India is one of the worlds fastest growing economies The Indian economy is the third largest by purchasing power parity, and has reported an average annual GDP growth rate of nearly six percent over the last two decades. However, the Indian banking sector still follows the Indian Generally Accepted Accounting Principles (IGAAP), as opposed to the International Financial Reporting Standards (IFRS) that are followed by the banks in the most major economies the world over. Adopting global reporting standards holds several benefits for the Indian banking sector, as this will bring in the much needed transparency and comparability at the international level.
Will the adoption of IFRS work in our favor?
Well, one things for sure: while Indian companies will benefit from a single accounting and reporting norm, IFRS can prove to be a boon in more ways than one. Broadly, Indian financial firms can look at raising capital for expansion without having to separately comply with the financial accounting and disclosure requirements at some of the worlds prominent stock exchanges. Moreover, it will be a lot easier, and economically viable, to manage new relationships with customers, analysts, and investors from other countries, especially with regard to accounting tasks.
Having said that, a cascading effect of the adoption of the IFRS by Indian banks (scheduled to take effect from April 1, 2018) is inevitable. Compliance to these global accounting standards is not just about converged financial statements; it translates to a new way to tackle the entire record-to-report chain of business transactions. In some cases, it would be prudent to even lean beyond and evaluate the relevance of existing products, services, and their implications on financial KPIs and taxation strategies in the new accounting regime.
What should Indian banks do to achieve IFRS compliance?
The fair valuation principle and the expected loss model are two of the most important concepts that the new accounting paradigm will bring about, to gauge the true value of a business. Financial firms will need to develop IT-enabled innovative solutions to arrive at the opening balances of assets and liabilities. Since this requires elaborate investment and efforts, it might prove to be a stumbling block in meeting the first time adoption requirements.
Moreover, having followed the IGAAP so far, Indian financial firms and accounting companies are, predictably, comfortable with the existing way of things, and will therefore require elaborate IFRS-related training. The current lack of knowledge of IFRS, its accounting policies, tax implications, and other prerequisites involved in the changeover process, can hinder smooth IFRS adoption to a large extent.
The IFRS adoption initiative qualifies as a large-scale transformation program that requires top managements commitment toward investing in solution deployment, personnel training, business process reengineering, and so on. And hence banks will have to proactively drive this forward. An apex steering group will need to be formed to oversee this initiative and look into arising issues across all lines of business and functions of a bank. It is necessary to bring all stakeholders to a common forum and make them aware of the technical nitty-gritty and other nuances of this changeover. Finally, banks and financial firms will also need to factor in the massive IT overhaul required to juggle between diverse GAAP reporting and disclosure requirements, especially in case of global operations that warrant multi-jurisdictional compliance. All this will need a well-documented organizational structure with roles, responsibilities, systems, and processes to ensure minimal business disruption, as the real work will begin after April 2018. Functioning according to IFRS 9 would be as daunting as adopting it.