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307– International
Business Environment
Generic Elective – University Level
2 Credits
LTP: 2:0:0
2
International Monetary Fund
(IMF)
The International Monetary Fund (IMF) is the inter-
governmental organisation established to stabilize the
exchange rate in the international trade.
It helps the member countries to improve their Balance of
Payment (BOP) condition thorough the adequate
liquidity in the international market, promote the growth
of global monetary cooperation, secure financial
stability, facilitate international trade.
It is one of the Bretton woods twins, which came into
existence in 1945, is governed by and accountable to
the 189 countries that make up its near-global
membership.
The International Monetary Fund (IMF) and the
International Reconstruction and Development
Bank (IBRD) were established in July 1944 together
on the basis of Bretton Woods conference that is
why they are also known as the Bretton Woods
twins. India is the founding member of the IMF.
Objectives of IMF:
Article 1 of the Articles of Agreement (AGA) spell out 6 purposes
for which the IMF was set up.
To promote international monetary cooperation through a
permanent institution which provides the machinery for
consolation and collaboration on international monetary
problems.
To facilitate the expansion and balanced growth of international
trade, and to contribute thereby to the promotion and
maintenance of high levels of employment and real income
and to the development of the productive resources of all
members as primary objective of economic policy.
Objectives of IMF:
To promote exchange stability, to maintain orderly exchange
arrangements among members, and to avoid competitive
exchange depreciation.
To assist in the establishment of a multilateral system of
payments in respect of current transactions between
members and in the elimination of foreign exchange
restrictions which hamper the growth of world trade.
To give confidence to members by making the general resources of
the Fund temporarily available to them under adequate
safeguards, thus providing them with the opportunity to correct
maladjustments in their balance of payments, without resorting to
measures destructive of national or international prosperity.
Objectives of IMF:
To give confidence to members by making the general
resources of the Fund temporarily available to them under
adequate safeguards, thus providing them with the
opportunity to correct maladjustments in their balance of
payments, without resorting to measures destructive of
national or international prosperity.
In accordance with the above, to shorten the duration and
lessen the degree of disequilibrium in the international
balance of payments of members.
Obligations of IMF
The IMF's primary purpose is to ensure the stability of the
international monetary system—the system of exchange
rates and international payments that enables countries
(and their citizens) to transact with each other.
Resources: The primary source of the IMF's financial resources is
its members’ quotas, which broadly reflect members’
relative position in the world economy. In addition, the IMF
can borrow temporarily to supplement its quota resources.
Obligations of IMF
Surveillance: To maintain stability and prevent crises in the
international monetary system, the IMF reviews country policies
and national, regional, and global economic and financial
developments through a formal system known as surveillance.
The IMF advises its 188 member countries, encouraging policies
that foster economic stability, reduce vulnerability to economic
and financial crises, and raise living standards. It provides
regular assessment of global prospects in its World Economic
Outlook, of financial markets in its Global Financial Stability
Report, and of public finance developments in its Fiscal
Monitor, and publishes a series of regional economic outlooks.
Obligations of IMF
Financial assistance: It financing provides financing to
its members breathing room to correct balance of
payments problems: national authorities design
adjustment programs in close cooperation with the
IMF that are supported by IMF financing; continued
financial support is conditional on effective
implementation of these programs.
Obligations of IMF
Technical assistance: It provides technical assistance and
training to help member countries strengthen their capacity
to design and implement effective policies. Technical
assistance is offered in several areas, including tax policy
and administration, expenditure management, monetary
and exchange rate policies, banking and financial system
supervision and regulation, legislative frameworks, and
statistics.
Obligations of IMF
SDRs: This facility was started in 1971 to improve the situation
of international liquidity in the world.
The IMF issues an international reserve asset known as Special
Drawing Rights (SDRs; also known as paper Gold) that can
supplement the official reserves of member countries.
Total allocations amount to about SDR 204 billion (some $286
billion).
IMF members can voluntarily exchange SDRs for currencies
among themselves.
The value of SDR is decide by the 4 currencies i.e, US $, Euro,
Pound sterling and Japanese Yen.
Obligations of IMF
Governance and organization: The IMF is accountable to the
governments of its member countries.
At the top of its organizational structure is the Board of
Governors, which consists of one Governor and one
Alternate Governor from each member country.
The Board of Governors meets once each year at the IMF-
World Bank Annual Meetings.
Twenty-four of the Governors sit on the International Monetary
and Financial Committee (IMFC) and normally meet twice
each year.
Lending Facilities of IMF
Stand-By Arrangement (SBA): This instrument help countries in
economic crisis to overcome the Balance of Payment (BoP)
problems.
The Flexible Credit Line (FCL): This instrument is for countries with
very strong fundamentals, policies, and track records of
policy implementation. It represents a significant shift in how
the IMF delivers Fund financial assistance, particularly with
recent enhancements, as it has no ongoing (ex post)
conditions and no caps on the size of the credit line.
Lending Facilities of IMF
The Precautionary and Liquidity Line (PLL) builds on the strengths
and broadens the scope of the Precautionary Credit Line
(PCL). The PLL provides financing to meet actual or potential
balance of payments needs of countries with sound policies,
and is intended to serve as insurance and help resolve crises.
The Extended Fund Facility is used to help countries address
balance of payments difficulties related partly to structural
problems that may take longer to correct than
macroeconomic imbalances.
The Trade Integration Mechanism allows the IMF to
provide loans under one of its facilities to a
developing country whose balance of payments is
suffering because of multilateral trade liberalization,
either because its export earnings decline when it
loses preferential access to certain markets or
because prices for food imports go up when
agricultural subsidies are eliminated.
The IMF’s various lending instruments are tailored to different types of
balance of payments need as well as the specific circumstances of
its diverse membership.
All IMF members are eligible to access the Fund’s resources in the
General Resources Account (GRA) on non-concessional terms, but
the IMF also provides concessional financial support (currently at
zero interest rates through June 2021) through the Poverty Reduction
and Growth Trust (PRGT; see IMF Support for Low-Income Countries ),
which is better tailored to the diversity and needs of low-income
countries.
Historically, for emerging and advanced market economies in crises,
the bulk of IMF assistance has been provided through Stand-By
Arrangements (SBAs) to address short-term or potential balance of
payments problems. The Standby Credit Facility (SCF) serves a
similar purpose for low-income countries. The Extended Fund
Facility (EFF) and the corresponding Extended Credit Facility (ECF)
for low-income countries are the Fund’s main tools for medium-
term support to countries facing protracted balance of payments
problems. Their use has increased substantially since the global
financial crisis, reflecting the structural nature of some members’
balance of payments problems.
To help prevent or mitigate crises and boost market confidence
during periods of heightened risks, members with already strong
policies can use the Flexible Credit Line (FCL) or the Precautionary
and Liquidity Line (PLL).
The Rapid Financing Instrument (RFI) and the corresponding Rapid
Credit Facility (RCF) for low-income countries provide rapid
assistance to countries with urgent balance of payments need,
including from commodity price shocks, natural disasters, and
domestic fragilities.
Reflecting different country circumstances, GRA-supported programs
are expected to resolve the member’s BoP problems during the
program period, while PRGT programs envisage a longer duration
for addressing BoP problems.
Lending to low-income countries
There are three types of loans were created under the new
Poverty Reduction and Growth Trust (PRGT) as part of this
broader reform: the Extended Credit Facility, the Rapid Credit
Facility and the Standby Credit Facility which is discussed
below:
Debt relief : In addition to concessional loans, some low-income
countries are also eligible for debts to be written off under two
key initiatives.
The Heavily Indebted Poor Countries (HIPC) Initiative, introduced
in 1996 and enhanced in 1999, whereby creditors provide
debt relief, in a coordinated manner, with a view to restoring
debt sustainability; and
Lending to low-income countries
The Multilateral Debt Relief Initiative (MDRI), under which the IMF,
the International Development Association (IDA) of the World
Bank, and the African Development Fund (AfDF) cancelled
100 percent of their debt claims on certain countries to help
them advance toward the Millennium Development Goals.
IMF is playing very prominent role in the development of its
members countries so that they can ride on the trajectory of
holistic development.
Role of IMF in Economic Development of LDCs:
The IMF works for global prosperity by promoting a balanced
expansion of world trade. The IMF not only operates as a BOP
adjustment institution but also a BOP financing institution. The
IMF system provides for exchange rate stability in the short run
but allows for exchange rate adjustment if a country faces
‘fundamental’ disequilibrium in its BOP accounts. Hence the
name ‘adjustable peg system’ that lasted till 1971 since its
birth. Till the mid-60s of the 20th century, some progress had
been achieved in the direction of international cooperation
and compliance with the Fund’s Articles of Agreement.
Role of IMF in Economic Development of LDCs:
Continuous drop in its gold reserves and chronic BOP deficits resulting in
a crisis of confidence of dollar forced the USA to abandon the
convertibility of dollars into gold in 1971. This is called breakdown of
the Bretton Woods System that seriously raised questions about the
role of the IMF in the provisioning of international finance.
Floating exchange rate system thus introduced caused severe hardships
to the LDCs. Meanwhile, many LDCs faced serious BOP deficits
because of a world recession, the first oil shock in the form of
ricocheting fuel prices, and a falling exports of LDCs.
The IMF now serves the needs of global finance instead of the needs of
global stability. The use of conditionality and the direct ‘surveillance’
on macroeconomic policy by the Fund is suggestive of increasing
involvement in the LDCs’ development process.
Role of IMF in Economic Development of LDCs:
Drawings from the EFF, SRF, PRGF, etc., are available if the
member countries agree to a stabilisation programme. The IMF
focuses mainly on a country’s macroeconomic stability as well
as structural adjustment programme that influences its
macroeconomic performance. Conditionality’s are attached
when member countries opt for drawings from the above noted
sources of the Fund.
Structural adjustment programmes (that includes not only
stabilisation programmes associated with monetary and fiscal
policy measures, but also trade liberalisation, privatisation,
globalisation, freeing markets to determine prices, reforming
institutions, to carry government’s new role, and so on) are said
to be preconditions for securing Bank-Fund loans.
Role of IMF in Economic Development of LDCs:
First, SAP was justified as necessary to the LDC world as it would
enable them to repay their debt to banks of advanced
countries. By the late 1980s, more than 70 LDCs had to swallow
the SAP medicine. But its impact on growth of these countries
was negative
Secondly, the costs of adjusting to greater openness of the LDC
economy are shouldered mainly by the poor. The Fund
recommends privatisation so as to offset government failure. It is
said that the government-run enterprises are inefficient.
Bureaucracies are corrupt. Thus by ‘freeing the markets’,
competitive efficiency could be improved. But the costs of such
adjustment programmes are expensive.
Role of IMF in Economic Development of LDCs:
The inevitable consequence of this is the rise in the number of
unemployed and poor people. “In the eyes of some, the
acronym IMF stands for(I)inflation, (M)isery and (F)amine!”
Again, the IMF introduced economic shock therapy measures
in command economies. All these comprised the introduction
of capitalism in Russia and other former Soviet bloc countries
and hence a shift from the state-led development to market-
led development.
Role of IMF in Economic Development of LDCs:
Thirdly, the IMF promoting an agenda of ‘market fundamentalism’
thereby injuring the country’s social fabric. The Fund
emphasizes fiscal discipline—cuts in government expenditures
and subsidies—so as to pursue a free market economy
philosophy. But because of cuts in government expenditures
and various subsidies on basic necessities and a rise in the
price of public services, vulnerable people bore the major
brunt. The Fund is unresponsive to “adjustment with a human
face”
Role of IMF in Economic Development of LDCs:
Fourthly, structural adjustment conditionality is often criticised for
the third world debt crisis. Borrowing-dependent third world
countries in the 1970s and 1980s went for private commercial
bank loans—thereby causing accumulation of external debt
and ballooning of debt service payments. Faced with this crisis,
many of the LDC countries approached the IMF for borrowing to
avert the risk of default. It then invented the structural adjust
ment lending, provided conditionality’s imposed by the Fund-
World Bank are respected by the borrowing nations. This debt
burden also caused severe BOP crises in many countries. The
Fund- Bank do not find incentives to close exchange gap;
rather they decapitalise LDCs.
Role of IMF in Economic Development of LDCs:
The Fund often brings political and social unrest. Many of the
policy measures suggested by the Fund (e.g., subsidy cut,
labour retrenchment, golden handshake, etc.)caused
widespread strikes, riots, etc., in many countries. Actually,
finding no other alternatives, these countries had to swallow the
bitter painful SAP medicine.
The basis
for Difference
IMF World Bank
Meaning International Monetary Fund,
It is an international
organization that maintains
the global monetary system.
A global organization
established to fund and advises
the developing countries, the
World Bank has to develop
them economically.
Aim Economic Stability Economic Growth
Structure of
Organization
A single organization with four
credit lines.
There are two major institutions
– IBRD and IDA.
Objective To deal with all issues related
to the financial sector and
macroeconomics.
To reduce poverty and
promote the long-term
development of the economy.
United Nations Conference on
Trade and Development
(UNCTAD)
The need for reducing disparities between the rich and the poor
was keenly felt at the global level. Particularly developing
countries in Asia, Africa and Latin America realized the
importance of global efforts to be undertaken in this direction.
In order to fulfill the above, the United Nations Conference on
Trade and Development (UNCTAD) came to be established on
30th December, 1964.
The UN session aimed at attaining a minimum of 5 percent annual
growth rate for the developing countries by the end of 1970. It
sought the help of developed countries to attain the above
objective.
In 1960s, most of the developed countries became independent of their
formal imperial masters. These nations launched programmes of rapid
industrialization of their backward economies.
As developing countries required enormous amount of
investments for their rapid industrialization, this has
necessitated large imports of capital goods. But their export
earnings were not sufficient for the purpose of import of capital
goods and technical know-how. Resultantly, huge balance of
payments deficits prevailed in most developing countries.
During 1950s, these deficits were made good with foreign loans.
But the conditions attached to foreign loans were difficult to
comply-with. It was also realized that the protection available
from GATT was inadequate to their needs.
In this context, UNCTAD came into existence in 1964 as a
permanent organization of UNO with its own permanent
secretariat. UNCTAD has its headquarters in Geneva.
Organization of UNCTAD
The UNCTAD was set up as the permanent organ of the
UN General Assembly. It has its own structure of
subsidiary bodies and a full time secretariat. It has
established a Trade and Development Board to
take policy decisions when the conference is not in
session. It has 155 members, elected from among its
members in proportion to geographical distribution.
The Board meets twice a year.
Organization of UNCTAD
There are four subsidiary committees to assist the Trade and
Development Board. These include
the committee on commodities
the committee on manufacture
the committee on shipping and
the committee on invisible items and financing related to
trade.
Generally, these committees meet once a year. However, special
sessions of committees can be convened to transact matters of
urgent nature. All the members of the United Nations are
entitled to become the member of the UNCTAD.
A special committee on preferences furnishes reports from time to
time for the conference to be held.
Basic Principles of UNCTAD
The first conference held in 1964 laid down UNCTAD’s action
programme and priorities. The various recommendations are
based on the following principles:
1) Every country has the supreme right to freely dispose of its
natural resources for the sake of its economic development.
It can freely trade with other countries.
2) Principles of sovereign equality of states, self determination of
people and non-interference in the internal affairs are the
principles which guide trade and economic relations
between countries; and
3) There shall be no discrimination on the basis of differences in
socioeconomic systems. The adoption of various trading
methods and policies shall be consistent with this principle.
Functions of UNCTAD
UN General Assembly has laid down certain essential functions of
UNCTAD. Accordingly, it shall promote accelerated
development of the less developed regions of the world by
dealing properly with the problem of slow expansion of
exports confronting the less developed countries.
The other important functions of UNCTAD are as follows:
To promote international trade between the developed and
underdeveloped countries with a view to accelerating
economic development, special emphasis should be laid
upon the accelerated development of the underdeveloped
countries.
Functions of UNCTAD
 To formulate the principles and policies on
International trade.
 To negotiate multinational trade agreements.
 To make proposals for implementing its principles
and policies.
 To promote research and support negotiations for
commodity agreements, technical elaboration of
new trade activities designed to assist in the areas
of trade and capital for developing countries.
Functions of UNCTAD
 To generally review and coordinate the activities of
other institutions within the fold of United Nations
relating to international trade and economic
development.
 To act as a centre for harmonious trade related
policies of governments and regional economic
groupings in pursuance of Article 7 of the Charter of
the United Nations.
Objectives of UNCTAD
The objectives of UNCTAD in the sphere of competition
are analysis and improvement of the international
bases of the introduction of competition policy and
law, harmonization of competition and trade policy,
convergence of the national norms of competition
with the Set of multilaterally agreed equitable
principles and rules relating to the Control of
Restrictive Business Practices adopted by the UN
Conference.
Balance of Payment
Account
The Balance of Payments is a statement that contains the
transactions made by residents of a particular country with the
rest of the world over a specific time period. It is also known as
the balance of international payments and if often
abbreviated as BOP. It summarizes all payments and receipts
by firms, individuals, and the government.
The systematic accounting is done on the basis of double entry
book keeping (both sides of transactions credit and debit are
included).
Economic transaction includes all such transactions that involve
the transfer of title or ownership of goods and services, money
and assets. The transactions can be both factor payments and
transfer payments.
The Balance of Payments (BOP) is the method countries use to monitor
all international monetary transactions at a specific period of time.
Usually, the BOP is calculated every quarter and every calendar year.
All trades conducted by both the private and public sectors are
accounted for in the BOP in order to determine how much money is
going in and out of a country.
If a country has received money, this is known as a credit, and, if a
country has paid or given money, the transaction is counted as a
debit.
Theoretically, the BOP should be zero, meaning that assets (credits) and
liabilities (debits) should balance.
But in practice this is rarely the case and, thus, the BOP can tell the
observer if a country has a deficit or a surplus and from which part of
the economy the discrepancies are stemming.
Components of BOP
There are two accounts in the BOP statement: the Current Account and
Capital Account.
The Current account records all transactions involving goods, services,
investment income, and current transfer payments.
The Capital account shows the net change in ownership of foreign assets
and transactions in financial instruments.
The balance of payments account follows a double entry system.
All receipts are entered on the credit side whereas all payments are
entered on the debit side.
Theoretically, a balance of payments accounts is always zero, with the
total on the debit side equaling the total on the credit side.
Practically, however, there might be an error of some degree due to the
different sources of data and fluctuation of currency exchange rates.
The BOP comprises of two accounts: Current and Capital.
Current Account
The four major components of the Current account are as follows:
 Visible trade – This is the net of export and imports of goods (visible items).
The balance of this visible trade is known as the trade balance. There is a
trade deficit when imports are higher than exports and a trade surplus
when exports are higher than imports.
 Invisible trade – This is the net of exports and imports of services (invisible
items). Transactions mainly consist of shipping, IT, banking and insurance
services.
 Unilateral transfers to and from abroad – These refer to payments that are
not factor payments. For example, gifts or donations sent to the resident
of a country by a non-resident relative.
 Income receipts and payments – These include factor payments and
receipts. These are generally rent on property, interest on capital, and
profits on investments.
Capital Account : The Capital account is used to finance the deficit in the
current account or absorb the surplus in the current account. The three
major components of the Capital account:
 Loans to and borrowings from abroad – These consist of all loans
and borrowings given to or received from abroad. It includes both
private sector loans, as well as public sector loans.
 Investments to/from abroad – These are investments made by
nonresidents in shares in the home country or investment in real estate
in any other country.
 Changes in foreign exchange reserves – Foreign exchange reserves
are maintained by the central bank to control the exchange rate and
ultimately balance the BOP.
A Current account deficit is financed by a surplus in the Capital account and
vice versa. This can be done by borrowing more money from abroad or
lending more money to non-residents.
The Balancing Act
The current account should be balanced against the combined-
capital and financial accounts. However, as mentioned
above, this rarely happens. We should also note that, with
fluctuating exchange rates, the change in the value of money
can add to BOP discrepancies. When there is a deficit in the
current account, which is a balance of trade deficit, the
difference can be borrowed or funded by the capital
account.
If a country has a fixed asset abroad, this borrowed amount is
marked as a capital account outflow. However, the sale of
that fixed asset would be considered a current account inflow
(earnings from investments). The current account deficit would
thus be funded.
When a country has a current account deficit that is financed by
the capital account, the country is actually foregoing capital
assets for more goods and services.
If a country is borrowing money to fund its current account
deficit, this would appear as an inflow of foreign capital in the
BOP.
When the export of a country exceeds the import, then BOP is
termed as the favourable BOP or surplus BOP.
But when import exceeds the export, then BOP is termed as the
unfavourable or deficit BOP.
Purposes of calculation of Balance of Payment:
1. The basic purpose of BOP accounting is to know the strength
and weaknesses of the Economy in international relations.
2. By analyzing the BOP accounts of the last year one can come
to know the overall gains and losses from international trade. It
can be ascertained that whether composition and direction
of international trade and capital movements have improved
or caused deterioration in the economic condition of the
country.
3. BPO statements give warning signals for future policy
formation.
Significance of BOP
The balance of payments data is important to a lot of users. Investment
managers, government policymakers, the central bank, businessmen,
etc., all make use of the BOP data to make important decisions. The
BOP data is affected by vital macroeconomic variables such as
exchange rate, price levels, interest rates, employment, and GDP.
Monetary and fiscal policies are formed in a way to achieve very
specific objectives, which generally exert a significant impact on the
balance of payments. Policies can be formed with the objectives to
induce or curb foreign inflows or outflows.
Businesses use BOP to analyze the market potential of a country,
especially in the short term. A country with a large trade deficit is not
as likely to import as much as a country with a trade surplus. If there is
a large trade deficit, the government may adopt a policy of trade
restrictions, such as quotas or tariffs.
Introduction to Basic Concept of IFRS.
In India, from Vedic literature, we can found many references that
accounts were properly written.
According to Valmiki Ramayana, when Bharat met Lord Ram in
forest, Lord Ram asked Bharat about income and expenses of
state.
In Mahabharata, Nakul has been asked by yudhisthir to supervise
his accounts of army.
During the kingdom of Maurya, kautilya, a minister of
Chandragupta Maurya wrote a book named “Arthashashtra”
which give various detailed instruction about maintaining
accounts.
The Italian monk Luca Pacioli developed double entry system in
1494 A.D.
The word 'Standard' is of a recent origin. Before that it is
known as 'Principles'.
The British used the term 'Standard' in place of 'Principles'
when they established their Accounting standard
steering committee at the end of 1969.
While Americans introduced the term standard in 1973
when Accounting Principles Board was wound up and
the Financial Accounting Board was created.
In India, this term adopted by establishing Accounting
standard Board (ASB) in April, 1977 by the Institute of
chartered Accountant of India.
The stated goal of the IFRS Foundation and the International
Accounting Standards Board (IASB) is to develop, in the public
interest, a single set of high-quality, understandable,
enforceable and globally accepted financial reporting
standards based upon clearly articulated principles.
There were once scores of unique sets of financial reporting
standards among the more developed nations (“national
GAAP”).
The year 2005 marked the beginning of a new era in global
conduct of business, and the fulfillment of a thirty-year effort to
create the financial reporting rules for a worldwide capital
market.
For during that year's financial reporting cycle, the 27 European Union (EU) member
states, plus many others in countries such as Australia, New Zealand, Russia,
and South Africa adopted International Financial Reporting Standards (IFRS).
IFRS Vs GAAP
IFRS is used primarily by businesses reporting their
financial results anywhere in the world except the
United States. Generally Accepted Accounting
Principles, or GAAP, is the accounting framework used
in the United States.
GAAP is much more rules-based than IFRS. IFRS focuses
more on general principles than GAAP, which makes
the IFRS body of work much smaller, cleaner, and
easier to understand than GAAP.
International Financial Reporting Standards (IFRS) are a set of
international accounting standards stating how particular
types of transactions and other events should be reported in
financial statements.
IFRS are issued by the International Accounting Standards Board
(IASB), and they specify exactly how accountants must
maintain and report their accounts.
IFRS were established in order to have a common accounting
language, so business and accounts can be understood from
company to company and country to country.
OBJECTIVES OF IFRS
 To develop, in the public interest, a single set of high quality,
understandable and enforceable global accounting standards
that require high quality, transparent and comparable
information in financial statements and other financial reporting
to help participants in the worlds capital markets and other users
make economic decisions;
 To promote the use and rigorous application of those standards;
 In fulfilling the objectives associated with (1) and (2), to take
account of, as appropriate, the special needs of small and
medium-sized entities and emerging economies.
 To bring about convergence of national accounting standards
and International Accounting standards and IFRS to high quality
solutions.
What are the advantages of converting to IFRS?
By adopting IFRS, a business can present its financial statements
on the same basis as its foreign competitors, making
comparisons easier.
Furthermore, companies with subsidiaries in countries that require
or permit IFRS may be able to use one accounting language
company-wide.
Companies also may need to convert to IFRS if they are a
subsidiary of a foreign company that must use IFRS, or if they
have a foreign investor that must use IFRS.
Companies may also benefit by using IFRS if they wish to raise
capital abroad.
Encouraging factors of the use of IFRS
The below are the primary drivers encouraging the use of IFRS
globally.
 Globalisation of trade & capital markets
 Rapid development of Information Technology and its
impact on operations
 Fast & simplified process of moving funds between
countries
 Increased investors interest in foreign investments
IFRS Defined Objective of Financial Statements
A financial statement should reflect true and fair view
of the business affairs of the organization.
As these statements are used by various constituents
of the society/regulators, they need to reflect an
accurate view of the financial position of the
organization.
It is very helpful to check the financial position of the
business for a specific period.
Three Basic Accounting Models
 Current Cost Accounting, under Physical Capital Maintenance at all
levels of inflation and deflation under the Historical Cost paradigm as
well as the Capital Maintenance in Units of Constant Purchasing
Power paradigm
 Financial capital maintenance in nominal monetary units, i.e.,
globally implemented Historical cost accounting during low inflation
and deflation only under the traditional Historical Cost paradigm
 Financial capital maintenance in units of constant purchasing power,
i.e., Constant Item Purchasing Power Accounting – CIPPA – in terms
of a Daily Consumer Price Index or daily rate at all levels of inflation
and deflation under the Capital Maintenance in Units of Constant
Purchasing Power paradigm and Constant Purchasing Power
Accounting – CPPA – during hyperinflation under the Historical Cost
paradigm.
Three Underlying Assumptions
Going concern: for the foreseeable future an entity will continue
under the Historical Cost paradigm as well as under the
Capital Maintenance in Units of Constant Purchasing Power
paradigm
Stable measuring unit assumption: financial capital maintenance
in nominal monetary units or traditional Historical cost
accounting only under the traditional Historical Cost
paradigm.
Units of constant purchasing power: capital maintenance in units
of constant purchasing power at all levels of inflation and
deflation in terms of a Daily Consumer Price Index or daily rate
only under the Capital Maintenance in Units of Constant
Purchasing Power paradigm.
Question Answer
/ Final Discussion

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Ibe307 unit4b

  • 1. 307– International Business Environment Generic Elective – University Level 2 Credits LTP: 2:0:0
  • 3. The International Monetary Fund (IMF) is the inter- governmental organisation established to stabilize the exchange rate in the international trade. It helps the member countries to improve their Balance of Payment (BOP) condition thorough the adequate liquidity in the international market, promote the growth of global monetary cooperation, secure financial stability, facilitate international trade. It is one of the Bretton woods twins, which came into existence in 1945, is governed by and accountable to the 189 countries that make up its near-global membership.
  • 4. The International Monetary Fund (IMF) and the International Reconstruction and Development Bank (IBRD) were established in July 1944 together on the basis of Bretton Woods conference that is why they are also known as the Bretton Woods twins. India is the founding member of the IMF.
  • 5. Objectives of IMF: Article 1 of the Articles of Agreement (AGA) spell out 6 purposes for which the IMF was set up. To promote international monetary cooperation through a permanent institution which provides the machinery for consolation and collaboration on international monetary problems. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objective of economic policy.
  • 6. Objectives of IMF: To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments, without resorting to measures destructive of national or international prosperity.
  • 7. Objectives of IMF: To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in their balance of payments, without resorting to measures destructive of national or international prosperity. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balance of payments of members.
  • 8. Obligations of IMF The IMF's primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. Resources: The primary source of the IMF's financial resources is its members’ quotas, which broadly reflect members’ relative position in the world economy. In addition, the IMF can borrow temporarily to supplement its quota resources.
  • 9. Obligations of IMF Surveillance: To maintain stability and prevent crises in the international monetary system, the IMF reviews country policies and national, regional, and global economic and financial developments through a formal system known as surveillance. The IMF advises its 188 member countries, encouraging policies that foster economic stability, reduce vulnerability to economic and financial crises, and raise living standards. It provides regular assessment of global prospects in its World Economic Outlook, of financial markets in its Global Financial Stability Report, and of public finance developments in its Fiscal Monitor, and publishes a series of regional economic outlooks.
  • 10. Obligations of IMF Financial assistance: It financing provides financing to its members breathing room to correct balance of payments problems: national authorities design adjustment programs in close cooperation with the IMF that are supported by IMF financing; continued financial support is conditional on effective implementation of these programs.
  • 11. Obligations of IMF Technical assistance: It provides technical assistance and training to help member countries strengthen their capacity to design and implement effective policies. Technical assistance is offered in several areas, including tax policy and administration, expenditure management, monetary and exchange rate policies, banking and financial system supervision and regulation, legislative frameworks, and statistics.
  • 12. Obligations of IMF SDRs: This facility was started in 1971 to improve the situation of international liquidity in the world. The IMF issues an international reserve asset known as Special Drawing Rights (SDRs; also known as paper Gold) that can supplement the official reserves of member countries. Total allocations amount to about SDR 204 billion (some $286 billion). IMF members can voluntarily exchange SDRs for currencies among themselves. The value of SDR is decide by the 4 currencies i.e, US $, Euro, Pound sterling and Japanese Yen.
  • 13. Obligations of IMF Governance and organization: The IMF is accountable to the governments of its member countries. At the top of its organizational structure is the Board of Governors, which consists of one Governor and one Alternate Governor from each member country. The Board of Governors meets once each year at the IMF- World Bank Annual Meetings. Twenty-four of the Governors sit on the International Monetary and Financial Committee (IMFC) and normally meet twice each year.
  • 14. Lending Facilities of IMF Stand-By Arrangement (SBA): This instrument help countries in economic crisis to overcome the Balance of Payment (BoP) problems. The Flexible Credit Line (FCL): This instrument is for countries with very strong fundamentals, policies, and track records of policy implementation. It represents a significant shift in how the IMF delivers Fund financial assistance, particularly with recent enhancements, as it has no ongoing (ex post) conditions and no caps on the size of the credit line.
  • 15. Lending Facilities of IMF The Precautionary and Liquidity Line (PLL) builds on the strengths and broadens the scope of the Precautionary Credit Line (PCL). The PLL provides financing to meet actual or potential balance of payments needs of countries with sound policies, and is intended to serve as insurance and help resolve crises. The Extended Fund Facility is used to help countries address balance of payments difficulties related partly to structural problems that may take longer to correct than macroeconomic imbalances.
  • 16. The Trade Integration Mechanism allows the IMF to provide loans under one of its facilities to a developing country whose balance of payments is suffering because of multilateral trade liberalization, either because its export earnings decline when it loses preferential access to certain markets or because prices for food imports go up when agricultural subsidies are eliminated.
  • 17.
  • 18. The IMF’s various lending instruments are tailored to different types of balance of payments need as well as the specific circumstances of its diverse membership. All IMF members are eligible to access the Fund’s resources in the General Resources Account (GRA) on non-concessional terms, but the IMF also provides concessional financial support (currently at zero interest rates through June 2021) through the Poverty Reduction and Growth Trust (PRGT; see IMF Support for Low-Income Countries ), which is better tailored to the diversity and needs of low-income countries.
  • 19. Historically, for emerging and advanced market economies in crises, the bulk of IMF assistance has been provided through Stand-By Arrangements (SBAs) to address short-term or potential balance of payments problems. The Standby Credit Facility (SCF) serves a similar purpose for low-income countries. The Extended Fund Facility (EFF) and the corresponding Extended Credit Facility (ECF) for low-income countries are the Fund’s main tools for medium- term support to countries facing protracted balance of payments problems. Their use has increased substantially since the global financial crisis, reflecting the structural nature of some members’ balance of payments problems.
  • 20. To help prevent or mitigate crises and boost market confidence during periods of heightened risks, members with already strong policies can use the Flexible Credit Line (FCL) or the Precautionary and Liquidity Line (PLL). The Rapid Financing Instrument (RFI) and the corresponding Rapid Credit Facility (RCF) for low-income countries provide rapid assistance to countries with urgent balance of payments need, including from commodity price shocks, natural disasters, and domestic fragilities. Reflecting different country circumstances, GRA-supported programs are expected to resolve the member’s BoP problems during the program period, while PRGT programs envisage a longer duration for addressing BoP problems.
  • 21. Lending to low-income countries There are three types of loans were created under the new Poverty Reduction and Growth Trust (PRGT) as part of this broader reform: the Extended Credit Facility, the Rapid Credit Facility and the Standby Credit Facility which is discussed below: Debt relief : In addition to concessional loans, some low-income countries are also eligible for debts to be written off under two key initiatives. The Heavily Indebted Poor Countries (HIPC) Initiative, introduced in 1996 and enhanced in 1999, whereby creditors provide debt relief, in a coordinated manner, with a view to restoring debt sustainability; and
  • 22. Lending to low-income countries The Multilateral Debt Relief Initiative (MDRI), under which the IMF, the International Development Association (IDA) of the World Bank, and the African Development Fund (AfDF) cancelled 100 percent of their debt claims on certain countries to help them advance toward the Millennium Development Goals. IMF is playing very prominent role in the development of its members countries so that they can ride on the trajectory of holistic development.
  • 23. Role of IMF in Economic Development of LDCs: The IMF works for global prosperity by promoting a balanced expansion of world trade. The IMF not only operates as a BOP adjustment institution but also a BOP financing institution. The IMF system provides for exchange rate stability in the short run but allows for exchange rate adjustment if a country faces ‘fundamental’ disequilibrium in its BOP accounts. Hence the name ‘adjustable peg system’ that lasted till 1971 since its birth. Till the mid-60s of the 20th century, some progress had been achieved in the direction of international cooperation and compliance with the Fund’s Articles of Agreement.
  • 24. Role of IMF in Economic Development of LDCs: Continuous drop in its gold reserves and chronic BOP deficits resulting in a crisis of confidence of dollar forced the USA to abandon the convertibility of dollars into gold in 1971. This is called breakdown of the Bretton Woods System that seriously raised questions about the role of the IMF in the provisioning of international finance. Floating exchange rate system thus introduced caused severe hardships to the LDCs. Meanwhile, many LDCs faced serious BOP deficits because of a world recession, the first oil shock in the form of ricocheting fuel prices, and a falling exports of LDCs. The IMF now serves the needs of global finance instead of the needs of global stability. The use of conditionality and the direct ‘surveillance’ on macroeconomic policy by the Fund is suggestive of increasing involvement in the LDCs’ development process.
  • 25. Role of IMF in Economic Development of LDCs: Drawings from the EFF, SRF, PRGF, etc., are available if the member countries agree to a stabilisation programme. The IMF focuses mainly on a country’s macroeconomic stability as well as structural adjustment programme that influences its macroeconomic performance. Conditionality’s are attached when member countries opt for drawings from the above noted sources of the Fund. Structural adjustment programmes (that includes not only stabilisation programmes associated with monetary and fiscal policy measures, but also trade liberalisation, privatisation, globalisation, freeing markets to determine prices, reforming institutions, to carry government’s new role, and so on) are said to be preconditions for securing Bank-Fund loans.
  • 26. Role of IMF in Economic Development of LDCs: First, SAP was justified as necessary to the LDC world as it would enable them to repay their debt to banks of advanced countries. By the late 1980s, more than 70 LDCs had to swallow the SAP medicine. But its impact on growth of these countries was negative Secondly, the costs of adjusting to greater openness of the LDC economy are shouldered mainly by the poor. The Fund recommends privatisation so as to offset government failure. It is said that the government-run enterprises are inefficient. Bureaucracies are corrupt. Thus by ‘freeing the markets’, competitive efficiency could be improved. But the costs of such adjustment programmes are expensive.
  • 27. Role of IMF in Economic Development of LDCs: The inevitable consequence of this is the rise in the number of unemployed and poor people. “In the eyes of some, the acronym IMF stands for(I)inflation, (M)isery and (F)amine!” Again, the IMF introduced economic shock therapy measures in command economies. All these comprised the introduction of capitalism in Russia and other former Soviet bloc countries and hence a shift from the state-led development to market- led development.
  • 28. Role of IMF in Economic Development of LDCs: Thirdly, the IMF promoting an agenda of ‘market fundamentalism’ thereby injuring the country’s social fabric. The Fund emphasizes fiscal discipline—cuts in government expenditures and subsidies—so as to pursue a free market economy philosophy. But because of cuts in government expenditures and various subsidies on basic necessities and a rise in the price of public services, vulnerable people bore the major brunt. The Fund is unresponsive to “adjustment with a human face”
  • 29. Role of IMF in Economic Development of LDCs: Fourthly, structural adjustment conditionality is often criticised for the third world debt crisis. Borrowing-dependent third world countries in the 1970s and 1980s went for private commercial bank loans—thereby causing accumulation of external debt and ballooning of debt service payments. Faced with this crisis, many of the LDC countries approached the IMF for borrowing to avert the risk of default. It then invented the structural adjust ment lending, provided conditionality’s imposed by the Fund- World Bank are respected by the borrowing nations. This debt burden also caused severe BOP crises in many countries. The Fund- Bank do not find incentives to close exchange gap; rather they decapitalise LDCs.
  • 30. Role of IMF in Economic Development of LDCs: The Fund often brings political and social unrest. Many of the policy measures suggested by the Fund (e.g., subsidy cut, labour retrenchment, golden handshake, etc.)caused widespread strikes, riots, etc., in many countries. Actually, finding no other alternatives, these countries had to swallow the bitter painful SAP medicine.
  • 31. The basis for Difference IMF World Bank Meaning International Monetary Fund, It is an international organization that maintains the global monetary system. A global organization established to fund and advises the developing countries, the World Bank has to develop them economically. Aim Economic Stability Economic Growth Structure of Organization A single organization with four credit lines. There are two major institutions – IBRD and IDA. Objective To deal with all issues related to the financial sector and macroeconomics. To reduce poverty and promote the long-term development of the economy.
  • 32. United Nations Conference on Trade and Development (UNCTAD)
  • 33. The need for reducing disparities between the rich and the poor was keenly felt at the global level. Particularly developing countries in Asia, Africa and Latin America realized the importance of global efforts to be undertaken in this direction. In order to fulfill the above, the United Nations Conference on Trade and Development (UNCTAD) came to be established on 30th December, 1964. The UN session aimed at attaining a minimum of 5 percent annual growth rate for the developing countries by the end of 1970. It sought the help of developed countries to attain the above objective. In 1960s, most of the developed countries became independent of their formal imperial masters. These nations launched programmes of rapid industrialization of their backward economies.
  • 34. As developing countries required enormous amount of investments for their rapid industrialization, this has necessitated large imports of capital goods. But their export earnings were not sufficient for the purpose of import of capital goods and technical know-how. Resultantly, huge balance of payments deficits prevailed in most developing countries. During 1950s, these deficits were made good with foreign loans. But the conditions attached to foreign loans were difficult to comply-with. It was also realized that the protection available from GATT was inadequate to their needs. In this context, UNCTAD came into existence in 1964 as a permanent organization of UNO with its own permanent secretariat. UNCTAD has its headquarters in Geneva.
  • 35. Organization of UNCTAD The UNCTAD was set up as the permanent organ of the UN General Assembly. It has its own structure of subsidiary bodies and a full time secretariat. It has established a Trade and Development Board to take policy decisions when the conference is not in session. It has 155 members, elected from among its members in proportion to geographical distribution. The Board meets twice a year.
  • 36. Organization of UNCTAD There are four subsidiary committees to assist the Trade and Development Board. These include the committee on commodities the committee on manufacture the committee on shipping and the committee on invisible items and financing related to trade. Generally, these committees meet once a year. However, special sessions of committees can be convened to transact matters of urgent nature. All the members of the United Nations are entitled to become the member of the UNCTAD. A special committee on preferences furnishes reports from time to time for the conference to be held.
  • 37. Basic Principles of UNCTAD The first conference held in 1964 laid down UNCTAD’s action programme and priorities. The various recommendations are based on the following principles: 1) Every country has the supreme right to freely dispose of its natural resources for the sake of its economic development. It can freely trade with other countries. 2) Principles of sovereign equality of states, self determination of people and non-interference in the internal affairs are the principles which guide trade and economic relations between countries; and 3) There shall be no discrimination on the basis of differences in socioeconomic systems. The adoption of various trading methods and policies shall be consistent with this principle.
  • 38. Functions of UNCTAD UN General Assembly has laid down certain essential functions of UNCTAD. Accordingly, it shall promote accelerated development of the less developed regions of the world by dealing properly with the problem of slow expansion of exports confronting the less developed countries. The other important functions of UNCTAD are as follows: To promote international trade between the developed and underdeveloped countries with a view to accelerating economic development, special emphasis should be laid upon the accelerated development of the underdeveloped countries.
  • 39. Functions of UNCTAD  To formulate the principles and policies on International trade.  To negotiate multinational trade agreements.  To make proposals for implementing its principles and policies.  To promote research and support negotiations for commodity agreements, technical elaboration of new trade activities designed to assist in the areas of trade and capital for developing countries.
  • 40. Functions of UNCTAD  To generally review and coordinate the activities of other institutions within the fold of United Nations relating to international trade and economic development.  To act as a centre for harmonious trade related policies of governments and regional economic groupings in pursuance of Article 7 of the Charter of the United Nations.
  • 41. Objectives of UNCTAD The objectives of UNCTAD in the sphere of competition are analysis and improvement of the international bases of the introduction of competition policy and law, harmonization of competition and trade policy, convergence of the national norms of competition with the Set of multilaterally agreed equitable principles and rules relating to the Control of Restrictive Business Practices adopted by the UN Conference.
  • 43. The Balance of Payments is a statement that contains the transactions made by residents of a particular country with the rest of the world over a specific time period. It is also known as the balance of international payments and if often abbreviated as BOP. It summarizes all payments and receipts by firms, individuals, and the government. The systematic accounting is done on the basis of double entry book keeping (both sides of transactions credit and debit are included). Economic transaction includes all such transactions that involve the transfer of title or ownership of goods and services, money and assets. The transactions can be both factor payments and transfer payments.
  • 44. The Balance of Payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time. Usually, the BOP is calculated every quarter and every calendar year. All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country. If a country has received money, this is known as a credit, and, if a country has paid or given money, the transaction is counted as a debit. Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance. But in practice this is rarely the case and, thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming.
  • 45. Components of BOP There are two accounts in the BOP statement: the Current Account and Capital Account. The Current account records all transactions involving goods, services, investment income, and current transfer payments. The Capital account shows the net change in ownership of foreign assets and transactions in financial instruments. The balance of payments account follows a double entry system. All receipts are entered on the credit side whereas all payments are entered on the debit side. Theoretically, a balance of payments accounts is always zero, with the total on the debit side equaling the total on the credit side. Practically, however, there might be an error of some degree due to the different sources of data and fluctuation of currency exchange rates.
  • 46. The BOP comprises of two accounts: Current and Capital. Current Account The four major components of the Current account are as follows:  Visible trade – This is the net of export and imports of goods (visible items). The balance of this visible trade is known as the trade balance. There is a trade deficit when imports are higher than exports and a trade surplus when exports are higher than imports.  Invisible trade – This is the net of exports and imports of services (invisible items). Transactions mainly consist of shipping, IT, banking and insurance services.  Unilateral transfers to and from abroad – These refer to payments that are not factor payments. For example, gifts or donations sent to the resident of a country by a non-resident relative.  Income receipts and payments – These include factor payments and receipts. These are generally rent on property, interest on capital, and profits on investments.
  • 47. Capital Account : The Capital account is used to finance the deficit in the current account or absorb the surplus in the current account. The three major components of the Capital account:  Loans to and borrowings from abroad – These consist of all loans and borrowings given to or received from abroad. It includes both private sector loans, as well as public sector loans.  Investments to/from abroad – These are investments made by nonresidents in shares in the home country or investment in real estate in any other country.  Changes in foreign exchange reserves – Foreign exchange reserves are maintained by the central bank to control the exchange rate and ultimately balance the BOP. A Current account deficit is financed by a surplus in the Capital account and vice versa. This can be done by borrowing more money from abroad or lending more money to non-residents.
  • 48. The Balancing Act The current account should be balanced against the combined- capital and financial accounts. However, as mentioned above, this rarely happens. We should also note that, with fluctuating exchange rates, the change in the value of money can add to BOP discrepancies. When there is a deficit in the current account, which is a balance of trade deficit, the difference can be borrowed or funded by the capital account. If a country has a fixed asset abroad, this borrowed amount is marked as a capital account outflow. However, the sale of that fixed asset would be considered a current account inflow (earnings from investments). The current account deficit would thus be funded.
  • 49. When a country has a current account deficit that is financed by the capital account, the country is actually foregoing capital assets for more goods and services. If a country is borrowing money to fund its current account deficit, this would appear as an inflow of foreign capital in the BOP. When the export of a country exceeds the import, then BOP is termed as the favourable BOP or surplus BOP. But when import exceeds the export, then BOP is termed as the unfavourable or deficit BOP.
  • 50. Purposes of calculation of Balance of Payment: 1. The basic purpose of BOP accounting is to know the strength and weaknesses of the Economy in international relations. 2. By analyzing the BOP accounts of the last year one can come to know the overall gains and losses from international trade. It can be ascertained that whether composition and direction of international trade and capital movements have improved or caused deterioration in the economic condition of the country. 3. BPO statements give warning signals for future policy formation.
  • 51. Significance of BOP The balance of payments data is important to a lot of users. Investment managers, government policymakers, the central bank, businessmen, etc., all make use of the BOP data to make important decisions. The BOP data is affected by vital macroeconomic variables such as exchange rate, price levels, interest rates, employment, and GDP. Monetary and fiscal policies are formed in a way to achieve very specific objectives, which generally exert a significant impact on the balance of payments. Policies can be formed with the objectives to induce or curb foreign inflows or outflows. Businesses use BOP to analyze the market potential of a country, especially in the short term. A country with a large trade deficit is not as likely to import as much as a country with a trade surplus. If there is a large trade deficit, the government may adopt a policy of trade restrictions, such as quotas or tariffs.
  • 52.
  • 53.
  • 54.
  • 55. Introduction to Basic Concept of IFRS. In India, from Vedic literature, we can found many references that accounts were properly written. According to Valmiki Ramayana, when Bharat met Lord Ram in forest, Lord Ram asked Bharat about income and expenses of state. In Mahabharata, Nakul has been asked by yudhisthir to supervise his accounts of army. During the kingdom of Maurya, kautilya, a minister of Chandragupta Maurya wrote a book named “Arthashashtra” which give various detailed instruction about maintaining accounts. The Italian monk Luca Pacioli developed double entry system in 1494 A.D.
  • 56. The word 'Standard' is of a recent origin. Before that it is known as 'Principles'. The British used the term 'Standard' in place of 'Principles' when they established their Accounting standard steering committee at the end of 1969. While Americans introduced the term standard in 1973 when Accounting Principles Board was wound up and the Financial Accounting Board was created. In India, this term adopted by establishing Accounting standard Board (ASB) in April, 1977 by the Institute of chartered Accountant of India.
  • 57. The stated goal of the IFRS Foundation and the International Accounting Standards Board (IASB) is to develop, in the public interest, a single set of high-quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles. There were once scores of unique sets of financial reporting standards among the more developed nations (“national GAAP”). The year 2005 marked the beginning of a new era in global conduct of business, and the fulfillment of a thirty-year effort to create the financial reporting rules for a worldwide capital market. For during that year's financial reporting cycle, the 27 European Union (EU) member states, plus many others in countries such as Australia, New Zealand, Russia, and South Africa adopted International Financial Reporting Standards (IFRS).
  • 58. IFRS Vs GAAP IFRS is used primarily by businesses reporting their financial results anywhere in the world except the United States. Generally Accepted Accounting Principles, or GAAP, is the accounting framework used in the United States. GAAP is much more rules-based than IFRS. IFRS focuses more on general principles than GAAP, which makes the IFRS body of work much smaller, cleaner, and easier to understand than GAAP.
  • 59. International Financial Reporting Standards (IFRS) are a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are issued by the International Accounting Standards Board (IASB), and they specify exactly how accountants must maintain and report their accounts. IFRS were established in order to have a common accounting language, so business and accounts can be understood from company to company and country to country.
  • 60. OBJECTIVES OF IFRS  To develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the worlds capital markets and other users make economic decisions;  To promote the use and rigorous application of those standards;  In fulfilling the objectives associated with (1) and (2), to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies.  To bring about convergence of national accounting standards and International Accounting standards and IFRS to high quality solutions.
  • 61. What are the advantages of converting to IFRS? By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier. Furthermore, companies with subsidiaries in countries that require or permit IFRS may be able to use one accounting language company-wide. Companies also may need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS, or if they have a foreign investor that must use IFRS. Companies may also benefit by using IFRS if they wish to raise capital abroad.
  • 62. Encouraging factors of the use of IFRS The below are the primary drivers encouraging the use of IFRS globally.  Globalisation of trade & capital markets  Rapid development of Information Technology and its impact on operations  Fast & simplified process of moving funds between countries  Increased investors interest in foreign investments
  • 63. IFRS Defined Objective of Financial Statements A financial statement should reflect true and fair view of the business affairs of the organization. As these statements are used by various constituents of the society/regulators, they need to reflect an accurate view of the financial position of the organization. It is very helpful to check the financial position of the business for a specific period.
  • 64. Three Basic Accounting Models  Current Cost Accounting, under Physical Capital Maintenance at all levels of inflation and deflation under the Historical Cost paradigm as well as the Capital Maintenance in Units of Constant Purchasing Power paradigm  Financial capital maintenance in nominal monetary units, i.e., globally implemented Historical cost accounting during low inflation and deflation only under the traditional Historical Cost paradigm  Financial capital maintenance in units of constant purchasing power, i.e., Constant Item Purchasing Power Accounting – CIPPA – in terms of a Daily Consumer Price Index or daily rate at all levels of inflation and deflation under the Capital Maintenance in Units of Constant Purchasing Power paradigm and Constant Purchasing Power Accounting – CPPA – during hyperinflation under the Historical Cost paradigm.
  • 65. Three Underlying Assumptions Going concern: for the foreseeable future an entity will continue under the Historical Cost paradigm as well as under the Capital Maintenance in Units of Constant Purchasing Power paradigm Stable measuring unit assumption: financial capital maintenance in nominal monetary units or traditional Historical cost accounting only under the traditional Historical Cost paradigm. Units of constant purchasing power: capital maintenance in units of constant purchasing power at all levels of inflation and deflation in terms of a Daily Consumer Price Index or daily rate only under the Capital Maintenance in Units of Constant Purchasing Power paradigm.
  • 66.