SIX MYTHS

ABOUT THE IFRS INDIA

TRANSITION
“ We all have our perceptions of what IFRS means for our
companies. These are surprisingly consistent across
sectors within India.

Not too long ago, our member CFOs and controllers in

Australia and the European Union had their own views on
IFRS, very similar to ours. When they finally transitioned,
most of them realized how off mark their initial
perceptions were. That’s why we call them myths.

“
Treat this as a peek into the ground realities of IFRS
transition—what it really looked like for the hundreds
of companies we worked with and learned from.
IFRS Research Team
Corporate Executive Board
 Six Myths About the IFRS India Transition

1 We have a comfortable transition deadline

2 IFRS is limited to changes in accounting procedures

3 We can rely solely on auditors and consultants

4 Transition won’t be very expensive

5 Accountants are the only constituency we need to train

6 We’ll get it right the first time

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 FIGURE 1 FIGURE 2

Time Required to Complete the Transition to IFRS Time Allocation for IFRS Implementation Activities
Australia-Based Companies

More Than One Year or Change Planning

Three Years Less Management 58%
15% 5% 26%

9%
Internal
Communication

3%
25% 55% 4% Internal Non-Finance
Two to One to External Staff Communication
Three Years Two Years Communication
 MYTH 1
WE HAVE A COMFORTABLE TRANSITION
DEADLINE
ƒƒ Ninety-five percent of companies in Australia and in the European Union took more
than a year to the complete IFRS transition, with 40% taking more than two years.
The ICAI requirement to publish 2010 comparative numbers in IFRS leaves Indian
companies only eight months to be IFRS–ready.

ƒƒ In other countries, regulators released final interpretations two to three years

in advance of IFRS deadline and provided step-by-step transition road maps
for companies. In India, with just eight months to go, ICAI is yet to finalize the
standard—increasing the confusion around standard interpretation.

ƒƒ Indian companies must begin assessing the impact of IFRS and start planning
immediately, dedicating full-time resources to the project. Companies that delay
the effort expose themselves to several risks including restatement, cost overrun,
reputational damage, and market risk.

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 FIGURE 3
How IFRS Impacts
Functions Outside Finance
HR
ƒƒ Pension and bonus plans
need to be modified.
ƒƒ Training coordinators
and services must be
purchased or developed.
PROCUREMENT
ƒƒ Long-term contracts
that reference to India
GAAP may need to be
renegotiated.
ƒƒ Loan covenants, lease
agreements, supplier
agreements, etc., need to
be modified.
IT
ƒƒ GL, AP, AR and other
Finance IT systems need to
be modified.
ƒƒ IFRS needs to be aligned
to long-term IT strategy.
FIGURE 4
Impact of Cross-Functional
Involvement on Transition Effectiveness
Transition Effectiveness, Average Rating, 4.0 Scale
SALES
3.7
ƒƒ Sales and service contracts
referencing India GAAP must
be modified. 2.4
CORPORATE STRATEGY
AND PLANNING
ƒƒ Revenue models, scenario
plans, and budgeting
processes based on India
GAAP need to be reworked. Transferred Implementation Did Not Transfer
Ownership to Impact Implementation Ownership
Business Units and to Impact Business Units
Functions and Functions
FIGURE 5
Impact of Cross-Functional
Involvement on Implementation Time
Average of Total Controller Team Time Spent on Transition
63%
= 110%
33%
Transferred Implementation Did Not Transfer
Ownership to Impact Implementation Ownership
Business Units and to Impact Business Units
Functions and Functions
 MYTH 2
IFRS IS LIMITED TO CHANGES IN ACCOUNTING
PROCEDURES
ƒƒ Senior management at many companies view IFRS as a Finance priority because of
the required changes in accounting practices. However, the impact of IFRS is truly
cross-functional, spanning divisions and business units.

ƒƒ HR, Sales, Procurement, Legal, IT, and individual business unit (BU) owners often
need to redesign key processes to accommodate IFRS. Critical third-party contracts,
debt covenants, and key leadership metrics will change with the change in
accounting policies.

ƒƒ Finance must convince stakeholders of cross-functional impact and enlist transition

support. Companies that actively involved impacted functions and BUs early had
55% greater transition effectiveness than companies that did not, with Finance
spending 90% less time on transition.

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 FIGURE 6 FIGURE 7

The Role of Consultants in IFRS Projects IFRS Project Team Composition

Australia-Based Companies, Percentage of Respondents, 2008 Percentage of Respondents; Multiple Responses Allowed

60%
55%
71%

The majority of survey

40% respondents did
not involve external
consultants or
subcontractors extensively
in the transition.

20%

14% 14%

0% 0%
Consultant Consultants Consultants Consultants External Corporate Corporate External Subcontractors
Played a Major Used Mainly to Used Mainly Played No Role Consultants Were Functions Functions Consultants Were Used
Role in the ID Accounting to ID Process in the IFRS Involved in an or Business or Business Played a Major Extensively
IFRS Process Changes Changes Process Advisory Role Units Severely Units Severely Role (or Led) in to Implement
to Support the Impacted by the Impacted by the the Project Team the Proposed
Project Team Transition Were Transition Were Changes
Represented Represented
in the Relevant in the Central
Subproject Team Project Team
 MYTH 3
WE CAN RELY SOLELY ON AUDITORS AND
CONSULTANTS
ƒƒ While many companies believe that auditors and consultants can take on much of
the transition load, a vast majority of adopters used consultants in only a minor way
during the transition—mainly to identify accounting changes. The nature of transition
activities requires most work to be done in house by the internal Finance team.

ƒƒ Given the need to have internal staff lead the transition team and efforts, companies
need to invest in training the IFRS project team very early in the process.

ƒƒ At a very early stage, companies must determine the level of external support
needed in different transition stages and auditor intervention/sign-off points. Not
doing so can result in unnecessary consulting spend and mid-cycle corrections to
the project plan.

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 FIGURE 8 FIGURE 9

Average Number of FTEs Required for IFRS Transition Cost Estimates for Auditor Involvement

Breakdown of FTEs Average DNA Money Newspaper

Tuesday, March 24, 2009 2:13 IST
On average, companies
Internal FTEs 16 Mumbai: With the debate on convergence with international financial reporting standards (IFRS)
will need around 20 FTEs heating up, audit firms have started showcasing talent to companies and pitching for business.
Uncertainties with regard to convergence with IFRS—adoption of international accounting
through the course of the standards in India, which has so far followed Indian GAAP—continue, but audit firms are interacting
External FTEs 3
transition period. with companies nonetheless. They are either conducting training programmes for companies or
doing an impact analysis, wherein they are helping companies understand how their balance

ƒƒ Sub-Contractors 1 …According to market sources, an impact

analysis costs INR 1–5 lakh, while a full-
ƒƒ Consultants 2 blown audit as per IFRS would cost
between INR 30 lakh and INR 1 crore…
Venkatram said, "Convergence market is potentially about 75% of the listed companies, but
practically only 25% of the listed companies as a large group of Indian companies is not exposed
to US GAAP”.
Ram Iyer, director—accounting advisory services at KPMG, said they are conducting a lot training
programmes for company workers. “We are training them on IFRS as it exists,” he said, adding,
the training programmes involve identification of 5–6 areas, which are likely to be impacted by
convergence with IFRS.
Audit firms, however, are also warning companies on the uncertainties.
“Regulators are concerned that their sovereign independence goes away if the IFRS is adopted as
it is. Every country has a decision…
 MYTH 4
TRANSITION WON’T BE VERY EXPENSIVE
ƒƒ The IFRS transition is expected to cost Indian firms between Rs. 30 lakh and
1 crore1, with an average of 16 internal and three external full-time staff dedicated
to the transition.

ƒƒ Fifty percent of adopters had to implement entirely new IT systems to accommodate

IFRS; only 20% of companies did not implement systems changes

ƒƒ Costs such as auditor fees, systems changes, and reporting costs tend to overrun at
the last minute. Companies can avoid this through robust planning, auditor sign-off
on every accounting change, systems testing, and reporting dry runs.

Khyati Dharamsi, “Auditors start gearing up firms on

1

IFRS,” DNA Money, 24 March 2009.

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 FIGURE 10 FIGURE 11

IFRS Training and Communication Challenges Time Allocation for the Various Stages of Transition
Percentage of Controllers Rating “Difficult”

Implementation Planning
39%  31%
65%

50%

Training and Training and

Educating Non- Educating
Controller Staff Controller Staff

30%
Communication
and Training
Breakdown of time allocation for
Communication and Training:
ƒƒ For internal staff directly involved
with the conversion—17%
ƒƒ For other internal staff not directly
involved with the conversion—7%
ƒƒ For key external stakeholders
(investors, analysts, etc.)—6%
 MYTH 5
ACCOUNTANTS ARE THE ONLY CONSTITUENCY
WE NEED TO TRAIN
ƒƒ Once companies realize the impact of IFRS on non-accounting functions,
coordinating firmwide training for functional and BU staff becomes a daunting,
costly task.

ƒƒ Sixty-five percent of controllers found it more difficult to train non-accounting staff

and spent a quarter of IFRS training time on functions outside Finance.

ƒƒ Companies cannot save time and resources by using the same training modules for
all constituencies, or learnings will be inapplicable and easily forgotten. The level and
scope of training needs to be tailored to meet different segments’ needs.

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 FIGURE 12

Impact of Overinvestment in Planning on Transition Effectiveness

Transition Effectiveness, Average Rating, 4.0 Scale

3.8

3.0

Average for Average for

Companies Spending Companies Spending
53% of Their Time in 20% of Their Time in
the Planning Stage the Planning Stage

FIGURE 13 FIGURE 14

Transitional Internal Reporting to IFRS Approaching the Transition from a Project Management
Along with or Before External Reporting Perspective Rather Than an Accounting Change
Percentage of Respondents Percentage of Respondents
We Did This, and It 50% We Did This, and 60%
Was Not Useful We Did This, and It It Was Not Useful We Did This, and It
5% Was Useful 5% Was Useful

We Did This, and We Did This, and

It Was Extremely It Was Extremely
Useful Useful
15% 5%

We Did Not Do
This, and It Would We Did Not Do This, We Did Not Do This, We Did Not Do This,
Not Have Been and It Would Not and It Would Not and It Would Not
Useful Have Been Useful Have Been Useful Have Been Useful
10% 20% 5% 25%
 MYTH 6
WE’LL GET IT RIGHT THE FIRST TIME
ƒƒ Companies that undertake the transition without extensive project planning have
25% less effective transitions. These companies are also much more likely to face
auditor sign-off conflicts, restatements, and stock price falls as they come closer
to the deadline.

ƒƒ Not conducting internal and external reporting test runs has often caused companies
to discover system bugs, process failures, and accounting errors too close to
deadline to be fixed in time.

ƒƒ Given the scale of its impact across functions, companies must approach adoption
from a project management perspective to increase the likelihood of having a
successful transition.

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