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International Financial

Reporting Standards
Financial Accounting - 2010

Submitted
Submitted To
By
Prof. Madhu Vij Ankit
Agarwal (F-095)
Chan
dni Khundia (F-)
Inderj
eet (F- )
Sanc
hita Gupta (F-144)
Shini
e Dutta (F-149)
Shrut
i Jain (F-150)
Vivek
Kumar (F-159)

Table of Contents
Table of Contents....................................................................................................... 2

International Financial Reporting Standards (IFRS)....................................................3

Basic Differences.................................................................................................... 3

Qualitative characteristics of financial....................................................................4

Convergence with IFRS in India..................................................................................4

Applicability.............................................................................................................4

Convergence........................................................................................................... 5

Need for IFRS............................................................................................................. 5

Characteristics of IFRS............................................................................................... 8

IFRS around the globe................................................................................................9

IFRS implementation: Challenges in India................................................................10

Knowledge on International practices...................................................................10

Gap in Training......................................................................................................10

Law and Amendments...........................................................................................10

Taxation................................................................................................................ 11

Fair value.............................................................................................................. 11

Management compensation plan..........................................................................11

Information system and Reporting........................................................................11

Transition to IFRS..................................................................................................... 12

First time adoption................................................................................................12

Major differences in Indian GAAP and IFRS...............................................................13


Survey Analysis – Banking Sector.............................................................................16

International Financial Reporting Standards (IFRS)

IFRS is a set of international accounting standard stating how particular types of

transactions and other events should be reported in financial statements.

Accounting treatment is governed by the substance of the transaction and entirely

driven by accounting principles and not by legal framework.

Basic Differences
ACCOUNTING STANDARDS IFRS
Cost Fair Value
Reliability Relevance
Accounting driven by value Accounting driven by principles

International Financial Reporting Standards (IFRS) is a global accounting language.

They are standards, concept and framework issued by International Accounting

Standards Board (IASB) based in London. India is one among the 100 countries that

have or are moving towards implementation of IFRS convergence with a view to

bring uniformity in reporting globally and making ways for its business, finances

and funds for larger opportunities. The basic idea behind convergence of IFRS in

India was to give a wider route for FDIs, FIIs as they are more comfortable and

compatible with globally recognized accounting standards. Both premier bodies in

India i.e. ICAI and Ministry of Corporate Affairs have announced for implementation

and convergence of it.


Qualitative characteristics of financial

Convergence with IFRS in India

Applicability

• ICAI is of the view that IFRS to be adopted for public interest entities such

listed Co, Banking Companies, Insurance entities and large size entities from

the Accounting period beginning on or after April 2011. The view is further

strengthened by convergence process being initiated by Ministry of

Corporate Affairs.

• For this purpose, public interest entities are the entities falling under the

Category level 1 as defined by ICAI except that turnover should exceed Rs


100Crs (Instead of Rs 50 Crs) and borrowing should exceed Rs 25 Crs

(instead of Rs 10Crs) and holding and subsidiary of above.

• Even if listed company does not fulfill the above criteria for level 1 enterprise,

the application of IFRS is mandatory.

• Early adoption of IFRS is encouraged but it should be the adoption of all IFRS

and should not be on selective basis.

• For other entities, IFRS are not mandatory but recommendatory.

Convergence

Convergence means to achieve harmony with IFRSs; in precise terms convergence

can be considered “to design and maintain national accounting standards in a way

that financial statements prepared in accordance with national accounting

standards draw unreserved statement of compliance with IFRSs.” But convergence

doesn’t mean that IFRS should be adopted word by word, e.g., replacing the term

‘true & fair’ for ‘present fairly’, ‘Presentation of Financial Statements’. Such changes

do not lead to non-convergence with IFRS.

Need for IFRS

Switching to IFRS will offer many advantages to a company. Companies that are

global would be benefited by complying with international financial reporting

requirements. Reporting costs would be reduced and a common reporting system

will be developed. This will ensure consistency in statutory reporting. Furthermore,

comparison and benchmarking of financial data with international competitors

would be possible.
Acquisitions and joint ventures between countries will be possible due to adoption

of IFRS. It will also help provide access to foreign capital. This is because majority of

stock exchanges require financial information presented according to the IFRS.

Some companies can gain advantage over their competitors by adopting IFRS

relatively earlier. Thus, the company will improve and strengthen the brand value of

the company. To trade their shares and securities on stock exchanges world-wide,

most of the stock exchanges require companies to make financial statements under

IFRS.

A major advantage implementing IFRS is that the management of a company can

view all the companies in a group on a common platform. This will reduce the time

and efforts involved to adjust the accounts in order to comply with the

requirements of the national GAAP. Business acquisition would be reflected at fair

value in IFRS rather than the carrying values. This would ensure greater

transparency in the financial statements.

The implementation of IFRS in the corporate world would require trained

accountants, auditors and actuaries. This will boost job growth in the service sector

and India can emerge as an accounting services hub. Moreover, a single set of

accounting standards worldwide would ensure that auditing firms standardize their

training and quality of work is maintained globally.

India is an emerging market and globalization is at its peak. Indian companies are in

seeking of fund raising and also the flow of FII and FDI is increasing at a galloping

rate. Hence in order to make the investments easier and to make easy for the

foreign companies to assess the financial statements of the Indian companies we

need convergence of IFRS.


Secondly many Indian companies have their subsidiaries in different countries. If

one of the branches use accounting standard pertaining to that particular country

then it is difficult for the parent/other subsidiaries to assess the financial position of

it. Till now crores of many are spent in changing the representation of one national

GAAP to another GAAP. In order to remove this extra cost, an international standard

is to be adopted which is IFRS.

Implementation of IFRS would thus ensure the following benefits:

• Same language across the world

• Cross border investments leading to economic growth

• Comparability of financial statements of any two companies of different

countries

• Globalization of and improve in world trade

• For multinational companies:

o Consolidation of group financial statements made easier

o Accounting and audit functions made easier and cheaper

o Compliance with regulatory requirements of bodies such as stock

exchanges

o Mergers and acquisitions made easier

o Access to multinational funds


• The job of governments and standard setters in the developing countries made

easier

• The job of tax authorities made easier

• Time and money saved by international professional accounting firms in

planning and execution of accounting and audits

• Administrative costs of accessing the capital markets around the world reduced.

• To make a common platform for better understanding of accounting

internationally.

• Synchronization of accounting standards across the globe.

• To create comparable, reliable, and transparent financial statements.

• To facilitate cross border capital raising and trade.

• Having company wide one accounting language that has subsidiaries in different

companies.

Characteristics of IFRS

• Reliability

• Understandability

• Relevance

• Comparability
• Materiality

• True and fair value

• Consistency

• Completeness

IFRS around the globe

Almost all over the globe, IFRS has been adopted. Some parts of the world have

accepted IFRS as their National GAAP such as some parts of Africa and Caribbean.

Europe was the first ones to adopt it. But EU, for listed companies it is mandatory to

follow IFRS and for others it is permitted. In UK and Ireland, national GAAP is

converging to IFRS. Currently more than 100 countries are following IFRS, but by

2011 approximately 150 countries will be following


IFRS implementation: Challenges in India

Though there are various benefits of adopting IFRS, implementation of IFRS is a

massive task in India. Challenges faced during adoption of IFRS in India are listed

below:

Knowledge on International practices


Adoption of IFRS means that the entire set of financial statements will be required

to undergo a drastic change. There are a number of differences between IFRS and

Indian GAAP. This may cause the users of financial statements to look at them from

a new perspective. It would be a challenge to bring about awareness of IFRS and its

impact among the users of financial statements.

Gap in Training
Professional accountants are looked upon to ensure successful implementation of

IFRS. The biggest hurdle for the professionals in implementing IFRS is the lack of

training facilities and academic courses on IFRS in India. As the implementation

date draws closer (2011), it is observed that there is acute shortage of trained IFRS

staff. The solution to this problem is that all stakeholders in the organization should

be trained and IFRS should be introduced as a full time subject in the universities.

Law and Amendments


It is observed that implementation of IFRS may result in a number of inconsistencies

with the existing laws which include the Companies Act 1956, SEBI regulations,

banking laws and regulations and the insurance laws and regulations. Currently, the

reporting requirements are governed by various regulators in India and their

provisions override other laws. IFRS does not recognise such overriding laws.
Although steps to amend these laws have been initiated, the authorities need to

ensure that the laws are amended well in time.

Taxation
IFRS convergence would affect most of the items in the financial statements and

consequently the tax liabilities would also undergo a change. Thus the taxation laws

should address the treatment of tax liabilities arising on convergence from Indian

GAAP to IFRS. It is extremely important that the taxation laws recognize IFRS-

compliant financial statements otherwise it would duplicate administrative work for

the organizations.

Fair value
IFRS uses fair value as a measurement base for valuing most of the items of

financial statements. The use of fair value accounting can bring a lot of volatility

and subjectivity to the financial statements. It also involves a lot of hard work in

arriving at the fair value and valuation experts have to be used. Moreover,

adjustments to fair value result in gains or losses which are reflected in the income

statements. Whether this can be included in computing distributable profit is also

debated.

Management compensation plan


The terms and conditions relating to management compensation plans would also

have to be changed. This is because the financial results under IFRS are likely to be

very different from those under the Indian GAAP. The contracts would have to be re-

negotiated which is also a big challenge.

Information system and Reporting


The disclosure and reporting requirements under IFRS are completely different from

the Indian reporting requirements. Companies would have to ensure that the
existing business reporting model is amended to suit the reporting requirements of

IFRS. The information systems should be designed to capture new requirements

related to fixed assets, segment disclosures, related party transactions, etc.

Existence of proper internal control and minimizing the risk of business disruption

should be taken care of while modifying or changing the information systems.

Transition to IFRS

The Institute of Chartered Accountants of India has proposed two options for

convergence:

• All at once

• Stage-wise approach

It has been observed that there are certain implementation dangers and

compliance problems with IFRS in adopting the all at once approach. Therefore,

stage-wise approach would be preferable.

First time adoption


For first time adoption, two key terms need to be understood:

Reporting date- It is the end of the latest period covered by the financial

statements.

Transition date- It is the beginning of the earliest period for which an entity

presents its first full IFRS compliant financial statements.


ICAI has proposed that in the case of Indian corporate, the first reporting date will

be 31-03-2012 and transition date will be 01-04-2010. Therefore, the first set of

financials will be for the period 01-04-2011 to 31-03-2012 with IFRS comparables

which are to be provided for the period 01-04-2010 to 31-03-2011. It is mandatory

for entities to include at least one comparative period in IFRS compliant financial

statements. After considering the current economic environment, ICAI has decided

that IFRS should be adopted for public interest entities such as listed companies,

banking companies, insurance companies and other large size identities from the

accounting periods commencing on or after 1st April, 2011.

Major differences in Indian GAAP and IFRS

The major focus of IFRS is on getting the balance sheet right. This can bring

significant volatility in the income statement. There are quite a lot of differences

between the Indian GAAP and IFRS with respect to the presentation of financial
statements, disclosure requirements, and accounting policies: it is difficult to

summarize all the differences here. However a few of the major differences are

presented here.

SUBJECT IFRS INDIAN GAAP


Components of Comprises of Comprises of
Financial • Statement of Financial • Balance sheet
Statements Position • Profit and Loss A/c
• Statement of • Cash flow statement
Comprehensive Income • Notes to Accounts
• Statement of Cash flow
• Notes to Accounts
• Statement of Changes in
Equity
Format of IAS 1 prescribes the format of According to the format prescribed
Income income statement. in Schedule VI to the Companies
Statement Act 1956, Banking Regulation Act
for Banks etc.
Statement of Mandatory for all entities Exempted for Level 3 entities as
Cash Flows prescribed by ICAI.
Indian GAAP requires extraordinary
items to be presented in the profit
IFRS prohibits the presentation of and loss statement of the entity
Presentation of
extraordinary items in the distinct from the ordinary income
extraordinary
statement of comprehensive and expenses for the period. As a
items
income or in the notes. result, extraordinary items are
considered to determine the
profit / loss for the period.
Dividends Dividends declared after the end
proposed after of the reporting period but before Dividends declared after the end of
the end of the the financial statements are the reporting period but before the
reporting authorised for issue are not financial statements are approved
period recorded as liability in the financial are recorded as liability in the
statements. financial statements.
Depreciation Allocated on a systematic basis to Depreciation is based on the
rates each accounting period during the higher estimate of useful life of the
useful life of the asset. asset, or the rates prescribed by
Schedule VI of The Companies Act
1956.
Change in the Treated as a change in the Treated as a change in the
depreciation accounting estimate and hence is accounting policy and is accounted
method accounted for prospectively. for all the relevant previous years.
Any excess/deficit in the case of
this kind of recalculation must be
adjusted in the period in which the
change is affected.
Entire class to If an item of property, plant and An entire class of assets can be re-
be re-valued equipment is re-valued, the entire valued, or selection of assets for
class of assets to which that asset revaluation can be made on a
belongs should be re-valued. systematic basis.
Functional and Functional currency is the No concept of functional currency.
foreign currency of the primary economic
currency environment in which the entity
operates. Functional and
presentation currencies may be
different. The standard contains
detailed guidance on this.
Goodwill Goodwill is not amortised under AS 14 provides that goodwill
IAS 38 but is subject to annual arising on amalgamation in the
impairment test under IAS 36. nature of purchase is amortised
over a period of 5 years.
Measurement Are measured at cost only.
Can be measured at cost or re-
of intangible
valued amount.
assets
Survey Analysis – Banking Sector

How would you rate the advantage of IFRS to the following? - To Tax
authorities

Excellent 8 38%

Good 9 43%

Average 3 14%

Bad 1 5%

How would you rate the advantage of IFRS to the following? - To


Management

Excelle 4 19%
nt

Good 1 67%
4

Averag 3 14%
e

Bad 0 0%

How would you rate the advantage of IFRS to the following? - To


Accountants
Excellen 6 29%
t

Good 10 48%

Average 5 24%

Bad 0 0%

How would you rate the advantage of IFRS to the following? - To


Shareholders

Excellent 9 43%

Good 7 33%

Average 5 24%

Bad 0 0%

Analysis:

As can be seen from the graph, we find that majority of the respondents are
positive on the implementation of IFRS. There is recognition of the fact
among the people surveyed about the impact of IFRS wrt to tax authorities,
management, accountants and stakeholders. This is a welcome sign as India
goes for IFRS convergence April 2011

How would you rate the following with respect to implementation of


IFRS? - Regulatory Issues

Major Challenge 7 33
%

Significant 1 62
Challenge 3%

Not a huge 0 0%
concern
Irrelevant 0 0%

Analysis:

Implementation of IRFS poses a significant challenge due to regulatory

issues as more than one government body is involved namely RBI (banking

regulation act), SEBI, IRDA rules and regulations and Ministry of Corporate

Affairs( Companies Act). This requires a concerted effort from the above

mentioned agencies, as stated by ICAI.

How would you rate the following with respect to implementation of


IFRS? - Lack of skilled manpower

Major Challenge 1 62
3%

Significant 3 14
Challenge %

Not a huge 4 19
concern %

Irrelevant 1 5%

Analysis:

Most of the current accounting firms are finding it tough to cope up with the

demand pressure on IFRS implementation for all their clients due to lack of

competent manpower. IFRS is itself an evolving concept and India is trying to

converge with IFRS whereas IFRS itself keeps evolving with participants from

various international accounting agencies contributing for the same.

How would you rate the following with respect to implementation


of IFRS? - Huge cost of establishment

Major Challenge 524


%

Significant 838
Challenge %

Not a huge 629


concern %

Irrelevant 15%

Analysis:

A complete implementation of IFRS will require initial investment which is

the changeover cost. However in the long run, when the companies go in

for single reporting standards as per IFRS norm, the cost will come down.

How would you rate the following with respect to implementation of


IFRS? - Delivering the market expectation

Major Challenge 2 10
%

Significant 6 29
Challenge %

Not a huge 1 57
concern 2%

Irrelevant 0 0%

Analysis:

People resistance will be there to a new change being brought about as the

concept is new to India and will take time for the organizations to develop
competency.

How would you rate the following with respect to implementation of


IFRS? - Managing Business

Major Challenge 0 0%

Significant 8 38
Challenge %

Not a huge 1 57
concern 2%

Irrelevant 0 0%

Analysis:

Managing business is does not seem to be a huge concern for many

organizations because to stay in business they need to be compliant with

the regulations in place.

How would you rate the following with respect to implementation


of IFRS? - Difficulty level ( for the companies)

Major Challenge 314


%

Significant 838
Challenge %

Not a huge 629


concern %

Irrelevant 314
%
Analysis:

Overall the difficulty level remains high for most of the companies. It poses

a challenge in terms of change over cost involved and competent

personnel. Some respondents replied with “irrelevant” because they are

already IFRS compliant in case they are currently reporting back to their

parent company in the country which requires IFRS.

How would you rate the difficulty level for implementing IFRS on a
scale of 1-5?

1 - Lowest 0 0%

2 1 5%

3 8 38%

4 9 43%

5 - Highest 3 14%
Lowes Highest
t

Analysis:

The general trend is that IFRS implementation is difficult due to factors

discussed as part of previous question.

What would be the cost of adapting IFRS in an Indian Company?


Very high 5 24
%

High 13 62
%

Average 3 14
%

Low 0 0%

Analysis:

The cost of implementation is high, as a one time changeover cost. It will be

manageable if companies don’t have to prepare statement of accounts

based on Indian GAAP and IFRS. The cost covers the IT systems changeover

needed to match expectations of IFRS , Training and development of skilled

manpower.

Rate the following features based on the level of difference of the


following attributes of accounting standards between IFRS &
current accounting practice - Contingent liabilities

1-Lowest 15%
Difference

2 419
%

3 629
%

4 314
%
5- Highest 524
Difference %

Rate the following features based on the level of difference of the


following attributes of accounting standards between IFRS & current
accounting practice - Special Purpose Entities (SPE)

1- Lowest 00%
Difference

2 314%

3 733%

4 419%

5- Highest 524%
Difference

Rate the following features based on the level of difference of the


following attributes of accounting standards between IFRS &
current accounting practice - Goodwill

1-Lowest 15%
Difference

2 419
%

3 838
%

4 419
%

5-Highest 210
Difference %

Rate the following features based on the level of difference of the


following attributes of accounting standards between IFRS &
current accounting practice - Intangible assets
1-Lowest 00%
Difference

2 419
%

3 629
%

4 838
%

5-Highest 00%
Difference

Rate the following features based on the level of difference of the


following attributes of accounting standards between IFRS &
current accounting practice - Depreciation on revalued portion

1-Lowest 314
Difference %

2 524
%

3 838
%

4 15%

5-Highest 210
Difference %

Will the affect be huge on banking and investment sector?

Yes 17 81%

No 3 14%
Analysis:

Banking sector will be affected in major areas of

• Loan provisioning

• Derivatives accounting

There is change with respect to structure of the financial statements.

Revenue recognition and dividend payout are two examples of the

same.

In your opinion, is it the right time for India to accept IFRS?

Ye 1 76
s 6%

No 4 19
%

Analysis:

Majority of the respondents feel that it is the right time for India to

accept an converge with IFRS as we move into a globalized era

whereby we have foreign subsidiary companies operating in India can

get benefit of single Accounting standards

Does India have the necessary trainers who can conduct IFRS
training?
Ye 5 24
s %

No 1 76
6%

Analysis:

Lack of skilled manpower remains a concern. Only big MNCs which had

already been using IFRS are now at a competitive cost advantage.

Do you think that India would manage to train enough


accountants by the time IFRS is implemented?

Ye 7 33
s %

No 1 67
4%

Analysis:

Demand for accountants which can help in changeover to OFRS is

surging as the deadline for implementation comes closer. It is

imperative then for skilled personnel to collaborate and train others

which would help the industry as a whole. This is because there is

evident lack of manpower to handle the current work load.


Do you think it should be made mandatory for all companies in
India to follow IFRS?

Ye 9 43
s %

No 1 52
1%

Analysis:

As per the response and our analysis, it is better not to implement IFRS

for all the companies in a single go because IFRs is an evolving

concept. Once there is a ready framework in country to match with, by

seeing some of the bigger companies implementing IFRS, smaller

companies can learn and adopt IFRS. This is because costs involved are

huge and small companies might be able to absorb the same right

now, coming out of a recession.

Is there a need for a proper discussion between economists


and members from trade and industry before implementation
of IFRS?

Ye 1 90
s 9%

No 1 5%

The concept of mark-to-market in IFRS is being debated in the


very country of its origin. Do you think that we are overlooking
the risks of IFRS?

Ye 1 48
s 0%

No 1 48
0%

Will IFRS improve consistency between internal and external


financial information?

Yes 19 90%

No 2 10%

Have you calculated the cost for preparation of information


under IFRS?

Yes 7 33%

No 14 67%

Analysis:

Most companies haven’t figured out the exact cost of implementation.

Though there are some guesstimates for the same.

If yes, is it greater as compared to current accounting


practices?
Ye 524
s %

No 943
%

Will there be a positive impact of foreign investments in India


due to implementation of IFRS?

Ye 2 95
s 0 %

No 1 5%

Analysis:

Yes. The FDI and FII are expected to increase due to IFRS

implementation. This is because of similar standards that investing

companies have to deal with in India vis a vis their home country. This

saves cost on preparing one report for their operations.