1. Relevance of IFRS & BASEL NORMS in Global Economy Vaibhav Agrawal & karthik vaibhav Presented by:- Vaibhav Agrawal Karthik Vaibhav

2. About IFRS Accounting framework that establishes measurement, presentation & disclosure requirements relating to the transaction of events that are reflected in the financial statements. Framework developed by International Accounting standards board in 2001. Vaibhav Agrawal & karthik vaibhav

3. Why IFRS Globalization Comparability Congruency Vaibhav Agrawal & karthik vaibhav

4. Benefits of convergence Improved access to international markets Access to low cost foreign funds Easier comparability among global peers Vaibhav Agrawal & karthik vaibhav

5. Benefits of convergence(cont.) Elimination of multiple reporting costs Opportunities for professionals Substance over form approach Vaibhav Agrawal & karthik vaibhav

6. FOREX accounting  Effect of change in exchange rates  Integral and non integral foreign operations-no distinction is made and all the transactions including gains and losses must be made in the functional currency.  Translation to the presentation currency Vaibhav Agrawal & karthik vaibhav

7. Mergers and Acquisitions accounting  IFRS provides clear guidelines to both amalgamations and to acquisitions.  Use of pooling interest method is disallowed under IFRS –firms should use purchase method difference in goodwill.  Goodwill amortization is prohibited under IFRS. Vaibhav Agrawal & karthik vaibhav

8. Effect of convergence on certain aspects of the industry Profits Reporting will be much more objective and transparent Profits may shrink in the short run but will recoup once they get settled in the new system Vaibhav Agrawal & karthik vaibhav

9. Effect of convergence on certain aspects of the industry (cont) Balance sheet Will look different Changes in recognization aspects like depreciation, valuation etc EPS Depends upon profits and hence will decrease in the short run Vaibhav Agrawal & karthik vaibhav

10. IT sector  IT relies more on intangible assets and human capital than fixed assets.  Simultaneous sale of License, Service contract and Software development are common in IT.  Revenue recognition currently done by the ‘Intrinsic Value method’ needs to shift to the fair value method as prescribed by IFRS.  Profits will reduce and hence ESOP options will be reconsidered Vaibhav Agrawal & karthik vaibhav

11. Banking sector  Banking sector is highly regulated in India owing to the strict norms of the RBI  Interest on loans-accrued vs effective annual rate of interest.  Interest recognition on NPA’s.  IFRS makes it mandatory for banks to disclose their credit, market and operational risk in their financial statements Vaibhav Agrawal & karthik vaibhav

12. Empirical Analysis Vaibhav Agrawal & karthik vaibhav

13. Challenges to convergence Scarcity of human resource Compatibility with other laws IT security Training needs of all the stakeholders to be addressed Vaibhav Agrawal & karthik vaibhav

14. BASEL NORMS Common Benchmark Financial Soundness Managing Risk Vaibhav Agrawal & karthik vaibhav

15. BASEL II PILLARS CAR= (TIER I + TIER II)/(Risk Weighted Asset for Credit Risk + 12.5*(Market Risk + Operation Risk)) Vaibhav Agrawal & karthik vaibhav

16. CREDIT RISK Credit Risk Standardized Approach Internal Rating Approach Advance IRB Foundation IRB Securitization Framework Drivers Probability of default Loss given default Time Horizon Credit exposure Concentration Vaibhav Agrawal & karthik vaibhav

17. MARKET RISK Market Risk Standardized Approach Duration Based Maturity Based Internal Model Based Approach Components Liquidity Risk Exchange Rate Risk Equity/commodity Price Risk Interest Rate Risk Vaibhav Agrawal & karthik vaibhav

18. OPERATION RISK Operational Risk Basic Indicator Approach Standardized Approach Advance Measurement Approach Components Failed Internal Processes People External events Vaibhav Agrawal & karthik vaibhav

19. BENEFITS Improved Risk Management Consolidation of Banking Industry Improving the credit ratings of Bank Vaibhav Agrawal & karthik vaibhav

20. CHALLANGES Capital Requirement Profitability of smaller Banks Choice of Alternative Approaches Vaibhav Agrawal & karthik vaibhav

21. CHALLANGES (Cont.) Absence of Historical Database IT infrastructure and training cost Incentive to remain unrated Vaibhav Agrawal & karthik vaibhav

22. CHALLANGES (Cont.) Supervisory Framework Corporate Governance Issues Discriminatory against developing countries Vaibhav Agrawal & karthik vaibhav

23. CHALLANGES (Cont.) National Discretion External and Internal Auditors Ineffective Pillar 3 Vaibhav Agrawal & karthik vaibhav

24. SIMILARITIES Both the frameworks aim to move away from a narrow and perspective to a more broader approach that focuses on institution own assessment and management of Risks. BASEL II encourages improvements in risk management and IFRS aims to link it with the firm’s capital structure. Risk is an integral element of IFRS financial statements both in extending the scope of disclosure and in seeking to ensure that what is presented reflects the information used by management. Vaibhav Agrawal & karthik vaibhav

25. DIFFERENCES Accounting Difference Scope Difference Frequency Difference Vaibhav Agrawal & karthik vaibhav

26. Empirical Analysis Vaibhav Agrawal & karthik vaibhav

27. Empirical Analysis Vaibhav Agrawal & karthik vaibhav

28. No Regret Moves Improve Capital Efficiency Optimize Market Risk Model Loan Loss provision Liquidity & Funding Management Centralized liquidity management Accurate View of Liquidity position Vaibhav Agrawal & karthik vaibhav

29. Balance-sheet Restructuring Capital Quality & DeductionsReduced long term funding cost Vaibhav Agrawal & karthik vaibhav

30. Business Model Adjustment Product design/ Mix Capital light products Product Bundling Customer Mix Capital allocation by customer segment (e.g. Profitability, size) Cost & Pricing Review of cost base Assessment of Re-pricing potential Risk Transfer Cooperation b/w lending organization & product development Syndication & securitization Liquidation Targets Key Elements Vaibhav Agrawal & karthik vaibhav

31. References Vaibhav Agrawal & karthik vaibhav International Research Journal of Finance and Economics - Issue 23 (2009) IFRS - a step towards BASEL II and Solvency II Implementation? by John McDonnell www.in.kpmg.com www.ey.com/in/en/issues/governance_and _reporting/ifrs http://ifrs.icai.org http://www.mckinsey.com

32. Vaibhav Agrawal & karthik vaibhav