financial reporting practice in india and ifrs

RIJBFA Volume 1, Issue 9(September 2012) ISSN: 2277- 100X

Journal of Radix International Educational and Research Consortium

1 | P a g e www.rierc.org

FINANCIAL REPORTING PRACTICE IN INDIA AND IFRS

VIS-A VIS

INDIAN AS 101 THROUGH INDIAN AS 108: SOME OBSERVATION

RISHI BHARGAV DAS

M.COM (FINANCE); NET (JRF); SLET

DEPARTMENT OF COMMERCE

DIBRUGARH UNIVERSITY

INTRODUCTION

Financial reporting is the communication of financial information of an enterprise to its

users for better economic decision making. Bedford conceptualizes the financial reporting

process as consisting of four procedural activities.

1. Perception of the significant activity of the accounting entity or in the environment in

which the entity performs. Implicit in the traditional perception is the belief that financial

transactions represent the significant activities

A Journal of Radix International Educational and

Research Consortium

RIJBFA

RADIX INTERNATIONAL JOURNAL OF BANKING, FINANCE AND ACCOUNTING




2. Symbolizing the perceived activities in such fashion that a database of the activities is

available that can then be analyzed to grasp an understanding of the interrelationship of

the mass of perceived activities. Conventionally, this symbolization has taken the form of

recordings in accounts, journals, and ledgers using well-established bookkeeping and

measurement procedures

3. Analysis of the model of activities in order to summarize the interrelationships among

activities and to provide a status picture or map of the entity. Traditionally, this analysis

process has been viewed as one of developing accounting reports to provide insights into

the nature or entity activities

4. Communication (transmission) of the analysis to users of the accounting products to

guide decision makers in directing future activities of the entity or in changing their

relationship with the entity.

First two steps constitute the process of accounting measurement, the quantification of an

entity’s past, and present, or future economic phenomena on the basis of observations and

rules. Implicit in this conception are the requirements that

(a) There exist some attribute or feature of a business-related objects or event (e.g.; the

value of an asset) worthy of measurement and

(b) There exist a means of making the measurements (e.g., the use of exchange prices to

value enterprise assets)

Step 3 and 4 of the financial reporting process constitute disclosure.




Hence, measurement and disclosure are two dimensions of reporting process and these

two aspects are interrelated. Together, they give corporate reporting its substance

.Financial statements are a central feature of financial reporting. The accounting process or

financial reporting system, which generates financial information for external users,

encompasses following principal financial statements both stand-alone and consolidated:

1. Balance Sheet (or statement of financial position)

.2. Profit & Loss Account (or statement of earnings or income statement).

3. Cash Flow Statement (or statement of cash flows).

These three financial statements, augmented by footnotes and supplementary data (often

referred to as ‘Notes on Accounts’ or ‘Notes to the Accounts’) are intended to provide

relevant, reliable and timely information essential for making investment, credit and similar

decision. Such financial statements are called general purpose financial statements.

It may be mentioned that the term financial reporting is not restricted to information

communicated through financial statements. Financial reporting includes other means of

communicating information that relates, directly or indirectly to the information generated

through accounting process. Information provided by means of financial reporting other

than financial statements may take various forms and relate to various matters.

Communication by means of financial reporting other than a formal financial statement is

made due to regulatory requirements or customs. In a few occasions, management may




communicate any matter voluntarily when it considers such communication is useful to the

stakeholders outside the enterprise. Publication of unaudited financial results, news

releases, management forecasts and description of future plans is examples of reports that

are provided outside the general-purpose financial statements.

Corporate financing reporting is not an end in itself but is a means to certain objectives.

There are debates regarding objective of financial reporting. However, some consensus*

has been developed on the objectives of financial reporting through the issuance of the

conceptual framework. The conceptual framework provides the conceptual basis for

generally accepted accounting principles (GAAP). It delineates the characteristics

accounting information must possess to be useful in investment and other economic

decisions. Like other standard setting bodies, the Framework states that the objective of

financial statements is to provide information about financial position, performance and

cash flows of an enterprise that is useful to a wide range of users in making economic

decisions. The Framework specifies present and potential investors, employees, lenders,

suppliers and other trade creditors, customers, governments and their agencies and the

public as the users of financial statements.

MAJOR OBJECTIVES OF FINANCIAL REPORTING

(i) Financial reporting should provide information that is useful to present and potential

investors and creditors and other users in making rational investment, credit, and similar

decisions.

(ii) Financial reporting should provide information to help investors, creditors, and others to

assess the amount, timing and uncertainly of prospective net cash inflows to the related

enterprise.




(iii) Financial reporting should provide information about the economic resources of an

enterprise, the claims to those resources (obligations of the enterprise to transfer resources

to other entities and owners’ equity), and the effects of transactions, events and

circumstances that change resources and claims to those resources..

(iv) Financial reporting should provide information about an enterprise’s financial

performance during a period.

(v) The primary focus of financial reporting is information about an enterprise’s

performance provided by measures of earnings and its components.

(vi) Financial reporting should provide information about how an enterprise obtains and

spends cash, about its borrowing and repayment of borrowing, about its capital

transactions, including cash dividends and other distributions of enterprise’s resources to

owners, and about other factors that may affect an enterprise’s liquidity or solvency.

(vii) Financial reporting should provide information about how management of an

enterprise has discharged its stewardship responsibility to owners (stockholders) for the

use of enterprise resources entrusted to it.

(viii) Financial reporting should provide information that is useful to managers and directors

in making decisions in the interest of owners. Apart from investment decision making

another objective of financial reporting is to provide information on management

accountability.

OBJECTIVES OF THE STUDY

1. An analytical study of the provisions of IFRS 1, IFRS 2 THROUGH IFRS 8

2. An analytical study of the provisions of Ind As 101 to 108




3. Observing the differences between Indian Accounting Standard 101 through 108 and the

related IFRS.

METHODOLOGY

1. The present study is based on Secondary sources.

FINDINGS

1. Difference between IND AS AND IFRS

Time First Adoption of Indian Accounting Standards

It provides only one option to present first IFRS financial statement includes at least

*Three Statement of financial positions

*Two Statement of comprehensive income

*Two Statement of change in equity

*Related notes including comparative information Reconciliation

*Reconciliation of equity as at beginning of the earliest comparative period.

*Reconciliation of its total comprehensive income for comparative period

*Reconciliation of equity as at the end of the comparative period.

*Ind AS 101: provides an option to recognise exchange difference arising on translation

of certain long term monetary item from foreign currency to functional currency, first in

(*IND AS 21 : The Effect of Changes in the Foreign Exchange Rates.)




equity & then transferred to profit & loss in an appropriate manner (as a consequence of

paragraph 29A inserted in Ind AS 21*). Ind-AS 101 allows a company to measure non-

current assets held for sale and discontinued operations at the lower of carrying value and

fair value less cost to sell.

Date of Transition: Entities have to mandatorily transition as of the beginning date of

financial year on or after 1 April 2011 and are not required to present comparative

information; however, entities have an option to present memorandum* comparative

information based on deemed transition date as of the beginning date of immediately

preceding financial year (on or after 1 April 2010).

Additional comparatives as per previous GAAP

Irrespective of the option elected for presentation of memorandum Ind AS comparatives,

the first time adopter shall present latest corresponding previous

period‟s financial statements prepared as per the previous GAAP (existing Indian GAAP,

also refer point iv. for choice of previous GAAP). Such

previous GAAP financial statements shall be reclassified to the extent practicable, when

presenting its first Ind AS financial statements.

2. BUSINESS COMBINATIONS

Common control transactions: IND AS 103: Common control transactions are included in

the scope; and additional guidance is provided. The additional guidance provides that




business combination transactions between entities under common control should be

accounted for using the pooling of interest* method

IFRS 3: Common control transactions are excluded from the scope

Gain on bargain purchase: IND AS 103: Gain on bargain purchase is recognized in OCI**

and accumulated in equity as capital reserve if there is a clear evidence of the underlying

reason for classification of the business combination as a bargain purchase; otherwise, the

resulting gain is recognized directly in equity as capital reserve

IFRS 3: Gain on bargain purchase is recognized in profit or loss after reassessment of the

fair value of assets acquired and liabilities assumed.

3. PRESENTATATION OF FINANCIAL STATEMENTS

Classification of expenses recognised in profit or loss

IND AS: Entities should present an analysis of expenses recognized in profit or loss

using a classification based only on the nature of expense.

IFRS: Entities can present an analysis of expenses recognized in profit or loss using either

nature, or functional classification, whichever provides information that is reliable and

more relevant.

* is that a sale and purchase of business have not accrued. Two companies have same similarity pooled their financial resources and managerial talents in such a manner that owner of each separate business are now corner of enlarged business. ** OCI = other comprehensive income




4. STATEMENT OF CASH FLOWS

Classification of interest and dividends paid and received for entities other than

financial institution

IND AS 7: Interest and dividends paid is classified as financing cash flows and interest and

dividends received is classified as investing cash flows.

IFRS 7: Interest and dividends paid and received shall be disclosed separately, and each

shall be classified in a consistent manner from period to period as operating cash flows,

investing cash flows or Financing cash flows.

5. CONSTRUCTION CONTRACT

Construction of real estate

IND AS 11: Revenue from agreements for construction of real-estate is recognised using

percentage of completion* without further evaluation.

IFRS 11: Revenue from agreements for construction of real-estate will generally be

recognised on completion of the contract. Percentage of completion method* to recognise

revenue is applied for such contracts only if such contracts meet the specified criteria




6. EMPLOYEE BENEFITS

*Actuarial gains and losses for post-employment defined benefit plans and other long-

term employee benefit plans

IND AS 19 All actuarial gains and losses for post-employment defined benefit plans and

other-long term employment benefit plans various other comprehensive income

IFRS 19: Actuarial gains and losses for defined benefit plans can be recognised using one of

the following three alternatives: in profit or loss; or in OCI or using corridor approach.

Actuarial gains and losses for other-long term employment benefit plans are recognised in

profit or loss.

7 . DISCOUNT RATE FOR EMPLOYEE BENEFIT OBLIGATIONS

IND AS 19: Discount rate used to discount employee benefit obligations shall be

determined by reference to market yields at the end of the reporting period on government

bonds only.

IFRS 19: Discount rate used to discount employee benefit obligations shall be determined

by reference to market yields at the end of the reporting period on high quality corporate

bonds. In countries, where there is no deep market in such bonds, the market yields(at the

end of the reporting period) on government bonds shall be used.

__________________________________________________________________

*An accounting method in which the revenues and expenses of long-term contracts are recognized yearly

as a percentage of the work completed during that year. It allows taxpayers to defer the reporting of any

income and expenses until a long-term project is completed. The percentage of completion method of

accounting is commonly used in construction projects.




8. GOVERNMENT GRANTS

Loan from Government at nil or low interest rates

IND AS 20:Benefit resulting from government loan at nil or low rate of interest is recognized

and measured in accordance with revised Ind AS 39 and the difference between the

proceeds from the loan and the initial carrying value of the loan is recognised as

government grant

IFRS 20: Benefit resulting from government loan at nil or low rate of interest is recognize

and measured in accordance with revised IAS 39 Financial Instruments: Recognition and

Measurement and the difference between the proceeds from the loan and the initial

carrying value of the loan is recognized as government grant.

*Non-monetary grants

IND AS 20 Grants are recognized only at their fair value. Grant related assets are presented

only by setting up the grant as deferred income.

IFRS 20 Grants can be recognized either at their fair value or at nominal value. Grant

related assets can be presented either by setting up the grant as deferred income or by

deducting the grant in arriving at the carrying amount of the asset.

*IND AS and IFRS 27: consolidated and separate financial statement IND AS and IFRS 28: investment in associate IND AS and IFRS 31: investment in joint venture




9. Consolidation, proportionate consolidation and equity method of accounting

*Presentation of consolidated financial statements

IND AS 27,28,31*: does not mandate presentation of consolidated financial statements as

requirements to present consolidated or separate financial statements is regulated by

governing statutes in India.

IFRS 27, 28,31: Presentation of consolidated financial statements is mandatory subject to

limited Exceptions

10. * Investments in associates

*Uniform accounting policies

IND AS 28 Revised Ind AS provides an exemption from the use of uniform accounting

policies for like transactions and events in similar circumstance if it is impracticable to do

so.

IFRS 28 The investors financial statements should be prepared using uniform accounting

policies for like transactions and events in similar circumstances

GAIN ON BARGAIN PURCHASE

IND AS 28 Gain on bargain purchase on acquisition of investment in associates should be

recognized in capital reserve.




IFRS 28 Gain on bargain purchase on acquisition of investment in associates should be

recognized in profit or loss.

11. FINANCIAL INSTRUMENTS

Conversion option embedded in foreign currency convertible bonds

IND AS 32, 39, 107: Conversion option to acquire fixed number of equity shares for fixed

amount of cash in any currency (entity’s functional currency or foreign currency) is treated

as equity and accordingly is not required to be premeasured at fair value at every reporting

date

IFRS 7: Conversion option to acquire fixed number of equity shares for fixed amount of cash

in entity’s functional currency only is treated as equity. Thus, a conversion option

embedded in foreign currency convertible bonds is treated as embedded derivative*, and

accordingly fair valued through profit or loss at every reporting period end.

Changes in fair value of financial liabilities due to changes in credit risk.

IND AS 32,39, 107 In determining the fair value of the financial liabilities designated at fair

value through profit or loss upon initial recognition, any change in fair value due to changes

in the entities own credit risk are ignored.

_____________________________________________________________________

*A component of a hybrid security that is embedded in a non-derivative instrument. An embedded

derivative can modify the cash flows of the host contract because the derivative can be related to an

exchange rate, commodity price or some other variable which frequently changes

http://www.investorwords.com/6838/hybrid_security.html

http://www.investorwords.com/2507/instrument.html

http://www.investorwords.com/1421/derivative.html

http://www.investorwords.com/768/cash_flow.html

http://www.investorwords.com/7155/host_contract.html

http://www.investorwords.com/10870/related.html

http://www.investorwords.com/1806/exchange_rate.html

http://www.investorwords.com/975/commodity.html

http://www.investorwords.com/3807/price.html

http://www.investorwords.com/5219/variable.html

http://www.investorwords.com/7046/change.html




IFRS: In determining the fair value of the financial liabilities designated at fair value

through profit or loss upon initial recognition, any change in fair value due to changes in

the entities own credit risk are considered

EARNINGS PER SHARE

Presentation of earnings per share (EPS)

IND AS 33: EPS is required to be presented in both, consolidated as well as separate

financial statements.

IFRS 33: When an entity presents both consolidated financial statements and separate

financial statements, EPS is required to be presented only in the consolidated financial

statements. An entity may disclose EPS in its separate financial statements voluntarily.

INVESTMENT PROPERTY

IND AS 40: Investment properties are measured using only cost model.

IFRS 40: Investment properties can be measured using either cost model or fair value

model*




EPILOUGE

IFRS is a principle based approach with limited implementation and application guidelines.

In the initial years,there is immense learing and subsequently , revisions would araise in

implementation of IFRS .India has set a roadmap for convergence with International

Financial Reporting Standards (IFRS) commencing from 1 April, 2011. The convergence with

IFRS standards is set to change the landscape for financial reporting in India. IFRS

represents the most commonly accepted global accounting framework as it has been

adopted by more than 100 countries. With the growth of Indian Economy and increasing

integration with the global economies, Indian corporate are raising capital globally and the

fair financial reporting with the help of IFRS will be the corporate to grow with the value of

Indian economy.

REFERENCES

1. International Financial Reporting Standards (IFRSs) - published by Taxmann Publications P

Ltd.

2. A Guide through International Financial Reporting Standards July 2008- Published by

IASB.

3. IFRS : A Quick Reference Guide by Robert Kirk

4. Wiley IFRS: Practical implementation guide and workbook by Abbas Ali Mirza, Graham J.

Holt and Magnus Orrell




5. Wiley IFRS 2008: Interpretation and application of International Accounting and Financial

Reporting Standards 2008 by Eva K. Jermakowicz

6.. Lantto, Anna-Maija and Sahlström, Petri (2009). Impact of International Financial

Reporting Standard adoption on key financial ratios. Accounting and Finance, 49, 341–

361.and

7. Armstrong, Chris S., Barth, Mary E., Jagolinzer, Alan D. and Riedl, Edward J. (2009).

Market Reaction to the Adoption of IFRS in Europe. Accounting Review Forthcoming.

8. Ball, Ray (2005). International Financial Reporting Standards (IFRS): Pros and Cons for

Investors. Accounting and Business Research, Forthcoming.

9. Daske, Holger, Hail, Luzi, Leuz, Christian and Verdi, Rodrigo S. (2008). Mandatory IFRS

Reporting Around the World: Early Evidence on the Economic Consequences. ECGI - Finance

Working Paper No. 198/2008; Chicago GSB Research Paper No. 12.

10. De Jong, Abe, Rosellón Cifuentes, Miguel Angel and Verwijmeren, Patrick (2006). The

Economic Consequences of IFRS: The Impact of IAS 32 on Preference Shares in the

Netherlands. ERIM Report Series Reference No. ERS-2006-021-F&A.

11. Hboxma (2008). Economics and IFRS. Retrieved on October 14, 2009 from

http://www.oppapers.com/essays/Economics-Ifrs/177415.

12 Callao, Susana, Ferrer, Cristina, Jarne, Jose I. and Lainez, Jose A. (2009). The impact of

IFRS on the European Union: Is it related to the accounting tradition of the countries?.

Journal of Applied Accounting Research, 10(1), 33 – 55.




13. Carmona, Salvador and Trombetta, Marco (2008). On the Global Acceptance of IAS/IFRS

Accounting Standards: The Logic and Implications of the Principles-Based System. Journal of

Accounting and Public Policy, 27(6).

14. Ramanna, Karthik and Sletten, Ewa (2009). Why do Countries Adopt International

Financial Reporting Standards?. Harvard Business School Accounting & Management Unit

Working PaperNo09-10

financial reporting practice in india and ifrs

Documents