IBA workshop on IFRS 7 th August, 2009 By Mohandas Pai, Trustee IASC Foundation and Director, Infosys Technologies Limited 1

Structure of IASCF 2 Standards Advisory Council Operations International Accounting Standards Board IFRIC (interpretations) Staff The standard-setting operation Advisory Groups PublicationsXBRLEducation International Accounting Standards Committee Foundation Trustees International monitoring Group

IASC Foundation Formed in 2001 as a not-for-profit, private sector body IASC Foundation (Trustees): appoints, oversees and funds independent standard-setting board (IASB) made up of 22 geographically and professionally diverse Trustees accountable to the public interest Mr. Mohandas Pai is a Trustee from India 3

IASC Foundation contd.. IASB: Independent standard-setting body Current 15 Board members. Mr. Prabhakar Kalavacherla, Board member from India Key principles: transparency, consultation, engagement Board members are completely independent and not associated with other firms or companies during this tenure. Trustees of the IASC Foundation are responsible for governance, oversight inclding funding. IFRSs are developed following an international consultation process, involving interested individuals and organisations from around the world and with the support of an external advisory council, the Standards Advisory Committee. 4

IASC Foundation contd.. Standard Advisory Council: provides forum for participation by organisations and individuals advises IASB on the agenda decisions and priorities in the IASB’s work. informs IASB of organisation’s and individuals views on major standard setting projects. Mr. Narendra Sarda is SAC member from India 5

IASC Foundation contd.. IFRIC: independent body to interpret the application of International Accounting Standards publish after cleraance by IASB draft Interpretations for Public comment and finalise the same after receipt of approval from nine members. 6

IASC Foundation contd.. Due Process for setting standards- The due process comprises six stages, with the Trustees having the opportunity to ensure compliance at various points throughout: Setting the agenda Planning the project Developing and publishing the discussion paper Developing and publishing the exposure draft Developing and publishing the standard After the standard is issued 7

Public accountability A unique international organisation IFRSs supported, but no authority to impose Need to maintain trust of the market Confidence in oversight role of IASC Foundation is key 8

Funding process The IASC Foundation is a not-for-profit, private sector body that raises funds to support the operations of the IASB as an independent accounting standard-setter. Principles Broad-based: Funded by a wide range of market participants from across the world’s capital markets Compelling: Funding burden to be appropriately shared across beneficiaries within jurisdiction, with official support from relevant regulatory authorities Open-ended: Not contingent on any particular action that would infringe on the independence of the organisation Country-specific: Shared by the major economies of the world on a proportionate basis, using Gross Domestic Product as the key determining factor of measurement 9

Independent assessment “Accountability makes powerful organisations more effective and legitimate. Without it, solutions to global challenges will fail. The IASB has developed procedures that bring transparency, predictability and consistency to the way its key constituencies are involved in its activities and should be congratulated on its achievements. We would like to see more global organisations doing the same” - One World Trust Global Accountability Report

11 Global Accounting Architecture After their joint meeting in September 2002, FASB and IASB issued their Norwalk Agreement acknowledging their commitment to the development of high quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. Currently IASB and FASB have undertaken nine joint projects few of which are mentioned below: Revenue Recognition Financial Statement presentation Income taxes Post employment benefits Leases Financial instruments with characteristics of equity

Transition to IFRS IASB has issued IFRS 1 with an objective that the financial statements are transparent and comparable, provide a good starting point and also to ensure that the costs do not exceed the benefits of the users. IFRS 1 should not be regarded as too technical as this facilitates ease of transition. 15 optional exemptions have been provided after reviewing the potential transition problems and 5 exceptions have been provided wherein retrospective application is prohibited. 12

13 Financial Instruments Standards The existing standards on Financial instrument are very complex and have been difficult to understand. Based on G-20 recommendations both IASB and FASB have undertaken to simplify accounting for financial instruments. Current IASB proposal is to have two categories for debt instruments- Amortized cost and Fair value and for equity instruments- mostly in fair value and some equity instruments (strategic investments) gains or loses through equity.

IASB response to the financial crisis IASB is reviewing accounting issues emerging from the global financial crisis, including those identified by the G20 and other international bodies such as the Financial Stability Forum (FSF). Committed to a global approach, the IASB is working closely with the US Financial Accounting Standards Board. Fair value accounting saved the world from irreversible damages as it gave a method to evaluate the losses which were already present in the financial system. Hans Hoogervorst, Co-Chairman of the FCAG said “Accounting was not a root cause of the financial crisis, but it has an important role to play in its resolution.” 14

Financial Crisis Advisory Group (FCAG) The FCAG was formed at the request of the International Accounting Standards Board and the US Financial Accounting Standards Board to consider financial reporting issues arising from the crisis. Yezdi Malegam, Board Member, Reserve Bank of India (India) is a member of FCAG. 15

Financial Crisis Advisory Group (FCAG) The recently issued report of the FCAG articulates four main principles and contains a series of recommendations to improve the functioning and effectiveness of global standard-setting. The chief areas addressed in the report are: Effective financial reporting Limitations of financial reporting Convergence of accounting standards Standard-setters’ independence and accountability 16

Recommendations of FCAG Effective Financial Reporting Highest priority to be given to simplify and improve standards on financial instruments Explore alternatives for adopting incurred loss model rather than historical model for loans, else the loans are overstated. This method would consider forward looking information. Reconsider appropriateness of an entity’s recognition of gains and losses as a result of changes in own debt instruments due to changes in credit worthiness. Effective consultation to be made with prudential regulators for finalising standards on financial instruments and consolidation. 17

Recommendations of FCAG Limitations of Financial Reporting As financial statements pertain to a limited period of time, those get outdated. Boards should acknowledge the limitation of financial reporting. Users should also recognise the same and should not suspend their own prudence and judgement. Reliability of financial statements depend on reliable data and infrastructure for obtaining the data. Appropriate authorities to ensure robust infrastructure is in place for structure products to provide reliability in valuation. Financial institutions should not only rely on credit rating agencies but should independently validate the price apart from actual sale values. 18

Recommendations of FCAG Convergence of Accounting Standards Global financial crisis has made it mandatory that effort should be made towards converged accounting standards. G- 20 and US Treasury has supported the need for a single set of high quality global standards. National governments should set strict internal deadlines for convergence to IFRS. Carve-outs and Carve-ins are strongly being discouraged at the national and regional levels. Post convergence, differences in financial reporting may arise from national or regional auditing standards. National accounting standards setters and global accounting firms have been requested to harmonize common interpretations and reach to converged solutions. 19

Recommendations of FCAG Standard Setter Independence and Accountability Due process should not be compromised as it would undermine public confidence in the accounting standards. Standard setters should encourage public to voice their concerns however they should refrain from seeking to prescribe specific standard setting outcomes. Such restraint is important in maintaining public confidence. IASB should have a robust and permanent funding structure in place based on a equitable and mandatory basis. Monitoring Board, which has the role of governing the IASB, should be comprising of a broad geographical structure to include securities regulators from a wide range of nations. 20

Questions or comments? 21 The views expressed in this presentation are those of the presenter.