More time for IFRS rollout: banks

Banks’ association says the process needs a huge effort.

Banks may seek time beyond the March 2011 deadline to shift to International Financial Reporting Standards (IFRS) in view of the mammoth effort required for the switover, according to industry sources.

The Indian Banks’ Association (IBA) today said its management committee last week discussed the implications of the convergence.

Banks, it felt, faced various challenges while implementing IFRS, most of which pertained to fair value accounting, erosion in value of loans and investments, and derivatives and hedge accounting.

“We want clarity on who will issue specific standards, whether it is RBI, ICAI or the Ministry of Corporate Affairs. When Basel-II norms were prescribed, there was much clarity on regulatory and other issues. We require more time beyond March 2011,” said a senior IBA official.

While the committee agreed that migration to IFRS was necessary, it extensively discussed the proposed schedule.

The association said there was a need to collect detailed information of the preparedness of banks as well as the ICAI to comply with and guide on various aspects of IFRS. After gathering feedback, the bankers’ body would submit its recommendations to RBI.

The first challenge, it felt, pertained to loan and investment erosion. Banks would need to build models to assess facts and circumstances on the recoverability and timing of future cash flows from credit exposure. They will have to strengthen systems for capturing data to assess impairment and spruce up their loss-forecasting mechanism.

The second issue pertains to the fair value of financial investments. At present, this measurement is not done frequently under the Indian Generally Accepted Accounting Principles (GAA). Under IFRS, there will be a significant increase in use of fair value measurements. Also, due to stringent criterion, the held-to-maturity classification is unlikely to be available for a substantial part of the portfolio. Banks would have to keep their valuation methods and practices up-to-date, validated and back-tested under the current market environment.

A treasury head of a public sector bank said there could be a substantial change in how the derivatives transactions were treated in valuations. IFRS prescribes that all derivatives are recognised at fair value. In contrast, the Indian GAAP does not specifically address fair value and hedge accounting. For implementing stringent standards, banks wil have to formulate hedge accounting policies and spread awareness about these.

The fourth aspects concerns derecognition of a financial asset. It is quite complex process under IFRS and depends on whether there has been a transfer of risks and rewards. This could impact securitisation of assets since most special purpose vehicles are structured to meet the Indian norms.

Finally, banks wil have to grapple with consolidation of entities for financial purposes. Under IFRS, this is not driven purely by the ownership structure. Instead, the focus is on the power to control the entity to get economic benefits. This power could be expressed by ownership of an equity stake but not limited to it. Global norms provide much more rigorous consolidation tests while the Indian GAAP focuses on narrower set of tests like majority ownership and composition of board of directors.