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Prarthana Bajaj

Student

Amity International Business School

Abstract:

International Financial Reporting Standards (IFRS) introduced by International Accounting

Standards Board (IASB) are worldwide accepted accounting principles which are coming

under limelight. In this world of globalization and cut throat competition its highly crucial for

the Indian Economy to converge with this form of reporting system in order to be at pace

with the world economy. This concept is extremely essential for global Indian companies to

establish a name in the international market and to encourage investments from abroad. This

paper talks about the considerable differences between Indian GAAP v/s IFRS, the opinion of

finance/accounting professionals also certain segments impacted of telecom sector.

Objective of the Study:

Primary Objective:

The Study of the major challenges being faced by Indian Economy on implementing

IFRS:

There exist various issues which need to be sorted in order to give clear entrance to

introduction of IFRS in a domestic economy. It is very important to rationalize the concepts

of domestic GAAP to those being adopted under IFRS, the level of ambiguities being forced

upon by various set of regulatory bodies also the confusion on how the taxable income is to

be computed on its implementation.

Secondary Objective:

Analysing the strongest reason behind the delay:

Every individual has a different take on the procedures being adopted by India Inc. various

factors are to be looked into. Thus the approach was of industrial personnel who are already

undergoing the stress of change in their comfort level. The rigorous training and exhausting

measures which are to be adopted in order to bring about the best results.

Studying the major concerns of SMEs:

India has a huge percentage of businesses functioning in the domain of SMEs which face

issues of lack of financial resources, slow mind set of running business, set of rigid

employees under such scenarios to deal with the complex nature of IFRS.

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Studying the Global Business Opportunities:

IFRS is deemed to be worldwide accepted accounting standards which will make comparison

of accounts/financial data to global peers easy. It would encourage display of appropriate and

trustworthy information of financial facts in order to encourage investments from abroad.

Scrutiny of segment being impacted the most:

The difference between domestic GAAP and IFRS would impact parts of financial

statements, understanding and gathering information on which segment is impacted the most

by the difference and why.

Is India ready for IFRS or not?

Studying all articles on IFRS reflect that India Inc. is not ready for the same yet as it involves

various stages that need to be covered which would time and capital both of the

organizations.

Hence it’s important to study the trade off between the benefits of introducing IFRS in the

accounting system to the cost involved in its implementation.

The objectives of the report are to be met by studying articles, journals and published papers

on the same. Majorly gathering the appropriate extract from contacting the professionals of

the financial industry, researchers and students covering aspects of finance/accounting.

Study of Indian GAAP V/s IFRS:

Analysis of International Financial Reporting Standards , its techniques, concepts of

recording and representation of financial data against those adopted by Indian GAAP. There

are a number of difference that prevail between the two, few basic difference are elaborated

here:

Study of the conceptual difference :

IFRS focuses on representation of facts that are substantial in nature rather than just

focusing on rules whereas Indian accounting standards are rule based statements

being less flexible in nature , Regulatory authorities like SEBI, RBI, IRDA etc play

a key role in defining the rules for accounting and presentation of financial

statements.

IAS 1 states the guidance for the presentation of financial statements, the structure,

and the minimum content requirements. The format and components of financial

statements include:

Statement of Financial Position (Balance sheet),

Statement of Comprehensive Income / Income Statement (Profit and Loss

Account),

Statement of Changes in Equity (SOCIE),

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Statement of Cash Flows,

Notes comprising a summary of significant accounting policies and other

explanatory information, and

Statement of Financial Position as at the beginning of the earliest comparative

period when an entity applies an accounting policy retrospectively or makes

retrospective restatement of items in its financial statements, or when it

reclassifies items in its Financial Statements.

There is no specific standard on presentation and content of financial statements but

as per Companies Act, the following are displayed:

Balance Sheet

Profit & Loss A/c,

Notes to Accounts.

As stated in the above explanation key importance is given to regulatory authorities

further elaborated under the following example: As per AS3 which talks about Cash

Flow Statements and its methodology of calculation under direct or indirect method.

SEBI mandates the use of indirect method for listed companies. The insurance

regulator IRDA requires insurance companies to prepare the Cash Flow Statement

using the direct method. The concept of SOCIE does not prevail; however, they are

represented by the captions share capital and reserves and surplus in the balance

sheet.

Study of the accounting framework :

Historical Cost or Fair Valuation:

IFRS uses the concept of historical cost for valuation of the organization’s assets but

intangible assets, plant & equipment (PPE) and investment property might be

revalued at fair value. Derivatives, financial instruments and biological assets are

surely valued at fair price. As per Indian GAAP which follows historical cost

themselves and similar treatment for PPE but no guidance on derivates and

biological assets.

First time adoption of accounting Framework:

IFRS 1 talks about the procedure that must be followed for inculcating IFRS in their

system , taking into account the retrospective effect , the comparative statements to

be prepared and the limited number of exemptions being covered. No such standard

is available for first time adoption under Indian GAAP.

Extraordinary items :

IFRS prohibits the use of such items in financial statements whereas as per Indian

GAAP, they are defined as irregular, distinctive aspects of business considered

separate from the regular functioning of the business. These items are not frequent

but are recorded in the books of accounts.

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Related party disclosure :

IAS 24 (under IFRS) and AS 18 of Indian GAAP both state the procedure for

related party disclosures. The key difference being that IAS 24 focuses on the

substance of the relationship that exists rather than the legal form. Under IAS 24 the

pricing policies being adopted also needs to be disclosed whereas there are no such

requirements under AS 18.

Hyper-inflationary economics :

IAS29 discusses about the recording of transactions in Hyper- Inflationary

Economics whereas Indian GAAP does not refer to any such discussions.

Employee share-based payment :

IAS 19 states computation of equity acquired or liability incurred as per fair value

method. There is no Accounting Standard in India regarding this aspect but SEBI

has set guidelines on the same for the public listed companies. Compensation

expense as per stock option is recorded either based on intrinsic value or fair value

using option pricing model.

Depreciation :

As per IFRS, depreciation is allocated on a systematic basis to each accounting

period over the useful life of the asset. As per Indian GAAP it’s a similar procedure

except that the useful life is shorter as envisaged under Companies Act and the rate

of depreciation is higher.

Goodwill:

IAS 36 states Impairment of assets requires Goodwill to be tested for impairment at

each balance sheet date whereas as per Indian GAAP no testing for impairment

needs to be done at each balance sheet date.

Revenue recognition :

IAS 18 provides that revenue is to be recognized when rewards, risks and controls

have been transferred to the buyer. In case of construction contracts, the level of

completion is to be taken for revenue valuation but this must be reliable. AS 9

provides an option of either proportionate completion method or completed service

method.

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Preparation of cash flow statements :

As per IFRS there exists no exemptions for small to medium enterprises (meaning

all companies have to compulsorily prepare cash flow statements) whereas as per

Indian GAAP all listed or in the process of listing, banks, financial institutions,

insurance companies, basically all enterprises with turnover exceeding Rs. 500

million or having borrowings in excess of Rs. 100 million in the current accounting

year or either its holding or subsidiary.

Key Challenges faced by Indian Accountants:

Fair value

As per IFRS fair value is computed for display of financial information but that’s not

the case as per the current standards being followed which might display extensive

volatility in terms of EPS, P/E etc. Taking an example of real estate companies

which have to restudy their construction contracts for revenue recognition as the

revenue is taken into account on completion stage basis and when risks , rewards of

ownership has been shifted to the buyer.

Also it’s difficult to obtain information on fair value of financial aspects.

Amendments in regulations

Accounting Standards are not only set by the Institute of Chartered Accounts of

India (ICAI) but a set of other regulatory bodies play a crucial role aswell like

Securities Exchange Board of India (SEBI), Insurance Regulatory and Development

Authority (IRDA) , Reserve Bank of India (RBI) and National Advisory Committee

on Accounting Standards (NACAS). The presentation of financial information

involves all these aspects.

Schedule VI of Companies Act which defines the format for display

of financial information of a company, referring to classification of

expenses by nature. Under IFRS expenses can be classified either by

nature (salary, rent, stationary, fuel & power etc) or by function (cost

of revenue, selling expenses, general and administrative expenses).

Taxable Income is computed under the guidance of Income Tax Act,

1961. Shifting of the reporting style to IFRS will require

clarifications with tax authorities, for example gains or losses from

derivates are to be marked as per IFRS which needs to be sorted by

Indian Tax Authorities.

RBI and IRDA provide for display, reporting and accounting treatment for Banks,

financial institutions, insurance companies etc which don’t match the guidelines of

IFRS.

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Change in the organization’s IT system

Conversion to IFRS will lead to significant upgradation in IT system used for

recording transactions of the company. Severe replacing and updating of ERP

applications is to be conducted, for example ERP modules such as for inventory ( As

IFRS does not follow LIFO method), reporting, asset management , purchase and

project accounting might require modifications.

Determine the Impact

As there exist differences between Indian GAAP and IFRS, application of IFRS

might lead to significant impact on the financial position and performance of many

Indian companies. In accordance with IFRS financial disclosure is made on

qualitative basis that includes display of related party transactions, risk management

policies, currency exposures for entities etc. Whereas schedule VI of Companies Act

focuses more on quantitative factors such as sales volume, production capacity, CIF

value of imports and exports etc. Indian entities prepare their financial statements in

Indian currency, IFRS calls for measuring assets, liabilities, revenue and expenses as

per functional currency which reflects the economic substance of underlying events

and circumstances. Also Indian entities consider preference capital to be a part of the

shareholders fund however that’s not the case in IFRS as they do not include

preference capital in shareholders fund which might indicate a significant decline in

the net worth of the entities if they adopt the same. As per Indian GAAP intangible

assets have a definite life span not exceeding 10years but under IFRS intangible

assets can have indefinite life time exceeding 10years. Interest paid can be shown as

either a financing or an operating cash flow under IFRS but as per Indian GAAP its

reflected as a financing cash flow.

Availability of Professionals

There is lack of professional advisors for the purpose of conversion to IFRS; hence

the entities might have to hire outsiders for the same and also invest heavily in

training of the accounts conducting the conversion.

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Research Analysis:

Delay in Introduction to IFRS in India

Figure 1

There are various factors which have lead to delay in adoption/ convergence to IFRS in India.

The difference between domestic GAAP and IFRS can impact various set of stakeholders of

the company especially the investors as they have keen interest in profits and net worth of the

company. Asset valuation is done via fair value basis under IFRS whereas in India via

historical basis, each factor of the financial statement can be impacted by the change. Hence

39% of professionals are of the opinion that the strongest reason in delay of implementation

of IFRS in India is the drastic impact the difference can have on the accounting system. Also

implementation of IFRS needs basic level change in the system, professionals are not trained

to adapt to the same, one can’t ignore the fact that employees are resistant to change hence

requires high level of expenditure in training and bringing about the change, as per my survey

15% of the professionals are of the opinion that delay is majorly cause lack of IFRS trained

professionals.

Significant Difference Between IFRS vs

Indian GAAP 39%

Lack of IFRS trained

professionals 15%

Interference by Regulatory

Authorities in Accouting

procedures 21%

Change in the Organization's

IT System 9%

Impact on the Net Worth

9%

The cost involved in

bringing about the

change 7%

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Global Business Opportunities Abroad:

Figure 2

IFRS provides a common platform to the world Economy, this characteristic helps improve

the level of comparability and compatibility of financial statements across the globe. It

improves the scenario of global finance, as Indian companies like Infosys, Wipro, Airtel

Reliance etc have ADRs & GDRs also functions across half the planet. This helps investors’

analyze financial statements giving them a better prospective. It would also encourage inflow

of foreign investments in the Indian market.

Transparency in the Indian Accounting System:

As we are aware of the fact that Indian Accounting system is filled ambiguities and lacks

clarity in terms of display of information, IFRS in the system would help global companies

compare the financial statements with other global peers. It would inculcate the responsibility

of achieving goals in a very efficient and effective manner. The procedure of accounting

involves a series of steps that need to be undertaken also its important in a country like ours

to follow regulations set by regulatory authorities hence making it a task, IFRS sets a fixed

pattern of guidelines in terms of accounting clarify the purpose of same. The various factors

undertaken and percentage held as follows:

0%

10%

20%

30%

40%

50%

60%

Efficient and effective form of global

sourcing

Influential capital

allocation

Inflow of more FII

funds in the capital market

World wide accepted platform

Efficient and effective form of global sourcing

Influential capital allocation

Inflow of more FII funds in the

capital market

World wide accepted platform

Global Scenario 25% 6% 18% 51%

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Figure 3

Interference by Regulatory Authorities:

The rules and regulations set by Institute of Chartered Accountants of India for accounting

procedures to be adopted are highly influenced by the various regulatory bodies in how the

actual accounts of a company are to be managed. The Companies Act of 1956 under its

schedule IV talks about how the financial information of the company is to be displayed, it

states the format which needs to be followed. Under IFRS the expenses of a company can be

displayed either as by nature (such as salary, rent, stationary etc) or by function (cost of

revenue, operating expenditure etc) whereas schedule IV talks about classification only by

nature. Computation of taxable income is governed by Income Tax Act, 1961 hence in order

to ensure proper functioning of IFRS in India the facts are to be dealt with also tax

authorities. Reserve Bank of India and Insurance Regulatory Development Authority govern

the accounting system, the format to be followed and reporting of certain key transaction for

banks, financial institutions and insurance companies.

Securities Exchange Board of India sets format presentation of quarterly and annual results of

listed companies in our economy. National Advisory Committee on Accounting Standards

advises ICAI on how the Indian accounting system is to be managed.

The following displays the segregation as per my survey:

Achieving local as well as

global targets efficienlty

28%

Elimination of bureaucracy

19%

No form of multiple reporting

9%

Principal based accounting

compared to rule based

19%

Removal of tedious

procedures 25%

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Figure 4

Segment Impacted

Figure 5

On studying the concept of IFRS v/s Indian GAAP, we come across stark differences

between the two, which may have a negative or a positive impact on a certain aspect of the

financial information. Indian GAAP focuses on rule based form of accounting also in India

importance is given to law rather than facts and judgement on the other hand IFRS is more of

principal based accounting , it deals with application of intelligence.

Securities and Exchange

Board of India 42%

Reserve Bank of India

34%

Insurance Regulatory

and Development Authority of

India 20%

Competition Commission of

India 4%

0%

10%

20%

30%

40%

50%

60%

17% 11%

15%

53%

5% 10%

Segment Impacted

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One of the major differences between the two is the display in the presentation of financial

data. As per Companies Act, 1956 (schedule IV) reflects upon the display of financial

information majorly on how the formatting is to be done whereas on the other hand IFRS

does not prescribe any specific format, even IAS does not state any pre- requisites.

Is India ready for IFRS?

Figure 6

As per the survey 45% of accountants/finance personnel rank India 3/5 in terms of readiness

to adopt India, but as per other study off the internet - Indian Corporate world is not ready to

achieve the target of adopting IFRS by 1st April, 2013. The concepts of IFRS have come

across as slightly illogical to India Inc. Almost 70 per cent of the companies believe it is

illogical and not good for the corporate sector.

Study conducted:

This part basically covers the study paper of Telecom Regulatory Authority of India, India

has decided upon converging with IFRS not adopting the same yet as Indian economy

functions differently from the world economy. Ministry of Corporate Affairs came up with

notified 35 Indian Accounting standards in convergence with IFRS. This paper studies the

implementation of IND AS/IFRS in the accounting system of telecom sector and how it

impacts their corporate profit.

Implementation of IND AS would leave an impact on the corporate profits of the sector

bringing about a degree of fluctuations blowing the stakeholders of the sector away.

It is important to study the possible impact it causes on the financial position of the company,

Airtel has already introduced the concept of IFRS in their annual report.

1 2 3 4 5

Rank out of 5 2% 34% 45% 17% 2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

In %

of

resp

on

ses

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Segment of Revenue Recognition impacted on the Telecom Sector:

Revenue Recognition Activation Fee (Customer Connection Fee):

This is a fee charged on customers for availing any telecom company’s services.

There exists a key difference in its accounting treatment under IND AS compared to

that under IGAAP. As per IND AS (18), such installation/activation fee is be charged

on the P&L a/c over the life of the customer and not to be recognized upfront whereas

AS-9 has no such specific treatment of this form of revenue just that it is to recorded

in the year of receipt. For example: A fee of Rs 500 charged from a customer with an

expected life of 2years (2012-13).

Under IND AS (18): Rs. 250 would be displayed in the P&L a/c for the first year

(2012-13) and balance in the next year (2013-14).

Under AS-9: Rs. 500 would be taken upfront on the year of receipt (2012-13).

Revenue Recognition –Multiple Deliverables:

Telecom sector companies provide multiple deliverables along with a particular

with the customer such as handsets, modems, free call minutes etc.

For treatment under IND AS (18): The set of bundled deliverables, free bees,

handsets and other multiple components are to be divided on unit basis for

accounting purposes and further consideration to be done on fair value basis

whereas under AS-9, there is no specific guideline to be followed just that the sale

made under the contract is to be taken as a single unit of revenue generation.

For example: A service provider has provided a mobile connection with mobile

handsets along with 500 free calls to a customer in April 2012 for a total value of

Rs. 3000. All free calls are used by customer in the year 2012-13.

Under IND AS (18): the bundled set is divided into two components the value of

handset and the value of call minutes, say Rs. 2700 is for the handset going in P&L

a/c as revenue from sale of handsets and the balance Rs. 300 as revenue from sale of

talk time.

Under AS-9: The value of the whole contract is taken as one reflecting Rs. 3000 as

revenue for sale of handsets in P&L a/c.

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Revenue Recognition for free talk time:

Telecom operators along with paid talk time give customers an incentive of free talk

time aswell. As per its treatment under IND AS (18), the extra minutes provided are

added to compute the revenue per minute for revenue recognition whereas under

AS-9, the free minutes are not added for the purpose. For example: A customer

purchased a package of 500 minutes for Rs. 500 in April 2012 and he has been

given another 500 minutes free as Bonus talk time by the service provider with a

validity period of 2 years. The customer could use 600 minutes only in the year

2012-13.

Under IND AS: the revenue per minute is computed as Rs.500/ (500+500) minutes

= Rs.0.50, 600minutes are consumed in first year, reflecting a revenue of Rs.300 in

P&L a/c for 12-13 and balance Rs.200 in the next year when minutes are consumed

before its expiry.

Under AS-9: The revenue charged for a minute is to be taken into account i.e.

Rs500/500minutes, the entire value of Rs.500 would be shown as revenue earned.

Conclusion:

The significant difference between Indian GAAP and IFRS may lead to a heavy dent in the

financial disclosure especially in terms of presentation of financial data, net worth

computation, cash flow statements and other aspects too.

Also the implementation of IFRS involves high level of cost as India lacks well trained

professionals to converge/adopt the same concept. These matters can be looked after by

inculcating the knowledge of IFRS in the academic sessions, focusing on grass root level

issues, diverging our attention on benefits of IND AS/IFRS. Ministry of Commerce has

notified 35 IND AS standards which are in sync with IFRS; these must be looked into with an

open mind in order to converge with globally accepted standards.

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References:

Study of the concept:

http://www.pwc.in/en_IN/in/assets/pdfs/ifrs-us-gaap-indian-gaap.pdf

http://www.ifrs.com/ifrs_faqs.html

http://www.pwc.com/en_US/us/10minutes/assets/pwc_10minutes_090308.pdf

http://www.astuteconsulting.com/upload/Document/IFRS%20in%20India%20-

%20Key%20Aspects.pdf

Articles:

http://www.thehindubusinessline.com/industry-and-economy/article3785544.ece

http://articles.economictimes.indiatimes.com/2009-08-05/news/27655596_1_ifrs-

accounting-assets

http://www.caclubindia.com/articles/ifrs-impact-on-country-s-gdp-

13485.asp#.UUICVNamjys

http://www.centreformanagement.com/resources/career-counselling/147-ifrs-

how-will-this-affect-indian-accounting

http://www.indianmba.com/Articles_on_Management/AOM49/aom49.html

Research Papers:

(Source: International Journal for Computational Engineering & Management,

(November 2012)

(Source: Research paper on IFRS by Prashant Madhukar Shinde, (April 2012)

(Source: World Journal of Social Sciences, research paper by Pawan Jain, (April

2011)

(Source: Research paper on Need for India Inc. in terms of IFRS by Bhuvnesh

Sharma, (July 2011)

(Source: Research on convergence with IFRS by Dr. Kavita Indapurkar, (November

2009)

(Source: Research by Chand and White, (2007)

Study Paper by TRAI:

http://www.trai.gov.in/WriteReadData/WhatsNew/Documents/FINAL%20Study%20PaperJan-13.pdf