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

1

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

3

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.

4

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.

5

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

6

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

7

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.

8

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.

9

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

10

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

11

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

12

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.

14

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

16

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.

18

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.

20

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.

21

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.

22

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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