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  1. 1. ARS Synopsis On IFRS: A ROAD TO HARMONIZATION Submitted by: Submitted to: Shaiki Agarwal Sri A. Muralidhar Prasad TPS-A Asst. Professor 18046 Sri K.V. Rama Rao Lecturer & Asst. Director (P&T)
  2. 2. ABOUT THE Author CA V.K.Mahipal 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. INTRODUCTION 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.
  3. 3. International Financial Reporting standards (IFRS) 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. HISTORY 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.
  4. 4. 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 standards. 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 INR1,000 crore 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
  5. 5. 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.
  6. 6. 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 corruption. 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 strategies. 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 entity. 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.
  7. 7. Conclusion: 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