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Radhika Differences in accounting frameworks impose additional cost and time constraints on companies that operate in various countries as well as creating an inherent confusion on what the real numbers are. Further, in today’s global markets inves tors are looking at global opportunities. Uses of different national accounting standards market it difficult, time consuming and costly for an investor to com pare global opportunities and make informed decisions. Therefore a need has ari sen for a common worldwide accounting language. This paper studies the requirem ents under IFRS and by Migrating to IFRS are the difficulties facing by world to convert GAAP to IFRS. ________________________________________________________________________ Associate professor,GITAM University Hyderabad, she can be reached radhika.raman firstname.lastname@example.org INTRODUCTION DEVELOPMENT OF STANDARDS The history of international accounting standards really began in 1966 with prop osal to establish an International Study Group comprising ICAEW, AICPA and CICA. In February 1967 this resulted in foundation of Accountants International Study Group (AISG), which began to publish papers on important topics every few month s and created an appetite for change. Many of these papers led the way for stand ards that followed, when in March 1973 it was finally agreed to establish an int ernational body writing accounting standards for international use. In June 1973 the International Accounting Standards Committee (IASC) came into existence wit h the stated intent that new international standards it released must ‘be capabl e of rapid acceptance and implementation world-wide’. IASC survived for 27 years until 2001 when the organisation was renamed as International Accounting Standa rds Board (IASB). International Accounting Standards Between 1973 and 2001, the International Accounting Standards Committee (IASC) r eleased International Accounting Standards. Between 1997 and 1999, the IASC rest ructured their organization, which resulted in formation of International Accoun ting Standards Board (IASB). These changes came into effect on 1st April 2001. S ubsequently IASB made a statement about current and future standards: IASB publi shes its Standards in a series of pronouncements called International Financial Reporting Standards (IFRS). It has also adopted the body of Standards issued by the Board of the International Accounting Standards Committee. Those pronounceme nts continue to be designated “International Accounting Standards” (IAS). The IA SB approved IASB Resolution on IASC Standards at their meeting in April 2001, wh ich confirmed the status of all IASC Standards and SIC Interpretations in effect as of 1 April 2001. International Financial Reporting Standards On its formation in April 2001 the IASB announced that the IASC Foundation Trust ees agreed that accounting standards issued by IASB would be designated “Interna tional Financial Reporting Standards” in a statement dated 23rd April 2001. On May 23rd 2002, IASB issued a press release announcing publication of the Pref ace to International Financial Reporting Standards which Sir David Tweedie, the then IASB Chairman, said provided ‘a brief description of the purpose and functi on of the main structures of the new arrangements for setting global standards’. The first IFRS was published in June 2003 (IFRS 1, First-time Adoption of International Financi al Reporting Standards). The term International Financial Reporting Standards (IFRSs) has both a narrow a nd a broad meaning. Narrowly, IFRSs refers to the new numbered series of pronoun cements that the International Accounting Standards Board (IASB) is issuing, as distinct from
the International Accounting Standards (IASs) series issued by its predecessor ( IASC –International Accounting Standards Committee). More broadly, IFRSs refers to the entire body of IASB pronouncements, including standards and interpretations approved by IASB and IASs and SIC interpretations approved by the predecessor International Accounting Standards Committee. Benefits of IFRSs to Indian Corporate: Adopting IFRS by Indian corporate is going to be very challenging but at the sam e time could also be rewarding. Indian corporate is likely to reap significant b enefits from adopting IFRS. Challenges to Indian Corporate: The transition will be a tough challenge for the country as it requires a shift in the academic approach, along with regulatory challenges. The Institute of Cha rtered Accountants of India (ICAI) and the government will have to play a larger role in countering industry problems. There are several impediments and practical challenges to adoption of and full c ompliance with IFRS in India. These are: IFRS requires application of fair value principles in certain situations an d this would result in significant differences from financial information curren tly presented, especially relating to financial instruments and business combina tions. Given the current economic scenario, this could result in significant vol atility in reported earnings and key performance measures like EPS and P/E ratio s. Indian companies will have to build awareness amongst investors and analysts to explain the reasons for this volatility in order to improve understanding, an d increase transparency and reliability of their financial statements. This situation is worsened by the lack of availability of professionals with adequate valuation skills, to assist Indian corporate in arriving at reliable fa ir value estimates. This is a significant resource constraint that could impact comparability of financial statements and render some of the benefits of IFRS ad option ineffective. Although IFRS are principles-based standards, they offer certain accounting po licy choices to preparers of financial statements. For example, the use of a cos t-based model or a revaluation model in accounting for investment properties. Th is could reduce consistency and comparability of financial information to a cert ain extent and therefore reduce some of the benefits from IFRS adoption. IFRS ar e formulated by the International Accounting Standards Board (IASB) which is an international standard-setting body. However, the responsibility for enforcement and providing guidance on implem entation vests with local government and accounting and regulatory bodies, such as the ICAI in India. Consequently, there may be differences in interpretation o r practical application of IFRS provisions, which could further reduce consisten cy in financial reporting and comparability with global peers. The ICAI will hav e to make adequate investments and build infrastructure to ensure compliance wit h IFRS. One of the biggest issues in the accounting world today is should the United St ates switch from GAAP to IFRS? Currently the SEC is contemplating making the sw itch, hearing arguments from both sides. Some experts say that the U.S should w hile others disagree with this notation. Some believe that by switching to IFRS (International Financial Reporting Standards) international investing would be easier and costs would be cut. The counter argument for this is the transition phase; saying it will cause confusion and be quite expensive. Another argument against switching over to IFRS is that some believe that there are not enough ru les in IFRS and it leaves companies too much wiggle room unlike that of GAAP who se rules are quite precise. As of right now the SEC is planning on allowing s
ome of the larger multinational companies to make the switch starting in 2010. Other smaller companies would make the switch in 2014. it would be a smart idea if the United States switched to IFRS from GAAP. becau se of a couple of things. For one, we would now be able to compare apples to ap ples; under our current system we compare apples to oranges. Another reason the switch is necessary is for the international companies. As of right now the Un ites States requires companies that have sales in other counties to disclose the amounts on their 1120’s. This is a problem because it wastes time, because com panies have to take the time to attain the information needed from their subsidi aries, and then convert them from local currency to the dollar because those are the guidelines from the government. If the United Sates followed IFRS this wou ldn’t be such an issue because we would all be following the same accounting met hods. In return the time that was once wasted on dealing with the foreign subsi diary can now be spent on more pressing issues. As for the argument of the switch would cause confusion and be costly; there are answers for these rebuttals. For one, any of the confusion can be dealt with. The SEC would obviously give a time table for the switch and up until the day o f the switch companies have time to learn the new system. The people who would be affected by this change are very smart people. If they read certain guidelin es and take the time to actually learn about how IFRS works then the switch will be smoother than expected. Another way to curve the learning is that IFRS will have to be implemented into college curriculums. One of the ways that the prof essors can learn about IFRS is if the AICPA holds seminars which would count tow ards their hours that they need to fulfill in order to retain their CPA status. Once these professors understand IFRS they can teach it in their business schoo ls. Make it mandatory for the accredited schools to have IFRS as a part of the curriculum. One of the advantages to adding it to the curriculum is that when t he students enter the work force they already have knowledge of IFRS and can pro bably help in the implementation of the new system. As for the argument it will be costly; how can anyone truly know? They cannot; and because they cannot truly tell how much it would cost the argument is a sli ppery slope. Also, is it not true that in order to make money one must spend m oney? The expensive part would come if the CEO’s and the CFO’s do not take the time to learn IFRS. If they don’t learn it then when the switch actually happen s their companies will be at a huge disadvantage. So learning about IFRS is an incentive to keeping your job. Also, the big 4 should love the idea of switchi ng over because when implementing a new system they will have to do more work wh ich means that they can bill you even more. To go along with that; when you ha ve recent college graduates who know about IFRS you can assign them to internati onal clients and be confident that they will succeed. IFRS could very well be a great thing for the United States if people would just let it work. It will give people jobs because there will be more demand for ac counts at firms to handle the bigger companies with foreign subsidiaries. It wi ll now put the entire world on the same page when it comes to books; now being a ble to truly see who the stronger companies are. The question is not if we swi tch anymore, it is when will we switch. Many Accounting students seem to be worried about the change from U.S. Generally Accepted Accounting Principles to International Financial Reporting Standards i n the upcoming years. Students think everything they are learning now, will be u seless in the next couple of years. There are some changes, but they are very su btle compared to how people are making them out to be. In the following paragrap h, I will discuss the changes that impact the financial statements for students and companies. Some examples include a change in the statement of income section. W ith IFRS, extraordinary items are together, whereas under U.S. GAAP, they are sh own underneath the net income. Another change comes in the inventory section. Un der IFRS, LIFO (Last In, First Out) cannot be used, but with U.S. GAAP, all comp anies have a choice between LIFO and FIFO (First In, First Out). Also the earnin gs per share calculation under IFRS are not included, but under U.S. GAAP the ca lculations are included into the interim period of shares. The earnings per shar
e are important, because many companies use this number to see how the company i s doing and it allows investors as well. Finally, Developmental cost can be capi talized under IFRS if criteria are met, but under U.S. GAAP it is considered as an expense. These slight changes will affect how students learn Accounting princ iples, which as of now is still U.S. GAAP. The change from IFRS is supposed to take place sometime in the year 2016. With the ever shrinking world and globalization, it makes sense to have a universal set of accounting rules. This would make it easier and more efficient for companies who operate around the world, instead of having to switch differen t principles back and forth. This will also make companies more cost efficient a nd consolidate their time for other projects and problems. Accounting students should want to embrace these new changes, which will help them to compete on the international level. Students also can travel t hroughout the world to work for companies that they previously could not work fo r. IFRS is the way of the future and students do not need to worry about major c hanges, but only little changes that can be learned in only a small amount of ti me. Time will tell if these rules are right, but as of now students have a coupl e more years until IFRS comes into affect. In today’s business, companies usually report their financial statements followi ng the guidelines of what is know as the Generally Accepted Accounting Principle s (GAAP). This will not be the same a few years now because in 2002, the Financ ial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) agreed to try to reach a common ground between GAAP and IFRS by th e year 2014. In order to fully to fully understand what this transition means, one must know what the Differences are between both GAAP and IFRS. Some of the differences between IFRS and GAAP occur in the asset accounts. This first difference to be discussed is that of fair value and historical cost. Un der IFRS, companies are allowed to revalue their items under plant, property and equipment in order to provide more up to date values of those items. Under GAA P, companies are required to record all of these under historical cost. Another notable difference comes when dealing with the inventory account. When the sel ling of goods occurs, under GAAP, companies in the United States are allowed to used the method of Last in First Out (LIFO) however under IFRS, companies are pr ohibited from using this method. IFRS and GAAP also treat the topic of intangibl e assets differently. Under GAAP, companies can recognize intangible assets at fair value when they’re acquired. Under IFRS, intangible assets are recognized if it is probable that they have a future economic benefit and if reliably measu red. Other differences occur in the income statement. When doing an income statement following GAAP, companies keep extraordinary items separate from the rest of th e statement and list them below the net income. If one was to use IFRS, they wo uld include them with the rest of the income statement and would in turn be incl uded in the net income. Also on the income statement, earnings per share is cal culated differently. With IFRS, earnings per share does not average the individ ual period calculations. GAAP however does so. For discontinued operations, GA AP requires companies to record pre-tax and post-tax income or losses from disco ntinued operations. For IFRS, the post-tax income or loss from discontinued ope rations is recorded in either a statement of comprehensive income or separate in come statement. These are just a few of the differences that occur with the transition of GAAP t o IFRS and in order to properly transition by the year 2014, companies will have to begin to implement some of these concepts and shy away from GAAP. In coopera ting with the IASB, the FASB has begun to do so and it will only be a matter of time before the accounting standards for one are the accounting standards for al l. International Financial Reporting Standards (IFRS) is gaining momentum throughou t the world as a single, consistent accounting framework and is positioned to be come the predominant GAAP in the near future. More than 100 countries have moved to, or base their local standards on IFRS. In 2005, UK, the rest of Europe and Australia moved to IFRS. In 2007, China moved to IFRS.
Brazil is expected to move in 2010, and Canada in 2011. In the US, the SEC has l aid down the roadmap for conversion to IFRS starting 2014, 2015 or 2016, dependi ng on the size of the issuer. Indian Accounting Standards have not kept pace with changes in IFRS. There are s ignificant differences between IFRS and I-GAAP, because Indian standards remain sensitive to local conditions, including the legal and economic environment.Reco gnizing the significance of having full convergence with IFRS, the ICAI has deci ded to adopt a ‘big bang’ approach and fully converge with IFRS issued by IASB, from accounting periods commencing on or after 1 April 2011 subject to regulator y approvals. The Ministry of Corporate Affairs has also announced its commitment to convergence to IFRS by 2011. There is lot of opportunity for us in IFRS. But the Indian Government has to qui ckly bring changes in the Companies Act. The law should refrain from specifying the accounting treatment and leave it to IFRS. At a panel discussion on IFRS, or ganised by Grant Thornton India, Mr Ramesh Sanka, Group CFO, DLF Ltd, said that corporates would need to ensure preparedness for IFRS reporting as early as Apri l 1, 2010 even though adoption was from April 1, 2011. The first set of IFRS fin ancial statements for the year ended March 31, 2012 would require preparation of opening balance sheet as on April 1, 2010. The Institute of Chartered Accountants of India (ICAI) has already announced int ent to adopt IFRS from April 1, 2011. It would apply to all public interest enti ties from the accounting periods after April 1, 2011. The public interest entiti es include listed companies, banks, insurance companies, enterprises with turnov er in excess of Rs 100 crore and all enterprises with borrowings in excess of Rs 25 crore. Conclusion: Convergence to IFRS will greatly enhance an Indian entities’ ability to raise an d attract foreign capital at a low cost. A common accounting language, such as I FRS, will help Indian companies benchmark their performance with global counterp arts. Early adoption of IFRS gives companies the opportunity to anticipate chall enges, manage outcomes and implement the best solutions. Without careful study, the full impact of converting to IFRS will not be clear. Companies need to condu ct a diagnostic study before proceeding for a full IFRS conversion. After comple ting the preliminary assessment, the management should prepare a detailed IFRS c onversion programme. Given the enormity of the exercise, companies should consid er a dedicated team that will work on the conversion exercise. For successful im plementation of IFRS in India, the regulator should immediately announce its int ention to convert to IFRS and make appropriate regulatory amendments. References: • Reports of Institute of Chartered Accountant of India (ICAI) • Reports of International Accounting Standard Board, IFRIC,SIC • Economics Times, Business Standard, Financial Express • Web Support- Price Water Cooper, Ernst and Young and Wikipedia.
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