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Background: In an increasingly interconnected global economy, many market participants are considering the question of whether it is possible or desirable to move toward a more uniform global “language” for financial reporting. The proponents of this idea argue that a uniform set of global accounting standards, supported by strong governance, independent standard-setting and a sound regulatory framework, could benefit investors and businesses alike. Others suggest that trying to establish a uniform set of global standards would run the risk of overlooking the unique economic, political, cultural, legal and regulatory realities that exist in different nations and regions. Over the past decade, this global discussion has intensified. In 2001, the International Accounting Standards Board (IASB) adopted the first iteration of International Financial Reporting Standards (IFRS) to serve as a possible pathway for establishing uniform global accounting standards. Since then, IFRS has been adopted or become accepted in over 100 countries. Over this same period, the
Financial Accounting Standards Board (FASB) and the IASB have begun an effort to converge IFRS and the Generally Accepted Accounting Principles in the United States (US GAAP), essentially working to make the two sets of accounting standards increasingly similar to each other. More recently, some market participants have raised the possibility of transitioning entirely from US GAAP to IFRS for public company financial reporting in the United States. In the coming years, critical decisions will need to be made regarding the use of global accounting standards in the United States. Market participants will be called upon to determine whether achieving a uniform set of high-quality global accounting standards is feasible, what sort of investments would be required to achieve that outcome, and whether it is a desirable goal in the first place. This dialogue will be critical to the future of financial reporting and of fundamental importance to the long-term strength and stability of the global capital markets. In that spirit, the Center for Audit Quality (CAQ) has developed this Guide to IFRS to provide interested parties with useful information and to help facilitate an informed public discussion among all those who have a stake in our capital markets system.
The International Accounting Standards Board (IASB) has recognised the need for guidance. Over 100 countries have now adopted IFRS and many more have committed to make the transition in the next few years. However. For companies. acknowledging the cost and complexity of that approach. IFRS 1 covers the application of IFRS in a company's first IFRS financial statements. it then establishes various exemptions in areas where retrospective application would be too burdensome or impractical. The benefits of global standards are widely acknowledged.Meaning: International Financial Reporting Standards (IFRS) is fast becoming the global accounting language. the conversion to IFRS is a major change both for the finance function and for the wider business. International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. It starts with the basic premise that an entity applies IFRS for the first time on a fully retrospective basis. They are a consequence of growing international shareholding and trade and are particularly important for . In 2003 it published IFRS 1 First-time adoption of International Financial Reporting Standards (IFRS 1). however.
The rules to be followed by accountants to maintain books of accounts which is comparable. IFRS stands for International Financial Reporting Standards dards stating how particular types of transactions and other events should be reported in financial statements. They are sometimes still called by the original name of International Accounting Standards (IAS). IAS was issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). The IASB has continued to develop standards calling the new standards International Financial Reporting Standards (IFRS). reliable and relevant as per the users internal or external. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). 2001. the new International Accounting Standards Board took over from the IASC the responsibility for setting International Accounting Standards. understandable. They are progressively replacing the many different national accounting standards. . IFRS began as an attempt to harmonize accounting across the European Union but the value of harmonization quickly made the concept attractive around the world. On April 1.companies that have dealings in several countries.
33 SIC (standing interpretations committee) and 19 IFRIC(IFRS Interpretation Committee) are also issued to provide guidance on some interpretation issues arising from IAS and IFRS. IFRS refers to the new numbered series of pronouncements that the IASB is issuing. .Scope : The term IFRS has both. including standards and interpretations. Till date. IFRS refers to the entire body of IASB pronouncements. IASB has issued 41 IAS and 9 IFRS. private-sector body that develops and approves International Financial Reporting Standards. as distinct from the IAS series issued earlier. The IASB was formed in 2001. More broadly. IASB (International Accounting Standard Board) The International Accounting Standard Board is an independent. a narrow and a broad meaning. The IASB operates under the oversight of the International Accounting Standards Committee Foundation (IASCF). Narrowly.
LIST OF IFRS 1 First-time Adoption of International Financial Reporting Standards -based Payment -current Assets Held for Sale and Discontinued Operations and evaluation of Mineral Resources ting Segments .
Applicability ICAI is of the view that IFRS to be adopted for public interest entities such listed Co. the application of IFRS is mandatory. ry. and should not be on selective basis. . Banking Companies. The view is further strengthened by convergence process being initiated by Ministry of Corporate Affairs. Insurance entities and large size entities from the Accounting period beginning on or after April 2011. entities are the entities falling under the Categorylevel 1 as defined by ICAI except that turnover should exceed Rs 100 Crs (Instead of Rs 50 Crs) and borrowing should exceed Rs 25 Crs (instead of Rs 10Crs) ove criteria for level 1 enterprises.
g. e. be adopted word by word. in IAS 1. in precise terms convergence can be considered “to design and maintain national accounting standards in a way that financial statements prepared in accordance with national accounting standards draw unreserved statement of compliance with IFRSs”.Stage wise Approach.All at once 2. hence the “all at once approach” has been adopted. i. Convergence of AS with IFRS The ICAI has proposed two options for convergence 1. replacing the term „true & fair‟ for „present fairly‟..e. Such changes do not lead to non-convergence with IFRS.What is convergence? Convergence means to achieve harmony with IFRSs. „Presentation of Financial Statements‟.. But since the stage wise approach leads to non compliance with either of IFRS or AS. when the national accounting standards will comply with all the requirements of IFRS. First Time adoption .
two key terms needs to be understood: Reporting date-It is the end of latest period covered by financial statements. Hence.For first time adoption.It is beginning of earliest period for which an entity presents first full IFRS compliant financial statements. For an Indian Company. the first reporting date will be 31-03-2012 and transition date will be 01-04-2010. companies to develop consistent global practices on accounting problems. Transition date. first set of financials shall be for 01-04-2011 to 31-03-2012 with IFRS comparables also to be provided for 01-04-2010 to 31-03-2011. needing to understand various reporting regimes would be reduced. Why ifrs? set of accounting standards would enable internationally to standardize and assure better quality on a global screen. .
How are these to be dealt in Income Tax? ing a lot of volatility and subjectivity to the financial statements besides requiring a lot of hard work and use of valuation experts . sell their services in the different part of world issues need to be addressed Right now accounting standards and other reporting requirements are governed by various regulators e.assess the investment opportunities other than Home Country. all these hurdles will have to be addressed by corresponding amendments in respective laws. lized gain/loss. SEBI. tax authorities.g. High courts (for amalgamation etc) . Global standards do not recognize such override by nonstandard setters. RBI. If the 2011 deadline is to be met then. Companies Act.
in June 2009. Brazil. including the 27 member-states of the European Union. In addition. Singapore and Mexico. Korea. Chile. India. a . Others scheduled to follow in the next few years include Argentina.) As more and more countries adopt IFRS. Japan approved a roadmap for the adoption of IFRS which includes an election for Japanese companies to begin voluntarily using IFRS immediately.The Challenges and Opportunities of IFRS Since 2001. Canada. IFRS has become accepted or been adopted for public reporting purposes in over 100 countries. (See sidebar for information on global market trends.
While progress has been made to reduce he differences between IFRS and US GAAP. this sets accounting standards in the United States. the speed at which that progress has been made has been substantially slower than originally anticipated. (See sidebar for more information on the FASB. This view has led some to call for the United States to adopt IFRS outright to replace US GAAP. . if not completely. have been engaged in a process aimed at “converging” IFRS and US GAAP.) The goal is that over time the differences between IFRS and US GAAP could steadily be diminished and eventually the two sets of standards would be essentially. As part of that effort.robust conversation has begun about whether the United States should take this step or otherwise participate in a process that leads to the acceptance of more uniform global accounting standards for use in the U. the U. there are some who believe that convergence is unlikely to get to the point where the two sets of standards are truly identical. In addition. Issuers” (the Proposed Roadmap) and solicited public reaction. In that vein. since 2002. the IASB and the FASB.S. Securities and Exchange Commission (SEC) in November 2008 proposed a “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with IFRS by U.S.S. identical.
. . . . . . .53% Singapore . . . . . 10% United States . 163% India . . . . .Global Market Trends Accounting Standards Used by Global Fortune 500 Companies: US GAAP . . . . . . . .42% IFRS . . 9% Canada* . . . . . . . . . .27% United Kingdom . . . . 3% Other . . . . . . . . . . . . . . . .32% Japan* . . . .(1)% Percentage of Worldwide Market Capitalization on Exchanges:(2002 2008) . . . . . . . . . . . .53% China . . . . 14% * Have committed to accepting IFRS Growth of Listed Companies on Exchanges Around the World (2002–2008): Korea . . . . . . . .
the Accounting Standards issued by the ICAIdepart from the corresponding IFRS in order to ensure consistency with the legal.1% 5. Accordingly. the ASB of the ICAI formulates Accounting Standards based on IFRS.regulatory and economic environments of India. the council of ICAI expressed the view that IFRS maybe adopted in full at a .3% United Kingdom 8. Atpresent. including the legal & economic environment.8% China 4.8% Singapore 0. these standards remain sensitive to local conditions.2% 34.Korea 0.4% 0.1% 9.At a meeting held in May 2006.however.4% India 0.9% 1 As of 2007 2 Data derived from World Federation of Exchanges statistics reports IFRS & INDIA:The issue of convergence with IFRS has gained significant momentum in India.5% United States 48.9% 1.5% 1.
the ASBdecided to form an IFRS Task Force .Keeping in mind theextent of differences between IFRS and Indian Accounting Standards. for accounting periods commencingon or after 1 April 2011.ICAI istaking up the matter of convergence with IFRS with NACAS and other regulatorsincluding RBI. at its269th meeting decided to converge with IFRS.These include: •Formulations of work – plan.future date.IFRS will be adopted for listed and other public interestentities such as banks . at least for listed and large entries. IRDA and SEBI. that convergence with IFRS would be important policy decision.With an objective to ensure smooth transition to IFRS from 1 April 2011.Based on the recommendation of the IFRS Task Force. the council of ICAI. at ameeting held in August 2006. insurance. and •Laying down a road map for achieving convergence with IFRS with a view tomake India IFRS – compliant.The ASB.The NACAS has been established by the Ministry of Corporate Affairs.ICAI is taking various other steps as wellas to ensure that IFRS is effectively adopted from 1 April 2011. and . Government of India. companies and large – sized organizations. as well as thefact.considered the matter and supported the council‟s viewthat there would be several advantages of converging with IFRS.The objectives of the Task Force were toexplore: •The approach for achieving convergence with IFRS .
Some of them are listed below: Improved access to international capital markets : Many Indian entries are expanding or making significant acquisitions in the globalarena. BENEFITS OF ADOPTING IFRS FOR INDIANCOMPANIES:The decision to converage with IFRS is a milestone decision and is likely to providesignificant benefits to Indian corporates. . the European Union has recentlyallowed entries to use Indian GAAP for listing on a European securities marketwithout reconciliation through to 2011.Recognizing the convergence efforts of ICAI & MCA.Migration to IFRS will enableIndian entities to have international capital markets.In May 2008.•Conducting training programmes for members of ICAI and othersconcerned to prepare them to implement IFRS. with the IASB those areas. the MCA issued a press release in which it committed to IFRSconvergence by 1 April 2011. where changes in certainIFRS may be required. •ICAI will also discuss. to reflect conditions specific to India and areas of conceptual differences. and if the convergence plan is achieved. tocontinue to do so after 2011. removing the risk premium thatis added to those reporting under Indian GAAP.The majority of stock exchangesrequire financial information prepared under IFRS. for which large amounts of capital is required.
Enable benchmarking with global peers and improve brand value: Adoption of IFRS will enable companies to gain a broader and deeper understandingof the entity‟s relative standing by looking beyond country and regional milestones.Further.adoption of IFRS will facilitate companies to set targets and milestones based onglobal business environment. by all groups entities. rather than merely local ones. as it will eliminate the needfor preparing a dual set of financial statements. Reflects true value of acquisitions : . will enable company managements toview all components of the groups on one financial reporting platform. Escape multiple reporting : Convergence to IFRS. This willeliminate the need for multiple reports and significant adjustment for preparingconsolidated financial statements in different stock exchanges.Lower Cost of Capital : Migration to IFRS will lower the cost of raising funds.abolish risk premiums and will enable access to all major capital markets as IFRS isglobally acceptable.It will also reduce accountants‟ fees.
which in – turn. IFRS CHALLENGES:Some of the challenges are listed below:Shortage of resources : .it will open up a host of opportunities in the service sector.As IFRS is fair value focused it will provide significant opportunitiesto professionals including.In fact. New opportunities : Benefits from the adoption of IFRS will not be restricted to Indian corporates. even if they have not been recorded in the acquirer‟s financial statements. are recorded atcarrying values rather than fair values of net assets acquired.IFRS will overcome this flaw.Hence. with few exceptions. instead the amount gets added to goodwill. Purchase considerationpaid for intangible assets not recorded in the acquirer‟s books is usually not recordedin the financial statements. India can emerge as an accounting services hub for theglobal community.In Indian GAAP. as it mandates accounting for net assets taken over in a business combination at fair value. accountants. valuers and actuaries. business combinations.It also requires recognition of intangible assets.With a wide pool of accounting professionals.thetrue value of the business combination is not reflected in the financialstatements. willboost the growth prospects for the BPO/KPO segment in India.
regulators and tax authorities need to be addressed. teachers. entries need to enhance their IT . students. It is imperative thatIFRS is introduced as a full subject in universities and in the Chartered Accountancysyllabus. Accounting resources is a majorchallenge. implementation of SOX. strengthening of corporategovernance norms. which is far below its requirement. such as segment information. Information systems: Financial accounting and reporting systems must be able to produce robust andconsistent data for reporting financial information.India.As financialaccounting and reporting systems are modified and strengthened to deliverinformation in accordance with IFRS. audit committees. auditors. including CFOs. training needs of allstakeholders.With the convergence to IFRS.analysts. increasing financial regulations and global economic growth.fair values of financial instruments and related party transactions.The systems must also be capableof capturing new information for required disclosures. Training : If IFRS has to be uniformly understood and consistently applied.accountants are most sought after globally. with a population of more than 1 billion has only approximately145000 Chartered Accountants.
willgovernment authorities tax unrealized gains arising out of the accounting required bythe standards on financial instruments? From an entity point of view.Tax authorities should ensure that there is clarity on thetax treatment of items arising from convergence to IFRS. both internally and in the market place and agree onkey messages to be delivered to investors and other stake holders.Tax. and the restriction on existing practices such as hedge .For example.in particular to address the risk of fraud. cyber terrorism and data corruption.Managing market expectations and educating analysts will therefore be critical.otherregulatory issues and the risks involved will have to be considered by the entities. Communication: IFRS may significantly change reported earnings and various performance indicators.Acompany‟s management must understand the differences in the way the entity‟sperformance will be reviewed. a thoroughreview of existing tax planning strategies is essential to test their alignment withchanges created by IFRS. Taxes: IFRS convergence will have significant impact on financial statements andconsequently tax liabilities.Reported profitsmay be different from perceived commercial performance due to the increased use of fair values.security inorder to minimize the risk of business interruption .
Management compensation and debt covenants: The amount of compensation calculated and paid under performance – basedexecutive. and employee compensation plans may be materially different underIFRS. as the entity‟s financial results may be considered different.bank covenants or FCCB conversation trigger. the indicators for assessing both business and executive performancewill need to be revisited. within the new regime.Consequently. Significantchanges to the plan may be required to reward an activity that contributes to anentity‟s success.Re – negotiating contracts that referencedreported accounting amounts.may be required on convergence to IFRS.such as .accounting. .