The transition to International Financial Reporting Standards (IFRS), from the Indian Accounting Standards, effective April 1, 2011, would require companies to incur direct and indirect costs in areas such as training employees, hiring consultants and trainers and adding new features to revamp IT systems.
While the compliance costs for large companies such as Tata Steel may not be significant as they are better placed to deal with the changes given their well established ERP platforms and the fact that their foreign subsidiaries are already IFRS-compliant, local unlisted companies that do not run on standard ERP platforms may incur higher one-time costs, especially in IT.
Although the cost of such transition may itself run into a few crores in absolute terms, it may not be significant enough to hurt bottomlines, given that only large companies would come under the first phase.
Sensex and Nifty companies, companies (listed or not) with net worth of over Rs 1,000 crore as of March 2009 and after, as well as companies that have securities listed abroad would come under the first phase. This phase would exclude banking and insurance companies.
Cost break-up
According to Mr Jamil Khatri, Executive Director, Head-Accounting Advisory Services at KPMG, for large companies IT could account for 30-35 per cent of the total cost involved in transition; internal costs such as training employees could account for 25-30 per cent, while external costs such as hiring consultants and advisors could constitute 40-45 per cent. This, assuming companies do have an updated ERP package in place.
Management of large corporates such as Ashok Leyland, Tata Steel and DLF, state that some of the changes not only involve altering accounting practices such as revenue recognition but also the reporting systems, thus calling for extensive training of employees in the account and finance divisions as well as in other departments.
Companies such as Tata Steel and BHEL have designed internal guidelines to systematically shift to the new standards. BHEL, for instance, has trained over 170 employees. Tata Steel has adopted a three-pronged approach of first creating basic awareness about the changes, training specific divisions such as treasury or capital asset accounting on changes relevant to them and is also looking at formal certification programmes. The company runs on SAP and hopes to incorporate IFRS requirements in its existing ERP.
IT spend
While the standard ERPs provide enough room for customisation, many smaller companies may not be running on such platforms. According to Mr Khatri, unlisted companies or those that have to comply with IFRS as a result of raising FCCBs, may not have IT systems that support this transition.
However, as the IFRS transition has been in the offing for some time, a few companies may have withheld their IT spends earlier and decided to go for a revamp now, feels Mr Dolphy D Souza, IFRS Leader, India-Ernst & Young. This appears to be the case with companies such as Ashok Leyland.
Speaking on the sidelines of an Ernst & Young -CII summit on IFRS, Mr K. Sridharan, CFO, Ashok Leyland, stated that the company has decided to invest in SAP and therefore any requirements under IFRS would be dealt with concurrently. For such companies, the IT spend would be classified as a regular capex spend besides the one-time IFRS transition cost.
For a few such as HCL Technologies, the cost, at least in terms of tweaking IT, could be lower than that of companies from other industries, given that they have significant in-house expertise in the area as a result of their experience in dealing with IFRS for international clients. As a result, the company does not expect to incur any further costs, says Mr Anil Chanana, Chief Financial Officer, HCL Technologies.
Besides, the transition could even provide business opportunities for IT companies as it could form a part of their overall service offering, especially when companies decide to change their IT platforms.
