international financial reporting standards (ifrs)

Indian GAAP: Towards Convergence with IFRSDr. Jaskiran Arora

Monday, July 6, 2009

JK Padampat Singhania Institute, Gurgaon.

Flow of the presentationWhat & Why IFRS? Indian Accounting standards Benefits & Challenges for IFRS Key differences between Indian GAAP & IFRS Impact on IT Sector Case-Study : Infosys Technologies LimitedMonday, July 6, 2009

What is IFRS?

International Financial Reporting Standards (IFRS) are developed by IASB, private sector organization, based in London and began its operations in 2001. International Accounting Standards (IAS) issued by IASC, predecessor body of IASB, continue to be applicable. IFRS Comprises: 8 IFRSs and 31 IASs. It started of with EU making IFRS mandatory from 2005 onwards. By 2011 more than 150 countries would have adopted IFRS.


Accounting Standard Indian BackgroundICAI, constituted the Accounting Standards Board (ASB) on 21st April, 1977 At a meeting held in May 2006, the Council of ICAI expressed the view to adopt IFRS. The ASB, at a meeting held in August 2006, considered the matter and decided to form an IFRS Task Force. Based on the recommendation of the IFRS Task Force, the Council of ICAI, at its 269th meeting, decided to converge with IFRS, for accounting periods commencing on or after Monday, July 6, 2009 1 April 2011.

Benefits of IFRS

Improved access to international capital markets Lower cost of capital Enable benchmarking with global peers Escape multiple reporting Reflects true value of acquisitions New opportunities


IFRS Challenges


Shortage of resources Training Information systems Taxes Communication Management compensation and debt covenants Distributable profits Alignment with other statutory bodies

Key Difference: IGAAP & IFRS1.

Presentation of financial statements:True and fair provisions. Presentation of a statement of comprehensive income Prohibits presentation of an extraordinary items Information to evaluate the entitys objectives, Restatement for prior period items or change in accounting policy


Key Difference: IGAAP & IFRS1. o

Business Combinations:Amalgamation & Acquisitions Purchase method of accountingo

Fair value of consideration, assets, liabilities and contingent liabilities acquired Identification of intangible assets

Goodwill to be tested for impairment annually. Negative goodwill to be credited to P & L a/c and not capital reserve.



Financial Instruments:

Financial instrument classified as liability or equity in accordance with substance i.e. Preference share Compound financial instruments to be split into liability and equity components IAS 39 prescribes detailed rules on recognition and measurement of financial instruments i.e. FVPL, AFS, HTM and L&R IAS 39 also lays the standards on derivatives Monday, July 6, 2009


Income Taxes:IAS 12 is based on the balance Income Taxes sheet liability method which focuses on temporary differences whereas AS 22 Accounting for Taxes on Income is based on the income statement liability method, which focuses on timing differences Convincing evidence required that sufficient taxable profit will be available under IFRS for carrying tax losses, where as in IGAAP three should be virtual certainty.


Key Difference: IGAAP & IFRSEmployee benefits & share based payments: Actuarial gains and losses on defined benefit plans o Actuarial Gain / loss below 10% corridor need not be recognized o Actuarial Gain / loss above 10% corridor can be deferred over remaining service period or on accelerated basis Termination benefit constructive as against obligation legal obligation Monday, July 6, 2009 IFRS requires ESOP expense to be1.


Property, Plant & Equipment:Major repairs and overhaul expenditure capitalized under IFRS whereas, Indian GAAP requires these to be charged off to the profit and loss account as incurred. IFRS requires estimates of useful lives and residual values to be reviewed at least at each financial year-end. In Indian GAAP, there is no need for an annual review of estimates of useful lives and residual values.


Key Difference: IGAAP & IFRS1. o o

Revenue recognition:Measurement Fair value / charges to customer Discounting Multiple element contracts Embedded derivatives


Impact on IT Sector

Technology companies enter into bundled contracts and multiple offerings. Stock options Outsourcing contracts Discounting of receivables & payables Foreign exchange derivatives


Case Study InfosysIGAAP)

(P& L


(Income Statement IFRS)

Case Study Infosys


Case Study Infosys (B/SIGAAP)


Case Study Infosys(Balance Sheet IFRS)


Reconciliation of Indian and IFRS financial statementsIndian GAAP - standalone Net profits of subsidiary companies Minority interest Indian GAAP - consolidates Amortization of Goodwill Share based compensation IFRS net income IFRS net income (USD million) 2009 5,819 169 5,988 (6) (7) 5,975 1,281 2008 4,470 189 4,659 (29) (13) 4,617 1,163


Case Study InfosysAnalysis)RatioAnalysisSales GrossProfit OperatingProfit NetProfit Equity CurrentAssets CurrentLiabilities GrossProfitRatio(%) OperatingProfitRatio(%) NetProfitRatio(%) ReturnonEquity CurrentRatio(Times)

(Ratio

IFRS($) IndianGAAP(Rs.) 2009 2008 2009 2008 4,663 4,176 21,693 16,692 1,964 1,723 9,928 7,485 1,374 1,159 6,434 4,640 1,281 1,163 5,988 4,659 3,784 3,916 18,254 13,795 3,120 3,127 16,646 13,018 537 549 3,872 4,191 41.26% 27.75% 27.85% 29.70% 45.77% 29.66% 27.60% 32.80% 4.29907 44.84% 27.80% 27.91% 33.77% 3.10618

42.12% 29.47% 27.47% 33.85%

5.810056 5.695811



Thank You


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