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Implementation of IFRS in Indian banking Sector : Effects & Challenges

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Abstract -
Accounting is the language of business, through which an organization can communicate to its stakeholders. From a petty shop to a Multinational Company needs accounting. Even though India is a country which is rapidly moving towards globalization, is still in the process of adopting global reporting standards (i.e. IFRS). Indian banking sector considered as one of the strongest industry, where everything is standardized, but even today it practicing the traditional accounting system i.e. Indian GAAP. This paper concentrates on effects and challenges in implementation of IFRS in Indian banking sector.
Adoption of global accounting standards in Indian banking system will bring more positive drastic changes, where as it has plenty of challenges also. This study elaborates how the challenges can be overcome to avail the benefits of global accounting standards. The Ministry of Corporate Affairs of India (MCA) is likely to notify all sections and rules of the new companies Act and start convergence of Indian Accounting Standards with International Financial Reporting Standards (IFRS) process immediately, which have to be implemented from April 2015 and it has developed a roadmap for the implementation of IFRS in India and this paper examine the effects of IFRS-9 “Financial Instruments” on Indian banking after the implementation of IFRS. This research study also contains the findings and suggestions based on the survey.

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Implementation of IFRS in Indian banking Sector : Effects & Challenges

  1. 1. IMPLEMENTATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) IN INDIAN BANKING SECTOR: EFFECTS AND CHALLENGES Miss. NAVERIYA BANU & Mr. RANJAN B U Research Scholars, Mandavya Research & Development Center, Mandavya First Grade College, Mandya .
  2. 2. INTRODUCTION  India is a country which is rapidly moving towards globalization, is still in the process of adopting global reporting standards (i.e. IFRS).  Indian banking sector considered as one of the strongest industry, where everything is standardized, but even today it practicing the traditional accounting system i.e. Indian GAAP.  Adoption of global accounting standards in Indian banking system will bring more positive drastic changes, where as it has plenty of challenges also.  This paper/presentation concentrates on effects and challenges in implementation of IFRS in Indian banking sector.
  3. 3. OBJECTIVES OF THE STUDY  To comprehend the concept and effects of International Financial Reporting Standards (IFRS).  To study the major challenges for International Financial Reporting Standards (IFRS) adoption in Indian banking sector.  To suggest the appropriate measures for the effective implementation of IFRS in Indian banking industry.
  4. 4. SCOPE OF THE STUDY  The scope of the study is confined to nationalized banks and excludes all other industries in India.  The data collected by consulting the accountants and bankers are belongs to banking industry in and around Mandya district.  Further the scope is limited to the data collected by the accountants and bankers are 25 respondents only.  The time covered by the study is one month.
  5. 5. STATEMENT OF THE PROBLEM  In Indian banking industry in order to get the advantages of IFRS adoption we have to control over the challenges for the adoption of IFRS, in order to control them the proper understanding of those challenges is most important.  Thus the study concentrates on identifying the major challenges and understanding the effects of IFRS adoption in Indian banking sector
  6. 6. METHODOLOGY Quantitative research method is adopted. The data for the study collected from both primary sources as well as secondary source:  PRIMARY DATA: Primary data has collected through questionnaire by consulting 25 accountants and bankers of different nationalized banks around Mandya district.  SECONDARY DATA: Secondary data has collected from various books, articles, journals, dailies, and official websites.  The Primary and secondary data are analyzed using simple arithmetical techniques such as percentage, tables, graphs that are extensively used for analyzing and interpretation of the data collected.
  7. 7. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)  IFRS - stands for International Financial Reporting Standards are high quality, understandable, enforceable and globally accepted accounting standards issued by IASB (International Accounting Standards Board).  These standards are a set of international accounting standards stating how a particular type of transaction and other event should be reported in the financial statements.  The ultimate goal of issuing these standards is to achieve a single set of high quality, common accounting standards should be in practice around the world
  8. 8. NO. TITLE ORIGINALLY ISSUED EFFECTIVE IFRS 1 First-time Adoption of International Financial Reporting Standards 2003 January 1, 2004 IFRS 2 Share-based Payment 2004 January 1, 2005 IFRS 3 Business Combinations 2004 April 1, 2004 IFRS 4 Insurance Contracts 2004 January 1, 2005 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 2004 January 1, 2005 IFRS 6 Exploration for and Evaluation of Mineral Resources 2004 January 1, 2006 LIST OF EXISTING IFRS:
  9. 9. IFRS 7 Financial Instruments: Disclosures 2005 January 1, 2007 IFRS 8 Operating Segments 2006 January 1, 2009 IFRS 9 Financial Instruments 2009 January 1, 2015 IFRS 10 Consolidated Financial Statements 2011 January 1, 2013 IFRS 11 Joint Arrangements 2011 January 1, 2013 IFRS 12 Disclosure of Interests in Other Entities 2011 January 1, 2013 IFRS 13 Fair Value Measurement 2011 January 1, 2013 IFRS 14 Regulatory Deferral Accounts 2014 January 1, 2016
  10. 10. IFRS CONVERGENCE PLAN  The Ministry of Corporate Affairs of India as a part of Government of India, in January 2010 announced a multi phased plan for transition beginning April 1, 2011 to the new converged accounting standards India’s attempts to converge the IFRS which has carve outs that distinguish it from IFRS which is known as “Ind AS”.  The MCA has finalized “Thirty five Ind AS” in February 2011. The actual date of application of these Ind AS is yet to be notified.
  11. 11. EFFECTS OF IFRS ADOPTION IN INDIA:  Common basis of comparison: Adopting a global financial reporting basis will enable the banks to be understood in the global market place. It would allow banks to be perceived as an international player.  Improved access to international capital market: Migration to IFRS will enable Indian banks to have access to international capital market reducing the risk premium that is added to those reporting under banking regulation act.  Escape multiple reporting: IFRS will eliminate the need for multiple reports and significant adjustments for preparing consolidated financial statements or filing financial statements in different stock exchanges.
  12. 12. MAJOR CHALLENGES FOR IFRS ADOPTION IN INDIA:  Wide Gap: IFRS is very much different from the present accounting policies being followed. There are big differences expected in accounting for financial instruments, business combinations and employee benefits.  Inadequate Trained People on IFRS: A large group of trained and skilled accountants and bankers are required to Indian banks for the effective implementation of IFRS.  Fair Value Measurement of Items in the Financial Statements: IFRS uses fair value as a base to measure a majority of items in the financial statements which yields a true value of a business. But the Indian banks are preparing financial statements on historical cost basis, and there are difficulties are there in shifting from historical cost based of accounting to the fair value based accounting system.
  13. 13. DATAANALYSIS AND INTERPRETATION: 1. WHETHER THE ACCOUNTANTS AND BANKERS ARE COMFORTABLE WITH THE PRESENT METHOD OF ACCOUNTING SYSTEM: Source: primary data. INFERENCE: From the above table and graph we can noticed that, out of 25 respondents the entire 25(100%) respondents are comfortable with the existing system of accounting, and no one is uncomfortable with the present method of accounting in India OPTION NO. OF RESPONDANTS PERCENTAGE (%) Yes 25 100 No. 00 000 Total. 25 100
  14. 14. 2. THE DEGREE OF AVAILABILITY OF TRAINING AND KNOWLEDGE TO THE RESPONDENTS TOWARDS LATEST DEVELOPMENTS IN ACCOUNTING IN THEIR ORGANISATION: 7 12 4 2 Excellent Good Satisfactory Poor INFERENCE: From the above table and graph we can observes that, out of 25 respondents, 07 (28%) of the respondents has an excellent availability of training and knowledge on the latest developments an accounting by their banks, while 12 (48%) respondents has Good, 04 (16%) has Satisfactory, and 02 (08%) respondents has poor availability of that training and knowledge in their organizations.
  15. 15. 3. THE AWARENESS OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) AMONG THE RESPONDENTS: 0 2 4 6 8 10 12 14 16 18 Yes No 8 17 INFERENCE: From the above table and graph we can come to know the fact that, out of 25 respondents, only 08 (32%) of them are aware of IFRS and 17 (68%) of the respondents are unknown of IFRS.
  16. 16. 4. WHETHER THE RESPONDENTS ARE READY TO MIGRATE FROM INDIAN BANKING ACCOUNTING SYSTEM TO IFRS: OPTION NO. OF RESPONDANTS PERCENTAGE (%) Yes 15 60 No. 10 40 Total. 25 100 INFERENCE: From the above table and graph we can conclude that out of 25 respondents, 15(60%) of the respondents are ready to migrate from existing accounting system to global accounting standards (IFRS), and 10 (40%) of them are not ready for the migration.
  17. 17. 5. RESPONDENTS OPINION ABOUT THE MAJOR BENEFIT OF IFRS ADOPTION IN INDIA: OPTION NO. OF RESPONDENTS PERCENTAGE (%) Improvements in the efficiency the international capital market. 03 12 Increased flow of FDI to India 04 16 Better information to investors. 00 00 Competition with foreign companies. 05 20 Reduced burden of multiple reporting. 10 40 Increased transparency. 03 12 Total 25 100
  18. 18. 6. ACCORDING TO THE RESPONDENTS, THE MAJOR CHALLENGE BEHIND THE DELAY IN IFRS ADOPTION: OPTION NO. OF RESPONDENTS PERCENTAGE (%) Difficulties involved in the transition process. 03 12 Fair value measurement of assets and liabilities. 02 08 Accounting policies. 03 12 Lack of knowledge on IFRS. 07 28 Tax implications 04 16 Amendments to the existing laws. 06 24 Total. 25 100
  19. 19. 7. RESPONDANTS RECOMMENDATION TO THEIR ORGANISATION FOR THE EFFECTIVE IMPLIMENTATION OF IFRS: OPTION NO. OF RESPONDANTS PERCENTAGE (%) Training to the staff. 12 48 Guidance and assistance of higher authority. 05 20 Keep investors informed. 00 00 All of the above. 07 28 Total. 25 100
  20. 20. SUGGESTIONS  The study indentified that the knowledge on International Financial Reporting Standards (IFRS) is very poor among the respondents, though the accountants and bankers are the pillars of the transition process it is suggested to ensure adequate training and knowledge on IFRS, its benefits, its implementation from now itself.  An adequate management and government support is very essential to the banks and other organizations for the effective implementation of IFRS in India.  The another key success factor for the effective IFRS implementation is “Outsourcing”, India can import the information related to the successful implementation of IFRS by other countries who are the leaders in the effective implementation of IFRS.
  21. 21.  The Government of India shall provide assistance as well as incentives to the banks that are ready to migrate to IFRS, this will definitely helps in the effective and early adoption of IFRS in Indian banking sector.  The another important suggestion is that the information given to the various stakeholders including investors, creditors, suppliers, customers, etc., regarding the migration from Indian accounting Standards to IFRS in such a way that it shall not create any confusions among them, that means it should be reliable, relevant and on time.  Academicians are also the part of transition process, so it is suggested to include the IFRS as a curriculum activity especially for the commerce students from the pre university level itself.
  22. 22. CONCLUSION  The adoption of IFRS in Indian banking sector will ensure a greater credibility and faith in the international capital market. It also helps in upgrading the status of Indian banks in the views of investors both domestic as well as Foreign Institutional Investors (FII).  There can be number of challenges will enter into the transition process, but the worth of benefits derived from the transition will definitely overcome those challenges.  Thus it is suggested to Indian banking sectors that the IFRS adoption or convergence have to be came into action as soon as possible.

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