IFRS: A ROAD TO HARMONIZATION
Submitted by: Submitted to:
Shaiki Agarwal Sri A. Muralidhar Prasad
TPS-A Asst. Professor
Sri K.V. Rama Rao
Lecturer & Asst. Director (P&T)
ABOUT THE Author
FCA, DISA, CIFRS
Mr. V.K. Mahipal is a qualified Chartered Accountant and Information
System Auditor from The Institute of Chartered Accountants of India
(ICAI). He is certified in IFRS. He has more than eight years of post
qualification experience in the field of Accounting and Auditing. He is also
“Direct Tax Committee” member of Federation of Andhra Pradesh
Chambers of Commerce and Industry (FAPCCI).
His areas of interest includes IFRS (International Financial Reporting
Standards), Direct Taxation, and Capital Markets. Presently he is working as
Faculty Finance in Siva Sivani Institute of Management, Secunderabad.
Globalization of Capital Markets has lead to an increasing need for the
businesses to communicate across their national boundaries. The entities in
emerging economies are increasingly accessing the capital markets globally
to fulfill their capital needs by getting their securities listed on Stock
Exchanges outside the country. As a result, the various financial statements
prepared and presented by a company are used in various countries. This has
raised the requirement of harmonization of accounting policies, accounting
standards and disclosure requirements. Also there is a need to discourage the
accounting policies which are not in conformity with the generally Accepted
Accounting Principles (GAAP). This harmonization in accounting may
result in elimination of non comparability of financial statements across
countries to a large extent and add reliability to the financial statements.
Increased competition has made it mandatory for companies to hunt for
cheaper sources of finance whether available locally or globally. Investors
generally like to invest their capital in companies which are more efficient
and productive. Foreign investors will be more comfortable in investing
globally provided they are in a position to understand the financial
statements and reports and further if they are able to compare them with
their peer ones. Thus, one of the essential requirements to attract foreign
investment may be to enhance comparability of the financial statements by
harmonization of accounts.
A financial reporting standard underline the trust the investors place in
financial reporting information and thus plays an important role in
contributing to the economic development of the country.
International Financial Reporting standards
IFRS is an accounting framework that establishes recognition, measurement,
presentation and disclosure requirements relating to transactions and events
that are reflected in the financial statements.
IFRS was developed by International Accounting Standards Board (IASB)
in the public interest to provide a single set of high quality global accounting
standards. The application of IFRS would lead to a better financial
comparison and enhanced transparency in financial reporting. IFRS are
increasingly being recognized as global reporting standards.
International Accounting Standards Committee (IASC) was founded in June
1973 in London, U.K., for developing the International Accounting
Standards (IAS) and promoting the use and application of these standards.
The IASC was founded as a result of an agreement between accounting
bodies in various countries. IASC issued IAS from year 1973 to year 2000.
Based on the recommendations of the report on shaping IASC for future,
IASB was founded in April 2001 to replace IASC. IASB is an independent,
privately funded accounting standard – settler based in London, U.K. Since
then IASB has replaced some IAS with new IFRS and has adopted or
proposed new IFRS on topics for which there was no previous IAS.
Adoption of IFRS Globally
In the year 2000, The International Organization of Securities Commission
formally accepted the IAS as a basis for cross border listing globally. In June
2000, The European Commission passed a requirement for all listed
companies in the European Union to prepare their Financial Statements
using IFRS for the financial year beginning year 2005. Since 2005 the
acceptability for IFRS has increased tremendously.
Over a 100 countries (including countries of European Union, Australia,
New Zealand, Russia) across the world have formally accepted IFRS in
order to bring about standardization and therefore greater applicability in the
preparation and presentation of financial statements.
The U.S. Securities & Exchange Commission (SEC) has given the foreign
private issuers a choice to use IFRS or US GAAP. SEC is also exploring the
possible option of treating US and foreign issuers at par by also providing
US issuers the alternative to use IFRS. This proposal will bring the whole
world in one single uniform accounting platform i.e.IFRS.
IFRS In Indian Context
In the scenario of globalization India cannot isolate itself from the
developments taking place globally. As the world globalizes, it has become
imperative for India also to make a formal strategy for convergence with
IFRS with the objective to harmonize with the globally accepted accounting
In order to ensure consistency with the legal and regulatory framework of
India, the Indian AS issued by ICAI tends to depart from their corresponding
IFRS. Realizing the fact that adoption of IFRS would be an important policy
decision and at the same time acknowledging the extent of difference
between IFRS and Indian AS, the ASB decided to form an IFRS Task Force.
The objectives of the task force were to explore: (a) approach for achieving
convergence with IFRS and (b) laying down a road map for achieving
convergence with IFRS with a view to make India IFRS- compliant. Based
on the recommendations of the IFRS Task Force, the Council of ICAI, in
July 2007, decided to fully converge with IFRS from accounting period
commencing from 1st April 2011.
Phase 1: Opening balance sheet as at 1 April 2011
Companies which are part of NSE Index – Nifty 50
Companies which are part of BSE Sensex – BSE 30
Companies whose shares or other securities are listed on a stock
exchange outside India
Companies, whether listed or not, having net worth of more than
Phase 2: Opening balance sheet as at 1 April 2012
Companies not covered in phase 1 and having net worth exceeding
INR 500 Crore
Phase 3: Opening balance sheet as at 1 April 2014
Listed companies not covered in the earlier phases
RBI sets up Working Group to address Implementation
Issues in IFRS
The Reserve Bank of India has constituted up a Working Group
under the Chairmanship of Shri P R Ravi Mohan, Chief General
Manager, Department of Banking Operations & Development
(DBOD), Reserve Bank of India, to address the implementation issues
and facilitate formulation of operational guidelines in the context of
International Financial Reporting Standards (IFRSs) convergence for
the Indian banking system. The members of the Group include
representatives from the Indian Banks' Association (IBA), Institute of
Chartered Accountants of India (ICAI) and various regulatory and
market related departments of the Reserve Bank of India. Besides,
professionals with core competence, expertise and experience in IFRS
implementation have been drafted in the Group as special invitees.
Six sub-groups have been formed to deal with the following issues:
1. Classification and measurement of financial assets
2. Classification and measurement of financial liabilities and hedge
accounting. This group would also look into the balance sheet
issues of corporates and their implications.
3. Amortised cost and impairment
4. Fair value measurement
5. Presentation, disclosures and balance sheet formats
6. Derecognition, consolidation and residuary issues.
Benefits of Convergence with IFRS in India
1. Improved access to international capital markets – a number of the
stock exchanges worldwide require financial statements prepared
under globally accepted financial reporting standards. IFRS
encourages international investing and thereby leads to increased
foreign capital flowing into the country.
2. Cheaper Sources of finance – If the industry is able to create
confidence among the foreign investors that their financial statements
comply with the globally accepted accounting principles, then the
industry will be able to raise capital from foreign markets at cheaper
rates. Accessibility to new international markets will also improve
the bargaining power of the industry.
3. Saving of Time and Cost – adoption of IFRS will eliminate the need
for preparing a dual set of financial statements and thus will lead to
reduction in cost. The need for multiple reporting and significant
adjustments in the preparation and presentation of financial
statements in different countries will also be eliminated and thus will
lead to saving of time.
4. Comparability with global peers – convergence to IFRS will help the
domestic companies to set benchmark standards of target based on
global business environment. Domestic companies will also come to
know their relative standing worldwide.
5. Opening up of opportunities for professionals – implementation and
maintenance of IFRS would require professional expertise and more
over since IFRS focuses on fair value, it will provide significant
opportunities to professionals including Chartered accountants,
valuers and actuaries which will in turn boost the growth prospects of
KPO in India.
CHALLENGES IN CONVERGENCE WITH IFRS IN INDIA:
1. Scarcity of Human resource – implementation and maintenance of
IFRS would require expert professionals in large numbers.
Availability of such workforce in a short period of time is a big
challenge in the convergence with IFRS.
2. IT Security – as financial accounting and reporting systems are
modified and strengthened to deliver the information in accordance
with IFRS, entities need to enhance their Information System (IT)
Security in order to minimize the risk of business interpretations
particularly to address potential frauds, cyber terrorism and data
3. Tax Planning – IFRS will have significant impact on financial
statements and consequently tax liability. There could be ambiguity
on tax treatment of various issues arising out of the convergence with
IFRS. Entities may also need to modify their existing tax planning
4. Performance Appraisal – since IFRS is based on fair value, the actual
reported earnings may significantly deviate from the expected
earnings by the stakeholders and other interested parties. Various
conventional performance indicators may not be of much relevance.
In such a situation it will be difficult to assess the performance of the
5. Compatibility with other Laws and Acts - Compatibility of IFRSs
with other Laws and Acts in the country like Companies Act, 1956 is
a big challenge. Further revisions in IFRSs will also make the
convergence process more complex as with every revision in IFRSs,
revision may be required in the existing Law / Act.
Convergence to IFRS will greatly enhance an Indian entities’ ability
to raise and attract foreign capital at a low cost. A common accounting
language, such as IFRS, will help Indian companies benchmark their
performance with global counterparts. Early adoption of IFRS gives
companies the opportunity to anticipate challenges, manage outcomes and
implement the best solutions. Without careful study, the full impact of
converting to IFRS will not be clear. Companies need to conduct a
diagnostic study before proceeding for a full IFRS conversion. After
completing the preliminary assessment, the management should prepare a
detailed IFRS conversion programs. Given the enormity of the exercise,
companies should consider a dedicated team that will work on the
conversion exercise. For successful implementation of IFRS in India, the
regulator should immediately announce its intention to convert to IFRS and
make appropriate regulatory amendments