SAP Petrofed Conference: Oil & Gas Industry

Moving towards to IFRS,

the future Indian GAAP*

Shrenik Baid (shrenik.p.baid@in.pwc.com), +91-22-6669-1312, +91-98-2011-6904

*connectedthinking
Agenda

• Where are we?

• How does it impact us?
• What are the next steps?

IFRS implementation and challanges March 2009

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Where are we…
Where are we...

IFRS, the Global Revolution

More than 100 countries require, permit, or are converging to IFRS
All major capital markets are changing

India Converging to IFRS

US Converging to IFRS
UK IFRS for listed
France IFRS for listed
Canada Converging to IFRS
Germany IFRS for listed
Japan Converging to IFRS
Spain IFRS for listed
Switzerland IFRS or US GAAP
Australia IFRS (adapted)

es have
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move ir existing
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Countries converging to IFRS with the goal of adoption fra
Countries that require or permit IFRS
Countries with no current plan to adopt
IFRS implementation and challanges March 2009
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Where are we...

The story so far…

• The ICAI has announced that all public interest entities in India need to adopt IFRS from 1
April 2011, as per the convergence paper of ICAI
- Only 2 standards are in line with IFRS
- 10 would require regulatory approvals
- 12 standards have conceptual differences
- 6 standards would require technical preparedness
- 6 standards would require minor adjustments
- 1 standard not applicable in Indian circumstances
• Even the Securities Exchange Commission (SEC) of the United States has proposed a
roadmap for potential use of IFRS by all US public companies; for certain qualifying
domestic issuers starting as early as fiscal 2009
• Joint standards by FASB and IASB already under way – IFRS 3R and FAS 141R on
business combinations is a joint standard
• Companies in India are already pro-actively seeking to manage the transition
• Some listed companies have already started reporting under IFRS.
IFRS implementation and challanges March 2009
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Where are we...

The story so far…

• Proposed application to:

- A listed company or in the process of listing, whether in India or outside India; or
- a bank, financial institution, a mutual fund, or an insurance entity; or
- turnover exceeds Rs. 1,000 million in the immediately preceding accounting year; or
- public deposits and/or borrowings from banks and financial institutions in excess of Rs. 250
million at any time during the immediately preceding accounting year; or
- a holding or a subsidiary of an entity which is covered in (i) to (iv) above.

IFRS implementation and challanges March 2009

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Where are we...
Timeline for IFRS conversion project – required 2011
IFRS
Comparatives
(annual and interim)
IFRS
First year of reporting
(annual and interim)

2008 2009 2010 2011 2012

Today
Transition date First IFRS year
Opening IFRS 1st IFRS
balance sheet 1st IFRS
interim report 2012 Annual report
(1 April 2010) (+Mar 2011
(+ Jun 2010
comparatives) comparatives)

The standards applicable as at the balance sheet date are required to be complied for all years.
Opening IFRS balance sheet at "the date of transition to IFRS – 1 April 2010". This is the beginning of the earliest
period for which full comparative information is presented in accordance with IFRS.
IFRS has a first time adoption standard (IFRS 1), which has to be complied with by all first time IFRS preparers.
The ICAI is still to announce its plan on transition provision.
IFRS implementation and challanges March 2009
PricewaterhouseCoopers Slide 7
How does it impact us?
How does it impact us?

Fundamental Changes

• Full compliance (no qualification) • Historical cost versus fair value

• More guidance all mandatory approach
- Fair value corresponds to the amount for
• Focus on risk and rewards IFRS may not be which an asset can be exchanged or a
liability extinguished between informed and
• Focus on substance over form a solution for the consenting parties transacting under normal
- current
All transactions must be accounted for andsituation
competitive conditions
presented according to their economic
reality and not only as a functionbut can provide
of their • Missing Standards and
legal form significant pronouncements
• Investor focused with more transparency!
- Business combinations
disclosures - Financial Instruments

• Comparability and transparency - Share-based payments

- Service concession agreements
• Court Order or companies Act
override • Practice differences

IFRS implementation and challanges March 2009

PricewaterhouseCoopers Slide 9
How does it impact us?

Key Issues for Accounting, Reporting and Business

Revenue Financial Financial
Recognition Instruments Systems Disclosures

Property, Board &

Valuation Reporting
Business Accounting Plant & Investor
Combinations Models
Equipment Communication
/Systems

Segmental Management
Consolidation Other issues Information Accounting
IGAAP US GAAP Dual reporting future Indian GAAP
2000 - 2005 2006 - 2008 2009 2010 2011 2012 2013
Product Investor
Design/ Relations/
Viability KPIs

Debt Business Tax

covenants

Training Top line &

EPS impact
IFRS implementation and challanges March 2009
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How does it impact us?
Key Areas of Differences
Consolidation
Primary set of financial statements
Control (substance over form)
Reveal true group strength
Joint ventures or control? (IFRS 9 soon)
Economic entity model (IAS 27R)
Alignment of Group accounting policies
Business Combinations
Demonstrate true value of acquisition
Move from legal form to substance
Fair value approach (IFRS 3)
Goodwill numbers may change;
Higher amortization
IFRS implementation and challanges
PricewaterhouseCoopers
Revenue recognition
Driven by an assessment of transfer of risks
and rewards?
Multiple element contracts
Service concession agreements (e.g. PPP
contracts - early recognition of revenue)
Discounting
Financial Instruments
Composite Contracts (FCCB)
Debt versus equity (Preference shares)
Risk and rewards model
IRR based revenue and expense recognition
Disclosures of risks and how are those are
managed by the Company
March 2009
Slide 11
How does it impact us?
Key Areas of Differences
Foreign currency
Comprehensive guidance
Functional currency (eg Shipping companies)
Related party
Relationship identified based on substance
Revealing transactions with owners and
related parties
More disclosure especially for family run
businesses
Guidance on share-based
payments, biological assets,
real estate accounting,
investment properties etc.
IFRS implementation and challanges
PricewaterhouseCoopers
Convenience accounting
Revaluation versus historical cost model for
fixed assets
Frequent revaluation
Benefit to B/s with Charge to I/s
Change in accounting policies
No discretionary change
Retrospective application
Full compliance of GAAP
Company specific accounting
Loan loss provisioning
Depreciation and amortization based on
useful lives
Insurance accounting
Electricity company regulations
March 2009
Slide 12
How does it impact us?

Disclosures – the cornerstone of IFRS reporting

• Financial risk management

- Exposure and how managed e.g. credit risk, liquidity risk
- Sensitivity analysis for market risk
• Related party transactions – broader definition and based on substance
• Segmental reporting – what is reviewed by CODM?
• Detailed disclosures of assumption used for fair values, impairment etc.
• Detailed accounting policies
• Impact of recently issued accounting standards

IFRS implementation and challanges March 2009

PricewaterhouseCoopers Slide 13
How does it impact us?
First-time adoption of IFRS (IFRS 1)
Application of IFRS 1 is a critical issue in making
the transition to IFRS
• The first annual financial statements in which an entity
adopts IFRS, by an explicit and unreserved statement
of compliance with IFRS.
Implications for the project:
• Identify the first IFRS financial statements
• Select accounting polices that comply with the IFRS in
force at the closing balance sheet date in the first IFRS
financial statements, and apply those policies
retrospectively to all of the periods presented, except
where exemption or exceptions allow or require
otherwise:
- IFRS 1 provides 15 optional exemptions and 4
mandatory exceptions, when an entity adopts
IFRS for the first time.
• Make extensive disclosures to explain the transition to
IFRS
- Reconciliation required with previous GAAP.
IFRS implementation and challanges
PricewaterhouseCoopers
Relevant optional exemptions that you can
choose from:
• Past business combinations – based on
historical values
• Vested options prior to IFRS transition date –
may continue with approach followed in
Previous GAAP
• Carrying values under IFRS versus FV of PPE
may be taken as deemed cost.
• Actuarial gains and losses is recorded on day1
• Cumulative translation difference set to zero
• Designation of previously recognized financial
instruments
• Fair value measurement of financial assets or
financial liabilities at initial recognition
Choice is between efforts required and impact
on net income and equity, normally these
decisions are made/approved at the CFO level
March 2009
Slide 14
How does it impact us?

There are challenges (in adopting IFRS)

• Managing and communicating the change

• Data capturing
• Aligning different policies, practices and system across the group having presence in
multiple jurisdictions and having different reporting requirements including tax and
statutory reporting
• IFRS itself is a moving target
• Conforming accounting with changes in business
• Aligning the business practices considering IFRS accounting requirements
• Training across the organization
• Lack of appropriately skilled resources in the market

IFRS implementation and challanges March 2009

PricewaterhouseCoopers Slide 15
How does it impact us?
There are challenges (in adopting IFRS) …Continued

Required changes in legal framework

• Form and substance of financial statements
• Current/ Non-current vs Schedule VI presentation

• Depreciation on revalued assets needs to be routed through income statement under IFRS
– Companies Act disallows such a treatment

• Preference shares are classified as debt instruments and not equity

• Certain instruments may have both debt and equity features
• No gain or loss on buy-back of shares

• The requirement to present five years of historical financial statements for IPO – will it be
Indian GAAP or five years of IFRS
• If yes, what would a company going public in 2011 do?

IFRS implementation and challanges March 2009

PricewaterhouseCoopers Slide 16
How does it impact us?
There are challenges (in adopting IFRS) …Continued

What all requires a change

• The rules included in Companies Act, which have accounting impacts, for example:
• Dividends determined in accordance with Companies Act
• Managerial remuneration
• Thresholds determined in accordance with the Act on debts assumed

• No concept of proposed dividend

• Declaration of dividend only when approved by the shareholders

• Correction of errors in audited financial statements

• Restatement is must when correcting errors

• Tax laws

IFRS implementation and challanges March 2009

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What are the next steps?
 Managing the Change Project Framework Controls and
Establishing an environment to Documentation
support the project
Ensuring the
conversion
process is
controlled and
documented
Technical
Accounting Advice
Technical accounting
Communication
information along with practical
and application advice
Knowledge
Sharing
Embedding
Monitoring the pace
and communication
the Change
of the work Creating a sustainable
reporting environment
IFRS implementation and challanges March 2009
PricewaterhouseCoopers Slide 19
IFRS impact – Industry and other company approaches to planning

Top planning and implementation considerations

• More differences, more effort, and more significant impacts, than expected
• Not just finance function project; need commitment from whole organization (messaging /
tone at the top; functional & BU breadth and depth; mobility / training)
• Strategic approach and tactical execution (centralised, hubbed, decentralised)
• Project management (route maps / levels, communication, roles & responsibilities)
• A one time opportunity to re-set reporting - ‘clean sheet of paper’; benchmarking
• Evolving nature of standards – no longer a “stable platform”; regulatory challenge
• Policy-setting and control challenges in a “principles-based” environment
• Discovering (managing) prior accounting errors and GAAP changes
• Addressing data/information gaps – disclosures and multi-GAAP requirements
• Managing investor communications – transition period, EPS guidance, etc.
• Revisions to contracts take time (debt, share-based compensation, revenue,
securitizations, etc.)

IFRS implementation and challanges March 2009

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What are the next steps?

Suggested approach...

High level initial assessment

Prepare an inventory of all contracts and perform an impact analysis under IFRS – numbers
and disclosure

Prepare a desktop reconciliation

Select the appropriate accounting policies

Draw up a detailed training plan for staff

Engage in the conversion of the financial statements

Focus on systems and processes to be in place to effect smooth transition

IFRS implementation and challanges March 2009
PricewaterhouseCoopers Slide 21
What are the next steps?

TransitionIFRS – GAAP conversion methodology

Indian

IFRS implementation and challanges March 2009

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What are the next steps?

TransitionIFRS – GAAP conversion methodology

Indian

Phase 1 Phase 2 Phase 3

Objectives • Assess impact of IFRS on F/S
• Assess how IFRS is currently
impacting the organization
• Assess the financial reporting,
business process and systems impact
• Deploy Measurement and Disclosure • Develop IFRS shell F/S
Checklist
• Develop informed business case and
strategy
• Establish proper governance and project management
• Complete Component Evaluation SM
- Establish IFRS policies and determine adjustments
- Assess impact at business unit level
- Evaluate parent company policies and decisions
• Design, build and test IFRS reporting process (dual
reporting period)
• Prepare initial IFRS financial statements and recon
(dual reporting period)
• Develop roadmap to embed IFRS as
primary reporting language
• Embed IFRS into financial reporting
processes and systems (corporate and
business units)
• Embed IFRS into other financial and
operational processes and systems
• Assess whether relevant contractual
agreements and financial covenants reflect
a different basis of accounting
• Go live and close project

Outputs • High-level assessment of IFRS impact
to F/S including financial reporting,
business process and systems impact
• Options for next steps including
strategy with timeline
• IFRS Workshop
• Operationalized Project Management Office (PMO)
• Documented IFRS policies
• IFRS adjustments
• Data gaps inventory
• Shell annual and quarterly IFRS F/S
• IFRS reporting process and system
• IFRS financial results for dual reporting period
• Prioritized project plan
• Data and business requirements
• System and configuration requirements
• SOX and procedural documentation
• Global Chart of Accounts (COA)
• Pre- and post-implementation testing
documentation

IFRS implementation and challanges March 2009

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What are the next steps?

Project Structure

Steering Committee

Decision Maker Auditor

TRC Technical Review
Committee INVITEES

Issue Originators Expert

Work Streams

Needs
Technical • Technical support
Champions WS1 WS2 WS3 WS4 material
• Roles &
o IFRS 1 o Fixed assets o Consolidation o Financial Responsibilities
o Revenue o Taxes o Financial Instruments
• Timelines
recognition Reporting o Cash Flows
• Nodal offices

IFRS implementation and challanges March 2009

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What are the next steps?

IFRS Consolidation Accelerator Kit - Key advantages

Time and costs savings to implement the Legal Consolidation Process:

A full set of Predefined but not Hard-coded consolidation eliminations
A full set of dynamic Input schedules
A full set of dynamic Audit Trails Reports
A full set of dynamic Reporting Templates

Highly flexible:
Can be adapted to any chart of accounts
5 customable dimensions for analysis requirements

Fully IFRS standards Compliant:

Disclosure requirements
Translation of financial statements
Segmental reporting
Intercompany elimination, minority interests calculation, equity accounting
Cash flow statement

Process control and audit trail

Business Process Flow

IFRS implementation and challanges March 2009

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What are the next steps?

Enabling Tools and methodology

• We propose to deploy the following methodologies and tools to help you achieve your
objective;

Project Management Framework Automated Disclosure Checklist –

a methodology that helps monitor the progress and take a software that will help ensure compliance with the
timely corrective actions to keep the project on track maze of disclosure requirements under the US GAAP

Component EvaluationSM methodology IFRS NoE –

a methodology that creates repository of key decisions our globally deployed database to ensure uniform
interpretation and application of IFRS principles focussed
Issue resolution process for each Industry

Excel based workarounds

Other knowledge management and thought these are excel based simple tools created in the past,
leadership tools which have helped clients control the conversion process
and create an audit trail
Comperio

IFRS implementation and challanges March 2009

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we can team up*

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constitute professional advice. You should not act upon the information contained in this presentation without
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is a trademark of PricewaterhouseCoopers LLP (US).