The Clause 49 of the Listing Agreement requires all listed companies, and companies seeking listing for the first time, to have an audit committee. All members of such audit committees are required to be ?financially literate?, which is defined as the ability to read and understand basic financial statements. Once India moves on International Financial Reporting Standards (IFRS), audit committee members and the Board needs to be ?IFRS literate? and should have an understanding of the transition from Indian GAAP to IFRS.
The Institute of Chartered Accountants of India (ICAI) has announced the date for convergence with IFRS for public interest entities as April 1, 2011. Audit committees are entrusted with the onerous responsibility of oversight of IFRS transition of the company. Unless the companies act now, the availability of time is going to be challenge.
The IFRS adoption date is effectively going to be April 1, 2010 since the first IFRS financial statements are required to include one year comparative numbers as a minimum. Therefore, the focus area for audit committees and boards in India will be to oversee the preparation of the company for transition to IFRS in the coming two years. Audit committees need to have advisors to explain its members the effect of IFRS transition on the company. Given the short time left from today, they cannot afford to delay dialogue with their IFRS advisors. The ICAI has already started the convergence process and has issued Indian Accounting Standards based on equivalent IFRS, such as standards on financial instruments, recommended for two years beginning 1 April 2009. Thus, companies can start converging with IFRS by adopting such standards well in advance.
The process of identifying issues relating to IFRS conversion is a complex and time-consuming exercise and addressing these issues is the next step. Audit committees would need to ensure that the companies start the first step of identifying issues with a detailed time plan prepared in advance. Further, they are required to review the company?s impact assessment of transition, timing of various stages of transition, costs and knowledge requirements, budget allocations, etc within one year from now to ensure smooth transition of the company.
The information and reporting systems will undergo change owing to the transition from Indian GAAP to IFRS. There may be a need to run parallel systems for the year 2009-10 to ensure that the new system is tested adequately for internal controls and flow of information. These modifications will also need to be communicated to stakeholders.
Keeping the complexities of conversion in mind, it is important for audit committees to start a dialogue with the management to understand the areas expected to be affected by IFRS, management?s process to identify such areas and to prepare a detailed plan of action for a smooth transition. Audit committees, by end of this year, should manage to oversee company?s identification of all IFRS issues it is expected to face on transition. IFRS is a principle based framework. When it is applied to the transactions, companies may face interpretational issues relating to IFRS. Audit committees need to ensure that companies have resolved such issues with them. If the preparation by audit committee for convergence to IFRS is inadequate presently, it poses a critical issue for the company. audit committee members should not be ill-prepared for such a challenge and should act urgently to get trained in IFRS.
?The author is a senior professional in a member firm of Ernst & Young Global. These are his personal views