Business Desk
In line with the global trend, the Institute of Chartered Accountants of India (ICAI) has proposed a plan for convergence with International Financial Reporting Standards (IFRS) for certain defined entities – including banks – with effect from April 1, 2011. Convergence to IFRS would mean India would join a league of more than 100 countries, which have converged with IFRS.

KPMG today released a report on IFRS on the sidelines of the IBA / KPMG Conference on ‘IFRS: Developing a roadmap to convergence for the Indian Banking Industry’.

According to the report titled, ‘IFRS Convergence: Challenges and Implementation Approaches for Banks in India’, the financial impact of convergence with IFRS will be significant for banks in India, particularly in areas relating to loan loss provisioning, financial instruments and derivative accounting. This is likely to have a significant impact on financial position and financial performance, directly affecting key parameters such as capital adequacy ratios and the outcomes of valuation metrics that analysts use to measure and evaluate performance.

Commenting on the release of the Report, Dr. K. Ramakrishnan, Chief Executive, Indian Banks’ Association, said, “Banks in India need to start thinking through the challenges and develop a roadmap for successful convergence at the earliest. The proposed convergence with IFRS is likely to create significant challenges. Most importantly, the initial and ongoing IFRS convergence will affect reported networth, available capital and capital adequacy for Indian Banks.”

Highlighting the challenges faced by the Indian Banking Sector along the path to convergence, Mr. Jamil Khatri, Head – IFRS Conversion Services, KPMG in India, said, “In addition to the general accounting standards and practices that constitute Indian GAAP, banking companies are currently required to adhere to accounting policies and principles that are prescribed by the Reserve Bank of India (RBI). For example, financial reporting policies for provision for loan losses and investments are specified by the RBI. Our experience indicates that adoption of IFRS requires a significant change to such existing policies and could have a material impact on the financial statements of financial companies. We also expect that in addition to the financial accounting impact, the convergence process is likely to entail several changes to the financial reporting systems (including IT systems) and processes adopted by banks in India”

By virtue of operating in a regulated industry, Banking companies are subject to regulatory reviews and inspections and are also subject to minimum capital requirements. IFRS requires increased use of judgement and extensive use of unobservable valuation inputs and assumptions. The regulatory review process would need to be adjusted to acknowledge the inherent judgements involved in the application of IFRS. Additionally, application of IFRS may result in higher loan losses and impairment charges, thereby impacting available capital and capital adequacy ratios. Similarly, use of fair values would introduce additional volatility in reported capital with its consequent impact on capital adequacy.