IFRS

The third issue that is going to cast a spell over the financial sector players is the compliance with IFRS or International Financial Reporting Standards.

Globalization of financial markets has meant an increased focus on international standards in accounting and has intensified efforts towards a single set of high quality, globally acceptable set of accounting standards.

Financial statements prepared in different countries according to different set of rules, mean numerous national sets of standards, each with its own set of interpretation about a similar transaction, making it difficult to compare, analyse and interpret financial statements across nations.

In respect of banks and NBFCs, in view of the special issues involved (finalisation of IFRS 9 expected in the middle of 2011), a separate road map was prepared in March 2010 for convergence with IFRS for the banking industry and NBFCs.

The convergence process would be from period beginning April 1, 2013, with a phased approach for urban banks and NBFCs.

This gives the banking system some time to adapt to the standards in a smooth and non-disruptive manner.

It has to be noted, however, that banks will be significantly affected by the IAS 39 replacement project and a number of other accounting developments including those relating to financial instruments, fair value measurement, financial statement presentation and consolidation.

Some of the major changes pertain to certain critical areas such as classification and valuation of financial assets, classification and valuation of liabilities, impairment provisions and fair value measurement.

One area of concern has been the drawback of the incurred loss model of IAS 39 and the need to introduce more forward looking provisioning.

We have seen the how concept of “marked to market” turned to be useless at the time of real crisis through the potential futility of the idea of “marked to model” as being divorced from real market and virtually ended up with a situation that can best be described as “marked to madness”.

The IFRS convergence process will involve significant challenges for the banking system in general.

Banks would need to upgrade their infrastructure, including IT and human resources, to face the complexities and challenges of IFRS.

Some major technical issues arising for Indian banks during the convergence process would be

1) differences between the IFRS and current regulatory guidelines on classification and measurement of financial assets,

2) focus in the standard on the business model followed by banks

3) and the challenges for management in this area, application of fair values for transactions where not much guidance is available in India in terms of market practices or benchmarks, and expected changes in impairment rules.