IFRS puts shareholders at the front: Kenneth Marshall

Interview with Americas FAAS leader & member of the Global FAAS leadership team

Global heads of Ernst & Young's Financial Accounting Advisory Services (FAAS) practice met in India to assess the impact of recent regulatory changes around the world on accounting and financial reporting. Kenneth Marshall, Americas FAAS leader and member of the Global FAAS leadership team, EY, spoke to Sudipto Dey on what businesses need to watch out for while migrating to Ind-AS, the IFRS-compliant accounting standard, and while preparing for GST. Edited excerpts:

What has been the experience in other markets when companies migrate to a global accounting standard?

The first wholesale migration to IFRS is being done in Europe as part of the EU mandate. However, the trick is that conversion from local GAAP to IFRS is not a one-time deal. The processes one needs to put in place, the changes in the IT systems, ability to make your investors understand what the financial systems are telling them - that is the challenge, and that does not happen overnight. That was where many jurisdictions, largely in Europe, struggled. They met their deadlines to convert to IFRS in 2005, but from then on they have been working to get their systems and procedures to support their reporting.

Companies must realise that IFRS is written for shareholders who do not have insights into the company. But because of that you are going to have volatile earnings. Preparing for that as the investor relations professional in the company, or as the CFO, is the challenge. Putting in process, systems and messaging are the three hardest things to accomplish in the time-frame for Ind-AS adoption.

The primary benefits of IFRS will be for the shareholders. In most jurisdictions outside the US, financial statements have served the needs of the taxman and the regulator. The shareholders were just nice-to-know. IFRS brings about a change in the thought process. Companies have to now think from the shareholder's perspective, rather than from regulatory or taxation purpose.

Many companies put a band-aid on old processes and procedures when they get to IFRS. That is a dangerous way to go about a conversion. Even if initially the band-aid is strong, it weakens over time. So Indian companies need to start thinking quickly how to put in place processes  and align them with their internal financial control framework.

Most companies are in the early stage of preparing themselves for Ind-AS. The country is also slated to roll out GST in April 2016. Would it make more sense for businesses to prepare simultaneously for both?

Companies should do both of them, but only after a risk assessment. One should look at which one is more difficult to tame and put resources there first.

Many companies are trying to split projects coming out of the Companies Act implementation, Ind-AS and GST. After doing that one should assess their cumulative impact on the IT systems. CFOs should consolidate the financial information, whether it is to go to the Ministry of Company Affairs, regulators or the tax authorities, and put them on a common platform and then change the IT systems.

In many companies tax and GST-related issues are led by the tax controller, the issues around the Companies Act by the company secretary, and the Ind-AS is with the CFO. Our message to companies is do not run parallel projects, but integrate them.

Also companies with a large global footprint will see a fundamental shift in the way they look at their business.

What is your assessment of the impact of IFRS on investment?

IFRS is the first step in a journey towards transparency. The more transparent the capital market and the companies operating in the market are, the more comfortable people will be in investing in these markets.

The other important part is that of related-party transactions. More transparency in related-party deals adds legitimacy to the economy. For retail investors, IFRS is a game-changer.

Any common concerns among countries on the way accounting standards are evolving?

The concerns are that as we harmonise standards, they become more and more complex. As a result, transactions are also becoming more complex.

Your advice to Indian companies as they get into IFRS-compliance mode?

They must go back to robust processes. Do not make it a back-of-envelope transition, but build this into the way you do business. If you do that, you will get your infrastructure of people, process, and IT solutions in line. Also think about how you manage your business in relation with IFRS.

It is an opportunity for companies to think about connected reporting and be transformative for the business. Companies do not have much time and it is not too soon to start the process of conversion to IFRS.