Delayed IFRS: Impact on GDR Issuers

By: Jamil Khatri, Partner & Head of Accounting Advisory Services, KPMG (India)

As discussed in my previous columns, the IFRS converged standards (Ind AS) have not been made effective from April 1, 2011 (the previously announced timeline). Further, the final notified Ind AS includes deviations from IFRS as issued by the International Accounting Standards Board (IASB). These developments have some unique implications for Indian companies that have issued Global Depository Receipts (GDR) listed on the European stock exchanges.

Ordinarily, the European stock exchange regulations would require that issuers which have their securities admitted for trading on an European Union (EU) regulated market or which make a public offer of their securities in Europe, to provide financial statements prepared in accordance with IFRS as issued by the IASB. 

However, in December 2008, based on the recommendations of the Committee of European Securities Regulators (CESR) and to support the efforts of countries, which had undertaken to converge their accounting standards to IFRS, the European Commission (the Commission) granted a transitional relief for issuers from certain countries whereby such issuers could provide financial statements prepared using Chinese, Canadian, South Korean or Indian GAAP.

This transitional relief was granted for financial statements relating to periods starting before January 1, 2012.  Thus, a majority of Indian companies with securities listed in the EU have historically provided financial statements prepared in accordance with Indian GAAP and have not been required to prepare IFRS compliant financial statements.

In its 2008 recommendations, the CESR had highlighted the status of IFRS convergence in India.  Based on its interactions with the Indian regulators, the CESR had also noted that the Institute of Chartered Accountants of Indian (ICAI) may make modifications to IFRS to reflect "Indian conditions" such as requiring additional disclosures, changing some terminology and omitting some options or alternative treatments.

However, these changes by the ICAI were expected to be minor and the then stated intention of both the Indian regulators was that the converged Indian Accounting Standards would be fully compliant with IFRS, by the end of the convergence program.   Indian issuers were therefore expected to be in a position to make an absolute statement of compliance with IFRS in the notes to their financial statements.

With the deferral of implementation of Ind AS and the deviations between Ind AS and IFRS, Indian companies will not be in a position to make a statement of compliance with IFRS in their financial statements (at least for the next few years).  A question therefore arises on whether Indian companies with outstanding GDR, or which plan to issue new GDR, will be required to provide separate IFRS compliant financial statements for periods commencing April 1, 2012 (assuming a March 31 fiscal year end).

This would also require financial statements for the year ending March 31, 2012 to be prepared using IFRS, with April 1, 2011 as the transition date.  I understand that the Commission has noted these developments and is likely to address this question in the coming months.  In addition to the deferral, the Commission's decision may also be influenced by the deviations between Ind AS and IFRS, and the fact that several other countries impacted by the transitional relief (for example, Canada and South Korea) would have implemented the IFRS converged standards per the agreed plan and timelines.

While we await the decision of the Commission, it may be useful for impacted companies to take stock of the IFRS implementation projects at their individual companies.  This will enable such companies to plan for meeting their reporting obligations if the Commission decides not to provide any further relief from IFRS reporting.  Impacted companies may also consider approaching their industry associations and the Indian regulators to ensure that their position is appropriately represented in potential discussions between the Indian regulators and the Commission.

This situation also highlights the practical consequences of the deferral and the downsides associated with implementing a set of standards, which are not fully compliant with IFRS as issued by the IASB.

I look forward to your feedback and comments.  You may communicate with me on thefirm@in.com or jkhatri@kpmg.com