Experience of Indian Corporates in implementation of IFRS. Infosys Technologies Limited

Transcription

1 Experience of Indian Corporates in implementation of IFRS Infosys Technologies Limited

2 Global developments Global developments in the past: In December 2007, the United States Securities Exchange Commission (SEC) proposed to allow foreign private issuers (Companies like Infosys, Siemens, Wipro, etc.) to submit their financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ( IFRS ) without reconciliation to generally accepted accounting principles as used in the United States. ( U.S. GAAP ). The companies could adopt IFRS regardless of whether its previous financial statements were prepared in accordance with U.S. GAAP or in accordance with the requirements of their home country regulations. The Institute of Chartered Accountants of India ( ICAI ) had issued a Concept Paper on Convergence with IFRS in India which laid down the roadmap to convergence by

3 Background of the Company.. Infosys has always set high standards in financial reporting and corporate governance and has been on the fore front of innovation and change.. First Indian Company to complete public offering of ADSs in the United States First Indian Company to be Sarbanes-Oxley compliant First Indian Company to file its XBRL statements under the SEC s voluntary filing program First Indian Company to be a part of the major global indices like NASDAQ-100 Index First Indian Company to file our primary financial statements in compliance with International Financial Reporting Standards. 3

4 Scenarios for transition Transition options available to a company adopting IFRS: Company filed its last Form 20-F (Annual Report) with SEC in accordance with U.S. GAAP It could transition to IFRS from U.S. GAAP. Company filed its last Form 20-F (Annual Report) with SEC in accordance with requirements of its home country regulations It could transition to IFRS from its local GAAP. Selection of Previous GAAP required considerable thought as IFRS 1, First time adoption of IFRS could be adopted only once and certain benefits/ exemptions available under IFRS 1 could be utilised only once. 4

5 Issues faced by Infosys upon transition Selection of Previous GAAP: Historically, Infosys had provided its Indian shareholders financial statements prepared in accordance with Indian GAAP and its holders of its American Depositary Shares financial statements prepared in accordance with U.S. GAAP. Adoption of U.S. GAAP as its Previous GAAP could have led to a problem when India transitioned to IFRS in It could have resulted in a potential non-compliance for Indian statutory purposes on the presumption that ICAI permitted only Indian GAAP to be adopted as the previous GAAP As India has made a conscious decision to adopt IFRS it was prudent for the Company to choose Indian GAAP as its Previous GAAP. However the problem lied as there was no precedence to the same 5

6 Issues faced by Infosys upon transition Detailed discussions were held with the SEC and they agreed with the rationale provided by Infosys. SEC suggested disclosure of certain additional information during the first year of our transition: Unaudited interim U.S. GAAP financial statements in compliance with SEC Regulations including the relevant footnotes in the interim quarterly reports. Reconciliations between U.S. GAAP and Indian GAAP in addition to the required reconciliations between Indian GAAP and IFRS. Infosys has adopted IFRS for the fiscal year ending March 31, 2009 with a transition date of April 1, All interim filings (i.e. quarters ending June 30, 2008, September 30, 2008 and December 31, 2008) with the SEC have also been in compliance with IFRS. 6

7 Key exemptions availed by Infosys upon First -Time Adoption Business combinations exemption - Non-application of IFRS 3, Business Combinations, to business combinations consummated prior to April 1, Goodwill stated at carrying value as per Previous GAAP Intangible Assets remaining subsumed in Goodwill and were not recognized separately. Share-based payment transaction exemption - Application of IFRS 2, Share Based Payment, only to grants made after November 7, 2002 and that remained unvested as at the date of transition. Vesting of all stock options under the 1998 and 1999 were accelerated on March 12, Share based payment charges for only stock options granted to IBPO employees on March 12, 2007 was required to be recognized. 7

8 Approach taken for IFRS adoption Transactions affecting equity were analyzed since 1999 under U.S. GAAP, Indian GAAP and IFRS. A complete equity balance break up was drawn up upto the date of transaction under IFRS by giving effect of appropriate transactions at the historic rate where exemptions were not available. IFRS 1, required only an equity reconciliation. Our approach was to carry out a complete reconciliation of each asset and liability to provide a full picture and detailed explanation to the investors. Two way reconciliation as required by SEC i.e. Indian GAAP to IFRS and U.S. GAAP to Indian GAAP provided complete transparency to investors. Condensed approach not adopted even for the Interim Financial Statements. Full disclosures as applicable to an Annual Report were provided. 8

9 Recent Developments in India A high level task force was set up in India to expedite the convergence process India 2 Committees were constituted Technical Committee CFO Sub Group Extensive Research and surveys were carried out to understand the state of readiness of the companies on adoption of IFRS. 9

10 Status of Sensex 30 and Nifty Companies The survey results depicted that the majority of the SENSEX 30 and Nifty 50 companies were already in a state of readiness and most of them had completed pilot phase Initiatives had been taken by Organizations like Indian Banking Association and Insurance Regulatory and Development Authority (IRDA) to ensure that the banking Companies and the Insurance Companies are geared up for IFRS Adoption. 10

11 Status of Readiness of SME Concerns were raised in survey by the Small and Medium Scale Enterprises as the new concepts under IFRS were unclear to them. Fair Valuation led to apprehensions within small scale community. 11

12 The Approach taken on Convergence MCA wide Press Release dated 22 nd January 2010, issued the proposed time lines for convergence of IFRS. Details are given below: 12

13 Questions which arose consequent to the Circular What would be the transition date for companies who have already adopted IFRS? If, subsequent to the adoption, the company does not meet the IFRS adoption criteria, should it discontinue IFRS? What is included in the Net worth and how to determine that? Is there any option to choose the IFRS v/s Indian converged accounting standards where differences exist? Does the Conversion Road Map make it mandatory for including unlisted companies to prepare CFS? all companies, What about changes required for other laws and regulations (i.e.) Taxation Laws, SEBI & RBI Regulations, etc.? 13

14 Exposure Drafts issued by ICAI ICAI has issued 38 exposure drafts which are in line with the IFRS together with IFRICs and SICs. The Major areas of impact in Indian GAAP are : Business Combination Income Taxes Share Based Payments Consolidation Property, Plant and Equipment Revenue 14

15 Major Exemptions granted for First Time Adoption Business Combination Share Based Payments Property, Plant and Equipment Cumulative Translation Differences 15

16 Changing Roadmap of IFRS The IFRS scenario is constantly changing even as we speak.. Highlights of the Staff Draft Financial Statement Presentation released jointly by the IASB and FASB: Presentation of cohesive set of financial statements i.e. aligning each line items, its description and order of presentation across the statement of financial position, comprehensive income statement and cash flow statement. Mandatory preparation of Direct Cash flows Disaggregation Principle Sample Statement of financial position on adoption of this standard would look like- 16

17 Changing Roadmap of IFRS BUSINESS Operating Short-term assets Long-term assets Short-term liabilities Long-term liabilities Investing Assets FINANCING Assets As at Total short-term assets - Total long-term assets - Total short-term liabilities - Total long-term liabilities - Net operating assets - Total investing assets - NET BUSINESS ASSETS - Total financing assets - NET FINANCING ASSETS - INCOME TAXES NET INCOME TAX ASSETS - NET ASSETS - EQUITY Share capital Retained earnings Other components of equity TOTAL EQUITY - 17

18 Exposure Draft on Employee Benefits Salient Features of the Exposure Draft Mandatory immediate recognition of all actuarial gains and losses through OCI Classification of interest costs net of gains as Finance Costs. Measurement of Interest on Plan Assets at the discount rate 18

19 Need of the hour.. Corporates need to gear themselves for constant updation and not only for the first time adoption: Keep track of changes at IASB Broadening the pool of trained resources, both in the industry and the audit firms. Active participation in the standard setting process by commenting on the Exposure Drafts and Staff Drafts Management would need to spend significant time and efforts in order to educate the investors, lenders, analysts, Board of Directors, regarding the impact of IFRS on the financial position and performance. 19

20 Questions? 20

21 Thank you Infosys Technologies Limited

22 Additional Information 22

23 Major differences between IFRS and Indian GAAP Form and components of financial statements Consolidated financial statements Property, plant and equipment IFRS Balance sheet Income statement Statement of changes in equity Statement of cash flows An entity having a subsidiary must present consolidated financial statements. The fair value approach is followed while calculating the goodwill at the time of preparing consolidated financial statements. Depreciation is based on useful life of assets. Indian GAAP The Companies Act does not prescribe preparation of statement of changes in equity. Further, preparation of a cash flow statement is not mandatory for all companies. There is no mandatory requirement under the Companies Act, 1956 for an entity to present consolidated financial statements. Goodwill/Capital reserve is calculated by computing the difference between the cost to the parent of its investment in the subsidiary and the parent s portion of equity in the subsidiary. Depreciation is based on higher of useful life or Schedule VI rates. 23

24 Major differences between IFRS and Indian GAAP Events after the Balance Sheet date Accounting for taxes on income IFRS Non-adjusting events are required to be disclosed in the financial statements. Deferred taxes are based on temporary differences in i.e. difference between carrying amount and tax base of assets and liabilities. Deferred tax assets and liabilities are classified net as non-current with supplement disclosures for: a) components of temporary differences and, b) amounts expected to be recovered within 12 months and more than 12 months of the balance sheet date. Indian GAAP Non-adjusting events are not required to be disclosed in financial statements but are required to be disclosed in the Director s report as per Section 217 of the Companies Act, Deferred taxes are based on timing differences. Timing difference is a term with a narrower meaning than temporary differences. Deferred tax assets, net are disclosed after Net Current assets, whereas deferred tax liabilities, net are disclosed after Unsecured Loans. 24

25 Major differences between IFRS and Indian GAAP IFRS Interim Financial reporting IFRS does not require public entities to furnish interim financial statements, though it encourages interim reporting. Employee benefits In IFRS, IAS 19, provides an option with regard to recognition of actuarial gains and losses i.e. in equity or profit and loss account. Indian GAAP The listing agreement in India requires all listed companies to furnish interim financial results on a quarterly basis. AS 15 Revised does not provide any option with regard to recognition of actuarial gains and losses. It requires such gains and losses to be recognized immediately in the statement of profit and loss. Share-based payments Share- based payments are accounted as per Fair Value method. Share- based payments are accounted as per the Guidelines issued by SEBI and the Guidance note on accounting for employee share-based payments both of which permit the use of Intrinsic Value method as an alternate to the Fair value method. 25

26 Major differences between IFRS and Indian GAAP Accounting policies, errors and estimates Business combination IFRS Accounting policy changes and corrections of prior period errors are accounted for retrospectively by restating equity and comparatives, unless impracticable. Business combination has a wider scope and are accounted using the purchase accounting method. Indian GAAP There is no concept of restatement of comparatives except in financial statements prepared for certain specific purposes like public offers. Indian GAAP deals only with amalgamations and there is liberal use of pooling of interests method which in not permitted under IFRS. Inventories IFRS requires same cost formula to be used for all inventories having a similar nature and use. Where inventories have a different nature and use, different cost formulas may be justified. Indian GAAP provides that the cost of inventories should be assigned by using FIFO, or weighted average cost formula. 26

27 Major differences between IFRS and Indian GAAP The Effects of Changes in Foreign Exchange Rates IFRS An entity measures its assets, liabilities, revenues and expenses in its functional currency, i.e. the currency of the primary economic environment in which the entity operates. Functional currency of an entity may be different from the local currency. Indian GAAP In Indian GAAP, there is no concept of functional currency. Financial statements need to be in Indian Rupees only. Related party transactions IFRS provides for including nonexecutive director under key management personnel. A non-executive director of a company should not be considered as a key management person by virtue of merely his being a director unless he has the authority and responsibility for planning, directing and controlling the activities of the enterprise. 27

28 Reconciliations- Indian GAAP- IFRS STATEMENT OF FINANCIAL POSITION April 1, 2007 March 31, 2008 Indian GAAP IFRS Indian GAAP IFRS Goodwill Intangibles Equity 2,611 2,722 3,448 3,916 April 1, 2007 Goodwill of$4 million Deferred purchase agreement entered with the minority shareholders of Infosys BPO in February 2007, to purchase equity shares of Infosys BPO by February 2008 did not qualify as an investment under Company Law. The same was recognized in IFRS as the risks and rewards of ownership were considered transferred in February 2007 itself. Goodwill Offset of $11 million- Gains from changes in proportionate share of subsidiary resulting from issuance of stock by subsidiary was offset against goodwill under Previous GAAP was grossed up in equity in IFRS. Retained Earnings $101- Liability for dividends (incl. corporate dividend tax) declared and approved after the reporting period are not recognized in IFRS. 28

29 Indian GAAP- IFRS March 31, 2008 Intangible assets of $11 million - Customer contract upon acquisition was included in goodwill under Previous GAAP, have been recognized separately under IFRS. Retained earnings of $456 million - Liability for dividends (incl. corporate dividend tax) declared and approved after the reporting period, are not recognized under IFRS. Share-based compensation of $3 million - Share based compensation for grants made to IBPO employees was recognized in IFRS. INCOME STATEMENT- No significant impact Share-based compensation of $3 million for grants made to IBPO employees was recognized in IFRS. CASH FLOWS- Minor presentational impacts Interest and dividends received may be classified as operating, investing or financing activities under IFRS. However, Indian GAAP mandates the classification of such cash flows under Investing activities. 29

30 Reconciliations- U.S. GAAP- Indian GAAP STATEMENT OF FINANCIAL POSITION April 1, 2007 March 31, 2008 US GAAP Indian GAAP US GAAP Indian GAAP Goodwill Intangibles Equity (including minority) 2,717 2,611 3,448 3,448 April 1, 2007 Goodwill of $4 million Deferred purchase agreement entered with the minority shareholders of Infosys BPO in February 2007, to purchase equity shares of Infosys BPO by February 2008 did not qualify as an investment under Company Law. The same was recognized in U.S. GAAP as the risks and rewards of ownership were considered transferred in February 2007 itself. Goodwill Offset of $11 million: Gains from changes in proportionate share of subsidiary resulting from issuance of stock by subsidiary was offset against goodwill under Indian GAAP which had been presented in equity in U.S. GAAP. Intangible Assets of $20 million net of amortization - Intangible assets acquired as a part of business combination are not permitted to be recognised under Indian GAAP and included in Goodwill. 30

31 Reconciliations- U.S. GAAP- Indian GAAP April 1, 2007 Retained Earnings $101 million- Liability for dividends (incl. corporate dividend tax) declared and approved after the reporting period are not recognized in U.S. GAAP. Retained Earnings $48 million- Share based payment charges were recognized only in U.S. GAAP as the grants were made at an intrinsic value of zero. March 31, 2008 Goodwill Offset of $11 million- Gains from changes in proportionate share of subsidiary resulting from issuance of stock by subsidiary was offset against goodwill under Indian GAAP. The same has been included in equity in U.S. GAAP. Intangible Assets of $25 million net of amortization- Intangible assets acquired as a part of business combination are not permitted to be recognized under Indian GAAP and are included in Goodwill. Retained earnings of $456 million- Liability for dividends (incl. corporate dividend tax) declared and approved after the reporting period, are not recognized in U.S. GAAP. Share Premium-Share-based compensation of $51 million- Share based payment charges were recognized only in U.S. GAAP as the grants were made at an intrinsic value of zero. 31

32 Reconciliations- U.S. GAAP- Indian GAAP INCOME STATEMENT Share-based compensation of $3 million- Share-based compensation for grants made to IBPO employees was recognized in U.S. GAAP but not in Indian GAAP. Amortization of Intangible Assets of $8 million- Intangible assets subsumed in Goodwill were never amortized in Indian GAAP. CASH FLOWS- Only presentational impacts Interest and dividends received are classified under operating activities in U.S. GAAP. However, Indian GAAP mandates the classification of such cash flows under Investing activities. 32