IFRS – A GUIDE BOOK ON TRANSITITION TO GLOBAL ACCOUNTING STANDARDS

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A GUIDEBOOK ON IFRS
INTERNATIONAL FINANCIAL REPORTING STANDARDS
RAMA KRISHNA VADLAMUDI
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MARCH 28th, 2010

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IFRS – A GUIDE BOOK ON TRANSITITION TO GLOBAL ACCOUNTING STANDARDS The article analyses the fundamentals of IFRS, the differences between USGAAP and IFRS and other related issues in a comprehensive manner.
IFRS ADOPTION AND USE AROUND THE WORLD

More than 120 countries now require or permit the use of IFRSs or are converging with the International Accounting Standards Board's (IASB) standards. The picture below shows the level of IFRS adoption at present. Blue areas indicate countries that require or permit IFRSs. Grey areas are countries seeking convergence with the International Accounting Standards Board (IASB) or pursuing adoption of IFRSs.

Picture courtesy: IASB (2009)

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CONTENTS
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Abbreviations used Executive Summary What is IFRS and its importance? What are standard-setting bodies? What are IASB and IASC Foundation? What is the role of IOSCO? Why do we need financial statements? What are the objectives of Financial Reporting Standards? What is the status of international adoption of IFRS? What are the latest developments in IFRS? What is global financial standards convergence? What are the obstacles to global covergence? Why is vital for investors to know about IFRS? How does USGAAP compare with IFRS? Does India need IFRS standards? What is India's roadmap for IFRS convergence? What are the issues involved in IFRS convergence in India? How are Indian Banks preparing for IFRS? What is the importance of new IFRS 9 on profits? Some Important IFRS standards

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3 4 6 7 7 8 9 10 11 11 12 13 13 13 15 16 17 19 20 21

1. ABBREVIATIONS USED
ADS CBDT FASB FCCB FIFO FSA GDR IASB IASC IASCF ICAI IFRS IOSCO IRDA LIFO MCA NACAS RBI SEBI SEC SOX USGAAP : American Depository Share : Central Board of Direct Taxes (of India) : Financial Accounting Standards Board (of the USA) : Foreign Currency Convertible Bond : First in, first out (a method used in inventory valuation) : Financial Services Authority (of the UK) : Global Depository Receipt : International Accounting Standards Board : International Accounting Standards Committee : International Accounting Standards Committee Foundation : Institute of Chartered Accountants of India : International Financial Reporting Standards : International Organization of Securities Commissions : Insurance Regulatory and Development Authority (of India) : Last in, first out (a method used in inventory valuation) : Ministry of Corporate Affairs (India) : National Advisory Committee on Accounting Standards (India) : Reserve Bank of India : Securities and Exchange Board of India : Securities and Exchange Commission (of the US) : Sarbanes-Oxley Act : Generally Accepted Accounting Principles of the US

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2. EXECUTIVE SUMMARY
The financial year 2011-12 is going to be one of the most significant years since the introduction of economic reforms in 1991 in india. Its significance can be gauged from the fact that three important legislations are coming into effect from April 1, 2011 as per the present indications and available information. They are: 1. Goods and Services Tax – GST (a long-pending reform of indirect taxes) 2. Direct Taxes Code – DTC (proposed to replace Income Tax Act) 3. Adoption of IFRS by companies in the Nifty 50 Sensex 30 indices and other companies with net worth exceeding Rs 1,000 crore These new acts are going to be very complex for ordinary investors. The implications for companies are quite humungous. As such, investors need to be well prepared for the changes that are going to happen in the next one year. All these legislations and standards are going to be game changers in India. Investors who overlook the impact are going to pay a heavy price for their ignorance. The valuations of companies and businesses are going to change in a substantial manner with effect from April 1, 2011. Stock markets are supposed to act ahead of time. As such, one can expect significant action on the bourses based on the news flows relating to the introduction and passing of these new legislations in India’s Parliament. Ramesh Damani, a veteran broker from Bombay, has gone on record saying that if the DTC implemented as per the draft released in August 2009, there is going to be huge sell-off in the stock markets before the deadline of April 1, 2011 (DTC proposes to eliminate the difference between long-term capital gains and shortterm capital gains on shares and mutual funds. Both LTCG and STCG will be taxed at the rate of the individuals or others. At present, tax on LTCG is NIL and tax on STCG is 15 per cent exclusive of surcharge and education cess.) As such, investors have to familiarize themselves with the provisions and implications of these new developments. To know about GST & DTC, just click:

Goods and Services Tax-GST-First Discussion Paper www.scribd.com/doc/20582103

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MY BLOG: www.ramakrishnavadlamudi.blogspot.com Direct Taxes Code-DTC-Its impact on individuals, etc www.scribd.com/doc/19542987 Direct Taxes Code-DTC-Its impact on Long-term capital gains and short-term capital gains of shares/MFs www.scribd.com/doc/23804443
This article discusses the significance of IFRS (International Financial Reporting Standards) and its likely impact on the balance sheets of Indian companies. The financial statements are extensively used by several groups of people – including analysts, creditors and other stakeholders. Financial statements include balance sheet, income statement, cash flow statement and others. They provide useful information to users about the financial position and financial performance of the company. IFRSs are developed by International Accounting Standards Board (IASB), a global body headquartered in London. The IFRSs are expected to replace national standards of respective countries, like, the USGAAP in the US. They are uniform global accounting standards offering higher transparency and disclosure requirements.
On 22 January 2010, the Ministry of Corporate Affairs (MCA) in India issued a press release setting out the roadmap for International Financial Reporting Standards (IFRS) convergence in India. The roadmap requires IFRS to be made applicable in three phases starting from April 1, 2011. This is an historic step and will go a long way in improving transparency and disclosure requirements of financial statements.

Leading Indian companies and banks have already begun to plan the conversion to IFRS. The convergence to IFRS will have far-reaching implications for Indian companies – in terms of initial public offers, disclosures, mergers and acquisitions, fair value of financial assets, publication of quarterly results, investors’ relations, debt offerings and raising foreign funds. These big companies have got a year’s time to migrate to IFRS from Indian GAAP. As of now, more than 120 countries use IFRS standards, including Australia, New Zealand, the UK, countries in the European Union and African countries. Japan, Brazil, Canada and India are moving towards IFRS in the next one year in a phased manner replacing their national standards. There are several benefits to Indian companies for implementing IFRS: 1. They can raise money abroad with favourable credit terms; 2. Indian companies will get international recognition and can avoid publication of financial statements based on multiple standards; 3. They can list on foreign bourses much more easily; 4. IFRS enhances the brand value of Indian companies abroad; and 5.

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India will be in line with the world in terms of its commitment as part of G-20 Group of nations to implement these uniform global accounting standards. The biggest economy US, however, is slow to move from its USGAAP to IFRS. It has been trying to narrow down the differences between its USGAAP and IFRS accounting standards. Still, there are significant differences between USGAAP and IFRS in the following areas: Upward revaluation of fixed assets, LIFO/FIFO inventory valuation, treatment of extraordinary items and others. There are big inconsistencies in the treatment of dividend/interest received and dividend/interest paid between USGAAP and IFRS cash flow statements. The development of IFRS and its convergence are on an evolutionary phase. Leading companies and banks in India are gearing up to meet the deadline of 1st of April 2011 set by the Government of India. The country’s leading bank, State Bank of India, has set up a separate team to migrate to IFRS. RBI and Indian Banks Association have been working together to set IFRS guidelines to banks.

3. WHAT IS IFRS AND ITS IMPORTANCE?
IFRS stands for International Financial Reporting Standards. IFRS standards are set by an international body known as IASB. The objectives of IFRS are to establish a single set of high quality global accounting standards that can be adopted by several companies across countries and continents. More than 120 countries have already adopted or are at an advanced stage of implementing the IFRS at their national level. Countries, like, Australia, the UK, countries in the European Union and several countries in Africa have already moved toward IFRS. Countries, like, Brazil, Canada and India are shifting their national standards to IFRS in the next one year. The US has been making a slow progress from its USGAAP standards to IFRS and it may take several more years for complete convergence. The IFRS standards are more transparent and easily acceptable to several users of financial statements. Disclosure standards are very high under IFRS. Comparability of companies’ balances sheets and income statements is much more easier under IFRS. The term IFRS refers to the new numbered series of pronouncements that the IASB is issuing, as distinct from the International Accounting Standards (IASs) series issued by its predecessor. More broadly, IFRS standards refer to the entire body of IASB pronouncements, including standards and interpretations approved by the IASB and IASs and SIC interpretations approved by the predecessor International Accounting Standards Committee. IASs start from IAS 1 up to IAS 41; while IFRSs start from IFRS 1 up to IFRS 9. Some of the IASs are superseded by other standards. All these IASs and IFRSs have been effectively implemented except IFRS 9 which is slated to be implemented with Page 7 of 23

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effect from 1st of January 2013. In addition, IASB has developed another IFRS for SMEs (Small and Medium-sized Entities) which was implemented in 2009.

4. WHAT ARE STANDARD-SETTING BODIES?
In general, standard-setting bodies are professional organizations in the private sector. They are responsible for the formulation, development and setting accounting standards for corporate bodies and other entities in a particular country. In the US, the standard-setting body is FASB, the Financial Accounting Standards Board. In addition, there are regulatory authorities that take care of regulation and overall supervision from the Government level. In the US, the regulatory authority under the government is SEC, the Securities and Exchange Commission and in the UK, it is called the Financial Services Authority. These regulators oversee the implementation of accounting standards made by the standard-setting bodies. Internationally, IASB, the International Accounting Standards Board is responsible for the creation and development of global standards that are used by several countries and multi-national corporations (MNCs). In India, the standard-setting body is ICAI, The Institute of Chartered Accountants of India, which is a professional body set up under an act of Indian Parliament for the maintenance of high accounting, auditing and ethical standards in India. ICAI now is the second largest accounting body in the whole world. Now, the role of standard setting is taken over by the National Advisory Committee on Accounting Standards (NACAS) and these accounting standards are binding on companies and their auditors. However, Guidance Notes are issued by the ICAI for the benefits of members and some of them are mandatory and some are recommendatory.

5. WHAT ARE IASB AND IASC FOUNDATION?
Prior to 2001, IASB is known as IASC, the International Accounting Standards Committee. IASC was established in 1973 and IASB was formed in 2001. The International Accounting Standards Board, headquartered in London, is a global body responsible for creation and development of international financial reporting standards, popularly known as IFRSs. There are four goals of IASB and they are: 1. Developing global accounting standards which are transparent, understandable, enforceable, consistent and high quality 2. Promoting these standards 3. To work for the convergence of national and accounting standards

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4. Taking care of special needs of small and medium entities (SMEs) and emerging market economies

More than 120 countries now require or permit the use of IFRSs or are converging with the International Accounting Standards Board's (IASB) standards.

The objective of the IASC Foundation and the IASB is to develop, in the public interest, a single set of high-quality global accounting standards. In pursuit of this goal, the IASB works in close cooperation with stakeholders around the world, including investors, national standard-setters, regulators, auditors, academics, and others who have an interest in the development of high-quality global standards. The IASB is the independent standard-setting body of the IASCF. IASB is supervised by the International Accounting Standards Committee Foundation. IASCF has got 20 trustees who promote the work of IASB and rigorous application of IFRSs. India is proud to have one of its leading businessmen, T V Mohandas Pai, Director and Member of the Board, Infosys Technologies Limited, Bangalore, as one of the Trustees. His term expires in December 2011. The IASC Foundation is an independent, not-for profit private sector organization, working in the public interest.

6. WHAT IS THE ROLE OF IOSCO?
The International Organization of Securities Commissions is an international forum of capital market regulators of the world. It was set up in 1983. At present, it has got 110 ordinary members from all the major countries of the world. It represents about 90 per cent of the securities market regulators in the world. It is headquartered in Madrid, the capital of Spain. According to IOSCO, the three objectives of securities regulation are:  The protection of investors;  Ensuring that markets are fair, efficient and transparent; and,

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 The reduction of systemic risk The body is responsible for the cooperation among capital market regulators to promote high standards of regulation in order to maintain just, efficient and sound markets. The regulators exchange information and unite their efforts to establish standards; effective surveillance of international securities transactions and promote the integrity of financial markets around the world. It is also working for the promotion of uniform regulation. IOSCO works closely with IASB, IASC Foundation, other standard-setting bodies and regulators for the global convergence of accounting standards. SEBI, the capital markets regulator in India, is an ordinary member of IOSCO. Forwards Markets Commission (FMC), the commodities market regulator in India is as associate member of IOSCO. The FSA in the UK and the SEC in the US are ordinary members of IOSCO.

7. WHY DO WE NEED FINANCIAL STATEMENTS?
A variety of users use the financial statements, like, balance sheet, profit and loss account, cash flow statement and others of companies and other entities. The body of users includes investors, creditors, credit rating agencies, bankers, financial analysts, management, regulators, standard-setting bodies, auditors and shareholders. The financial statements are most important in security analysis and valuation. In fact, these are the springboards to know about a company’s financial health and the soundness of its operations. With the help of financial statements, the users are expected to assess the financial position of a company in terms of assets, liabilities and equity. In addition, they can measure the financial performance in terms of income and expenses. Suppose a financial company or a bank is considering a credit proposal for a company. The bank has to study the financial statements of the company to evaluate its borrowing needs. Likewise, an analyst may want to find out the valuation of a listed company for investment purposes; then she has to necessarily dissect the numbers given in the financial statements of the company. These are only a few examples.

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According to IASB, the following are the necessary financial statements and fundamental principles underlying their preparation:
Financial Statements 1. Balance Sheet 2. Income Statement or Profit & Loss a/c 3. Statement of Cash Flows 4. Statement of changes in Equity 5. Notes to Accounting policies and others Fundamental Principles 1. Fair presentation 2. Going concern 3. Accrual basis 4. Consistency 5. Materiality

1. Easy understandability by users

In order to understand the financial statements properly, there are four essential features that financial statements should satisfy. They are:

2. Relevant and timely information 3. Reliable information free from errors 4. Comparability of information across companies

8. WHAT ARE THE OBJECTIVES OF FINANCIAL REPORTING STANDARDS?

As the financial statements are used by a large number of stakeholders, they are to be prepared by accountants in such a uniform and consistent way so that all the users of the statements understand them in a like manner. There should not be any confusion among the users with regard to figures, statistics or interpretation of the financial statements. There is a need to maintain consistency in financial statements and to make them understandable to all in a simple and similar way. The International Accounting Standards Board (IASB) has expressed the objective of Financial Reporting in a lucid way: “The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity; this information should be useful to a wide range of users for the purpose of making economic decisions.”

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9. WHAT IS THE STATUS OF INTERNATIONAL ADOPTON OF IFRS?
The following table shows the status of IFRS adoption across continents:
(The list is only for information purpose. For accuracy of information, please refer to the respective countries’ standard setting bodies:

Country AFRICA ASIA

Status of IFRS adoption Egypt, Kenya, Malawi, South Africa and Tanzania have made it mandatory for domestic companies to adopt IFRS Japan is adopting IFRS in a phased manner wef 31st of March 2010. India has made it compulsory for big companies to adopt IFRS from 1.4.2011. China has implemented IFRS for domestic companies. Around 150 Chinese companies are listed on the Hong Kong Stock Exchange and they are permitted to use IFRS or HK standards. Singapore, Burma, Sri Lanka and Hong Kong have implemented standards similar to IFRSs with some exceptions. Australia and New Zealand have already adopted IFRS It is adopting IFRS from 2011 The European Union (EU) has already made it mandatory for EU countries to adopt IFRS since 2005 It has introduced IFRS for banks and other companies in a phased manner. But Russia's national standards differ from IFRSs significantly. Countries, like, Ecuador, Nicaragua, Peru and Venezuela have adopted IFRS in the past in a phased manner. Brazil is adopting IFRS with effect from December 2010. The US has in principle agreed to switch over to IFRS. The US is trying for convergence with IFRS but the process is slow and may take several more years.

AUSTRALIA

CANADA EUROPE RUSSIA SOUTH AMERICA UNITED STATES

10. WHAT ARE THE LATEST DEVELOPMENTS IN FINACIAL STANDARDS?
Progress toward the goal of global convergence of accounting standards has been steady. Since 2001, more than 120 countries have required or permitted the use of International Financial Reporting Standards (IFRSs), while the

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remaining major economies have established timelines for convergence with, or adoption of, IFRSs. The notable exception to convergence of IFRSs is the USA. The IASB and FASB have made progress towards substantial convergence between IFRSs and USGAAP. Several memoranda of understanding were signed since 2006 and in November 2009 the two boards issued a further statement outlining steps for completing their convergence work by 2011. Most recently, at their September 2009 meeting in Pittsburgh, US, the Group of 20 Leaders (G20) reaffirmed their commitment to global convergence in accounting standards, calling for a single set of high-quality, global accounting standards within the context of their independent standard-setting process, and complete their convergence project by June 2011. Japan is moving towards IFRS with effect from 31st of March 2011 in a phased manner. Brazil too is shifting towards IFRS with effect from December 2010.

11. WHAT IS GLOBAL FINANCIAL STANDARDS CONVERGENCE?
The degree of globalization has increased by several folds in the past two decades. This calls for a need to have uniform and consistent set of regulations that can be used by investors and analysts across the world. From the principles of consistency, uniformity and correct interpretation of financial statements, there is a vital need for adoption of single set of standards that are useful to all types of global users of financial statements. As of now, more than 120 countries have adopted IFRS standards at their national level – some partially and some fully. The USA, the biggest country financially, is yet to adopt these standards creating a need to unite their standards with those at the international level. As such, IASB and FASB have been working together to move towards the goal of single set of accounting standards accepted by the entire world. This is necessary to achieve the objective of eliminating the differences between IFRS and USGAAP. Towards this direction, both IASB and FASB came to an agreement in 2002 known as “Norwalk Agreement” setting out their commitment to the development of compatible accounting standards that are useful to all. The FASB has been working with IASB for convergence of USGAPP to IFRS and narrow the differences. However, full alignment between IFRS and USGAAP, for a creating a unique set of globally accepted accounting principles, may take much longer time according to the present indications. A common set of high quality global standards remains a priority for both the IASB and the FASB. Accounting Scandals involving corporations, like, the Enron Corporation, Worldcom and Arthur Andersen of the US in the early 2000s, have highlighted the role of accounting standards in maintaining utmost integrity. These high profile scandals have led to the introduction of Sarbanes-Oxley Act (SOX) in the Page 13 of 23

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US in 2002 in order to strengthen investor protection laws. Even India suffered corporate scandals from the likes of Satyam Computers in early 2009.

12. WHAT ARE THE OBSTACLES TO GLOBAL CONVERGENCE?
However, the global convergence of accounting standards is not a smooth matter for a variety of reasons. One important factor that is creating hurdles for convergence is the powerful lobby of some corporations who have got vested interests in keeping the existing standards which may be lax in certain cases. And then there are dissimilarities between various standard-setting bodies and regulators in order to protect their own national standards that may be more useful in a domestic context. This has led to some political pressures also.

13. WHY IS IT VITAL FOR INVESTORS TO KNOW ABOUT IFRS?
Accounting standards are important for companies. For example, on March 31, 2009, Government of India diluted accounting standard AS-11, pertaining to mark-to-market provisioning for foreign exchange-related gains and losses; allowing foreign exchange losses to be deducted from the cost of fixed cost for the financial year 2008-09 by postponing the implementation of AS-11 from March 31, 2009 to March 31, 2011. This dilution has helped quite a few large companies (like, Reliance Communications, Tata Motors, JSW Steel, Sterlite Industries, M&M, Bharat Forge and Ashok Leyland) report a better profit picture as on 31st of March 2009. Likewise, the IFRS migration is going to impact the Indian companies in different ways in terms of their profits, quarterly results, treatment of extraordinary items, consolidated financial statements, etc. Only experts can fathom the impact on profits and the size of the balance sheet. One can expect research reports from brokerages, research houses and firms in the next one year, detailing the impact of the newly developed accounting standards. Assessing the impact of IFRS standards on holding companies with several subsidiaries – foreign as well as local – is much more complex due to the enormity of IFRS standards and its Framework. It will be a Himalayan task for analysts to decipher the ramifications from a balance sheet and income statement perspective.

14. HOW DOES IFRS COMPARE WITH USGAAP?
There are significant differences between IFRS and USGAAP. While calculating financial ratios, analysts need to be aware of them. For example, USGAAP

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allows LIFO method of inventory valuation which allows US companies to report lower profits and consequently pay lower taxes in an inflationary environment. By using LIFO method, US companies will be able to show higher raw material cost in the income statement which depresses the net income* and resulting in lower taxes for them. This will ultimately gets reflected in profitability ratios, like, Return on Equity (RoE), etc. With lesser profits to declare, the companies will show lower RoE. Historical data suggests that the difference in RoE for IFRS and USGAAP calculations can be as large as 3 to 4 per cent in several cases.
(* The word ‘net income’ is used in the context of international terminology and followed in the US and other countries. Net income is equal to net profit – the latter word is used in India for profit after tax. In this article, whenever the word ‘net income’ is used, it is used in the context of net profit only.)

There are a large number of differences between the provisions of these two standards. Presenting all of them is outside the scope of this article. Following are some of the main differences:
IFRS 1. Principles based approach 2. Upward revaluation of assets (property, plant & equipment) and intangible assets is allowed 3. Weighted average cost and FIFO are permitted for inventory valuation; LIFO is not permitted 4. IFRS does not allow any items to be classified as "extraordinary items" 5. While consolidating accounts for long-term investments, IFRS uses a voting control method for consolidation 6. Deferred tax assets and liabilities are classified net as NON-CURRENT on the balance sheet with additional disclosures USGAAP 1. A combination of principles and rules based approach 2. Upward revaluation of assets is not allowed 3. Weighted average cost, LIFO & FIFO are allowed for inventory valuation 4. Extraordinary items shall be reported in the income statement, net of tax, below income from continuing operations 5. USGAAP uses a dual model based on voting control and economic control for consolidation 6. Deferred tax assets and liabilities are classified as current or non-current, based on the classification of related tax asset or liability for financial reporting

Note: USGAAP allows LIFO method of inventory valuation, which allows US companies to report lower profits and pay lower taxes during an inflationary period

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DIFFERENCES IN CASH FLOW STATEMENTS: There are significant differences
in Cash Flow statements (Operating, Investing or Financing activity):
IFRS 1. Interest received can be Operating or investing activity 2. Dividend received can be Operating or investing activity 3. Interest paid can be Operating or financing activity 4. Dividends paid can be Operating or financing activity USGAAP 1. Interest received is Operating activity 2. Dividend received is Operating activity 3. Interest paid is Operating activity 4. Dividends paid is Financing activity

As can be seen from above, IFRS permits more flexibility in classifying cash flows

15. DOES INDIA NEED IFRS STANDARDS?
With increased globalization, several Indian companies have acquired large assets and expanded their businesses abroad through stake buys, outright acquisition and others. Uniform accounting rules, like, IFRS are extremely useful to such companies. With the adoption of IFRS, raising funds abroad through ADS, GDR or FCCB will be quite easy for Indian companies. Migration to IFRS will lower the cost of raising money as it will obviate the need for preparing a multiple set of financial statements (like, Indian GAAP, USGAAP or other). Moreover, the entire world is moving towards IFRS or accounting standards that bear close resemblance to IFRS. IFRS is expected to increase the transparency in financial statements which will help investors, creditors and other stakeholders in a better manner. Even during the summit meeting of the Group of 20 leaders (G-20) held in September 2009, India had committed itself to global convergence in accounting standards and complete the convergence project by June 2011. Several Indian companies and banks have created separate bodies for eventual implementation of IFRS as per the roadmap for transition. IFRS-compliant financial statements have a high brand value globally and the transition to IFRS will allow Indian companies to list their shares on foreign bourses much more easily. Companies may be able to get better credit rating from agencies.

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16. WHAT IS INDIA'S ROADMAP FOR IFRS?
The Indian Government had on 22nd of January 2010 released the roadmap for convergence of Indian Accounting Standards with the globally acknowledged International Financial Reporting Standards (IFRS). The Core Group, constituted by

the Ministry of Corporate Affairs for convergence of Indian Accounting Standards with IFRS from 1st of April 2011, that held its meeting on 11 th of January 2010 had agreed for a clear roadmap. There will be two sets of accounting standards:

FIRST SET OF ACCOUNTING STANDARDS
PHASE 1
Coverage Opening balance a. Companies which are part of NSE Index – Nifty 50 sheet as at 1 April 2011* b. Companies which are part of BSE Sensex – 30 c. Companies whose shares or other securities are listed on a stock exchange outside India d. Companies, whether listed or not, having net worth of more than Rs 1,000 crore Date

PHASE 2
Coverage Opening balance Companies (whether listed or not) not covered in sheet as at 1 April phase 1 and having net worth exceeding Rs 500 2013* crore, but not exceeding Rs 1,000 crore Date

PHASE 3
Coverage Opening balance Listed companies (not covered in phase 1 and 2) sheet as at 1 April having net worth of Rs 500 crore or less 2014* * When the accounting year ends on a date other than 31 st March, the conversion of the opening Balance Sheet will be made in relation to the first Balance Sheet which is made on a date after 31st March.
If an Indian company's financial year is April to March, that company will have to shift to IFRS with effect from FY 2011-12, if it falls under phase 1. Accordingly, the company will have to reset its balance sheet for FY 2010-11 as per IFRS.

Date

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According to an Economic Times’ estimate, IFRS will be adopted by about 400 Indian companies from 1st of April 2011 in the First Phase of implementation. This is highly significant from a stock market point of view.

SECOND SET OF ACCOUNTING STANDARDS
Companies which fall in the following categories will not be required to follow the notified accounting standards which are converged with the IFRS (though they may voluntarily opt to do so) but need to follow only the notified accounting standards which are not converged with the IFRS. These companies are: a. Non-listed companies which have a net worth of Rs. 500 crores or less and whose shares or other securities are not listed on Stock Exchanges outside India b. Small and Medium Companies (SMCs). The salient features of the roadmap are: 1. There will be two separate sets of Accounting Standards under Section 211(3C) of the Companies Act, 1956 – as given above 2. First set would comprise of the Indian Accounting Standards which are converged with the IFRSs which shall be applicable to the specified class of companies – the details are given above 3. The second set would comprise of the existing Indian Accounting Standards and would be applicable to other companies, including Small and Medium Companies (SMCs). But IFRS convergence will only be voluntary for SMCs. 4. For Banking and Insurance companies there will be a separate roadmap 5. The ICAI has submitted to the MCA revised Schedule VI to the Companies Act, 1956. The NACAS shall review the draft and submit a revised Schedule VI to the MCA. Amendments to Schedule XIV will also be carried out in a time bound manner.

17. WHAT ARE THE ISSUES INVOLVED IN IFRS CONVERGENCE IN INDIA?
The transition to convergence between Indian GAAP and IFRS is not going to be smooth. As mentioned above, the transition is going to be done in a phased

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manner in the next four years. The following are some of the issues that need to be sorted out before the elimination of differences: INCOME TAX ISSUES:  CBDT is working with ICAI to examine the direct tax issues arising out of the convergence between IFRS and Indian GAAP  It remains to be seen whether CBDT will full adopt IFRS for taxation purposes  The problem of income tax will get more complicated for Indian companies which have acquired several subsidiaries abroad, while preparing the consolidated financial statements  Consolidated financial statements concern companies having joint ventures, subsidiaries and associates. According to IFRS norms, companies will have to present their interim financial statements (like quarterly results) also on a consolidated basis.  Some experts contend the draft Direct Taxes Code (DTC) is very averse to IFRS and does not recognize fair value measurement  Fair value accounting concept is the bedrock of IFRS IMPLEMENTATION and COMPLIANCE COSTS:  The cost of implementation of IFRS convergence is going to be huge  Training cost of making employees being aware of IFRS provisions and implications is also very big AMENDMENTS TO VARIOUS LAWS:  Before implementation of IFRS, various laws need to be amended and approved in Indian Parliament  Some of the laws that need to amended are Companies Act (specifically Schedule VI of the Act), Income Tax Act (or the proposed Direct Taxes Code), SEBI norms, banking laws like the Banking Regulation Act, insurance laws, etc INSURANCE COMPANIES:  Under IFRS a large part of the premium of insurance companies is treated as investment liability (as against Indian GAAP treating it as revenue) as they have to return it to the investors. This will create a big dent in their financial statements. IRDA regulates financial reporting by insurance companies in India. IT AND ERP SYSTEMS:  Convergence to IFRS requires companies to upgrade their IT and ERP systems in a robust manner

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 There is a need to improve their Management Information Systems (MIS)  The convergence to IFRS is a big opportunity for IT companies training institutions and tax consultants DIFFERENCES BETWEEN IFRS and Indian GAAP (Cash Flows):
IFRS 1. Interest received can be Operating or investing activity 2. Dividend received can be Operating or investing activity 3. Interest paid can be Operating or financing activity 4. Dividends paid can be Operating or financing activity Indian GAAP 1. Interest received is Investing activity. In case of a financial enterprise, it is operating activity. 2. Dividend received is Investing activity. In case of a financial enterprise, it is operating activity. 3. Interest paid is Financing activity. In case of a financial enterprise, it is operating activity. 4. Dividends paid is Financing activity

18. HOW ARE BANKS PREPARING FOR IFRS?
With the Government deciding to implement IFRS with effect from 1st of April 2011 in a phased manner, RBI is expected to come with clarifications on how IFRS will be implemented in Indian Banks. The regulator is a member of a committee convened by the ministry of corporate affairs to finalize IFRS rules that will be applicable in India. Indian Banks Association (IBA), an industry body of Indian Banks, has set up a committee to guide banks in shifting towards IFRS framework. A lot of issues have to be addressed and banks have to adopt IFRS suitably to fit India’s need. The following issues will have a big impact on banks while adopting IFRS: 1. Provisioning for NPAs will change radically. Indian Banks currently follow RBI norms and Indian Accounting Standards according to which losses due to non-performing assets is based on what is actually incurred. But under IFRS, banks will have to make an estimation of all future NPAs based on an expectation of losses leading to upfront recognition of losses. 2. Presentation of financial statements 3. Financial Instruments-Disclosures: The two main categories of disclosures required by the new IFRS standard No. 7 are: (i). information about the significance of financial instruments and (ii). information about the nature and extent of risks (liquidity risk, market risk and credit risk) arising from Page 20 of 23

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financial instruments. The IFRS 7 provides for extensive disclosures under the above two categories and it will be a daunting task for the banks to disclose all such information in their financial statements. 4. Financial instruments and derivatives accounting: At present, valuation of investments by banks are classified as Helf for Trading (HTM), Available for Sale (AFS) and Held to Maturity (HTM). Under IFRS, all these investments are all mostly required to be treated as Held for Trading and they should be valued at fair value in the books. Fair value is defined as the amount at which an asset could be exchanged, or a liability settled, between willing and knowledgeable parties or market participants. When the asset or liability trades regularly, its fair value is usually readily available from its market price. All derivative instruments are to be recognized at fair value on the balance sheet under IFRS. State Bank of India, the country’s biggest commercial bank, has formed a separate team to work on a smooth transition from Indian GAAP to IFRS.

19. WHAT IS THE IMPACT NEW IFRS 9 ON PROFITS?
HDFC Limited is an Indian-based financial institution renowned the world over. It has got huge investments which are quoted at book value. The balance sheet value of these several unquoted investments is very low. And their market value could be much higher by several folds. When HDFC moves towards IFRS from 1st of April 2010, how does the new standards affect the valuation of its unquoted investments, whose market value could be in hundred of crores of rupees? It remains to be seen whether HDFC will have to pay income tax on the difference between book value and the fair value of these investments. How the Indian tax authorities will interpret and implement the provisions of IFRS is in the realm of speculation. Now, HDFC Limited has decided to unlock the value of its unquoted investments by transferring them to a Special Purpose Vehicle (SPV) and selling a portion of their investments in small portions to private equity or other investors. This is an interesting move by the company. Is it creating an SPV in order to move smoothly towards IFRS convergence or is it a simple case of unlocking value? The IASB has introduced a new standard, namely IFRS 9, relating to Financial Instruments: classification and measurement of financial assets. This is going to be effective from 1st of January 2013. The details are given below: Overview of IFRS 9: The new standard IFRS 9 is expected to be implemented with effect from 1 st of January 2013. It will replace the existing IAS 39. According to IFRS 9, all

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financial assets are initially measured at fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into two classifications – those measured at amortised cost and those measured at fair value. The new IFRS 9 does away with the classification of Available for Sale (AFS) and Held to Maturity (HTM) categories for financial assets (under the existing IAS 39), which are extensively used by companies and banks now. Debt instruments: A debt instrument that meets the following two conditions can be measured at amortised cost (net of any writedown for impairment): 1. An entity is holding the financial asset to collect the future cash flows and 2. The contractual cash-flows are solely payments of principal and interest. All other debt instruments must be measured at fair value through profit or loss (FVTPL). Equity instruments: All equity investments in scope of IFRS 9 are to be measured at fair value in the balance sheet, with value changes recognised in profit or loss, except for those equity investments for which the entity has elected to report value changes in 'other comprehensive income'. There is no 'cost exception' for unquoted equities. 'Other comprehensive income' option: If an equity investment is not held for trading, an entity can make an irrevocable election at initial recognition to measure it at fair value through other comprehensive income (FVTOCI) with only dividend income recognized in profit or loss. Derivatives: All derivatives, including those linked to unquoted equity investments, are measured at fair value. Value changes are recognised in profit or loss unless the entity has elected to treat the derivative as a hedging instrument in accordance with IAS 39, in which case the requirements of IAS 39 apply.

20. SOME IMPORTANT IFRS STANDARDS
The following are the standards in the series of IFRSs:
IFRS 1 2 3 4 5 6 DETAILS First Time Adoption of IFRSs Share-based Payment Business Combinations Insurance Contracts Non-current assets held for sale and discontinued operations Exploration for and Evaluation of Mineral Assets

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7 8 9 Financial Instruments: Disclosures Operating Segments Financial Instruments: Classification and measurement of financial assets

Sources:
1. www.iasb.org 2. www.iosco.org 3. www.iasplus.com 4. Press release of Ministry of Company Affairs 5. Newspapers and websites 6. www.cfainstitute.org Disclaimer: The views of the author are personal. This research paper is prepared for information purpose to the general reader only. For correct interpretation of the provisions and tax-related matters, readers are advised to consult their recognized tax consultants or qualified chartered accountants.

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