corporate Affairs (MCA), the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority (IRDA) and the Securities and Exchange Board of India (SEBI). Further the Indian Companies Act, 1956 provides guidance on accounting and financial reporting matters. The IFRS requirements of Schedule VI of the Act, which currently prescribes the format for presentation of financial statements for Indian companies, is substantially different from the presentation and disclosure requirements under IFRS. Convergence with IFRS will also require significant changes in

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the tax laws from the tax authorities [Central Board of Direct Taxes (CBDT)] on treatment of various accounting transactions.

3.3

BANKING SECTOR

In addition to the several challenges along the path to convergence that are applicable to all companies, the banking companies in India face certain additional challenges. These include:
 In addition to the general accounting standards and practices that constitute Indian GAAP,

banking companies are currently required to adhere to accounting policies and principles that are prescribed by the Reserve Bank of India (RBI). For example, financial reporting guidelines on provision for loan losses and investments are specified by the RBI. Adoption of IFRS requires a significant change to such existing policies and could have a material impact on the financial statements of banking companies.

 Application of IFRS in areas such as provision for loan losses and impairment of investments generally requires a high level of judgment and would require significant changes in the financial reporting processes (for example, to estimate cash flows that will be recovered including through sale of collateral). Banking companies that are currently using accounting models that require limited judgment (for example, due to prescribed loss / provision rates) would face significant challenges in incorporating some of the revised accounting models into their financial reporting systems.  Assuming that India converges with IFRS using the transition provisions of IFRS 1, Firsttime Adoption of International Financial Reporting Standards (currently, there is discussion regarding whether IFRS 1 would be adopted for transition), several provisions of IFRS would need to be retroactively applied, subject to available exemptions under IFRS 1. Current information systems (including IT systems) of several banking companies may not be sufficient to readily generate information required to retroactively apply these standards.

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 IAS 39 requires extensive use of fair valuation. Given the economic environment in India and lack of relatively developed financial markets for certain foreign exchange and interest rate instruments, application of these required fair valuation techniques poses additional implementation challenges.
 By virtue of operating in a regulated industry, banking companies are subject to regulatory

reviews and inspections and are also subject to minimum capital requirements.

As

highlighted earlier, IFRS requires increased use of judgment and extensive use of unobservable valuation inputs and assumptions. The regulatory and supervisory review process would need to be adjusted to acknowledge the inherent judgments involved in the application of IFRS.  Additionally, there are views that application of IFRS may result in higher loan losses and impairment charges, thereby impacting available capital and capital adequacy ratios. Similarly, use of fair values would introduce additional volatility in reported capital with its consequent impact on capital adequacy.

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4.

MATTERS FOR CONSIDERATION DURING

CONVERGENCE

4.1

Applicability to ‘group’ entities

The IFRS converged standards would require preparation of consolidated financial statements by covered companies. Many of these covered companies would have holding companies, subsidiaries, joint ventures and associates (group entities). It is possible that while the reporting company may be covered in a particular phase (for example, Phase 1), other group entities are covered only in subsequent phases or are not required to follow the IFRS converged standards.

4.2

Applicability to entities other than companies

Since the Announcement only covers convergence by companies, individual regulators governing other types of entities (for example, Mutual Fund entities organized as Trusts) would need to determine the manner of convergence for such entities

4.3 Applicability based on ‘shares/other securities listed on stock exchanges outside India’ criteria

In addition to entities that have issued American Depository Receipts (ADR) and Global Depository Receipts (GDR) listed outside India; issuers of other instruments such as Foreign Currency Convertible Bonds (FCCB) would need to evaluate whether such securities are listed on stock

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exchanges outside India. In the case that such instruments are listed; the entities would be covered in Phase 1.

4.4

Comparatives and first-time transition exemptions

The Announcement seems to suggest that comparative periods are not required to be revised in the initial period of transition. For example, consider an entity covered in Phase 1. While this entity would prepare an opening balance sheet as per the IFRS converged standards on 1 April 2011 and would follow the IFRS converged standards for the year ending 31 March 2012; comparative financial statements for the year ending 31 March 2011 would not be revised on a comparable basis. While this may be consistent with the intention of the regulators and would smoothen the transition in the initial year, several important points need consideration. For example, financial statements for the year ending 31 March 2012 prepared in accordance with the IFRS converged standards would still not be compliant with IFRS issued by the International Accounting Standards Board (IASB), which require comparatives. Thus, such companies will be able to fully comply with IFRS as issued by the IASB only on preparation of the financial statements for the year ending 31 March 2013. Similarly, investors may get confused if the profit and loss account prepared under the IFRS converged standards for 2011-12 is materially different from the profit and loss account for 2010-11. Individual companies would need to plan their communication strategies to identify changes caused due to changes in accounting policies/practices as compared to changes due to core business operations.

4.5

Tax and other regulations

The accounting standard setters indicated that while the convergence program is geared to achieve convergence with IFRS as issued by the IASB, each individual regulator may need to consider how

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regulatory requirements are measured and monitored. For example, it is likely that taxable profits may be determined after making appropriate adjustments to the financial statements prepared as per the IFRS converged standards. Similarly, regulators may need to determine whether adjustments to the numbers as per the financial statements are required for regulatory requirements relating to, for example, distributable profits and capital adequacy. The need for an integrated approach in this area is warranted in order to bring uniformity to the practice adopted and to make the system more meaningful. It is essential that matters relating to taxation are addressed in an integrated manner. For example, necessary amendments may be required to the taxation laws to identify any additional differences between book income and taxable income, post convergence. The tax implications of onetime adjustments recorded on the transition date would need to be examined. It would not be fair if companies that are required to follow the IFRS converged standards are exposed to adverse tax implications due to convergence. This matter is further complicated due to the phased implementation whereby a few large companies would initially prepare financial statements using the IFRS converged standards; while all other companies would continue to follow existing accounting standards. Different tax treatment for companies based solely on the results arrived at irrespective of the accounting standards followed may not be appropriate. Interactions with the proposed Direct Tax Code and the proposed Goods and Services Tax regime, would also need to be closely examined. Similar considerations would apply in other areas such as determination of distributable profits under the Companies Act.

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5.
5.1

DIFFERENCES BETWEEN INDIAN GAAP AND IFRS
CONCEPTUAL DIFFERENCES

The following are the main conceptual differences between the Indian GAAP and IFRS; 5.1.1 INCONSISTENCIES BETWEEN ACCOUNTING STANDARDS AND EXISTING LAW Under Indian GAAP, provisions of relevant laws shall prevail in case any provisions of an accounting standard are not in conformity with existing laws. Like for example banking companies prepare their financial statements with reference to Banking Regulation Act or as per RBI guidelines in case if there is any contradiction between the AS and laws. Similar is the case for listed companies, Insurance companies, NBFCs, etc. But under IFRS, an entity will have to comply with literature i.e. International Accounting Standards (IAS) / Standing Interpretations Committee (SIC) / International Financial Reporting Interpretations Committee (IFRIC) and IFRS issued by the IASB. If the financial statements are prepared in conformity with a law but not IFRS then those financial statements will not be in compliance with IFRS. 5.1.2 FORMAT OF FINANCIAL STATEMENTS Even though AS 1 does not prescribe any minimum structure of financial statements, Schedule VI of the Companies Act prescribes a detailed format for balance sheet. The Companies Act 1956 gives a list of items which must be disclosed in profit and loss account. The format of financial statements for banks is prescribed by the Banking Regulation Act and by the IRDA in case of insurance companies. Under IFRS, there is no similar prescribed format of financial statements (even though there are minimum disclosure requirements specified in IAS 1). IFRS also focuses more on qualitative information like terms of related party transactions and risk management policies.

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5.1.3 EXCEPTIONAL AND EXTRAORDINARY ITEMS Indian GAAP requires companies to disclose significant events which are not in the ordinary course of business as extraordinary items, and material items as exceptional, to facilitate the reader to consider the impact of these items on reported performance. Under IFRS, there is no concept of extraordinary or exceptional items, since all events/transactions are viewed as occurring in the normal course of business and if an item is material, it can be disclosed separately, but cannot be termed as 'extraordinary' or 'exceptional'. 5.1.4 OFFSETTING Under Indian GAAP, there is no guidance on offsetting of assets and liabilities. Under IFRS, a financial asset and a financial liability are offset and reported net only when the entity has a legally enforceable right to the offset and it intends either to settle on a net basis or to settle both amounts simultaneously. Specific offsetting rules exist for deferred tax assets and liabilities and defined benefit plan assets and obligations. Non-financial assets and liabilities cannot be offset under IFRS. 5.1.5 RESTATEMENT OF FINANCIAL STATEMENTS Indian GAAP does not have the concept of restatement of comparatives except in case of special purpose financial statements prepared for public offering of securities. Under IFRS, prior period comparatives are restated for changes in accounting policies or rectification of errors. 5.1.6 DISCLOSURE OF IMPENDING CHANGES Under Indian GAAP, there is no requirement to disclose impending changes in accounting policy when a new accounting standard or interpretation has been issued but has not come into effect. IAS 8 requires disclosure of an impending change in accounting policy when an entity has yet to implement a new standard or interpretation that has been issued but not yet come into effect. Also, it requires disclosure of known or reasonably estimable information relevant to assessing the possible impact that application of the new standard or interpretation will have on the entity's financial statements in the period of initial application.

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5.1.7 FUNCTIONAL CURRENCY There is no concept of functional currency under Indian GAAP. Entities in India prepare their general purpose financial statements in Indian rupees. Under IFRS, assets, liabilities, income and expenses are measured by an entity in its functional currency i.e. the currency of the primary economic environment in which an entity operates. An entity’s functional currency may be different from its local currency. IAS 21 provides guidance on factors to be considered while determining the functional currency of an entity. 5.1.8 FAIR VALUE IFRS require a more rigorous implementation of fair value accounting (e.g. business combinations, employee stock options, financial instruments). This creates the need for new skills and emphasizes judgment areas which have not been generally explored before in Indian GAAP. For example, equity Investments that are classified as long-term are carried at cost under Indian GAAP. IFRS would require all such investments to be carried at fair value, other than in rare situation when reliable fair value cannot be estimated. This would include investments that are not quoted on securities exchanges, where management would need to use judgment to estimate fair value. 5.1.9 VOLATILITY IN P&L Profit or loss reported under IFRS would have higher volatility due to factors such as fair value accounting (e.g. financial instruments). For example, under IFRS all non-hedge derivative financial instruments are required to be marked to market through the profit and loss account. Also as per IFRS more financial instruments have to be categorised in mark to market category due to stringent rules for classification under amortised cost. In such cases, the reported profit/loss can be volatile not only when there are unrealized losses, but also when previously recognized unrealized gains decrease due to changes in fair value, where as previously we used to ignore unrealised gains which resulted in lesser volatility in P&L. 5.1.10 COMPLEXITY

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Some of the IFRS (e.g. financial instruments, business combinations) are much more complicated than the corresponding standards under Indian GAAP and require deep understanding and application of mind for practical application. For example, under Indian GAAP, if a company acquires shares in a subsidiary, the purchase price is compared to the book value of the share in net assets – with the balance consideration attributed to goodwill. The results of the acquired subsidiary are often included in the consolidated financial statements from a designated effective date. This is a relatively simple process. Under IFRS, there are several complex decision points to account for this acquisition. This includes determining the actual date when control was obtained, fair valuation of consideration issued, fair value of tangible assets acquired, fair value of intangible assets acquired and segregating intangible assets between definite life and indefinite life intangibles. Remaining major differences has been explained in the Annexure: 1.

5.2

BANKING SECTOR

The following are the 5 main areas which will see a major change in accounting in banking sector due to convergence to IFRS; 5.2.1 LOAN / INVESTMENT IMPAIRMENT

IFRS prescribes an impairment model that requires a case by case (for significant exposures) assessment of the facts and circumstances surrounding the recoverability and timing of future cash flows relating to a credit exposure. Should there be an expectation that all contractual cash flows would not be recovered (or recovered without full future interest applications), an account would be classified as impaired and impairment is to be measured on present value basis using the effective interest rate of the exposure as the discount rate. For groups of loans that share homogenous characteristics (such as mortgage and credit card receivables), impairment can be assessed on a collective basis. The aim of an individual or collective assessment is to capture the incurred loss for a specified portfolio. General provisions are permissible only to extent that they relate to a specified risk that can be measured reliably and for incurred losses. No provisions are permitted for future or expected losses. For investments, a similar analysis is conducted, the key difference being that the

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fair value of the investment is also considered as an input in addition to the financial / credit standing of the issuer. The bedrock of this impairment assessment is a system that considers all the facts and circumstances and requires the use of informed judgment. This aspect represents the most significant difference from Indian GAAP for banks in India. Current Indian GAAP / RBI guidelines require a limited use of judgment and are mechanistic in nature with prescribed provisioning rates.
5.2.2 DERIVATIVES AND HEDGE ACCOUNTING

Under IFRS, all derivatives are recognized on the balance sheet at fair value with changes in fair value being recognized generally in the income statement other than in the case of a qualifying cash flow hedge relationship. Application of hedge accounting does reduce the income statement volatility induced by the fair value measurement of derivatives but comes with significant strings attached in the form of documentation, hedge effectiveness testing and ineffectiveness measurement. In addition, embedded derivative contracts (such as equity conversion options embedded in a convertible debenture – the most common situation found in India) require to be separated from their host contracts and be accounted for separately. In contrast, current Indian GAAP does not specifically address the more ‘difficult to apply’ provisions of fair value and hedge accounting.

5.2.3 DE-RECOGNITION OF FINANCIAL ASSETS

Under IFRS, de-recognition of financial assets is a complex, multi-layered area with the derecognition decision dependent largely on whether there has been a transfer of risks and rewards. If the assessment of the transfer of risks and rewards is not conclusive, an assessment of control and the extent of continuing involvement is required to be performed. In many cases, this cannot be restricted to qualitative assessments and needs to be necessarily a quantitative assessment. A major area impacted would be securitization activity – most Indian securitization vehicles are currently structured to meet Indian GAAP de-recognition norms. Substantially all those securitization vehicles would collapse into the transferor’s balance sheet and assets would fail the de-recognition test under IFRS. For example, securitization transactions where credit collaterals are provided / guarantee is

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provided to cover credit losses in excess of the losses inherent in the portfolio of assets securitized, may not meet the derecognition principles enunciated in IAS 39. Given that the IFRS position is significantly different from that followed under Indian GAAP, application of the new norms would in general lead to more instances of transfers failing the de-recognition criteria thereby resulting in large balance sheets and capital adequacy requirements, lower return on assets and deferral of gains / losses on such securitization transactions. 5.2.4 CONSOLIDATION OF ENTITIES

Under IFRS, consolidation is not driven purely by the ownership structure of an entity. Instead the focus is more on the power to control an entity to obtain economic benefits - this power to control could be expressed as ownership of equity securities but is not limited to it. For instance, this will include a consideration of currently exercisable potential voting rights / shares; management and other agreements, de facto control and other arrangements that provide the power to control an entity. IFRS also provides guidance on how consolidation decisions for special purpose entities should be arrived at. In a number of ways, IFRS provides more rigorous consolidation tests and in practice can result in the consolidation of a larger number of entities as compared to Indian GAAP which focuses on a narrower set of tests (majority of ownership and control over a majority of the composition of the board of directors or similar body).
5.2.5 REQUIRED USE OF FAIR VALUE FOR MORE FINANCIAL INSTRUMENTS

Fair value measurement is infrequently used under Indian GAAP and in most cases where it is, the aim is primarily to capture a lower of cost or fair value measurement base. Under IFRS, there may be a significant increase in the extent that fair value measurement needs to be used. For instance all financial assets and liabilities will need to be initially measured at fair value. While in a number of instances, fair values may be represented by transaction prices, the onus on banks will be to prove that transaction prices represent fair value. In addition, there will be a number of instances where unrealized gains can / should be recognized; for example, trading instruments and those where the bank elects the fair value option. Further, due to the stringent criteria prescribed under IFRS, a Held to Maturity (HTM) classification, (which currently results in an amortised cost valuation basis for a significant part of most Indian banks’ investment portfolio), is unlikely to be available leading to fair

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value measurement for a substantial part of the portfolio. Again, this is a significant shift from current accounting treatment under Indian GAAP.

6.

STUDY ON FINANCIAL INSTRUMENTS

Financial instruments have gone considerable change since 1980’s from simple derivative instruments to complex hedge against interest rates and exchange rates risk. Since financial instruments form a major portion of banks balance sheet, any change will have a considerable impact on banks financial position. In last few years there are quite a number of discussions on the financial instruments. With the talks of convergence to IFRS, these have further gained momentum.

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The main discussion nowadays is on the impact of Fair value measurement on these financial instruments. The following IFRS standard provides a brief about the classification and measurement of Financial Instruments.

6.1

IFRS -9

6.1.1 BACKGROUND The IASB has issued IFRS 9 as part of its comprehensive review of financial instruments accounting. The IASB aims to reduce the complexity of the current requirements and to replace IAS 39 in phases by the end of 2010. IFRS 9 is based on ED/2009/7 Financial Instruments: Classification and Measurement (the ED) which was published on 14 July 2009 but it contains many important changes compared to the ED. IFRS 9 deals with classification and measurement of financial assets only. Based on the responses to the discussion paper Credit Risk in Liability Measurement (DP) the IASB decided to remove financial liabilities from the scope of the first instalment of the replacement standard. The Board will consider and issue requirements for financial liabilities during 2010.

6.1.2 PURPOSE IFRS 9 retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets; amortised cost and fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. 6.1.3 CLASSIFICATION

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Consistent with the ED, the standard requires financial assets to be classified on initial recognition as measured at:  amortised cost; or  fair value.

1)

A financial asset is measured at amortised cost if:

 the objective of the business model is to hold assets in order to collect contractual cash flows; and  the contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. Financial assets that meet the conditions stated above qualify for amortised cost measurement even if they are quoted in an active market. All other financial assets are measured at fair value. The standard eliminates the existing IAS 39 categories of held to maturity, available for sale and loans and receivables. A diagrammatic representation of the classification of financial instrument in a simplistic manner is presented in Annexure: 2 6.1.4 FAIR VALUE OPTION The standard allows an entity to designate a financial instrument on initial recognition as measured at fair value through profit or loss regardless of it meeting the criteria to be measured at amortised cost. This election is available only if it eliminates or significantly reduces a measurement or recognition inconsistency (“accounting mismatch”). This election is retained from the ED and IAS 39. 6.1.5 INVESTMENT IN EQUITY

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 Investments in equity instruments are measured at fair value and, except as described below, gains and losses on remeasurement are recognised in profit or loss.  For an investment in an equity instrument that is not held for trading, IFRS 9 allows an

entity on initial recognition to elect irrevocably to present all fair value changes from the investment in other comprehensive income (OCI). No amount recognised in OCI is ever reclassified to profit or loss at a later date.  In a change from the ED, dividends on such investments are recognised in profit or loss,

rather than OCI, in accordance with IAS 18 Revenue unless they clearly represent a recovery of the cost of the investment.

6.1.6 MEASUREMENT IFRS 9 eliminates the exception in IAS 39 that allows investments in unquoted equity instruments, and related derivatives, for which a fair value cannot be determined reliably, to be measured at cost. These instruments are now measured at fair value although the standard notes that in some limited circumstances cost may be an appropriate estimate of fair value. All changes in the fair value of financial assets that are measured at fair value are recognised in profit or loss, with the exception of equity investments for which the OCI option has been elected, and assets that are part of a hedge relationship. Gains or losses on assets measured at amortised cost are recognised in profit or loss upon derecognition, impairment or reclassification of the asset, and through applying the effective interest method. Now with the exposure to IFRS-9 and knowledge of IAS 39 and RBI master circular on Investment portfolio, a detailed analysis and comparison of Financial Instruments has been presented in Annexure: 3. It also contains the impact which will be caused in P&L due to various classification categories. Annexure: 4 contain the calculation of amortised cost of a smaller portion of HTM portfolio of a Commercial Bank.

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6.2

ANALYSIS AND FINDINGS ON FINANCIAL INSTRUMENT

From the above annexure it could be found out that the calculation of amortised cost for the securities of the commercial bank cannot be arrived at perfectly. That may be due to many reasons. The following could be some reasons for it; COST: Cost is the base for calculating amortised cost. Banks’ portfolios are built over the years and the cost of entire portfolio is averaged instead of keeping individual scrip cost. AVERAGE: There is no guideline on whether the cost can be averaged and then amortised cost can be calculated or it should be done for every individual purchase. SOFTWARE: Without software it is not possible manually to calculate the amortised cost. Software can be prepared only when RBI comes out with the guidelines for calculation of amortised cost for banks. RESERVES: RBI should come out with regulation on the usage of reserves which are currently built under AFS category. After the adoption of IFRS such reserves would not exist. From the study and above calculation it can be seen that there is not much impact on the profit and loss A/c or balance sheet due to convergence to IFRS. Then what is the all talk about volatility in P&L. One thing is to be noted that by adopting IFRS there is no much difference in terms of measurement of any financial instrument. The main difference which IFRS will make is in terms of the classification of the instruments. IFRS has made the classification simple and easy. Now there are only 2 categories into which an instrument can be classified i.e. • Amortised cost

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•

Fair value through profit & loss.

Previously (i.e. IAS 39) there were 4 categories, • • • • HTM AFS HFT Loans & Receivables

And as per RBI’s master circular there were 3 classifications, • • • HTM AFS HFT

Basically if we see IFRS addresses the HTM and Loans & Receivables category into Amortised cost and the remaining 2 into Fair value through Profit & Loss. Profit & Loss A/c will be more volatile because more classification will fall under the category of Fair value through profit & loss under IFRS. For instruments to be classifies under amortised cost following both the conditions should be satisfied; (a) The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows. (b) The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. 6.2.1 LOOPHOLE Regulatory bodies’ intention to bring most of the investment portfolio under Fair value measurement may go in vain because still the power to for framing the business model lays in hands of the individual banks. They can come out with a model like, “to comply with regulatory norms and maintain a cushion of certain percentage, hold SLR securities”. This means again their portfolio will

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comprise of SLRs and since it is within the limit of business model they can amortise the cost over the life of the instrument, instead of marking it to market. 6.2.2 RECLASSIFICATION When and only when, an entity changes its business model for managing financial assets it shall reclassify all affected financial assets in accordance with paragraphs 4.1–4.4 OF IFRS 9. This condition will impose a restriction on the current practises of the banks, like classifying assets as HTM and then later selling it. Therefore they get advantage, by not causing much volatility in their P&L A/c and also reaping the short term benefits. But however even in IFRS there is a provision to sell the assets which are under Amortised cost category. These are; Although the objective of an entity’s business model may be to hold financial assets in order to collect contractual cash flows, the entity need not hold all of those instruments until maturity. Thus an entity’s business model can be to hold financial assets to collect contractual cash flows even when sales of financial assets occur. For example, the entity may sell a financial asset if: (a) The financial asset no longer meets the entity’s investment policy (e.g. the credit rating of the asset declines below that required by the entity’s investment policy); (b) An insurer adjusts its investment portfolio to reflect a change in expected duration (ie the expected timing of payouts); or (c) An entity needs to fund capital expenditures. However, if more than an infrequent number of sales are made out of a portfolio, the entity needs to assess whether and how such sales are consistent with an objective of collecting contractual cash flows. 6.2.3 AMBIGUITY

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The word Infrequent has not been quantified and this may lead to different perceptive for different players. This would lead to easy escape route for bankers in case they sell the instrument. Currently banks with high Net Time and Demand Liability (NTDL) can have their entire investment portfolio as HTM and also can sell from it because of regulatory relaxation offered. Thus this is the main reason after IFRS coming into effect bank’s P&L will be affected. More securities may fall under the category of Fair value through P&L (if the loopholes are overcome), thereby creating volatility in it, which actually should have been before. No surprise is the mantra here. It is highly likely that the reported profitability and other financial parameters, such as net worth, debt-equity ratio and current ratio, may be different under IFRS compared with the Indian GAAP. Setting the expectation of stakeholders for the anticipated changes would ensure that the stakeholders understand the impact in the right perspective. For example, some of the investments may be recorded under IFRS at fair value with the movement of fair values between different periods reported in equity or the income statement. Currently, such investments may be reported at cost. While the underlying business situations continue to be the same, the fact that the movement in fair values is recorded through the income statement in the future may affect the profitability of the company. Now, the investors should understand that this is additional financial information available. Though the reported profit may be different, such situation existed even under the Indian GAAP though not reported in the same manner. Currently, it is unclear if the ability of companies to pay dividends would be dependent on the profits reported under IFRS financial statements or a different formula would be set for determining distributable profits. This may affect all investors.

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7.

LOANS AND ADVANCES

The other area where there will be a considerable change would be Loans & Advances. The following gives the differences between the current norms and upcoming IFRS norms and also suggests the challenges that banks may have to face. Loans and advances will be measured (as per IFRS) at amortised cost because generally banks intention is to hold it till maturity and it generates contractual cash flows which are nothing but principle plus interest. Now the major impact due to IFRS will be on impairment of loans and advances. Currently banks follow the guidelines prescribed by RBI for the Non Performing Assets (NPA). These are as follows; A NPA is a loan or an advance where interest and/ or instalment of principle remain overdue for a period of more than 90 days in respect of a term loan. Banks are further required to classify the NPAs into 3 sub headings; 1. Substandard assets 2. Doubtful assets 3. Loss assets

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Substandard assets

NPA category

Doubtful assets

A substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.

Criteria

Provisioning
10% Unsecured portion- 100% Secured portion: 1 year - 20% 1 to 3 years - 30% More than 3 year - 100%

Loss assets

A loss asset is one where loss has been identified by the bank or internal or external 100% auditors or the RBI inspection but the amount has not been written off wholly.

However, IFRS require a case by case assessment (for significant exposures) of the facts and circumstances surrounding the recoverability and timing of future cash flows relating to the credit exposure. 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. The policy of income recognition should be objective and based on record of recovery rather than on any subjective considerations. Likewise, the classification of assets of banks has to be done on the basis of objective criteria which would ensure a uniform and consistent application of the norms. But IFRS prescribes banks to be more subjective in their approach in classification and providing for impairment. RBI could come up with new NPA norms that conform to IFRS standards to make sure that banks stick to one standard of NPA classification. At the same time subjectivity and discretion will be the key issue because of the subjectivity banks may have to provide for higher provisions. For secured loans, no provision may be required under IFRS though RBI guidelines require provisioning.

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7.1

CHALLENGES

1. Switching over to subjective based accounting would be a difficult process. This will also impact the regulatory inspection in which it would be difficult to trace out such information. 2. 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. 3. Disclosure requirements will also be high under IFRS. It is expected that the annual report will be at least 50% to 60% bigger in size than before.
4. Training of bank staff for such subjective analysis would be difficult. 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 by the staff. 5. Banks’ IT system would undergo a change as it would be required to store massive information about various debtors to make such subjective analysis. 6. How far RBI will be willing to dilute the regulatory norms of NPA to converge with IFRS is suspense still.

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8.

ADVANTAGES AND DISADVANTAGES OF IFRS

8.1

POTENTIAL BENEFITS OF CONVERGENCE TO IFRS

Convergence with IFRS is expected to result in several benefits to Indian entities:  Increased compatibility and comparability among the financial statements of sectors, countries and companies.  Improved communication and interaction with investors and analysts, which may provide companies with a competitive advantage and also wider access to capital at a lower cost. Indian entities may be able to initiate new relationships with investors, customers and suppliers internationally since IFRS provides a globally accepted reporting platform.  The use of IFRS is likely to enhance the reliability and image of financial reporting by Indian industry across the world since it will be based on a global set of accounting standards. As a result Indian entities are likely to experience a wider availability of capital through increased cross-border listing and investment opportunities.  IFRS compliant financial statements are acceptable for financial reporting purposes in an increasing number of countries across the world. The U.S. SEC has permitted foreign entities listed in the U.S. to report under IFRS (eliminating the previously existing requirement for

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reconciliation with US GAAP). Hence, convergence with IFRS will eliminate multiple reporting and related costs.  As Indian companies go global with operations across the world; convergence with IFRS will eliminate the need for multiple reporting in most cases as the same set of financial statements can be used both for reporting at the entity level and at the consolidated level.  IFRS convergence will require a change of mindset - from principles of conservatism to the new concept of fair value accounting, from accounting based on legal form to accounting based on overall substance.  The process of conversion to IFRS generally results in harmonization of internal and external reporting which can assist entities in reducing costs as well as helping ensure consistency in financial reporting within the organization as well as to external stakeholders.  IFRS uses the more interesting touchstone for segment reporting—the management information that the chief executive of a company views. Since CEOs will usually have the most meaningful information before them, the same segments will need to be reported to the public. This seemingly minor tweak to a standard will imply that shareholders will have a significantly greater ability to interpret the performance of a company, and potentially ask managements to re-examine unremunerated parts of their portfolios more easily than was the case thus far.  IFRS’ ramifications extend to management compensation policies, choices of capital structure, hiring and benchmarking. In many cases, senior executive compensation is linked to accounting measures and the compensation committee will need to realign incentives in an appropriate manner.  The significance of disclosures under IFRS is considerable. These disclosures bring along with them onerous data requirements but also create the need for preparers of financial statements to balance between protecting confidentiality and ensuring an adequate level of transparency so far as financial statement disclosures are concerned. The European experience of moving to IFRS indicates that entities that convert to IFRS experience significant internal as well as external benefits and that IFRS reporting contributes to the effective management of the business.

8.2

DISADVANTAGES OF IFRS

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There are many views against the implementation of IFRS. They defend the views on the main advantages of IFRS i.e. comparison. Comparisons will those people who invest their money throughout the world. But these people are already well equipped for such comparisons. They are not going to make any extra investments in any company just because they have adopted IFRS. In fact the adoption would affect the local investors who will first have to understand IFRS and then make any decision. Also the companies have to bare extra cost of conversion just to comfort few non permanent foreign investors. Companies converting to IFRS will attract more foreign investors is an untested theory still. Further IFRS rules are frequently updated and if not alert may lead to wrong presentations and calculations. High employee training cost and IT cost will be involved in conversion. People are of views that lets respect each other differences in accounting and impart due diligence for investments and not depend on any IFRS for it. 8.3 DISADVANTAGES OF FIAR VALUE ACCOUNTING The traditional model for valuing financial instruments was historical cost method. Then was the most widely used mixed model in which instruments held for trading were valued at mark to market prices, while the rest at historic cost. Now there are also views to present all the financial instruments at fair values. In the case of credit institutions the application of one method or the other is of fundamental importance as the lion's share of their balance sheet consists of financial instruments. In the last few years legislators at national and international level have taken steps to extend the application of the fair value principle to an ever greater range of assets and liabilities. Fair value accounting also possesses certain disadvantages, which are: 1. Fair value estimates of the assets and liabilities may reflect a higher value of the assets and liabilities in the financial statement even though no transaction has taken place.
2. Measurement of fair value is a challenge. Measurement at fair value when there are no

quoted market prices in active markets is bound to be based on assumptions which are subject to bias and manipulation by those preparing the financial statements. There are many methods and it may lead to same instrument represented at different values by different institutions due to valuation technique adopted

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3. There is uncertainty inherent in all estimates and fair value measurements, and there’s the risk that financial statements will be seen as more arbitrary with fair value because management has even more ability to affect the financial statements. 4. Financial professionals are to be trained on recognizing various biases with various accounting techniques and fair value measurement. They also need to give an explanatory note on how they arrived at a particular cost of assets and liabilities. They also need to maintain consistency in the technique of measurement followed. 5. Management also should consider future because once the fair value path has been chosen for an asset there is no going back. Today, fair value standards may provide a great financial advantage for the company, but circumstances and market conditions change. 6. Lack of consistency is another disadvantage where some financial statements will be presented at fair value and some at amortised cost. 7. Basic function to tell the user cost of a thing will be lost using fair value measurement. Without knowing the original costs future projections are almost hampered. 8. Another worry is accounting for derivatives. Few people actually understand what derivatives mean; even fewer people have the expertise to predict the correct fair values.

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9.

EUROPEN BANKS’ EXPERIENCE
1. Price Waterhouse Coopers issued a report “Accounting for change: A Survey of banks IFRS 2005 annual reports”. This was a survey of 20 EU leading global banks to find out how they comply with the IFRS first year mandatory adoption. “The survey found that compliance had been the top concern for the banks, as for disclosure it would take longer to be closer to the IFRS requirements. There was less volatility in the first set of financial statements than expected…” 2. The Financial Stability Forum (FSF)6 presented (29 March 2008) to the G7 Finance Ministers and central bank Governors a report making recommendations for enhancing the resilience of markets and financial institutions. They were provoked by the FSF conclusions of not sufficient transparency of the financial system valuations, investments and operations. The meaning of the recommendations was consistent with the ECB position. Summarized research results lead to the conclusion that IFRS adoption is a long, costly and controversial results process for different countries, sectors of economy and companies. 3. India should avoid problems faced by Bulgaria where each board had its own IFRS standard and people were confused which one to use. 4. A paper presented in HARVARD business school, concluded that market reacted positively towards the adoption of IFRS, expecting improvements in both information quality and information asymmetry.
5. Cost of conversion :( source ICAEW report for EU)

Based on the results of our on-line survey and application of the EU Common Methodology, insofar as this was practicable, a broad estimate of the typical cost of preparing the first IFRS consolidated financial statements of publicly traded companies is:

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Companies with turnover below €500m Companies with turnover from €500m to €5,000m Companies with turnover above €5,000m

0.31% of turnover 0.05% of turnover 0.05% of turnover

The costs of auditing IFRS implementation were significant, ranking as the second highest cost for companies with turnover below €500m and the third highest for larger companies.
6. Fair value accounting is much less extensive than is sometimes assumed to be the case. In

fact there were 36 companies out of 200 used the option of fair value accounting were amortised cost could have been used, of which 21 were banks and 8 insurers. (Source ICAEW report for EU). 7. Disclosures have made the size of financial statement huge.
8. Impairment of loans was a challenging task. KBC Group [Belgium] discloses its policies

and practice as follows: “Impairment losses are recognised for loans and advances for which there is evidence – either on an individual or portfolio basis – of impairment at balance sheet date. Whether or not evidence exists is determined on the basis of the probability of default (PD). Loans and advances with a probability of default of 12 (problem loans with the highest probability of default) are individually tested for impairment (and written down on an individual basis if necessary). Loans and advances with a PD of 10 or 11 (also considered to be problem loans) are tested either individually (significant loans) or on a statistical basis (non-significant loans). Impairment losses are posted on these loans and advances on an individual and a statistical basis, respectively. For loans with a PD lower than 10, lastly, impairment losses are recognised on a portfolio basis. 9. The level of use of HTM category for financial instruments also saw a dip considering with previous GAAP. This was because of the tainting risk of classifying entire portfolio as HFT for next two years if a sale takes place from HTM. 10. The biggest problems faced by Banks were regarding reading all the standards and understanding which one will require lot of work. Lot of time and money was spent on training the staff for IFRS.

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11. Banks were pushed for major change in Information systems and processes. Even operating modes were introduced to collect, process and disclose extra information required under the new standards. 12. Companies in UK and Ireland felt that IFRS did not bring any major change in their financial analysis apart from making it more complex for a normal man to understand. In fact they were of view that it did not alter any of their investment decisions.

10. CONCLUSION
Accounting can lead to a major change in the image of the company. Financial statements forms the base for any prediction related to the company. In this study an effort has been made to bring out the impact of IFRS on Indian Banks. It also throws light on the challenges that will be faced by banks and RBI as a regulator. Form the study it could be found that the volatility on P&L would be mainly due to more categories falling under FVTPL category. There would be heavy cost incurred by the banks for training the staff and bringing the change in IT systems. There would be requirement of software for calculation of amortised cost which will make banks dependent on IT companies. It would be of utmost importance for banks to go for a trial run before actual implementation of IFRS. RBI should come out with proper guidelines on the reclassification limit from one category to another of financial instruments. It is also to be bored in mind that any slight deviation from the IFRS standard will make it non compliance with the standard. During inspection the main problem would be to overcome subjectivity involved in the standards. It is also necessary to quantify the number of times an organisation can change their business model in a year. RBI should come out with guidelines to use AFS reserve which no longer would be required under IFRS. It would be much more difficult to handle two sets of standards i.e. one for converged banks and the other for non converged banks. This would even make inspection as a regulator more difficult. It is to be noted that convergence is a difficult task in front of Indian Banks and the entire banking industry would undergo a massive change in their practise. Three major challenges for banks would be dedicated internal staff, sufficient time and energy on impact assessment and training for important and complex standards.

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REFERENCES
• • • • • • • • • • • • • •
•

• •
•

•

RBI master circular – Prudential norms for classification, valuation and operation of Investment portfolio, DBOD No. BP. BC.3 / 21.04.141 / 2009-10 RBI Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, DBOD No. BP. BC. 17 /21.04.048/2009-10 Paper on Fair value accounting by INÉS FORTIS PITA and INMACULADA GARCÍA GUTIÉRREZ dated January 2006. ED/2009/5 on Fair Value Measurement. Paper on The defects of fair value under global financial crisis by ZHOU Yuan-yuan, DING Jun dated July 2009. CII IFRS summit 2009, a report by KPMG dated 18th March 2009. IFRS Monitor, report by KPMG dated January 2010. IFRS Monitor issue 2, report by KPMG dated April 2010. First impression: IFRS – 9 Financial Instrument report by KPMG dated December 2009. IFRS: Implementation challenges and approach for banks in India, report by KPMG. Comparative statement on Indian GAAP and IFRS, report by E&Y, January 2010 edition. CEBS report on Banks’ transparency in their 2008 audited results dated 24th June 2009. Evaluation of the application of IFRS in the 2006 financial statement of EU companies, report by European commission dated December 2008. CESR statement on the reclassification of financial instruments and other related issues dated 7th January 2009. A Harvard Paper on Market reaction to the adoption of IFRS in Europe by Christopher S. Armstrong, Mary E. Barth, Alan D. Jagolinzer and Edward J. Riedl. Report by the high level group on financial supervision in the EU chaired by Jacques de larosiere. Similarities and differences : A comparison of IFRS, US GAAP and Indian GAAP, report by PWC, dated May 2009. IFRS implementation and challenges in India by Vandana Saxena Poria, dated August 2009.

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ANNEXURE: 1

DIFFERENCE BETWEEN INDIAN GAAP AND IFRS:
SUBJECT
Components of financial statements • • • • •

IFRS
Statement position of financial

INDIAN GAAP
• • • • Balance sheet Profit & loss account Cash flow statement Notes to account

Statement of other comprehensive income Statement of cash flow Notes to accounts Statement equity of changes in

Format of statement of No particular prescribed format, but financial position IAS prescribes disclosure on the basis of current and non-current assets and liabilities. Format of Income IAS 1 prescribes the format of statement Income statement. Statement of cash flows Format of cash flow First time adoption Mandatory for all entities.

For companies as per prescribed by Companies Act 1956, for banks as per Banking regulation Act 1949. As per Companies Act for companies and as per Banking regulation Act for banks. Exempted for level 3 entities as prescribed by ICAI.

Can be prepared either by direct or For listed companies only by indirect method. indirect method. Full retrospective application is required and there is no separate standard for first time application. It is not mandatory for companies to prepare consolidated financial statements, but however SEBI requires all listed companies to prepare and present

Presentation consolidated statement

IFRS 1 gives guidance on preparation of first IFRS financial statements. It grants 4 mandatory exceptions and limited voluntary exceptions from the full retrospective application. of Each parent shall prepare a financial consolidated financial statement in which it consolidates its subsidiaries except the parent which satisfies certain condition.

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consolidated statements. Cash and equivalents cash Cash on hand, demand deposits with banks and other financial institutions, investments of maturity less than 3 months and also bank overdraft repayable on demand. Component accounting Mandates component accounting. ( IAS 16). Depreciation An item of PPE should be depreciated over its useful life and depreciation should be recognised as an expense.

financial

Same as IFRS except for bank overdraft, which is not considered as cash equivalent. Does not require full adoption of component accounting. (AS 10). The depreciable amount of each asset should be allocated on a systematic basis over its useful life. All companies must comply with minimum depreciation rate as per schedule XIV of Companies Act 1956, further top up depreciation to be charged to comply with AS 6 requirements in case of assets’ useful life is shorter than that envisaged in Schedule XIV. No need for annual review. Any entity may review it periodically.  Straight line method  Diminishing method. balance

Residual value useful life

and Shall be reviewed at least at the end of each financial year end, and if expectation differ change shall be accounted for as a change in accounting estimates. Methods of depreciation  Straight line method  Diminishing balance method  Units of production method. Servicing equipment Borrowing cost

Normally carried as inventory and Servicing equipment recognised in P&L once consumed. normally capitalised.

is

An entity is not required to apply There is no such scope of IAS 23 to borrowing costs directly exclusion in AS 16. attributable to acquisition, construction or production of qualifying assets, measured at fair value. Definition of borrowing  Interest expense calculated  Interest and cost using effective interest commitment charges method. on bank borrowings and other short term  Finance charge in respect of and long term finance lease recognised in borrowings. accordance with IAS 17  Amortisation of

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 Exchange differences arising from foreign currency borrowing to the extent that they are regarded as an adjustment to interest cost.

discounts or premiums relating to borrowings.  Amortisation of ancillary cost incurred in connection with the arrangements of borrowings.  Finance charges in respect of assets acquired under finance lease or under other similar arrangements  Exchange differences arising from foreign currency borrowing to the extent that they are regarded as an adjustment to interest cost.

Qualifying asset borrowing cost

for Qualifying assets are those assets that require a substantial period of time to get ready for their intended use or for sale. Impairment review for Assessing whether an asset may be assets impaired or not shall take place at each reporting date, and if there is any such indication of impairment then the entity should estimate the recoverable amount of the asset. Irrespective of whether there is an indication of impairment or not, an entity shall test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually by comparing its carrying amount with recoverable amount. Impairment test may be performed at any time of the year but same time for every year. Reversal of impairment An impairment loss recognised for losses for goodwill goodwill shall not be reversed in the subsequent year.

Similar to IFRS except for that substantial period means generally more than 12 months An entity should assess at each balance sheet date, whether there is any indication that an asset may be impaired. If there is any such indication of impairment then the entity should estimate the recoverable amount of the asset. However intangible assets which are not yet available for use or intangible assets which are amortised for greater than 10 years are tested for impairment annually irrespective of, whether there is any indication of impairment or not. An impairment loss recognised for goodwill should not be reversed in the subsequent year unless the impairment loss was caused by a specific external

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Non-current assets held for sale

Measured at lower of carrying amount and fair value less cost to sell.

Advertising expenses

Useful life of intangible assets

Revenue recognition of service provider

All the expenditure on advertising and promotional activities should be expensed immediately and not deferred until they are delivered to customer. An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or number of production or similar units, constituting, that useful life. The operator cannot recognise infrastructure as its own asset, as the operator does not control the use of public service infrastructure, such as roads, bridges and tunnels, but is merely a service provider. Rather it would recognise the consideration receivable as:  Financial asset or  Intangible asset.

event of an exceptional nature that is not expected to recur and subsequent external events have occurred that reverse the effect of that event. Items of fixed assets that have been retired from active use and are held for disposal are stated at the lower of their Net Book Value and Net Realisable Value. Entities generally defer the expenditure on advertising for 3 to 5 years. There is a rebuttable presumption that the useful life the intangible asset shall not exceed 10 years from the date when the asset is available for use. There is no specific guidance under Indian GAAP. Common practise is to recognise infrastructure as fixed asset in balance sheet.

Revenue recognition of Operator recognises the revenue and service provider costs relating to construction or upgrade service in accordance with IAS 11 and revenue in accordance with IAS 18 for services it performs. The consideration receivable for construction or upgrade service is recognised at its fair value. Method of accounting Use of pooling of interest is business combination prohibited. All business combination should be accounted under Purchase Method.

There is no specific guidance under Indian GAAP. Common practise is to recognise cost of developing infrastructure as construction WIP/ fixed asset in the balance sheet. Amalgamations are accounted for either using Purchase Method or Pooling of Interest Method. There are 5 conditions all of which need to be fulfilled for the application of pooling method. Minority interest is valued at its proportionate share of historical book value of net assets.

Minority interest acquisition

at

Minority interest is stated either at acquisition-date fair value or noncontrolling interest’s proportionate share of acquiree’s identifiable net

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asset. Special purpose entity Special Purpose Entity(SPE) should There is no specific guidelines be consolidated when the substance available for the consolidation of the relationship between an entity of SPE. and the SPE indicates that the SPE is controlled by the entity.

Source: E&Y Report.

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ANNEXURE: 2

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ANNEXURE: 3
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DETAILED ANALYSIS OF FINANCIAL INSTRUMENTS AND THEIR TREATMENT:
Q) On December 31, 2006, an entity acquires for cash 2000 shares at Rs. 10 per share and can designate them as at fair value through profit & loss. At the year end December 31, 2007, the quoted price increases to Rs. 16. The entity sells the share for Rs. 32,800 on January 31, 2007. AS PER IAS 39: I. FVTPL: Initial recognition: Financial asset at fair value A/c To cash A/c 31st December 2006: Financial asset at fair value A/c To P&L A/c 31st January 2007: Cash A/c Dr. To financial asset at fair value A/c Dr. To P&L A/c II. Available for sale (AFS): If the same asset is classified under available for sale, then the entries would be: Initial recognition: Available for sale financial asset A/c Dr. To cash A/c 31st December 2006: Available for sale financial asset A/c Dr. To reserves A/c 12,000 12,000 20,000 20,000 32,800 32,000 800 Dr. 12,000 12,000 Dr. 20,000 20,000

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31st January 2007: Cash A/c Dr. Reserves A/c Dr. To available for sale financial asset A/c To P&L A/c AS PER IFRS: Under IFRS, the above transaction would be classified under fair value through P&L, and the entries would be as follows: Initial recognition: Financial asset at fair value A/c To cash A/c 31st December 2006: Financial asset at fair value A/c To P&L A/c 31st January 2007: Cash A/c Dr. To financial asset at fair value A/c Dr. To P&L A/c CURRENT PRACTICE: Initial recognition: Financial asset at fair value A/c To cash A/c 31st December 2006: As per the current guidelines if there is any appreciation, it is to be ignored but any depreciation in the value of the asset should be taken into account. Hence here we ignore to take the appreciation into the account. 31st January 2007: Cash A/c Dr. To financial asset at fair value A/c Dr. To P&L A/c 32,800 20,000 12,800 Dr. 20,000 20,000 32,800 32,000 800 Dr. 12,000 12,000 Dr. 20,000 20,000 32,800 12,000 32,000 12,800

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III.

HTM investments and Loans & Receivables: They are measured at amortised cost, i.e. the cost of an asset or liability adjusted to achieve a constant effective interest rate over the life of the asset or liability. Q) Consider a situation where an entity purchases bonds with face value Rs.1,000 at a discount of Rs. 100. The bond has a coupon rate of 10% and it redeemable on maturity at par. Consider YTM as 12.38%.

AS PER IAS 39 & IFRS: Computation of amortised cost:
Year Opening amortised cost(A) Interest earned (A*.1283) Interest cash inflow (C=1000*10%) 100 100 100 100 100 Closing amortised cost (A+B-C) 915.5 933 952.7 974.9 1000

1 2 3 4 5

900 915.5 933 952.7 974.9

115.5 117.7 119.7 122.2 125.1

i) Initial recognition: Loans & receivables A/c Dr. To cash A/c ii) Year ending: Cash A/c Dr. Loans & receivables A/c To interest income iii) At the end of 5 years: Cash A/c Dr. To loans & receivables 1000 1000 100 15.5 115.5 900 900

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NOTE: Under IFRS there is no separate category like Loans & receivables, it has to be classified either under Amortised cost or Fair value through P&L. Above calculation is made assuming that it has been classified under amortised cost.

CURRENT PRACTICE:
YEAR COST AT BEGINNING OF THE YEAR 900 COUPON P&L COST AT END OF THE YEAR 900

1

100

100

2 3 4 5

900 900 900 900

100 100 100 100

100 100 100 100+100

900 900 900 900+100

i.

Initial recognition: Loans & receivables A/c Dr. To cash A/c Interest received A/c Dr. To P&L A/c (Interest received) 900 900 100 100

These entries are repeated for 5 years. ii. At the end of 5 years: Loans & receivables A/c Dr. To P&L A/c Cash A/c Dr. To Loans & receivables A/c 100 100 1000 1000

The basic difference between the IFRS and current standard in calculations on HTM portfolio is brought out by following example,

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FOR HTM PORTFOLIO
If face value is less than purchase price

Face Value 100

Market Price 105

Coupon Rate 12%

maturity Time 5 years

Yield 10.66%

Purchase Date 01-04-2010

Maturity Date 31-03-2015

IFRS
Year 1 2 3 4 5 Amortized Cost at the Beginning of year 105 104.1906613 103.295065 102.3040182 101.2073478 Interest Earned 11.19066125 11.10440377 11.00895316 10.90332964 10.78644901 Coupon 12 12 12 12 12 Amortized Cost at the end of year 104.1906613 103.295065 102.3040182 101.2073478 99.99379683 Amortizatio n Charge for the year -0.80933875 -0.89559623 -0.99104684 -1.09667036 -1.21355099 -5.00620317

CURRENT PRACTISE

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Year 1 2 3 4 5

Amortize d Cost at the Beginning of year 105 104 103 102 101

Interest Earned ---------------------------------------------------------------------------------

Coupon 12 12 12 12 12

Amortize d Cost at the end of year 104 103 102 101 100

Amortizatio n Charge for the year -1 -1 -1 -1 -1

If face value is more than the purchase price

Face Value 100

Market Price 95

Coupon Rate 12%

maturity Time 5 years

Yield 13.44%

Purchase Date 01-04-2010

Maturity Date 31-03-2015

IFRS
Year 1 2 3 4 5 Amortized Cost at the Beginning of year 95 95.76489851 96.6325744 97.61683761 98.73335366 Interest Earned 12.76489851 12.86767589 12.98426321 13.11651605 13.26653935 Coupon 12 12 12 12 12 Amortized Cost at the end of year 95.76489851 96.6325744 97.61683761 98.73335366 99.99989301 Amortizatio n Charge for the year 0.764898507 0.867675894 0.984263207 1.116516049 1.266539355 4.999893012

CURRENT PRACTISE
Cost at the Beginnin g of year 95 Interest Earned --------Cost at the end of year 95

Year 1

Coupon 12

P&L A/C ------------

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2 3 4 5

95 95 95 95

---------------------------------

12 12 12 12

95 95 95 100

---------------------------------5

ANNEXURE: 4
Now let us look at the amortisation of some of investments of the public sector commercial bank as per IFRS. A. 10.25% GOI 01-06-2012

YEAR 2010 2011

A.C. BEGINNING 177115886.8 178968786.3

INTEREST EARNED 20439173.33 20652997.94

CASH FLOW ( COUPON) 18586273.75 18586273.75

A.C.. ENDING

PERIOD

178968786.3 (12 months) 181035510.5 (12 months)

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2012

181035510.5

3481916.319 F.V. Diff

3097712.292

181419714.6 (2 months)

181329500 90214.55094

B. 7.32% GOI 20-10-2014

YEAR 2010 2011 2012 2013 2014

A.C. BEGINNING 503700000 502963440 502174436.9 501329256.8 500423899.9

INTEREST EARNED 35863440 35810996.93 35754819.91 35694643.09 20784272.64 F.V. Diff

CASH FLOW ( COUPON) 36600000 36600000 36600000 36600000 21350000

A.C. ENDING

PERIOD

502963440 (12 months) 502174436.9 (12 months) 501329256.8 (12 months) 500423899.9 (12 months) 499858172.6 (7 months)

500000000 141827.4324

C. 9.85% GOI 16-10-2015 A.C. BEGINNING 164585850.9 162326557 159895782.7 157280512.6 154466743.5 151439409.4 INTEREST EARNED 12492066.09 12320585.68 12136089.91 11937590.91 11724025.83 CASH FLOW ( COUPON) 14751360 14751360 14751360 14751360 14751360 A.C. ENDING

YEAR 2010 2011 2012 2013 2014 2015

PERIOD

162326557 (12 months) 159895782.7 (12 months) 157280512.6 (12 months) 154466743.5 (12 months) 151439409.4 (12 months) (7.5 149403716.3 months)

7183906.981 9219600 F.V. 149760000 Diff 356283.6666

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D. 11.50% KERALA SDL 08-07-2011 CASH FLOW ( COUPON) 3450000 862500 30000000 12978.91968 CASH FLOW ( COUPON) 23421860 9759108.333 249700000 136259.5945

YEAR 2010 2011

A.C. BEGINNING 29982000 29985926.4

INTEREST EARNED 3453926.4 863594.6803

A.C. ENDING

PERIOD

29985926.4 (12 months) 29987021.08 (3 months)

F.V. Diff E. 9.38% TAMILNADU SDL 29-08-2011 A.C. BEGINNING 250349220 249809278.7 INTEREST EARNED 22881918.71 9513570.031 F.V. Diff

YEAR 2010 2011

A.C. ENDING

PERIOD

249809278.7 (12 months) 249563740.4 (5 months)

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