chapter 1: introduction
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CHAPTER 1: INTRODUCTIONCHAPTER 1: INTRODUCTION
Accounting depicts the clear financial image of the business; hence it should be
clearly defined. The word accounting is basically defined as a system that provides
numeric or quantitative information about the financial status of an entity. It
depicts a clear view of the financial position. Accounting as a language of a
business, communicates the financial results of an enterprise, which gives valuable
information to decision makers, planners and investors for taking various
important decisions. Accounting has its own set of rules which have been
developed by accounting bodies. These rules can’t be absolutely rigid like those of
the physical sciences. These rules accordingly, provide a reasonable degree of
flexibility in line with the economic environment, social needs, legal requirements
& technological developments. Rules basically specify the parameter within
which, anything could be accepted in the society. Accounting rules provides the
framework or boundary within which they can be adopted. Accounting rules are
the backbone of accounting, without which there will be no authenticity or
reliability of accounting. Accounting principles have to operate within the bounds
of rationality. Theses accounting rules are Accounting standards.
Accounting standards provide consistency to accounting. It is only on the
basis of these accounting standards that the information provided by the business
organization is relied upon. It is not possible to compare the business performance
in the absence of accounting standards. These Accounting standards can be:
Financial Reporting Standards or Standard Accounting Practices. Accounting
Standards are issued by various regulatory authorities.
Accounting deals with the issues of:i) recognition of events & transaction in
the financial statements, ii) measurement of these transaction & events, iii)
presentation of these transactions & events in the financial statements in a manner
which is meaningful & understandable to the reader, & iv) the disclosure
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requirements. The disclosure requirement would enable the public at large & the
stakeholders & the potential investors in particular, to get an insight into what
these financial statements are trying to reflect &, in turn, enable them to take
informed business decisions. Accounting standards standardize diverse accounting
policies with a view to: i) reconcile the non-comparability of financial statements
& ii) provide a set of standard accounting policies, valuation norms & disclosure
requirements.
IFRS (Background)
International Financial Reporting Standards (IFRS) are Standards,Interpretations
and the Framework for the Preparation and Presentation of Financial Statements(in
the absence of a Standard or an Interpretation) adopted by the International
Accounting Standards Board (IASB).
Earlier the International Accounting Standards Committee (IASC) was formed for
facilitating the movement towards increased comparability & harmonization. It
was formed as an independent body in 1973 by the professional accounting bodies
in the US & eight other industrialized countries. Among the professional
accountancy bodies of over 75 countries, the Institute of Chartered Accountants of
India also joined International Accounting Standards Committee (IASC). The
members of IASC have undertaken a responsibility to support the standards
promulgated by IASC & to propagate those standard in their respective countries.
IASB, founded in 2001, basically a successor of IASC, is a highly professional
organization. It is supported by the industry & Government around the world. The
aim of the board is to provide transparent & complete information. The demand
for high quality global accounting standards increased significantly, when the
European Commission required all publicly listed companies within the European
2
Union, to prepare their consolidation financial statements in compliance with
IFRS. The IASB approved the resolution on IASC Standards at a meeting in April
2001, in which it confirmed the status of all IASC Standards & SIC interpretation
in effect as on April1, 2001.
IFRS are considered a "principles based" set of standards in that they establish
broad rules as well as dictating specific treatments.
International Financial Reporting Standards comprise:
International Financial Reporting Standards (IFRS) - standards issued after
2001
International Accounting Standards (IAS) - standards issued before 2001
Interpretations originated from the International Financial Reporting
Interpretations Committee (IFRIC) - issued after 2001
Standing Interpretations Committee (SIC) - issued before 2001
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CHAPTER 2: NEED FOR IFRS IN INDIACHAPTER 2: NEED FOR IFRS IN INDIA
IFRS is more comprehensive & market driven, since it improves the quality of
information, increases market efficiency, and minimizes capital cost. IFRS is said
to be “Principle Based”, like Financial Accounting Standard (FAS) & US GAAP.
This is more suitable to for the Indian Business. Indian Accounting Standard (AS)
is inherited from International Accounting Standards (IAS) or IFRS, which
facilitates easy adoption of IFRS.
Accounts prepared under IFRS will give confidence to investors & the
world community to understand Indian businesses more easily, which ultimately
will attract more investments in India. IFRS improves ‘Inter Unit/Inter Firm’
comparison & consistent financial information. Financial Statements made under
IFRS are accepted by all stock exchanges in the world. Thus, IFRS facilitates
Indian companies seeking entry into any stock exchanges in the world, including
the US. IFRS facilitates cross-border acquisitions by Indian companies,
international trading in securities, better customer/vendor relationship & timely
decision, since financial statements are more transparent.
Preparation of Consolidation Financial Statements (CFS) is made easy for a
group, when the group has different entities in different countries, all following
IFRS, because the reconciliation of two different GAAP can be avoided. Regular
review of IFRS by the research wings, make IFRS more qualitative & need-based
as per the requirements of modern business, which is not available in any domestic
GAAP.
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Is IFRS to our advantage?
Most of the countries of the world are sure to move to IFRS from their local
GAAPs by 2011, as it has proved to be more effective in many areas other than
local GAAP.
One of the vital reasons why IFRS is to be adopted is a transparency and
comparability it provides to the companies activities and overall performance.
Comparability is provided in each country, sector and company. Global
relationships can be built across the globe with suppliers, investors and customers,
so that the standards provided by IFRS have universal appeal. India will also have
to move along with the others, as its business relationships are also global. Hence
it is necessary to adopt IFRS so as to benchmark itself with its global peer.
India is blessed with quality human capital and to reap the full benefits it should
be well informed about international financial markets in order to generate the
hitherto untapped capital from international sources. Indian accountants are indeed
as competent as their foreign counterparts, hence the major area to be looked into
is making their knowledge understandable so as to impart them proper training on
IFRS and motivate them to acquire additional certification having international
recognition.
In India, lack of proper training to those who are responsible for implementing
these standards may prove to be fatal in case of SMEs because the workforce
employed there will have difficulty in understanding the complexities of IFRS,
which will further tend to increase the conversion costs. However IFRS can be
sure success, if the Indian companies plan for forthcoming changes in accounting
policies and reporting procedures well in advance. It will also help them actively
manage market, as well as shareholder expectations.
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CHAPTER 3: GLOBAL CONVERGENCECHAPTER 3: GLOBAL CONVERGENCE
The era of globalization has thrown open both opportunities and challenges.
Increasing global interaction marked by the Mergers & Acquisitions (M&A)
culture which has changed the socio-economic scenario of the globe in all aspects
has showed the need for a universal financial accounting standard that is
harmonized and adopted globally. The companies will then not face multiple
accounting standards. It implies that all the accounting standard setters world wide
come to the same platform and agree on a single wisecrack. The improvement of
accounting procedures and its implementation needs top priority.
International analysts & investors would like to compare financial statements
based on similar accounting standards. This led to growing support for an
internationally accepted set of accounting standards for cross-border filings. A
strong need was felt for a legislation to bring about uniformity, rationalization,
comparability, transparency, & adaptability in financial statements. Having a
multiplicity of accounting standards around the world is against public interest. It
creates confusion, encourages error & facilitates fraud. It makes the accounting
language difficult to be translated by the users of the information according to
their choice and needs. The cure for these ills is to have a single set of global
standards, of the highest quality. Global standards facilitates cross-border flow of
money, global listing in different bourses & comparability of financial statements.
The figures shown in the financial statements will become live and meaningful if
they are transparent, comparable, adequate, consistent and reliable.
Convergence by Different Countries
IFRS hogged the limelight ever since the European Union (EU) decided to adopt it
for all of its member states from 2005. Since then more than 8,000 EU listed firms
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have adopted the IFRS. After the EU, many more countries began to adopt the
IFRS. As of now, more than 100 countries, either allow or require their firms to
use the IFRS, while preparing the financial statements. Some of these countries
include Australia, New Zealand, China, Singapore, Japan, Middle East, Africa and
members of the EU.
The US capital markets are no exception to this trend. They have been losing their
sheen as a result of excessive regulations imposed by the existing US GAAP. As
an alternative many companies prefer those capital markets where IFRS is
accepted.
IFRS are used in many parts of the worlds. As of August 27, 2008 more than 113
countries, currently require or permit IFRS reporting. European organizations
prominent in European Capital markets are collectively know as the ‘Founding
Fathers Member Body Organization’. This will help eliminate obstacles for the
international trading of securities by guarantying that accounts of the company,
throughout the European Union, are more reliable & clear, without any
discrepancies. Member countries may defer application of IAS 2007 for those
companies.
In a meeting held in Norwalk in the year 2002, efforts were made to reduce
the differences between IFRS & GAAP (the Norwalk agreement). In 2006, FASB
(US Financial Accounting Standards Board) & AISB issued a Memorandum of
Understanding, by which the two bodies will seek to achieve convergence by
2008. The foreign private issuers are additionally permitted to file financial
statements in accordance with IFRS as issued by IASB, without reconciliation to
US GAAP.
The European Commission (EC) - the European Unions legislative &
regulatory arm, with a few expectations, requires all public companies domiciled
within its borders, to prepare their consolidation financial statements in accordance
with IFRS beginning January 1, 2005
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Status of accounting convergence in India
The IASB and IFRS have taken great strides towards achieving global accounting
convergence in the recent years. The changes have now been proposed in an effort
to achieve convergence. In recent amendments, many of the changes made in the
IASB to previous standards have accomplished the goal.
With regard to the need for convergence with IFRS in India, the council of the
ICAI, at its meeting held on 18th to 20th July 2007, has decided to fully converge
with the IFRS issued by the IASB from the accounting periods commencing on or
after April 1, 2011 for the listed entities and other public interest entities such as
banks, insurance companies and large sized entities, subject to its ratification by
the government and other legal and regulatory authorities. This means that within
the next two years there would be a transition from the Indian GAAP into the
IFRS. The ICAI has made an implementation schedule which identified the
changes require to be made in the existing standards in order to achieve
convergence. The ICAI has made a comprehensive plan for educating and training
accountants so that country gets well prepared by 2011. It has released a Concept
Paper on ‘Convergence with IFRS in India’. It includes the roadmap and strategy
for convergence of the accounting norms of all the listed companies to the IFRS.
In India many changes are being made for convergence of international accounting
standards. It is also recognized that it is a pre-requisite for attracting foreign
investment and for globalization of the economy.
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CHAPTER 4: IFRS V/S INDIAN GAAPCHAPTER 4: IFRS V/S INDIAN GAAP
Indian companies are required to adopt IFRS from April 1, 2011. It equally means
that our translated national GAAP would be the same, as practiced in more than
100 countries now. However, the adoption of such a translation requires careful
analyses because there are many conceptual differences between our national and
global standards. Considering the complexity of IFRS principles, the ICAI, in its
concept paper, has suggested adoption of IFRS by public companies like banks,
insurance, etc. To bridge such differences, the country needs legal sanction from
parliament. At this juncture, it would be imperative to list out the major
differences:
Promotion of a group concept: The Indian companies are treated as
separate legal entities in accounting. However, IFRS encourages the
treatment of a group concept for reporting. It considers similar group of
companies as a single economic entity. This group concept does not apply
for tax or legal purposes.
Treatment of fixed assets: There is a significant difference between Indian
GAAP and IFRS, with regard to the definition itself. IFRS defines Fixed
Assets on the basis of their usefulness, but Indian GAAP does not do so.
Treatment of depreciation: The assets with different useful lives will be
depreciated differently. For one fixed asset, there will be different sub-
components and these sub-components will be depreciated separately,
unlike Indian GAAP.
Definition of future cost: Under IFRS, even future obligations can be
discounted to a fair value with the current standards and recognized in
accounts. However, Indian GAAP will not permit any future costs to be
discounted, capitalized or recognized as a liability.
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Treatment of depreciation on revaluation of fixed assets: The
companies’ Act does not allow an accountant to consider Depreciation on
Revaluation of Fixed Assets to be included in the Profit and Loss Account.
It can be set off against the reserve or provision, specially created for the
purpose. Instead, in IFRS, the same will be treated in the income statement
of the current year.
Separation of capital components: The Companies Act, 1956, required
Indian companies to disclose all capital components separately, into equity,
preference, debt, etc. Also, there are different provisions which govern the
issuance of the same. Such restrictions are not explicitly present in the
IFRS.
Sanction for reclassification: The Companies Act permits classification of
the capital components into equity, preference shares and debt instruments.
Under IFRS, redeemable preference shares for cash will be reclassified as
debt. However, such a reclassification in India requires sanction of the Act.
Differences in legal rights: Another point that leaves a gap between
current Indian laws and IFRS is, the legal rights attached to capital
instruments. Mere convergence will not be enough to remove the
conceptual distinctions between Indian accounting rules and international
accounting principles.
Change in reserves position: Another problem that requires serious
attention is the effect of change in earnings to shareholders due to the
application of international principles. Reserves, according to Indian laws,
are the past undistributed profits retained by the company. These are
distributed to the shareholders as dividend or premium on dissolution.
However, if IFRS is implemented, either the shareholders will enjoy more
distributable profits or they will have to suffer financial loss.
Correction of past mistakes: Under IFRS, past accounting mistakes,
which are found later, can be adjusted in the years they relate to, even after
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auditing and disclosure. However, Indian accounting rules do not permit
reworking on the audited and disclosed financial statements later.
An analysis of differences between Indian GAAP and IFRS is given in table.
Table: Indian GAAP vs. IFRS
SL.NO.
Particulars Indian GAAP IFRS
1 Conceptual
Difference
Indian Accounting Standards are
generally rule based and are less
flexible in comparison with IFRS.
Regulatory authorities like SEBI,
ROC, RBI, IRDA, etc. play a very
important role in defining rules.
At various stages IFRS
provides scope of judgement
and requires information to be
presented on the basis of
substance rather than rules.
2 Law vs.
Standards
‘Law overrides standards’ is an
accepted principle in India. Latest
example is option given to the
corporates regarding treatment of
foreign exchange fluctuation in AS-
11
While applying IFRS usage
by investor is kept in mind
and requirement of law and
management takes a back seat.
3 Fairly
Presented
Statements
Indian GAAP has direction in True
and Fair presentation of financials.
IAS allows overriding true
and fair concept in extreme
cases. Rather the emphasis is
on fairly presented statements.
4 Presentation For companies of schedule VI of
the Companies Act, 1956, defines
format of balance sheet and its
IAS-1 Presentation of
financial statement provides
guidelines and overall
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related statements. For listed
companies, Insurance companies,
Banks, etc., SEBI, IRDA and other
regulatory authorities also guide as
to how the financials are to be
projected.
requirements, For example it
defines certain information,
which is to be presented on
the face of balance sheet.
5 Extra
ordinary
items
Extraordinary items are required to
be separately disclosed in Indian
GAAP.
There is no provision of
presenting extraordinary item,
separately.
6 Reports Generally in India, as per schedule
IV of the companies Act, 1956, a
business entity is required to
present the following.
Balance sheet
Profit and loss A/c
Notes to accounts
In a few cases, cash flow statement
is required to be presented (AS-3),
but is not mandatory for all
enterprises.
IAS-1 require a business
entity to report the financial in
the following five statements:
Balance sheet
Income Statement
Cash Flow Statement
Statement of change in
Equity
Notes to accounts
Cash Flow statements
are mandatory in
nature.
7 Depreciation Schedule XVI of the Companies
Act, 1956, defines minimum rate of
depreciation to be applied by
company.
IAS-16 Property Plant and
Equipments allows
management to charge
depreciation, based on useful
life of asset.
8 Revenue
recognition
AS-9 Revenue Recognition
provides an option to use either
proportionate completion method
IAS 18-Provides that revenue
can be recognized when risks
rewards and controls have
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or completed service method. been transferred to the buyer.
In construction contracts,
stage of completion method
can be applied to recognize
revenue, if reliable valuation
is possible.
9 First time
adoption
No such standard is available IFRS-1 sets the standard for
first time adoption of IFRS in
great detail. Previous year
comparables are also required
to be mentioned.
10 Valuation of
taken over
assets
Taken over assets to be valued at
cost and not on Fair Value.
IFRS 3 Business
Combinations allows the
Assets require Goodwill to be
tested for impairment at each
balance sheet date.
11 Goodwill Does not require goodwill to be
tested for impairment at each
balance sheet date.
IAS-36 Impairment of assets
requires Goodwill to be tested
for impairment at each
balance sheet date.
12 Reversal Permitted subject to certain
conditions.
Once impairment loss is
recognized on goodwill,
reversal is not permitted.
13 Share-based
employee
benefits
Allows Fair Value method, or
intrinsic value method. Hence,
choice is available here.
IAS 19 provides that a share-
based payment to employees
is to be taken into account,
using Fair Value method.
14 Treasury
share
No such guidance is available Provides detailed guidelines
13
transactions for treasury share transactions.
15 Hyper
inflationary
economies
No such standard in India IAS 29 specifically discusses
about financial reporting in
Hyper Inflationary
Economies.
16 Related party
disclosures
AS 18 define related party, where
one party has ability to control the
other party or exercise significant
influence over the other party in
making financial/operating
decisions.
Related parties have been
specifically defined in the standard.
IAS 24 – Related Party
Disclosures defines related
party in terms of control or
significant influence, but
several types of exemption are
granted, particularly for
relationships within a group.
This is a principled-based
definition and includes close
family members.
These are the major differences between IFRS and Indian GAAP.
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A Standard-wise Comparison:
If we compare IFRS’ as it is in present form’ & IAS or Indian GAAP, there are
certain key areas which need to be addressed. A brief comparative analysis is
given in the following table:
A comparative Analysis of IFRS, IAS, & AS
IFRS/
IAS
Description AS/
Indian
GAAP
Description Basic Features of IFRS
IFRS/
IAS/
AS30
First time adoption of
IFRS/Presentation of
Financial
Statements/Disclosure
in the Financial
Statements of Banks &
similar Financial
Institutions.
AS1 Disclosure
of
Accounting
Policies
Statements of change in
equity or a statements of
recognized income or
expenses to figure in
addition to balance sheet,
income statement, & cash
flow statements. An entity
preparing IFRS for the first
time, must apply IFRS in
the current periods, as well
as the previous period.
Thus, IFRS preparation to
be done from April 1, 2010
will be even. No separate
AS is available for banking
& similar industries.
IFR3/
IAS27/
SIC12/
Business
combination/consolidate
d financial
S14/
AS21
Accounting
of
amalgamati
The ultimate parent
company must produce
consolidated financial
15
IAS22 statements/consolidation
-special purpose
entities/business
combination
on/consolid
ated
financial
statements
statements. (IAS). On the
other hand, in the India
context, it is optional. Only
‘purchase method’ of
amalgamation is permitted
in IFRS. Goodwill arising
out of consolidation is
subject to impairment at
least annually & is at
amortized. IRFS deal with
cross-holding & complex
holdings of subsidiaries &
minority in detail, which is
a regular feature of modern
business, where AS14 &
AS21 have not been
updated to meet the current
requirements.
IFRS4 Insurance companies Not
availabl
e
Not
available
A detailed guideline has
been given in IFRS for
Insurance companies.
IFRS6 Exploration for &
evaluation of mineral
resources
Not
availabl
e
Not
available
No separate AS is available
in India for this transaction.
IFRS8/
IAS14
Operating
segments/segments
reporting
AS17 Segment
reporting
This IFRS is applicable for
annual reporting. IFRS
adopts the management
reporting approach, to
identify operating
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segments, unlike AS 143 of
business or geographical
segments. This principle is
discretely based on chief
operating decision make
(CODM) of the internal
management report. Thus
by adopting IFRS, segment
reporting in financial
statement will have a new
look.
IAS2 Inventories AS2 Valuation
of
inventories
No significant difference
with AS
IAS7 Cash flow statements AS3 Cash flow
statements
IFRS cash flow statements
do not require showing
movement in borrowings
but can be netted off.
Liquid investments & fixed
deposits with an original
maturity value not
exceeding three months,
forming part of cash &
cash equivalent.
IAS8 Net profit or loss for the
period, fundamental
errors & changes in
accounting practices
AS5 Net profit
or loss for
the period,
prior period
items &
Though AS inherited from
IAS, benchmark treatment
of prior period item is not
permitted in AS. More
detailed treatment is
17
changes are
changes in
accounting
policies
available in IFRS for
treatment of changes in
accounting policies.
IAS10 Events after balance
sheet date
AS4 Contingenc
ies &
events after
balance
sheet date
Significant changes to be
brought under financial
statement in IFRS, unlike
in AS, to mention as to
accounts.
IAS12/
SIC21/
SIC25
Income tax/income tax-
recovery of revalued
non-depreciation assets/
changes in tax status of
an entity of its
shareholders
S22 Accounting
for taxes on
income
More detailed
interpretations have drawn
in IFRS particularly for
revalued assets & fair
value. Temporary
difference approach is
focused in IIFRS, which is
not available in AS.
AS16 Property, plant &
equipment
AS10 Accounting
for fixed
assets
IFRS defines fixed assets
recognition in more detail;
revaluation is permitted
with sufficient regularity.
In AS10 there is no such
requirement for upward
revaluation.
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AS17/
SIC15/
SIC27
Lease/operating lease-
incentives/evaluating
substances of
transaction, involving
legal form of a lease.
AS19 Leases Not any significant
difference, since AS has
been inherited from IFRS,
except SIC15, SIC27.
IAS18/
SIC31/
SIC29
Revenue/revenue barter
transactions involving
advertising services,
disclosure, services,
concessions &
arrangements
AS15 Accounting
for
retirement
benefit in
the
financial
statements
of
employers
IFRS deals in ESOP &
project unit method to
measure the employees’
obligation, which will help
the companies to consider
‘employee cost’ in a
prudent way in the
financial statement.
IAS21 The effect of change in
foreign exchange rate.
AS11 The effect
of change
in foreign
exchange
rate.
IFRS explains the
treatment in more detail.
IAS23 Borrowing cost AS16 Borrowing
cost
IFRS allows dual (bench
mark & alternative)
treatment of capitalization
of borrowing cost.
IAS24 Related party
disclosures
AS18 Related
party
disclosure
IFRS does not permit
identification of goodwill
of capital reserve. Also,
investment should be
measured by the equity
method. Thus, the cost of
19
investment should be
considered in the financial
statement, whereas AS23
allow for valuation of
according to AS 13.
IAS31/
SIC13
Financial reporting of
interest in joint
ventures/jointly
controlled entity-non-
monetary contribution
by venture.
AS27 Financial
reporting of
interest in
joint
ventures
IFRS allows
multi=treatment of
presentation for joint
ventures, like-bench mark
& alternative method.
Thus, multiple choices are
available for the
companies. Though AS27
was established from IAS,
it allows only alternatives
method (line by line) of
accounting.
IAS33 Earnings per share AS20 Earnings
per share
(EPS)
No significant difference
with AS.
IAS35 Discounting operation AS24 Discountin
g operation
No significant difference
with AS.
IAS40 Investment property AS13 Accounting
for
investment
IFRS deals with derivatives
in detail which is not
available in India.
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CHAPTER 5: CHAPTER 5: OPPORTUNITIES FOR INDIAOPPORTUNITIES FOR INDIA
INC.INC. Easy and improved international capital markets accessibility: adoption
of IFRS may improve the capital accessibility of Indian corporate entities,
as several domestic companies are approaching globally huge resources to
cater to their fund requirements. Today, most of the stock exchanges
demand information under IFRS constraints and convergence to IFRS will
enable Indian corporate to access the global financial market easily. To
have a more dynamic financial market in a country, the opportunities
should be identified beyond the boundaries of the countries. It would be
possible to have more business collaborations and associations only through
global standardization of reports and maintenance of transparency.
Reduction of the cost of capital
To get financial support from finance companies, it is now necessary to
prepare a dual set of financial statements. This will reduce the cost of
chartered accountants, and IFRS will be globally accessible at lower costs.
Cost of raising capital/fund can be minimized under the IFRS as there is no
need to prepare a duel set of financial statements.
Global benchmarking and brand value
Organizations adopting IFRS will naturally come on an international
common platform which will be helpful for comparison purposes. Global
benchmarking is helpful for the organization to build its own brand image.
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True value acquisitions
Many business associations are failing because of the erroneous valuation
of their assets and liabilities. There is a wide gap between the Indian and
US GAAP. The valuation procedures and models are absolutely different in
many situations. Business combinations in Indian GAAP are not recorded
on fair values of assets acquired. They are recorded at carrying values. In
case of intangible assets (e.g. Goodwill, patent, copyright, and trademarks)
purchase consideration paid on their acquisition is not recorded in the
buyers’ book and, therefore, is not reflected in the financial statements. In
such cases, financial statements fail to communicate the true and fair value
of business combinations. Creation of a common procedure for the
valuation of assets and liabilities will help future business associations and
collaborations. IFRS overcomes this problem as it is mandatory to
undertake accounting of net assets taken over at fair value.
Eliminating the need for multiple reporting: the task of maintaining
multiple reports and submitting financial statements by a company can be
eliminated by adopting the provision under IFRS by all group entities.
New opportunities: benefits from the IFRS wave will not be restricted to
the Indian corporate sector. It will, perhaps, open up a plethora of
opportunities in the services sector. With the wide pool of accounting
professionals, India can emerge as an accounting services hub for the global
community. As fair value is a center point in IFRS, it can provide a lot of
opportunities to the accounting community.
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CHAPTER 6: CHALLENGES IN IFRSCHALLENGES IN IFRS
IMPLEMENTATIONIMPLEMENTATION
India made it mandatory that all listed companies have to switch over to IFRS.
However, their deadline (2011) is too short to be accomplished. Many corporate
commented on the practical difficulty of meeting the target. Jubilant Organosis, a
Parma company, changed its complete accounting procedures in the year 2002 and
immediately after 7 years, it had to change over to IFRS. In such situations, the
financial loss incurred by the company and the wastage of time will be enormous.
The complete overhauling of the accounting process is a lengthy process, which
normally an organization completes with the lot of efforts. Jubilant gave a training
session to the accountants for three full days.
According to Paritosh Basu, group controller, Essers, the auditors are very keen
about the critical issues of accounting. They have to be very clear in every single
aspect too. He again pointed out that the changes required are, not only in
procedures of accounting, but also in accounting software and systems, and Excel
based accounting.
Emerging economies including India are facing various challenges/ difficulties in
adopting IFRS.
These include:
Issues relating to non-compatible, legal and effective regulatory requirements;
Issues relating to differences in economic conditions/environments of the
countries;
Issues pertaining to quality education of accounting to produce/prepare
auditors;
Issues relating to SME accounting; and
Translation/description issues.
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India with a population, more than 1.2 crores, has only approximately 145,000
chartered accountants, which is inadequate and far below its requirement. The
following points need serious consideration.
Training
For successfully implementing IFRS in India, it is the need of the hour to
provide training to all interested parties, including teachers, students, auditors,
CFOs, tax professionals, etc. it is imperative that IFRS is introduced as a full
subject in universities and chartered accountancy syllabi.
Information system
Financial accounting and financial reporting are the backbone of any
accounting system, and therefore, the system must be able to produce robust
and consistent data for reporting financial information. Information must be
collected from every section of the organization and used for disclosure
purposes. So far as financial accounting and reporting are concerned, these
have been modified to provide information according to IFRS. In such
conditions, entities need to enhance their IT security in order to minimize the
risk of business interruption, particularly to address potential fraud, cyber and
data corruption.
Taxes
It is expected that IFRS convergence will have a significant impact on financial
statements, and consequently on tax liability. Tax authorities should ensure that
there is clarity on the tax treatment of items, arising out of convergence to
IFRS.
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Communication
Managing market expectations and educating analysts will be critical and IFRS
may significantly change reported earnings and various performance
indicators. Therefore this must be a major thrust area. Management of the
company must be particular, while viewing and analyzing the company’s
performance.
Management compensation
Since compensation to employees is one of the major monetary motivational
factors, IFRS provides a performance based approach for its computation. In
India, there may be a difference in opinion about this provision.
Distributable profits
Unrealized profit\loss is another issue in the adoption of IFRS, and since IFRS
is based on fair value considerations, it is hard to ignore these. Whether this
profit/loss can be considered for the purpose of computing distributable profits
will have to be debated in order to ensure that the distribution of unrealized
profits will not eventually lead to the reduction of share capital.
Action Plan
A result-based action plan and road map is the need of the hour for this
transition. We still have to see concrete steps in this direction. It is hoped that
both the ICAI and the government will act in tandem to make this transition
and the actual implementation a success. In reality, we do not have much
choice but to be prepared to adopt IFRS by the prescribed date.
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Impact on Financial Results
The moment companies will adopt IFRS, there are bound to be changes in the
financial reports. For example, the depreciation rates might differ and hence
the value of assets as well as the profitability of the organization might differ
from what is being shown at present. This may have an impact on the equity
and might confuse the investor.
Amendments in the Law
IFRS, once implemented, will have far-reaching effects on the existing
regulatory set up. It will be all-encompassing and have a bearing on the legal
provisions of the Income Tax Act, Company Law, etc. The IFRS, therefore,
needs to be seen in a holistic manner and dedicated efforts from all fronts need
to be made urgently to ensure that a seamless and smooth transition takes
place.
If the above challenges can be tackled and corrective action initiated, and
convergence with IFRS will be a great step forward in the adoption of global
uniform accounting practices.
Conclusion:
The convergence of financial reporting and accounting will help understand the
accounting language globally, and in the process, lead to free flow of international
investments in the capital market. It will also help the investor to compare the
investment on a global basis, analyze accounting and understand and avoid global
investment risks. It would facilitate accounting and reporting for companies with
global operations and eliminate some costly requirements, like reinstating of
financial statements. It has the potential to create a new standard of accountability
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and greater transparency, which are of great importance to all market participants
including regulators.
Standards must be simple and understandable as far as possible, recognizing the
complexity of transactions, and should be practical and cost effective too. With a
focus on realistic economic representation, accounting standards should address
the legitimate needs of key stakeholders and provide a comprehensive overview of
the financial information. It will create a common platform for better
understanding of accounting internationally. The main benefit of convergence is
that businessmen can present their accounts in the same way as that of any other
country. This will lead to a more healthy international competition by making
comparison easy. Companies should facilitate accountants to participate in training
and intensive workshop programs. Companies should mobilize resources, in terms
of funds and manpower for a smooth transition. In-house dialogues and group
discussions with expert agencies should be done on any issue and matter so that it
is properly understood and the company is benefited in the long run.
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