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Strategy, Benefits and Challenges

Convergence with IFRS in India

CA Kamal Garg

By:

Strategy, Benefits and Challenges Convergence with IFRS in India CA Kamal Garg By:

In some cases, departures are made on account of conceptual differences with the treatments prescribed in the IFRSs.

Presently, the Accounting Standards Board (ASB) of the Institute of Chartered accountants of India (ICAI) formulates Accounting Standards (ASs) based on the IFRSs keeping in view the local conditions including legal and economic environment, which have recently been notified by the Central Government under the Companies Act, 1956.

Accordingly, the Ass depart from the corresponding IFRSs to maintain consistency with legal, regulatory and economic environment, and keeping in view the level of preparedness of the industry and the accounting professionals.

Present Status of Indian Accounting Standard

The term IFRS comprises IFRS issued by IASB; IAS issued by IASC; and Interpretations issued by the Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB.

IFRS are generally principles-based standards and seek to avoid a rule-book mentality. Application of IFRS requires exercise of judgment by the preparer and the auditor in applying principles of accounting on the basis of the economic substance of

IFRS is 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.

What is IFRS?

transactions.

International Accounting Standard (IAS)
International
Accounting
Standard (IAS)
IFRS
IFRS
International Financial reporting Standard (IFRS)
International
Financial
reporting
Standard (IFRS)
Standing Interpretations Committee (SIC)
Standing
Interpretations
Committee (SIC)
International Financial Reporting Inter retations p Committee (IFRIC)
International
Financial
Reporting
Inter retations
p
Committee (IFRIC)

In line with the global trend, the Institute of Chartered Accountants of India (ICAI) has proposed a plan for convergence with IFRS with effect from April 1, 2011.

More than 100 countries such as countries of European Union, Australia, New Zealand and Russia currently require or permit the use of IFRSs in their countries.

Convergence to IFRS would mean India would join a league of more than 100 countries, which have converged with IFRS.

The IFRS issued by the International Accounting Standards Board (IASB) are increasingly being recognized as Global Reporting Standards.

Convergence To IFRS

It would be beneficial to regulators too, as a complexity associated with needing to understand various reporting regimes would be reduced.

It would also permit international capital to flow more freely, enabling companies to develop consistent global practices on accounting problems.

A single set of accounting standards would enable internationally to standardize training and assure better quality on a global screen.

Why Convergence to IFRS?

The IASB accepts in its ‘Statement of Best Practice: Working Relationships between the IASB and other Accounting Standards-Setters’ that “adding disclosure requirements or removing optional treatments do not create noncompliance with IFRSs. But additional disclosures or removing of optional treatment should be made clear so that users of the IFRS are aware of the changes.

Convergence means to achieve harmony with IFRSs; 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”, i.e., when the national accounting standards will comply with all the requirements of IFRS.

But convergence doesn’t mean that IFRS should be adopted word by word, e.g., replacing the term ‘true & fair’ for ‘present fairly’ , in IAS 1 , ‘Presentation of Financial Statements’. Such changes do not lead to non-convergence with IFRS.

Meaning of Convergence with IFRS

Reporting under IFRS, as proposed by ICAI, would be applicable for accounting periods beginning on or after April 1,2011.

The first set of IFRS financial statements for the year ending March 31, 2012 would require preparation of:

IFRS Reporting In India: Proposed Timelines

Opening balance sheet as on April 1, 2010 Comparative financial statements – year ending March
Opening balance sheet as on April 1, 2010
Comparative financial statements – year ending March 31, 2011
R eport i ng enterpr i ses wou ld nee d to ensure prepare d ness f or IFRS report i ng as ear l y as A pr il 2010 .

Which Entities will be covered under Convergence Strategy

Keeping in view the complex nature of IFRSs and the extent of differences between the existing
Keeping in view the complex nature of IFRSs and the extent of differences between the
existing ASs and the corresponding IFRSs and the reasons therefore, the ICAI is of the
view that beginning
IFRSs should
adopted
for the
public interest entities from the accounting
periods
on or be after
1st April,
2011.
Public Interest
Listed
Banking
Insurance
Large Size
Entities
Entities
Companies
Entities

Which Entities are Public Interest Entities

Public Interest Entities a) whose equity or debt securities are listed or are in the process
Public
Interest
Entities
a) whose equity or debt
securities are listed or are
in the process of listing on
any stock exchange,
whether in India or
outside India; or
b) which is a bank (including
a cooperative bank),
financial institution,
a mutual fund, or
an insurance entity; or
c) whose turnover
(excluding other income)
exceeds rupees 100 crore
In the immediately
preceding accounting year;
d) which has public deposits
and/or borrowings
from banks and financial
institutions in excess of
rupees 25 crore
at any time during the
immediately preceding
accounting year; or
e) which is a holding or a
subsidiary of an entity
mentioned
a) to d) points.

convert their opening balance sheets as at 1st April, 2011, if the financial year commences on or after 1st April, 2011 in compliance with the notified accounting standards which are convergen t w ith IFRS . Th ese compan i es are:-

will

accounting standards) will be applied to specified class of

net

a. Companies which are part of NSE – Nifty 50 b. Companies which are part of BSE - Sensex 30 c. Companies whose shares or other securities are listed on stock exchanges outside India

converged

have a

companies

MCA Press Release (January 22 nd , 2010)

(i.e.

which

of

Standards

or not,

categories

worth in excess of Rs.1,000 crores.”

d. Companies, whether listed

Accounting

following

companies in phases:-

of

The

set

“Phase-I:-

first

The

The proposed standard represents a simplified set of standards for SME's with

disclosure requirements reduced, methods for recognition and measurement

A separate standard for SMEs will be formulated based on the IFRS for SMEs

IFRS for Small and Medium Sized Entities (SMEs)

IFRS for SMEs will be adopted in toto or with modifications, if necessary.

Compliance with this IFRS for SMEs is not necessary to make India IFRS-

SMEs need not adopt all the IFRS as it will be too voluminous for them.

simplified and topics not relevant to SME's eliminated.

which is still in exposure draft stage.

compliant.

The numbers of the existing Accounting Standards may be given in brackets for the

The format of IFRSs to be adopted for public interest entities should be the same

The IFRSs when adopted will also take into account the International Financial

Only in rare circumstances of public interest a carve out from an IFRS may be

Wherever required, a section may be added at the end of the adopted IFRS

Format of IFRS for India

Reporting Interpretations issued by the IFRIC of the IASB.

indicating the Indian legal and regulatory position.

as that of IFRSs, including their numbers.

purpose of easier identification.

made.

Endorse the IFRSs in the form of IFRS-equivalent Indian Accounting Standards for the local regulatory framework with changes such as removing optional treatments and addin g disclosure requirements, where appropriate

Role of ASB in Post Convergence Scenario

Present the Indian Accounting Standards so developed for approval of National Advisory Committee on Accounting Standards (NACAS) for the purpose of Government notification

Determine whether each IFRS meets specified criteria set out in local legislation/regulation

Endorse the IFRSs in the form of IFRS-equivalent Indian Accounting Standards for the local regulatory framework
Endorse the IFRSs in the form of IFRS-equivalent Indian Accounting Standards for the local regulatory framework
Endorse the IFRSs in the form of IFRS-equivalent Indian Accounting Standards for the local regulatory framework
Benefits of Convergence Single Reporting Increase Comparability Access to Global Capital Markets Benefits for Investors •Convergence
Benefits of Convergence
Single Reporting
Increase Comparability
Access to Global
Capital Markets
Benefits for
Investors
•Convergence with IFRS
eliminates multiple reporting
such as Indian GAAP, IFRS, US
GAAP
•IFRS will give more comparability
among sectors, countries and
companies.
•This will result in more transparent
financial reporting of a company’s
•Convergence with IFRS will
enable Indian entities to have
easier access to global capital
markets and eliminates barriers
to cross-border listings.
activities which will benefit
investors, customers and other key
stakeholders in India and overseas
• It encourages international
investing and thereby leads to
more foreign capital flows to the
country.
•Financial statements
prepared using a common set
of accounting standards help
investors better understand
investment opportunities as
opposed to financial
statements prepared using a
different set of national
accounting standards
IFRS balance sheet will be closer to economic value Benefits to the accounting professional Benefits for
IFRS balance sheet will be
closer to economic value
Benefits to the
accounting professional
Benefits for the
Industry
Improvement in
financial reporting
•Historical cost will be substituted
by fair values for several balance
sheet items, which will enable a
corporate to know its true worth
•Convergence to IFRS will
increase the opportunities for
Indian professionals in abroad
as they will be able to sell
their services as experts in
different parts of the world
•Currently companies need to
prepare additional financial
statements based on multiple
reporting formats to arise
capital in global market.
•Better quality of financial
reporting due to consistent
application of accounting
principles and improvement in
reliability of financial statements.
•Convergence with IFRS will
eliminate the requirement for
dual set of financials
statements and thereby
reduces the cost of raising
funds by the companies
•This, in turn, will lead to
increased trust and reliance
placed by investors, analysts and
other stakeholders in a
company’s financial statements
Challenges of Convergence Change to regulatory environment Educating Lack of Preparedness Significant cost Stakeholders •For the
Challenges of Convergence
Change to regulatory
environment
Educating
Lack of Preparedness
Significant cost
Stakeholders
•For the success of convergence in
India, certain regulatory amendment is
required.
•For example, The Companies Act
(Schedule VI) prescribes the format for
presentation of financial statements for
Indian companies, whereas the
presentation requirements are
significantly different under IFRS. So, the
companies act needs to be amended in
•Adoption of IFRS by
approximately 5000 listed
companies by 2011 would result
in a significant demand for IFRS
resources. Corporate India and
accounting professionals need to
be trained for effective migration
to IFRS. Additionally auditors
would need to train their staff to
audit under IFRS environment
•Educating Stakeholders
comprising of investors,
lenders, employees,
auditors, audit committee
and etc would be a big
challenge as this would
require a considerable time
and effort
•Significant one-time costs
of converting to IFRS
(including costs of internal
personnel time, adapting IT
systems, implementing
revised reporting policies
and processes, training
personnel and educating
investors, analysts and
members of the board)
line with IFRS.
Complexity in the financial reporting process Impact on financial performance Communication of Impact of IFRS to
Complexity in the
financial reporting
process
Impact on financial
performance
Communication of Impact
of IFRS to investors
Conceptual
differences
•Under IFRS, companies
would need to
increasingly use fair value
measures in the
preparation of financial
statements. Companies,
auditors, users and
regulators would need to
get familiar with fair
value measurement
techniques
•Due to the significant
differences between Indian
GAAP and IFRS, adoption of
IFRS is likely to have a
significant impact on the
financial position and
financial performance of
most Indian companies
•Companies also need to
communicate the impact of
IFRS convergence to their
investors to ensure they
understand the shift from
Indian GAAP to IFRS.
•For example, the Indian
standard on intangibles is
based on the concept that all
intangible assets have a
definite life, which cannot
generally exceed 10 years;
while IFRS acknowledge that
certain intangible assets may
have indefinite lives and useful
lives in excess of 10 years are
not unusual

Resources

Communication

Knowledge

Critical success factors for IFRS conversion projects

Project Management

Strategy

Time

Leadership Critical Success Factors
Leadership
Critical Success
Factors
Categorization of IFRS by ICAI ICAI has categorize the IFRS in five categories based on the
Categorization of IFRS by ICAI
ICAI has categorize the IFRS in five categories based on the extent of changes or the extent
of support required from the regulatory authorities:
Categories of IFRS
Category II
Category III
Category IV
Category V
Category I
Category I A
Category I B
Category III A
Category III B

Category I IFRS

Category I B IFRS which has certain minor differences with the corresponding Indian Accounting Standards •
Category I B
IFRS which has certain minor
differences with the corresponding
Indian Accounting Standards
• IAS 2 Inventories
• IAS 7,Cash Flow Statements
• IAS 20, Accounting for Government
Grants and Disclosure of Government
Assistance
• IAS 33, Earnings Per Share
• IAS 36, Impairment of Assets
• IAS 38, Intangible Assets
Category I A IFRSs which do not have any differences with the corresponding Indian Accounting Standards
Category I A
IFRSs which do not have any differences
with the corresponding Indian
Accounting Standards
• IAS 11
,
C
ons ruc
t
ti
on
C
on rac s
t
t
• IAS 23, Borrowing Costs
Category II IFRS IAS 40, Investment Property (Corresponding Indian IAS 18, Revenue Accounting Standard is under
Category II IFRS
IAS 40, Investment
Property
(Corresponding Indian
IAS 18, Revenue
Accounting Standard is
under preparation)
Category II: IFRSs which may
require some time to reach a
IFRS 2, Share-based
IAS 21,The Effects of
level of technical preparedness by
Payment
Changes in Foreign
the industry and professionals
(Corresponding Indian
Exchange Rates
keeping in view the existing
Accounting Standard is
economic environment and other
under preparation)
factors
IFRS 5, Non-current Assets
Held for Sale and
Discontinued Operations
(Corresponding Indian
IAS 26, Accounting and
Accounting Standard is
Reporting by
under preparation)
Retirement Benefit
Plans

Category III IFRS

Category III B IFRSs having conceptual differences with the corresponding Indian Accounting Standards that need to
Category III B
IFRSs having conceptual differences with the
corresponding Indian Accounting Standards
that need to be examined to determine
whether these should be taken up with the
IASB or should be removed by the ICAI itself
• IAS 12, Income Taxes
• IAS 24, Related Party Disclosures
• IAS 41, Agriculture (Corresponding
Indian Accounting Standard is under
preparation)
• IFRS 3, Business Combinations
• IFRS 6, Exploration for and Evaluation
of Mineral Resources
• IFRS 8, Operating Segments
Category III A IFRSs having conceptual differences with the corresponding Indian Accounting Standards that should be
Category III A
IFRSs having conceptual differences with
the corresponding Indian Accounting
Standards that should be taken up with the
IASB
• IAS 17,Leases
• IAS 19, Employee Benefits
• IAS 27,Consolidated and Separate
Financial Statements
• IAS 28, Investments in Associates
• IAS 31, Interests in Joint Ventures
• IAS 37, Provisions, Contingent
Liabilities and Contingent Assets

Category IV and V IFRS

Category V IFRSs corresponding to which no Indian Accounting Standard is required for the time being.
Category V
IFRSs corresponding to which no Indian
Accounting Standard is required for the time
being.
• IAS 29, Financial Reporting in Hyper-
inflationary Economies
Category IV IFRSs, the adoption of which would require changes in laws/regulations because compliance with such
Category IV
IFRSs, the adoption of which would require
changes in laws/regulations
because compliance with such IFRSs is not
possible until the regulations/laws are
amended.
• IAS 1, Presentation of Financial Statements
• IAS 8, Accounting Policies, Changes in
Accounting Estimates and Errors
• IAS 10, Events A ter the Balance Sheet Date
f
• IAS 16, Property, Plant and Equipment
• IAS 32, Financial Instruments: Presentation
(Exposure Draft of the Corresponding Indian
Accounting Standard has been issued)
• IAS 34, Interim Financial Reporting
• IAS 39, Financial Instruments: Recognition
and Measurement (Exposure Draft of the
Corresponding Indian Accounting Standard
has been issued)
• IFRS 1, First-time Adoption of International
Financial Reporting Standards
• IFRS 4, Insurance Contracts
• IFRS 7, Financial Instruments: Disclosures

However, the ICAI concluded that such a stage-wise approach may result in several

whereby all IFRS should be adopted for the defined entities for accounting periods

application complexities because many accounting standards are inter-related . So ,

and III) and the balance standards are adopted only when the laws and regulation

participants in the financial reporting process to help in building the environment

followed whereby certain IFRS are adopted immediately (Category I) and certain

other IFRS are adopted within a short period of time, say two years (Category II

The ICAI examined whether a stage-wise approach to convergence should be

Which way of Adoption of IFRS is preferred: stage wise on the basis of category of IFRS or all at once from a specified future date

considering the challenges to transition, the ICAI has opted for an approach

The ICAI believes that this transition period till April 1, 2011 will enable all

commencing on or after April 1, 2011.

supporting the adoption of IFRS.

are changed.

Project Management for IFRS Convergence Project

• Complex tasks are easier when divided into manageable pieces and it is true for IFRS
Complex tasks are easier when divided into manageable pieces and it is true for
IFRS convergence project also. Project can be broken down into three key phases.
Assess
Design
1. Identify the key dates and the date of
transition to IFRS
2
Develop an IFRS training plan for
accounting and finance personnel.
Identify differences in the relevant
accounting policies.
Identify gaps in systems and processes
to gather information needed under
IFRS and the currently available
information.
5
3
4
6
7
8
Implement
9
Redevelop reporting manual i.e., develop
IFRS accounting manual modifying chart of
accounts and containing detailed
instructions.
Measure the impact of the differences
identified on the latest financial prepared
under Indian GAAP.
Apply latest version of IFRS consistently
Apply IFRS 1 which deals with first-time
adoption of IFRS.
Identify permitted exemptions from
specified IFRS as per IFRS 1.
10. Prepare an opening IFRS balance
sheet at the date of transition to
IFRS
11
12
Explain the impact of transition
from previous GAAP to IFRS as
required by IFRS 1
Apply IFRS as business as usual.

convergence to IFRS in India will depend on cooperation from government, regulators and tax

There is an urgent need to address these challenges and work towards full adoption of IFRS in

IFRS adoption

projects knowledge

for Indian

for restatement

reporting

transitioned is planned and managed successfully, it will generally be positive for financial

entities . This can be done by leveraging the knowledge and experience gained from IFRS

conversion in other countries and incorporating IFRS into the curriculum for professional

the company

global capital

Benefits derived from convergence are lot but also the challenges. The success of the

The transition to IFRS is likely to be challenging for corporate India. However, if the

the financial to system.

the financial

and an expansive

conditions, any

their preparedness

the conversion

of the

would be in detrimental

economy and

transparency

current market

IFRS skills

to manage

confidence

to improve

Conclusion

global

to build adequate

to the and

process

Given the

India quality

need is professionals

investor

right. entities

conversion

improve the

in the damage

for Indian

will corporate

accounting

process

severely

significant

is imperative

align

to errors

get the it conversion

further This

The most Indian

accounting courses.

due would

in India.

India. amongst

departments.

of results and

reporting and

Ultimately,

markets.

involved

process

base

and

Preparation of Convergence Manual; Documentation of IFRS Convergence; Preparation of IFRS Financial Statements; IFRS and Indian GAAP Reconciliation; Post Implementation review and follow up

Identification of Indian GAAP and IFRS Differences;

IFRS Training;

  • 1.
    2.

  • 3.
    4.

5.

  • 6.
    7.

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