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Monthly Archives: June 2011

FY 2012 – 13 AND FCCB – IS IT GOING TO BE A SPEED BREAKER FOR INDIA’S GROWTH STORY

Comments Off on FY 2012 – 13 AND FCCB – IS IT GOING TO BE A SPEED BREAKER FOR INDIA’S GROWTH STORYPosted by on June 29, 2011

Global hedge funds and offshore investors are closely tracking the response of Corporate India, the judiciary and financial market regulators as 16,000 crore of convertible bonds sold by local top 500 companies come up for repayment by March 2012. With some Indian firms trying to wriggle out of their commitments, overseas bondholders are beginning to question the creditworthiness of India Inc. They are also anxious to figure out whether Indian courts will uphold creditors’ rights. The Reserve Bank of India had raised concerns about high overseas borrowings in its recent Financial Stability Report. Shares of many companies are trading at a fraction of the price at which Foreign Currency Convertible Bonds (FCCBs) are to be converted into shares. If prices recover, investors can convert the bonds into equity shares. That looks unlikely. If prices don’t recover, the companies can redeem the bonds by paying off investors. That appears impossible given the stretched balance sheets of many companies. Then, companies will have to issue fresh bonds in lieu of the old ones, negotiating a new set of conditions — revised conversion price, extended tenure and reset interest rates. Most companies worth their salt will try to work out some solution either by raising fresh money to redeem the FCCBs along with redemption premium or by restructuring the bonds. This is because they know a default or legal tussle would blacklist them in the foreign market. It will also downgrade their credit rating. That’s why the companies, whose stocks are trading at a discount to the conversion price, are already in talks with investors, says Ashutosh Maheshwari, head of investment banking at Motilal Oswal. Assam Company and Suzlon are two such examples. “We are looking at restructuring our outstanding FCCBs,” says Sanjay Sharma, finance head of Assam Company, whose FCCBs worth $32 million will mature in November. Offshore Investors Watching Closely .

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The stock of the Kolkata-based tea company has been hovering at around15, a good 48% discount to the conversion price of 28.75 that the company had fixed when it issued bonds in 2006. The Suzlon spokesperson says the company does not foresee any problems with FCCBs. Suzlon’s $300 million worth FCCBs will mature in June and October next year. The Suzlon stock is quoting at 50% discount to the conversion price. Reliance Communications has the largest chunk of outstanding FCCBs worth $925 million (about 4,150 crore). These bonds are unlikely to be converted into equity shares when they mature in March, as the stock is trading at 86% discount to the conversion price of . 661. RCOM will try to raise bank loans to repay bondholders, says a person close to the company. That will add to the company’s ballooning debt burden of 35,000 crore. RCOM did not comment on the issue. “Offshore investors are watching how India Inc behaves. If pragmatism prevails over greed, then invariably restructuring will work,” says H Jayesh, founder-partner of law firm Juris Corp. At the same time, there is a lingering fear that this could easily turn into a minefield of disputes. “We fear some Indian promoters will neither agree to convert at a lower price — as it will dilute their stake, nor repay the money,” says a bondholder, who had subscribed to FCCBs of a handful of companies in 2007. Akil Hirani, managing partner of legal firm Majmudar & Company, expects some bondholders to have disagreements with the promoters on revision of the conversion price, leaving them with no option but to take legal recourse against the companies. If the companies want investors to give heavy discounts, the matter is likely to go to courts, according to Huzefa Nasikwala, managing partner, Nasikwala Law Office. “Agree to a conversion at a realistic price and most investors will effectively extend the maturity period by a few years, if not more,” is what Juris Corp’s Jayesh advises companies. A month ago, a Singapore-based hedge fund, 3 Degrees Asset Management, moved the RBI against Karur KCP Packagings, a Tamil Nadubased cement bag maker. Karur KCP had raised $10 million in April 2006 through FCCBs bearing a 2% interest rate and conversion price at 75. The bonds were due to expire on April 27, 2011. Backed by majority of the bondholders, the tenure of the security was extended by another 10 years and coupon was cut to zero. The hedge fund has alleged fraud and manipulations in the company’s exemption scheme. The foreign fund is planning to initiate legal proceedings against the issuer. Two years ago, US-based hedge funds DE Shaw and Citadel Investment Group had filed a winding-up petition against Chandigarh-based Venus Remedies after the company defaulted on an FCCB issue. However, the matter was resolved last year. Beginning 2006, FCCBs captured the imagination of promoters of Indian companies who exploited it as the cheapest source of finance. It was a simple bet: the stock market will continue to rise and issuers will not be driven to a point where they will have to pay back the money; once the stock of the issuing company touches a pre-agreed price (conversion rate), the bonds will be converted into shares. The bet backfired as the stock market dipped — the bellwether Sensex has fallen 15% this year — and the stocks are struggling at a fraction of the conversion price. Some small and mid-caps are now trying different ploys to hold back payment. A few have entered into messy court feuds, one of the firms has allegedly falsified accounts to overstate losses and moved the BIFR while another has taken refuge in complaints by local investors. Bonds worth 31,500 crore are due for redemption by March 2013, according to a Crisil Research study of S&P CNX 500 and BSE 500 companies. Of this, Rs 16,000 crore of bonds will mature by March 2012. Market participants say the numbers could double if all mid and small-cap companies are taken into consideration. Among the top 500 companies, it looks like 70% of outstanding bonds may not be converted, says Crisil’s Koparkar. Of this, the “real worry” is bonds worth 2,000 crore, he adds. But the figure is at least 5,000 crore if all small and mid-cap stocks are taken into account, says a bondholder, not wanting to be named. Three years ago, some companies defaulted in paying FCCB investors. The bondholders, in turn, took them to courts. The list included Wockhardt. Its bondholders had filed a winding up petition against the company.

Always Yours — As Usual — Saurabh Singh

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IFRS ——- What is IFRS ?

Comments Off on IFRS ——- What is IFRS ?Posted by on June 7, 2011

IFRS for SMEs  — What is IFRSs and IFRSs for SME

Scope of IFRS All International Accounting Standards (IASs) and Interpretations issued by the former IASC (International Accounting Standard Committee) and SIC (Standard Interpretation Committee) continue to be applicable unless and until they are amended or withdrawn. IFRS sets out recognition, measurement, presentation and disclosure requirements of transaction and events in general purpose financial statements. IFRSs apply to the general-purpose financial statements and other financial reporting by profit-oriented entities i.e. those engaged in commercial, industrial, financial, and similar activities, regardless of their legal form. Entities other than profit-oriented business entities may also use IFRSs with certain changes in terminologies. General purpose financial statements are intended to meet the common needs of shareholders, creditors, employees, suppliers, government and the public at large for information about an entity’s financial position, performance, and cash flows. IFRS apply to consolidated as well as separate financial statements. If an IFRS allows both a ‘benchmark’ and an ‘allowed alternative’ treatment none of them is preferred treatment. However, in developing Standards, IASB intends not to permit choices in accounting treatment. Further, IASB intends to reconsider the choices in existing IASs. IFRS presents fundamental principles in bold face type and other guidance in non-bold type (the ‘black-letter’/’grey-letter’ distinction). Paragraphs of both types have equal authority. IFRS does not prescribe as who should apply IFRS. It left upon the national standard setters to decide which entities would be bound to comply with IFRS. The focus of international standard setting is on profit-oriented reporting entities, including non-corporate entities such as mutual funds. Despite concentrating on profit-type entities, the IASB envisages that non-profit entities in the private and public sectors may nevertheless find its Standards an appropriate basis for financial reporting. The specific needs of the public sector have been acknowledged by the International Federation of Accountants (IFAC), whose Public Sector Committee has on its agenda the preparation of standards based on IFRS, for use by public sector entities. However, a non-profit entity that states compliance with IFRS should comply with IFRS in full. A profit-oriented reporting entity is one that reports to users, who rely on the financial statements as a major source of financial information about the entity. Financial Statements are directed to the information needs of users such as investors and potential investors, employees, lenders, suppliers, creditors, customers, governments and the public at large. The term financial statements refer to statements that display different aspects of the entity’s financial performance and position. Financial position is reflected in the statement of financial position and a statement of changes in shareholders’ equity (excluding transactions with shareholders). Financial performance is reported in the income statement and liquidity position in the cash flow statement. These statements are supplemented by a series of detailed notes. Some Standards permit different treatments for certain types of transactions or events. One treatment is designated as the benchmark treatment, and the other the allowed alternative. Neither is designated as the IASB’s preferred approach. The Board intends to develop future Standards that require similar transactions and events to be accounted for in the same way. The IASB intends to reconsider the choices given in current IFRS with a view to reducing and potentially eliminating them. Structure of IASB The IASB is organised under an independent Foundation named the International Accounting Standards Committee Foundation (IASCF). That Foundation is a not-for-profit corporation created under the laws of the State of Delaware, United States of America, on 8 March 2001.

Components of the new structure of IASB are as follows:

1. International Accounting Standards Board (IASB) – has sole responsibility for establishing International Financial Reporting Standards (IFRSs). 2. IASC Foundation – oversees the work of the IASB, the structure, and strategy, and has fundraising responsibility. 3. International Financial Reporting Interpretations Committee (IFRIC) – develops interpretations for approval by the IASB. 4. Standards Advisory Council (SAC) – advises the IASB and the IASCF. 5. Working Groups – expert task forces for individual agenda projects. 6. Monitoring Board of Public Authorities- effective 01.02.2009 Accounting Standards in India are issued by Accounting Standard Board (ASB) of Institute of Chartered Accountants of India and are largely based on IFRS. However, India has not been able to keep pace with the amendment and additions made in IFRS from time to time. This is largely because of its sensitivity to local conditions including the conflicting legal and economic environment. However, with the opening of Indian economy in near past, the convergence to IFRS has become unavoidable. Keeping this in view, ASB decided to form an IFRS task force in August 2006. Based on the recommendation of this task force, the Council of ICAI, in its 269th meeting decided to fully converge with IFRS from the accounting periods commencing on or after 1st April 2011. At initial stage, this convergence will be mandatory for listed and other public interest entities like banks, insurance companies, NBFCs, and large sized organizations with high turnover or annual income.

Why this convergence?

Converging with IFRS will have multiple benefits for Indian entities especially those who aspire to go global. Some of the benefits of convergence with IFRS are explained below:

a) Accessibility to foreign capital markets

The force of globalization has enabled the concept of ‘open economy’ and increasing numbers of countries has opened doors for foreign investment and foreign capital. Many Indian entities expanding and making their presence felt in international arena. Huge amount of capital commitment are required in this process for which entities have to list their shares in various stock exchanges around the world. Majority of stock exchanged either require or permit IFRS complaint accounts. Adaptation of IFRS will enable Indian entities to have access to international capital markets.

b) Reduced Cost

At present when Indian entities list their securities abroad they have to make another set of accounts which are acceptable in that country. Convergence with IFRS will eliminate this need for preparation of dual financial statements and thereby reduce the cost of raising capital from foreign markets.

c) Enhance Comparability

If the Financial statements of Indian entities are made in lines of IFRS, they will have greater comparability and will enable foreign companies to have broader and deeper understanding of the entities relative standing. This will also facilitate mergers, amalgamation and acquisition decisions.

d) Boon for multinational group entities

Entities in India may have a holding, subsidiary or associate company in some other nation. Compliance with IFRS for all group entities will enable the company management to have all the financial statements of the group in one reporting platform and hence will facilitate the consolidation process.

e) New Opportunities for the professionals

Migration to IFRS will not only be beneficial for Indian corporate, it will also be a boon to Indian accounting and other associated fields. India is a country with immense human resource. With knowledge of IFRS Indian professional can immerge as leading accounting service provider around the globe. This convergence will also open the flood gate of opportunities for valuers and actuaries as IFRS is fair value based accounting standard.

What is IFRSs?

 International Financial Reporting Standards comprise: – IFRSs – standards issued after 2001 – IASs- standards issued before 2001 – Interpretations originated from the International Financial Reporting Interpretations Committee (IFRIC) – issued after 2001 – Interpretations of Standing Interpretations Committee (SIC) – issued before 2001

Effective IFRSs as on date

• No of standards issued – effective 29 (total 41) IASs , 8 IFRSs • No of interpretations – effective 15 (total 18) IFRIC Interpretations, effective 11(total 33)SIC Interpretations • No of Financial Reporting Standards in force as on date – 63

 Grouping of IFRSs into eleven parts:

 1. Preface and framework

 Preface a. Objectives of the IASB b. Scope and authority of IFRSs c. Due process d. Timing of application of IFRSs e. Language

Framework a. Introduction b. Qualitative characteristics of financial statements c. The elements of financial statements d. Recognition of the elements of financial statements e. Measurement of the elements of financial statements f. Concepts of capital and capital maintenance

2. Other literature

 a. IASC Foundation Constitution b. Due process Handbook of IASB c. Due process Handbook of IFRIC d. Glossary

3. Presentation of Financial Statements

 Standard Number Standard Name IAS 1 Presentation of Financial Statements IAS 7 Statement of Cash Flows IAS 33 Earnings Per Share IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Reporting period IAS 21 The effects of changes in foreign exchange rates IAS 29 Financial Reporting in Hyperinflationary economies SIC 7 Introduction of the EURO IFRIC 7 Applying the restatement approach under IAS 29 Financial Reporting in Hyper inflationary Economies

4. IFRSs on Interim Financial Statements

IAS 34 – Interim Financial Reporting

 5. IFRSs on Group Reporting Standard

 Number Standard Name IFRS 3 Business Combinations IAS 27 Consolidated and separate financial statements IAS 28 Investment in Associates IAS 31 Interest in joint ventures

 6. IFRSs on Assets

 Standard Number Standard Name IAS 2 Inventories IAS 16 Property, Plant & Equipment IAS 40 Investment Property IAS 38 Intangible Assets IAS 32, IAS 39, IFRS 7 Financial Assets / Financial Instruments IAS 41 Biological assets IFRS 5 Non-Current Assets held for sale & Discontinued operations IAS 17 Leases IFRS 6 Exploration and Evaluation of Mineral Assets

 7. IFRSs on Expenses and Liabilities

 i. IAS 19 – Employee Benefits ii. IFRIC 14- IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction iii. IAS 37 – Provisions, Contingent Liabilities and Contingent Assets iv. IFRIC 1 -Changes in Existing Decommissioning, Restoration and Similar Liabilities v. IFRIC 5- Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds vi. IFRIC 6- Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment vii. IAS 12- Income Taxes viii. SIC 21 – Income Taxes – Recovery of Revalued Non-Depreciable Assets ix. SIC 25- Income Taxes – Changes in the Tax Status of an Enterprise or its Shareholders x. IFRS 2- Share-based Payment xi. Financial liabilities / Financial Instruments a. IAS 32 Financial Instruments: Presentation b. IAS 39 Financial Instruments: Recognition and Measurement c. IFRS 7 Financial Instruments: Disclosure

 8. IFRSs on Income

 i. Construction contracts (IAS 11) ii. Revenue (IAS 18) iii. Agriculture income (IAS 41) iv. Service concession arrangements – IFRIC 12 & SIC 29 v. Customer loyalty programmes – Customer reward credit or points IFRIC 13

 9. IFRs on Disclosure

 A.  IAS 24 Related Party Disclosures B. IFRS 8 Operating Segments

 10. IFRSs on Industry

 i. IFRS 4 Insurance Contracts ii. IAS 26 Accounting and Reporting by Retirement Benefit Plans

 11. IFRSs on First time adoption – IFRS 1

 IFRSs for SME

 History

 In Sept 2003: World Standard Setters survey n June 2004: Discussion Paper (117 comments) n April 2005: Questionnaire on recognition and measurement (94 responses) n Oct 2005: Roundtables on recognition and measurement (43 groups) n Feb 2007: Exposure Draft (162 comments) n Nov 2007: Field tests (116 real SMEs) n Mar – Apr 2008: Board education sessions n May 2008 – Apr 2009: Redeliberations n May 2009: Near-final draft posted on IASB website n 1 June 2009: Ballot draft sent to the Board n 9 July 2009: Final IFRS for SMEs issued

Why IFRSs for SME

A. Topics not relevant to SMEs are omitted. B. Where full IFRSs allow accounting policy choices, the IFRS for SMEs allows only the easier option. C. Many of the principles for recognizing and measuring assets, liabilities, income and expenses in full IFRSs are simplified. D Significantly fewer disclosures are required. E the standard has been written in clear, easily translatable language.

 What is SME as per IFRSs

 SME Small and medium-sized entities are entities that:  Do not have public accountability, and o Publish general purpose financial statements for external users. Examples of external users include owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies. General purpose financial statements are those that present fairly financial position, operating results, and cash flows for external capital providers and others. An entity has public accountability if: o Its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or o It holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.

 Contents of IFRSs for SME – divided into 35 sections

 1. Small and Medium-sized Entities 2. Concepts and Pervasive Principles 3. Financial Statement Presentation 4. Statement of Financial Position 5. Statement of Comprehensive Income and Income Statement 6. Statement of Changes in Equity and Statement of Comprehensive Income and Retained Earnings 7. Statement of Cash Flows 8. Notes to the Financial Statements 9. Consolidated and Separate Financial Statements 10. Accounting Policies, Estimates and Errors 11. Basic Financial Instruments 12. Additional Financial Instruments Issues 13. Inventories 14. Investments in Associates 15. Investments in Joint Ventures 16. Investment Property 17. Property, Plant and Equipment 18. Intangible Assets other than Goodwill 19. Business Combinations and Goodwill 20. Leases 21. Provisions and Contingencies 22. Liabilities and Equity 23. Revenue 24. Government Grants 25. Borrowing Costs 26. Share-based Payment 27. Impairment of Assets 28. Employee Benefits 29. Income Tax 30. Foreign Currency Translation 31. Hyperinflation 32. Events after the End of the Reporting Period 33. Related Party Disclosures 34. Specialised Activities 35. Transition to the IFRS for SMEs Glossary Derivation Table Basis for Conclusions – published in a separate booklet Illustrative Financial Statements and Presentation and Disclosure Checklist – published in a separate booklet

 Omitted topics in IFRSs for SME The IFRS for SMEs does not address the following topics that are covered in full IFRSs: n Earnings per share n Interim financial reporting n Segment reporting n Special accounting for assets held for sale

 Examples of options in full IFRSs NOT included in the IFRS for SMEs n Financial instrument options, including available-for-sale, held-to-maturity and fair value options n The revaluation model for property, plant and equipment, and for intangible assets n Proportionate consolidation for investments in jointly-controlled entities n For investment property, measurement is driven by circumstances rather than allowing an accounting policy choice between the cost and fair value models n Various options for government grants.

 Conclusion

 To conclude IASB put lot of efforts in coming out IFRSs for SME. IASB has received 162 comments on Exposure Draft for IFRSs for SME. IASB follows transparent approach for formulation of standards.

Always Yours —- As Usual — Saurabh Singh

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