IMPACT OF ACCOUNTING STANDARDS AND REGULATIONS ON FINANCIAL REPORTING

UNIVERSITY OF CALCUTTA 22.03.2005

Financial Reporting Infrastructure

Built on Four Pillars
Accounting Standards that are
consistent, comprehensive and based on clear principles to enable financial reports to reflect underlying economic reality.

Effective Corporate Governance practices, including a requirement of strong internal controls that implement the accounting standards. Auditing practices that give confidence to the outside world. Enforcement or oversight mechanism that ensures that the principles as laid out by accounting and auditing standards are followed.

Accounting Standards
Pronouncements issued by the Institute of Chartered Accounts of India Relating to the various aspects of
recognition measurement presentation disclosure

of accounting transactions and events.

Accounting Standards
Purpose of Accounting Standards Standardise diverse accounting practices with a view to
eliminate to the extent possible incomparability of information

contained in financial statements of various enterprises.

Accounting Standards
Legal Force : S.211 of the Companies Act, requiring every profit and loss account and balance sheet of the company shall comply with the Accounting Standard. Accounting Standard means standards of accounting prescribed by ICAI.

Recent Developments Accounting Standards

Till 1995, there were 15 AS Since 2000 to 2004 AS 16 to AS 29 have been published and are mandatory AS 21 & 25 are not mandatory Major applicable standards :
AS 16 : Borrowing Costs wef 1.4.2000 capitalisation of borrowing costs
Policy followed & amt. capitalised to be disclosed

Recent Developments Accounting Standards

AS 17 - Segment Reporting wef 1.4.2001
business/geographical segments basis is threshold of 10% of revenue, results, assets .. 75% criteria primary/secondary segment reconciliation between segment info & annual accounts info segment policy & inter segment transfers policy to be disclosed.

Recent Developments Accounting Standards

AS 18- Related party disclosures .. wef 1.4.2001
name/nature of related party/relationship . subsidiary, associate/JV, employee trusts, key management personnel description of nature/volume of transactions . sale, purchase of goods/fixed assets, interest income, remuneration to key mgmt personnel, dividend income/expenses, loans given.

Recent Developments Accounting Standards

AS 19 : Leaseswef 1.4.2001
classification of leases to operating/financial ITC .. Notes to Accounts .. leasing arrangements not non cancellable leases period of lease

AS 20 : Earnings per Share wef 1.4.2001

Basic & diluted EPS on the face of the P/L statement to be disclosed along with loss/share, FV of shares and to disclose the calculation in financial statements.

Recent Developments Accounting Standards

AS 21 - CFS - not mandatory . SEBI automatically mandatory wef 1.4.2001
To disclose alongwith CFS list of all subsidiaries, country of incorporation, proportion of interest, nature of relationship to disclose effect of acquisition/disposal of subs names of subs where reporting dates are different & amount accounting policies of the parent

Recent Developments Accounting Standards

AS 22 - Accounting for taxes on Income wef 1.4.2001
concept of temporary & permanent differences concept of deferred tax asset and liability disclosure of deferred tax asset/liability to be shown separately in the Balance Sheet deferred tax asset virtual certainty of profits

Recent Developments Accounting Standards

AS 23 - Accounting for Investments in Associates in CFS ... wef 1.4.2002
application of equity method initially recorded at cost carrying amount is adjusted calculation of goodwill/capital reserve to be disclosed separately disclosure of names of associates with proportion of interests accounting policy and reporting dates ..AS21

Recent Developments Accounting Standards

AS 24 - Discontinuing Operations wef 1.4.2002
component of an enterprise disposal, spin off, de-merger, termination, abandonment Disclosure description of the discontinuing ops, business/geographical segment as determined under AS 17, date and nature of initial disclosure event, date/period in which the discontinuance is expected to be completed Disclosure of all relevant financial information of the discontinuing operations

Recent Developments Accounting Standards

AS 25 - Interim Financial Reporting wef 1.4.2002
AS does not mandate which enterprises are covered but is a general AS Does not apply to Qtrly reporting .. SEBI Disclosure is for Balance Sheet, P/L Account, Cash Flow and selected explanatory notes

Recent Developments Accounting Standards

AS 26 - Intangible Assets wef 1.4.2003
Applicable to listed Cos. or other enterprises whose turnover for a year > Rs 50 Crs. Examples of intangible assets technical knowledge, designs, patents, copyrights, customer lists, customer loyalty, computer software etc. Disclosure relating to : useful lives / amortisation rates, method of amortisation, gross carrying amt & accumulated amortisation for each class of intangible assets.

Recent Developments Accounting Standards

AS 27 - Financial Reporting of Interests in Joint Ventures wef 1.4.2002
Jointly controlled Ops/Assets/Entities Disclosure relating to share of capital commitment, contingent liability, list of all JVs and interest in all significant JVs Aggregate amount of each of the assets, liabilities, income, expenses related to its interest in the jointly controlled entities proportionate consolidation

Recent Developments Accounting Standards

AS 28 - Impairment of assets wef 1.4.2004
carrying amount exceeding the recoverable amt external/internal information forms the basis of impairment impairment losses amts to be recognised in P/L amts of reversals of impairment losses disclose impairment in segment reporting

Recent Developments Accounting Standards

AS 29 - Provisions, Contingent Liabilities and Contingent Assets - wef 1.4.2004
Contingent Liabilities & Contingent Assets are not recognised in the financial statements. Amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet data. Amount of a provision should not be discounted to its present value.

Convergence : International Financial Reporting Standards

Todays world capital markets are borderless
participants in the markets should have no barriers to high-quality, transparent and comparable financial information; needed for sound economic decisions

Since 1973, IASB - serving public interest by developing a single set of high-quality, understandable and enforceable IFRS for investors, lendors and users.

Convergence : International Financial Reporting Standards

Listed companies in Europe
required to begin using IFRSs in their CFS in 2005

Many other countries are replacing national GAAP with IFRS for some or all domestic companies. IASB and the US counterpart, the Financial Accounting Standards Board, have embarked on a comprehensive program aimed at converging IFRS and US GAAP. SEC recognises IFRS of the 13000 Companies registered with US SEC, 1200 are non US companies. To do away with reconciliation by end of decade website : www.iasplus.com

Standards Overloads
Rules-based Standards or Principles-based Standards Too many Standards - Too Complex - Cost Benefit Ratio Is there a size test : Smaller & Larger
What is size : Determined by Assets, Revenues, Net Worth, Ownership ?

Standards Overloads
Movement towards Principle-based Accounting Standards could turn out to be Less Beneficial to Employees Compensated Absences (FAS 43); Post Retirement Benefit (FAS 106)
Business Community represented that they will be forced to reduce Employee Benefits Accounting Fraternitys View - Behaviour was long overdue as financial statements did not represent true and fair

Dissatisfaction can lead to escalation .. FEOs intervention on stock options expensing or financial derivatives.

Sarbanes Oxly Act, 2002

Public Company Accounting Oversight Board (PCAOB) established
to oversee audits of public companies that are subject to US security laws to establish auditing, quality control, ethics, independence and other standards relating to the preparation of audit reports 3 of the 5 PCAOB members cannot be and must not be CPA.

Sarbanes Oxly Act, 2002

PCAOB requires the CEO and CFO of each issuer to certify in each periodic report to the SEC
appropriateness of the financial statements and disclosures that they fairly present, in all material respects, the operational and financial condition of an issuer.

Sarbanes Oxly Act, 2002

PCAOB requires the SEC to conduct a study of off-balance sheet transactions and use of spendpurpose-entities and reports to Congress its recommendations. Section 404 : increases Corporate managements responsibility for assessing its effectiveness of internal control over financial reporting. Regulatory focus of SOX on auditors and corporate management.

Regulatory Issues
SEBI as the regulator ..
Introduced Qtrly Unaudited Results effective June 1998 Qtr . Clause 32 Limited Review by Statutory Auditors wef Half Y/E 30th Sept, 2000 Changes in Listing Agreement resulting in
Publishing of CFS in addition to Stand Alone Accounts wef Y/E March 2002 To comply with Related Party Transaction AS 18 wef Y/E March 2002

Regulatory Issues
SEBI as the regulator ..
Segment Reporting on Quarterly basis as per AS 17 wef Qtr ending Sept, 2001 . Clause 41 To comply with AS 22 Accounting for Taxes in respect of Qtrly Results wef Sept, 2001 Clause 41 Optional to do Quarterly CFS .. Clause 41
any material event strike, lock out, changes in capital structure

Regulatory Issues
SEBI as the regulator ..
effect of amalgamation, acquisition/disposal of subsidiary and long term investments qualification of auditors/how addressed

Uniform accounting policies to be followed Rules relating to Insider Trading Powers of Inspection and calling for any information Formation of Kumaramangalam Birla Comm on CG Nov 99 / SEBI accepted Dec99.Clause 49

Corporate Governance
Naresh Chandra Committee formed immediately upon SOX for amendment of Companies Act. Followed by Narayanmurthy Committee Based on Narayanmurthy Committees recommendation
Revised Clause 49 issued on 29th October, 2004 effective 1.4.2005

Corporate Governance
Mandatory Provisions in Corp Governance
All fees/compensation paid to non-executive directors including independent directors only with shareholders approval in general meeting.
Company shall publish criteria of making payments to nonexecutive directors in Annual Report on website. Co shall disclose no. of shares and convertible instruments held by non-executive directors. Non-executive directors to disclose their shareholding in the listed Co they are appointed prior to appointment. To be disclosed in the notice to general meeting called for appointment.

Corporate Governance
Mandatory Provisions in Corp Governance Board shall periodically review compliance reports of applicable laws to the Company; steps taken by the company to rectify instances of noncompliance. Code of conduct for Board members and senior management - to post in website of the Company.
All Board members and senior management to affirm compliance annually and Annual Report to have a declaration.

Corporate Governance
Mandatory Provisions - Audit Committee Comprising of at least 3 directors and two-third being independent directors. All members shall be financially literate (ability to read financial statements) and at least one member shall have accounting or related financial management expertise (experience in the area or professional qualification).

Corporate Governance
At least 4 meetings a year and not more than 4 months shall elapse between 2 meetings. Audit Committee to mandatorily review :
M, D & A of financial conditions and results Statement of significant related party transactions Management letters/letters of internal control weaknesses issued by statutory auditors. Internal audit reports relating to internal control weaknesses Appointment, removal, terms of remuneration of Chief Internal Auditors.

Corporate Governance
Mandatory Provisions
Risk Management - Procedures to inform Board members about risk assessment and minimisation procedures
Periodical review of procedures to ensure management controls risk through means of a properly defined framework.

Corporate Governance
Mandatory Provisions
CEO and CFO Certification : Certify to the Board that they have reviewed the financial statements and Cash Flow Statement and
they do not contain materially untrue statement or omit any material fact or misleading statements; they present a true and fair view of the Companys affairs and are in compliance with existing accounting standards, applicable laws and regulations; to the best of knowledge and belief, no transactions entered during the year which are fraudulent, illegal or violative of the companys code of conduct;

Corporate Governance
Mandatory Provisions
CEO and CFO Certification : Certify to the Board that they have reviewed the financial statements and Cash Flow Statement and they
accept responsibility for establishing and maintaining internal controls; evaluated the effectiveness of the internal control systems of the company; and disclosed to auditors/Audit Committee deficiencies in designing and operating of internal controls.

Corporate Governance
Mandatory Provisions Independent Director
no material pecuniary relationships or transactions apart from remuneration received with company, promoters, senior management, holding company, subsidiaries & associates; not related to promoters or board members/senior management; has not been an executive of the company in the preceding 3 financial years;

Corporate Governance
Mandatory Provisions Independent Director
is not a partner/executive in the last 3 years of statutory/internal audit firm. Legal/consulting firm with material association; not a material supplier, service provider, customer, lessor, lessee affecting independence of the directors; not a substantial shareholder of the company (2% holding)

Corporate Governance
Mandatory Provisions - Subsidiary Companies
At least one independent director of the holding company shall be a director on the BOD of a material non-listed Indian Subsidiary. Audit Committee of listed holding company shall review financial statements, in particular, the investments made by the unlisted subsidiary company.

Corporate Governance
Mandatory Provisions - Subsidiary Companies
Minutes of Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company. The management should periodically bring to the attention of the BOD of listed holding company, statement of all significant transactions and arrangements entered into by the unlisted subsidiary company.

Corporate Governance
Mandatory Provisions Disclosure of Accounting Treatment

Where an accounting treatment is different from the prescribed Accounting Standard

the fact shall be disclosed in the financial statements; together with managements explanation as to why it believes such treatment is more representation of the true and fair view of the underlying business transaction in the Corporate Governance Report

Recent Developments Companies Act

Companies (Amendment) Act, 2000 ..
Introduction of a clause on Directors Responsibility Statement to form part of the Directors Report S 217(2AA).
compliance of applicable accounting standards consistent application of all accounting policies so as to give a true & fair view of state of affairs of co proper & sufficient care for maintenance of accounting records as per Cos Act for . safeguarding the assets of Co, preventing and detecting frauds & irregularities

Recent Developments Companies Act

Companies (Amendment) Act, 2000 ..
Going concern basis

Auditors report changes .. S 211(3C) Companies (Amendment) Act, 1999 .. to certify in their report to the shareholders that all applicable accounting standards have been complied

Report & Accounts

SEBI Pronouncement
Frequent changes in Listing Agreement Recent Amendments : 29.01.2003
Quarterly Results Limited Review Annual Consolidated Results also to be published Time Frame for Removal of Audit Qualifications Loans/Advances to Subsidiaries/Associates

Report & Accounts

Corporate Governance
Enron and WorldCom have done more to further the cause of corporate transparency and governance in less than one year,than what activists could do in the last twenty SOX30th July, 2002 leading to issues in India relating to statutory auditor/company relationship,rotation of statutory audit firms or partners,audit/non audit fees ratio, certification of financial statements by management,

Report & Accounts - The Road Ahead

What does all this lead to ?

Report & Accounts - The Road Ahead

Value Reporting
valuable info. relevant to investors enable realization of full value in the capital markets reporting on significant communication gaps existing between current info. and desired info. of the investors class advocates starting from a position of complete transparency; effective in being clear, open and understandable apart from being sufficient

Report & Accounts - The Road Ahead

Value Reporting is not :
reporting price sensitive information voluminous raw data of the company

Investors Require
better & prospective info industry outlook corporate strategy to withstand competition intangible assets statement of strategic goals innovation

Report & Accounts - The Road Ahead

Value Reporting Format
Market Overview
managements perspective of industry dynamics and market positioning

Value Strategy
depth and clarity of strategy

Managing for Value

how companies manage their financial resources from the economic point of view

Report & Accounts - The Road Ahead

Value Reporting Format
Value Platform
critical inputs for creating future value by investing in activities and relationships customers, brands, innovation, people, supply chain, corporate reputation

Report & Accounts - The Road Ahead

Market Overview
Competitive Environment Regulatory Environment Macro Economic Environment

Report & Accounts - The Road Ahead

Competitive Environment
total size of the industry names of major players and competitors clear description of markets-product and geographic market share of the company and competitors risks and uncertainties associated with the business segments

Report & Accounts - The Road Ahead

Regulatory Environment
expected and proposed legislations related to Industry in which the company operates recent amendments as well as those proposed role of SEBI, stock exchanges, Company Law Board, Excise, Income Tax, Sales Tax authorities

Report & Accounts - The Road Ahead

Macro Economic Environment
economic data relating to production, consumption, along with the expected growth rates domestic and international market conditions interest rates stock market performance of industry and company

Report & Accounts - The Road Ahead

Value Strategy
statement of goals and objectives . both in the short term and the long term organizational design management structure governance communication relating to corporate governance, transparency and management

Report & Accounts - The Road Ahead

Managing for Value
management to offer a clear analysis not only of expected cash flow from operations but .. also, the degree of risks assumed in generating the cash flows financial position risk management

Report & Accounts - The Road Ahead

Value Platform
innovation brands customers human resources corporate reputation corporate infrastructure

Towards Sustainable Development

Creating an ethos of care and commitment Sustainability assumes great importance and urgency
impact of economic growth on society and environment; creating capacity to consume among those living at the margin - rural India; Environment capital has to be enriched.

Towards Sustainable Development

Issues to be addressed on a war footing
sharp decline in per capita availability of water low forest cover due to continuing deforestation increasing levels of air and water pollution remorseless increase in quantum of wastelands rising demand of fossil fuels

Towards Sustainable Development - Corporate Role

Corporates need to make their contribution in meeting this global challenge - a commitment beyond the market Premium needs to be placed on those companies
that create economic progress with minimal adverse effect on ecology those also serve to replenish natural capital

Towards Sustainable Development - Corporate Role

Accordingly contribution of companies need to be comprehensively measured along three dimensions
triple bottomline
economic, ecological and social

no conflict between the two goals of shareholder value creation and societal value creation.

Towards Sustainable Development

Stakeholder / Mode of Engagement 1. Shareholders AGM Written Communication Investor Service Centre Government Regular meetings and structured communication on key economic, EHS, social issues & regulatory trends Key Sustainability Concerns

Profitability & Growth

2.

Regulatory Issues and Community Interests

3.

4.

Employees Health & Safety; Career Prospects; Regular intervention with Unions, representat6ion/participation Ethical Standards; Attracting & of employees in EHS and social initiatives retaining talent, satisfaction and commitment Communications Air & water quality, Environment Neighbourhood, need based discussions & communication quality Customers Customer & market survey, customer compliment records, redressal systems etc. Quality, costs, delivery, innovation, services

5.

Towards Sustainable Development

Global Reporting Initiative (GRI)
need to better assess an organization's status and align future goals with a complex range of external factors. Sustainability reporting in a part of analytical toolkit.

Linkages between sustainability performance and key value drivers such as brand image, reputation, future asset valuation are awakening mainstream financial markets. Move away from conventional financial accounts to create a more complete picture of long term growth.

Towards Sustainable Development

Social Sights
Greening Wastelands Irrigating Drylands Creating Women Entrepreneurs Educating Rural Children Enhancing Livestock Quality

Towards Sustainable Development

Environmental Sights
Reducing Green House Gases
CO2 Released and CO2 Sequestered Carbon - Positive Company

Furthering use of climate-neutral fuels as against fossil fuels Water Positive Company
Reduce fresh water intake Recycle water Efforts to enhance rainwater harvesting potential

Towards Sustainable Development

Environmental Sights

Zero Solid Waste

Segregation of plastic waste Recycling of paper and inorganic waste Use wet and organic wastes as compost

Towards Zero Effluent Discharge

Waste water discharge for farming Chemical, oil and fuel spills
Infrastructure & design to avoid spills.

Towards Sustainable Development

There is no inherent contradiction between improving competitive context and making a sincere commitment to bettering society .. If systematically pursued in a way that maximises the value created, context focussed philanthropy can offer companies a new set of competitive tools that well justifies the investment of resources.
Michael E. Porter and Mark R. Kramer The Competitive Advantage of Corporate Philanthropy Harvard Business Review - December 2002

Thank You