IFRS

CONVERGENCE TO IFRS FROM INDIAN GAAPIMPACT AND CHALLENGES

PRESENTED BY
1

IFRS NOMAN AGASHIWALA (PG-FIN) 03

CONVERGENCE TO IFRS FROM INDIAN GAAPIMPACT AND CHALLENGES A PROJECT SUBMITTED IN THE PARTIAL FULFILLMENT OF THE POST GRADUATE DIPLOMA IN MANAGEMENT TO THAKUR INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH BY Mr. NOMAN AGASHIWALA PGDM –FINANCE 2008-10 UNDER THE GUIDANCE OF PROF. JYOTI NAIR THAKUR INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH
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IFRS

KANDIVALI (MUMBAI)

CERTIFICATE
This is to certify that the study presented by Mr. NOMAN I. AGASHIWALA to THAKUR INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH in the partial fulfillment of the POST GRADUATE DIPLOMA IN MANAGEMENT under CONVERGENCE TO IFRS FROM INDIAN GAAP- IMPACT AND CHALLENGES has been done under my guidance in the year 2008-10

The project is in the nature of original work. Reference work and relative sources of information have been given at the end of the project.

Signature of the Candidate

Forwarded through Research Guide JYOTI NAIR

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TABLE OF CONTENTS

Background of IFRS..................................................................................................11 Scope of IFRS........................................................................................................................................12 Benefits of IFRS....................................................................................................................................19 Adoption of IFRS..................................................................................................................................21 Challenges of IFRS................................................................................................................................24 There are several impediments and practical challenges to adoption of and full compliance with IFRS in India. These are:.....................................................................................................................................24 The need for a change in several laws and regulations governing financial accounting and reporting in India. In addition to accounting standards, there are legal and regulatory requirements that determine the manner in which financial information is reported or presented in financial statements. For example, the Companies Act, 1956 determines the classification and accounting treatment for redeemable preference shares as equity instruments of a company, whereas these may be considered to be a financial liability under IFRS. The Companies Act (Schedule VI) also prescribes the format for presentation of financial statements for Indian companies, whereas the presentation requirements are significantly different under IFRS. Similarly, the Reserve Bank of India regulates the financial reporting for banks and other financial institutions, including the presentation format and accounting treatment for certain types of transactions..............................................................................................................24 The recent announcement by the MCA is encouraging as it indicates government support for the timetable for convergence with IFRS in India. However, the announcement stops short of endorsing the roadmap for convergence and the full adoption of IFRS that is discussed in ICAI's concept paper. In the absence of adequate clarity and assurance that Indian laws and regulations will be amended to conform to IFRS, the conversion process may not gain momentum.....................................................................24 There is a lack of adequate professionals with practical IFRS conversion experience and therefore many companies will have to rely on external advisers and their auditors. This is magnified by a lack of preparedness amongst Indian corporate as this project may be viewed simply as a project management or an accounting issue which can be left to the finance function and auditors. However, it should be noted that IFRS conversion would involve a fundamental change to an entity's financial reporting systems and processes. It will require a detailed knowledge of the standards and the ability to consider their impact on business transactions and performance measures. Further, the conversion process will 4

IFRS
need to disseminate and embed IFRS knowledge throughout the organization to ensure its application on an ongoing basis................................................................................................................................25 Another potential pitfall is viewing IFRS accounting rules as "similar" to Generally Accepted Accounting Principles in India (Indian GAAP), since Indian accounting standards have been formulated on the basis of principles in IFRS. However, this view disregards significant differences between Indian GAAP and IFRS as well as differences in practical implementation and interpretation of similar standards. Further, certain Indian standards offer accounting policy choices, which are not available under IFRS, for example, use of pooling of interest method in accounting for business combinations.. 25 There is an urgent need to address these challenges and work towards full adoption of IFRS in India. The most significant need is to build adequate IFRS skills and an expansive knowledge base amongst Indian accounting professionals to manage the conversion projects for Indian corporates. Leveraging the knowledge and experience gained from IFRS conversion in other countries and incorporating IFRS into the curriculum for professional accounting courses can do this.......................................................25 Ultimately, it is imperative for Indian corporates to improve their preparedness for IFRS adoption and get the conversion process right. Given the current market conditions, any restatement of results due to errors in the conversion process would be detrimental to the company involved and would severely damage investor confidence in the financial system. .............................................................................26 Cost Formulae........................................................................................................................................51 Consistency of cost formulae for similar inventories..............................................................................51 Standard..................................................................................................................................................52 Cash and Cash equivalents.....................................................................................................................52 Format and content of cash flow statement.............................................................................................52 Cash flows associated with extraordinary items.....................................................................................52 Disclosure of interest paid and received.................................................................................................52 Disclosure of dividend paid....................................................................................................................53 Disclosure of dividend received..............................................................................................................53 Disclosure of taxes paid..........................................................................................................................53 Disclosure of cash payments...................................................................................................................53 Particulars................................................................................................................. 53 Particulars................................................................................................................. 53 Standard..................................................................................................................................................54 Standard..................................................................................................................................................55 5

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Revenue Definition.................................................................................................................................55 (*)Termination Benefits..........................................................................................................................61 Basic EPS...............................................................................................................................................67 Consolidated Financial Statements –..................................................................................................68 Fringe Benefit tax...................................................................................................................................72 Scope......................................................................................................................................................73 Discontinuing Operations –................................................................................................................74 Intangible Assets –..............................................................................................................................75 Useful life...............................................................................................................................................75 (*)Contingent assets...............................................................................................................................79 (*)Restructuring cost..............................................................................................................................79 Optional exemptions.................................................................................................94 Mandatory exceptions ........................................................................................................................98

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ACKNOWLEDGEMENT

It gives me great pleasure to present before you, my final project report for the year 2008-2010.

I express my gratitude towards our director Mrs. Mrinalini Kohojkar, for giving us an opportunity to work on this report.

I take this opportunity to thank our respected project guide Prof. Jyoti Nair, for giving us an opportunity to undertake this project. Her guidance has been invaluable to me to while preparing this report. She provided us with valuable suggestions and excellence guidance about this industry, which proved very helpful to me and helped me to gain theoretical knowledge as well as experience in the practical field.

Last but not the least, I am also thankful to CA Nikhil Joganputra for his valuable insights and sharing his experience on these topic, and to my friends, to all known and unknown individuals who have given me their constructive advise, suggestions, encouragement, co-operation and motivation to prepare this report.

-

Noman Agashiwala

(Thakur Institute of Management Studies and Research PG)
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EXECUTIVE SUMMARY
The International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) are increasingly being recognized as Global Reporting Standards. 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. Countries such as China and Canada have announced their intention to adopt IFRSs from 2008 and 2011 respectively. United States of America has also taken-up convergence projects with the IASB with a view to permit filing of IFRS-Compliant Financial Statements in the US Stock Exchanges without requiring the presentation of reconciliation statement. In view of the benefits of convergence with IFRSs to the Indian economy, its investors, industry and the accounting professionals, the Concept Paper has been developed with the objective of exploring:
 The approach for achieving convergence with IFRS.  Laying down a roadmap for achieving convergence with the IFRSs with

a view with IFRS.

to make India IFRS-compliant.

 And also to study impact and challenges India will face to converge 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 IFRSs should be adopted for the public interest entities such as listed entities, banks and insurance entities and large-sized entities from the accounting periods beginning on or after 1st April, 2011. In order to get more clarity on these issues, we have taken example of NACIL (National Aviation Company India Ltd.).Project studied the present accounting procedure in NACIL and steps taken by them for converging with IFRS.
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ACCOUNTING STANDARDS----OVERVIEW
A financial reporting system supported by strong governance, high quality standards, and firm regulatory framework is the key to economic development. Indeed, sound financial reporting standards underline the trust that investors place in financial reporting information and thus play an important role in contributing to the economic development of a country. The Institute of Chartered Accountants of India (ICAI) as the accounting standards-formulating body in the country has always made efforts to formulate high quality Accounting Standards and has been successful in doing so. Indian Accounting Standards have withstood the test of time. As the world continues to globalize, discussion on convergence of national accounting standards with International Financial Reporting Standards (IFRSs)1 has increased significantly.

The forces of globalization prompt more and more countries to open their doors to foreign investment and as businesses expand across borders the need arises to recognize the benefits of having commonly accepted and understood financial reporting standards. In this scenario of globalization, India cannot insulate itself from the developments taking place worldwide. In India, so far as the ICAI and the Governmental authorities such as the National Advisory Committee on Accounting Standards established under the Companies Act, 1956, and various regulators such as Securities and Exchange Board of India and Reserve Bank of India are concerned, the aim has always been to comply with the IFRSs to the extent possible with the objective to formulate sound financial reporting standards. The ICAI, being a member of the International Federation of Accountants (IFAC), considers the
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IFRSs and tries to integrate them, to the extent possible, in the light of the laws, customs, practices and

business environment prevailing in India. The Preface to the Statements of Accounting Standards, issued by the ICAI, categorically recognizes the same. Although, the focus has always been on developing high quality standards, resulting in transparent and comparable financial statements, deviations from IFRSs were made where it was considered that these were not consistent with the laws and business environment prevailing within the country. Now, as the world globalizes, it has become imperative for India also to make a formal strategy for convergence with IFRSs with the objective to harmonize with globally accepted accounting standards.

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INTRODUCTION TO IFRS
Background of IFRS Users of financial statements have always demanded transparency in financial reporting and disclosures. However, the willingness and need for better disclosure practices have intensified only in recent times. Globalization has helped Indian Companies raise funds from offshore capital markets. This has required Indian companies, desirous of raising funds, to follow the Generally Accepted Accounting Principles (GAAP) of the investing country. The different disclosure requirements for listing purposes have hindered the free flow of capital. This has also made comparison of financial statements across the globe impossible. An International body called International Organization of Securities Commissions (IOSCO), to harmonize diverse disclosure practices followed in different countries initiated a movement. The capital market regulators have now agreed to accept IFRS (International Financial Reporting Standards) compliant financial statements as admissible for raising capital. This would ease free flow of capital and reduce costs of raising capital in foreign currencies. Most jurisdictions that report under IFRS, including the EU, mandate the use of IFRS only for the listed companies. However, in INDIA, IFRS would apply to a wider group of entities than their international counterparts. This is primarily because of a large number of private enterprises getting covered under the size criteria based on their turnover and/or their borrowing. Companies also may need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS, or if they have a foreign investor that must use IFRS. The policy makers in India have also realized the need to follow IFRS and it is expected that a large number of Indian companies would be required to follow IFRS from 2011. This poses a great challenge to the makers of financial statements and also to the auditors.
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Meaning of IFRS International Financial Reporting Standards (IFRS) is a set of accounting standards, developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements. IFRS is a principles-based accounting system, meaning it is objective-oriented allowing for more presentation freedom. Objectives of IFRS
 to develop, in the public interest, a single set of high quality,

understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions;
 to promote the use and rigorous application of those standards;  in fulfilling the objectives associated with (1) and (2),  to take account of, as appropriate, the special needs of small and

medium-sized entities and emerging economies.
 to bring about convergence of national accounting standards and

International solutions. Scope of IFRS 1. 2.

Accounting

standards

and IFRS

to

high

quality

IASB Standards are known as International Financial Reporting All International Accounting Standards (IAS’s) and Interpretations

Standards (IFRS’s). issued by the former IASC and SIC continue to be applicable unless and until they are amended or withdrawn. 3. IFRS’s apply to the general-purpose financial statements and
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other financial reporting by profit-oriented entities -- those engaged in

IFRS
commercial, industrial, financial, and similar activities, regardless of their legal form. 4. 5. Entities other than profit-oriented business entities may also find General-purpose financial statements are intended to meet the IFRSs appropriate. common needs of shareholders, creditors, employees, and the public at large for information about an entity's financial position, performance, and cash flows. 6. Other financial reporting includes information provided outside financial statements that assists in the interpretation of a complete set of financial statements or improves users' ability to make efficient economic decisions. 7. 8. IFRS apply to individual company and consolidated financial A complete set of financial statements includes a balance sheet, statements. an income statement, a cash flow statement, a statement showing either all changes in equity or changes in equity other than those arising from investments by and distributions to owners, a summary of accounting policies, and explanatory notes. 9. If an IFRS allows both a 'benchmark' and an 'allowed alternative' treatment, financial statements may be described as conforming to IFRS whichever treatment is followed. 10. In developing Standards, IASB intends not to permit choices in accounting treatment. Further, IASB intends to reconsider the choices in existing IASs with a view to reducing the number of those choices. 11. The provision of IAS 1 that conformity with IAS requires compliance with every applicable IAS and Interpretation requires compliance with all IFRSs as well.

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Pronouncements of IFRS

International Financial Reporting Standards (IFRS) First-time Adoption of International Financial Reporting IFRS 1 Standards IFRS 2 Share-based payment IFRS 3 Business Combinations (Revised) IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments International Accounting Standards (IAS) IAS 1 Presentation of financial statements (Revised) IAS 2 Inventories IAS 7 Cash Flow Statements Accounting Policies, Changes in Accounting Estimates and IAS 8 Errors IAS 10 Events after the balance sheet date IAS 11 Construction Contracts IAS 12 Income Taxes IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 19 Employee Benefits Accounting for government Grants and Disclosure of IAS 20 Government Assistance IAS 21 The Effects of Changes in Foreign Currency Rates IAS 23 Borrowing Costs (Revised) IAS 24 Related Party Disclosures IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 27 Consolidated and Separate Financial Statements (Revised) IAS 28 Investments in Associates IAS 29 Financial Reporting in Hyperinflationary Economies IAS 31 Interests in Joint Ventures IAS 32 Financial Instruments: Presentation IAS 33 Earnings per share IAS 34 Interim Financial Reporting IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets
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IAS 39 IAS 40 IAS 41 Financial Instruments: Recognition and Measurement Investment Property Agriculture

International Financial Reporting Interpretation Committee (IFRIC) Changes in Existing Decommissioning, Restoration and Similar IFRIC 1 Liabilities Members Shares in Co-operative Entities and Similar IFRIC 2 Instruments IFRIC 4 Determining whether an Arrangement contains a Lease Rights to Interests arising from Decommissioning, Restoration IFRIC 5 and Environmental Rehabilitation Funds Liabilities arising from Participating in a Specific Market IFRIC 6 Waste Electrical and Electronic Equipment Applying the Restatement Approach under IAS 29 Financial IFRIC 7 Reporting in Hyperinflationary Economies IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of Embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment IFRIC 11 IFRS 2 - Group and Treasury Share Transactions IFRIC 12 Service Concession Arrangements IFRIC 13 Customer Loyalty Programmes IAS 19 - The Limit on a defined Benefit Asset, Minimum IFRIC 14 Funding Requirements and their Interaction IFRIC 15 Agreements for the Construction of Real Estate IFRIC 16 Hedges of a Net Investment in a Foreign Operation IFRIC 17 Distributors of Non-cash Assets to Owners IFRIC 18 Transfers of assets from customers Standard Interpretation Committee (SIC) SIC 7 Introduction of the Euro Government Assistance - No specific Relation to operating SIC 10 activities SIC 12 Consolidation- Special Purpose Entities Jointly Controlled Entities - Non-Monetary Contributions by SIC 13 Ventures SIC 15 Operating Leases – Incentives SIC 21 Income Taxes - Recovery of Revalued Non-Depreciable Assets SIC 25 Income Taxes - Changes in the Tax Status of an Entity or its
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Shareholders Evaluating the Substance of transactions Involving the Legal Form of a Lease Disclosure - Service Concession Arrangements Revenue - Barter Transactions Involving Advertising Services Intangible Assets - Web Site Costs

SIC 27 SIC 29 SIC 31 SIC 32

Need for Convergence with IFRSs In the present era of globalization and liberalization, the World has become an economic village. The globalization of the business world and the attendant structures and the regulations, which support it, as well as the development of e-commerce make it imperative to have a single globally accepted financial reporting system. A number of multi-national companies are establishing their businesses in various countries with emerging economies and vice versa. The entities in emerging economies are increasingly accessing the global markets to fulfill their capital needs by getting their securities listed on the stock exchanges outside their country. Capital markets are, thus, becoming integrated consistent with this Worldwide trend. More and more Indian companies are also being listed on overseas stock exchanges. Sound financial reporting structure is imperative for economic well-being and effective functioning of capital markets. The use of different accounting frameworks in different countries, which require inconsistent treatment and presentation of the same underlying economic transactions, creates confusion for users of financial statements. This confusion leads to inefficiency in capital markets across the world. Therefore, increasing complexity of business transactions and globalisation of capital markets call for a single set of high quality accounting standards. High standards of financial reporting underpin the trust investors place in financial and non-financial information. Thus, the case for a single set of globally accepted accounting standards has prompted many countries to pursue convergence of national accounting standards with IFRSs. Amongst others,
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countries of the European Union, Australia, New Zealand and Russia have already adopted IFRSs for listed enterprises. China has decided to adopt IFRS from 2008 and Canada from 2011. Insofar as US is concerned, Financial Accounting Standards Board (FASB) of USA and IASB are also working towards convergence of the US GAAPs and the IFRSs. The Securities & Exchange Commission (SEC) has mooted a proposal to permit filing of IFRScompliant financial statements without requiring presentation of a reconciliation statement between US GAAPs and IFRS in near future. Appendix II contains list of countries which require or permit the use of IFRSs for various types of the entities such as listed entities, banks etc. Benefits of achieving convergence with IFRSs There are many beneficiaries of convergence with IFRSs such as the economy, investors, industry and accounting professionals. The Economy As the markets expand globally the need for convergence increases. The convergence benefits the economy by increasing growth of its international business. It facilitates maintenance of orderly and efficient capital markets and also helps to increase the capital formation and thereby economic growth. It encourages international investing and thereby leads to more foreign capital flows to the country. Investors A strong case for convergence can be made from the viewpoint of the investors who wish to invest outside their own country. Investors want the information that is more relevant, reliable, timely and comparable across the jurisdictions. accounting Financial standards statements help prepared using a better common set of investors understand investment

opportunities as opposed to financial statements prepared using a different set of national accounting standards. For better understanding of financial
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statements, global investors have to incur more cost in terms of the time and efforts to convert the financial statements so that they can confidently compare opportunities. Investors’ confidence would be strong if accounting standards used are globally accepted. Convergence with IFRSs contributes to investors’ understanding and confidence in high quality financial statements. The industry A major force in the movement towards convergence has been the interest of the industry. The industry is able to raise capital from foreign markets at lower cost if it can create confidence in the minds of foreign investors that their financial statements comply with globally accepted accounting standards. With the diversity in accounting standards from country to country, enterprises which operate in different countries face a multitude of accounting requirements prevailing in the countries. The burden of financial reporting is lessened with convergence of accounting standards because it simplifies the process of preparing the individual and group financial statements and thereby reduces the costs of preparing the financial statements using different sets of accounting standards. The accounting professionals Convergence with IFRSs also benefits the accounting professionals in a way that they are able to sell their services as experts in different parts of the world. The thrust of the movement towards convergence has come mainly from accountants in public practice. It offers them more opportunities in any part of the world if same accounting practices prevail throughout the world. They are able to quote IFRSs to clients to give them backing for recommending certain ways of reporting. Also, for accounting professionals in industry as well as in practice, their mobility to work in different parts of the world increases.

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Benefits of IFRS  By adopting IFRS, you would be adopting a "global financial reporting" basis that will enable your company to be understood in a global marketplace. This helps in accessing world capital markets and promoting new business. It allows your company to be perceived as an international player.
 A consistent financial reporting basis would allow a multinational

company to apply common accounting standards with its subsidiaries worldwide, which would improve internal communications, quality of reporting and group decision-making.  In increasingly competitive markets, IFRS allows a company to benchmark itself against its peers throughout the world, and allows investors and others to compare the company's performance with competitors globally.  In addition, companies would get access to number of capital markets across the globe. Disadvantages of IFRS  Despite a general consensus of the inevitability of the global acceptance of IFRS, many people also believe something will be lost with full acceptance of IFRS.  Further certain issuers without significant customers or may resist IFRS because they may not have a market incentive to prepare IFRS financial statements.  Some other issuers may have to stick with existing GAAP because it is required for filings with other regulators and authorities, thus resulting in extra costs than currently incurred by following only existing GAAP.  Another concern is that many countries that claim to be converting to international standards may never get to 100 percent compliance.
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Most reserve the right to carve out selectively or modify standards they do not consider in their national interest, an action that could lead to incomparability – one of the very issues that IFRS seeks to address.

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ADOPTION & CHALLENGES OF IFRS
Adoption of IFRS More than 12,000 companies in almost 100 nations have adopted IFRS, including listed companies in the European Union. Other countries, including Canada and India, are expected to transition to IFRS by 2011. Some estimate that the number of countries requiring or accepting IFRS could grow to 150 in the next few years. Other countries, such as Japan and Mexico, have plans to converge (eliminate significant differences) their national standards. In India, the ICAI has issued a document titled "Concept paper of convergence with IFRS in India" to evaluate the need for Indian GAAP to change to IFRS. In the paper, the ICAI notes that as the world globalizes, it has become imperative for India to make a formal strategy for convergence with IFRS with the objective of harmonize with globally accepted accounting standards. In respect of many advantages to various stakeholders viz. the economy, industry, investors, and accounting professionals, it does caution that the convergence would require some fundamental changes to the corporate laws and regulations currently guiding the accounting and reporting space in India. In view of the difficulties, which may be perceived during adopting IFRS, the ICAI has decided that IFRS should be adopted for public interest entities from the accounting periods commencing on or after 1 April 2011. Adopting IFRS will likely impact key performance metrics, requiring thoughtful communications plans for the Board of Directors, shareholders and other key stakeholders. Internally, IFRS could have a broad impact on a company's infrastructure, including underlying processes, systems, controls, and even customer or lender contracts and interactions. Adopting IFRS by Indian corporate is going to be very challenging but at the same time could also be rewarding. Indian corporate are likely to reap
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IFRS
significant benefits from adopting IFRS. The European Union's experience highlights many perceived benefits as a result of adopting IFRS. Overall, most investors, financial statement makers and auditors were in agreement that IFRS improved the quality of financial statements and that IFRS implementation was a positive development for EU financial reporting (2007 ICAEW Report on 'EU Implementation of IFRS and the Fair Value Directive'). The current decline in market confidence in India and overseas coupled with tougher economic conditions may present significant challenges to Indian companies. IFRS requires application of fair value principles in certain situations and this would result in significant differences from financial information currently presented, especially relating to financial instruments and business combinations. Given the current economic scenario, this could result in significant volatility in reported earnings and key performance measures like EPS and P/E ratios. Indian companies will have to build awareness amongst investors and analysts to explain the reasons for this volatility in order to improve understanding, and 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 fair value estimates. This is a significant resource constraint that could impact comparability of financial statements and render some of the benefits of IFRS adoption ineffective. Although IFRS are principles-based standards, they offer certain accounting policy choices to preparers of financial statements. For example, the use of a cost-based model or a revaluation models in accounting for investment properties. This could reduce consistency and comparability of financial information to a certain extent and therefore reduce some of the benefits
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from IFRS adoption. The International Accounting Standards Board (IASB) which is an international standard-setting body formulates IFRS. However, the responsibility for enforcement and providing guidance on implementation vests with local government and accounting and regulatory bodies, such as the ICAI in India. Consequently, there may be differences in interpretation or practical application of IFRS provisions, which could further reduce consistency in financial reporting and comparability with global peers. The ICAI will have to make adequate investments and build infrastructure to ensure compliance with IFRS.

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Challenges of IFRS There are several impediments and practical challenges to adoption of and full compliance with IFRS in India. These are: The need for a change in several laws and regulations governing financial accounting and reporting in India. In addition to accounting standards, there are legal and regulatory requirements that determine the manner in which financial information is reported or presented in financial statements. For example, the Companies Act, 1956 determines the classification and accounting treatment for redeemable preference shares as equity instruments of a company, whereas these may be considered to be a financial liability under IFRS. The Companies Act (Schedule VI) also prescribes the format for presentation of financial statements for Indian companies, whereas the presentation requirements are significantly different under IFRS. Similarly, the Reserve Bank of India regulates the financial reporting for banks and other financial institutions, including the presentation format and accounting treatment for certain types of transactions. The recent announcement by the MCA is encouraging as it indicates government support for the timetable for convergence with IFRS in India. However, the announcement stops short of endorsing the roadmap for convergence and the full adoption of IFRS that is discussed in ICAI's concept paper. In the absence of adequate clarity and assurance that Indian laws and regulations will be amended to conform to IFRS, the conversion process may not gain momentum.

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There is a lack of adequate professionals with practical IFRS conversion experience and therefore many companies will have to rely on external advisers and their auditors. This is magnified by a lack of preparedness amongst Indian corporate as this project may be viewed simply as a project management or an accounting issue which can be left to the finance function and auditors. However, it should be noted that IFRS conversion would involve a fundamental change to an entity's financial reporting systems and processes. It will require a detailed knowledge of the standards and the ability to consider their impact on business transactions and performance measures. Further, the conversion process will need to disseminate and embed IFRS knowledge throughout the organization to ensure its application on an ongoing basis. Another potential pitfall is viewing IFRS accounting rules as "similar" to Generally Accepted Accounting Principles in India (Indian GAAP), since Indian accounting standards have been formulated on the basis of principles in IFRS. However, this view disregards significant differences between Indian GAAP and IFRS as well as differences in practical implementation and interpretation of similar standards. Further, certain Indian standards offer accounting policy choices, which are not available under IFRS, for example, use of pooling of interest method in accounting for business combinations. There is an urgent need to address these challenges and work towards full adoption of IFRS in India. The most significant need is to build adequate IFRS skills and an expansive knowledge base amongst Indian accounting professionals to manage the conversion projects for Indian corporates. Leveraging the knowledge and experience gained from IFRS conversion in other countries and incorporating IFRS into the curriculum for professional accounting courses can do this.

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Ultimately, it is imperative for Indian corporates to improve their

preparedness for IFRS adoption and get the conversion process right. Given the current market conditions, any restatement of results due to errors in the conversion process would be detrimental to the company involved and would severely damage investor confidence in the financial system.

Meaning of ‘Convergence’ with IFRS
Before discussing the contours of the convergence strategy with a view to meet the above mentioned objectives, the word ‘convergence’ needs to be clearly understood. In general terms, ‘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 International Accounting Standard (IAS) 1, Presentation of Financial Statements, which states that financial statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs. It does not imply that financial statements prepared in accordance with national accounting standards draw unreserved statement of compliance with IFRSs only when IFRSs are adopted word by word. The IASB accepts in its ‘Statement of Best Practice: Working Relationships between the IASB and other Accounting Standards-Setters’ that “adding disclosure requirements or a removing optional treatment does not create noncompliance with IFRSs. Indeed, the IASB aims to remove optional treatments from IFRSs.” This makes it clear that if a country wants to add a disclosure that is considered necessary in the local environment, or removes an optional treatment, this will not amount to noncompliance with IFRSs. Thus, for the purpose of this Concept Paper, ‘convergence with IFRSs’ means adoption of IFRSs with the aforesaid exceptions, where necessary. For a country to be
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IFRS-compliant, it is not necessary that IFRSs are applied to all entities of different sizes and of different public interests. Even the IASB recognizes that IFRSs are suitable for publicly accountable entities. The IASB has, therefore, recently issued an Exposure Draft of an IFRS for Small and Medium-sized Entities (SMEs)

PRESENT STATUS OF INDIAN ACCOUNTING STANDARDS
The Council of the Institute of Chartered Accountants of India constituted the Accounting Standards Board on 21st April, 1977, to formulate Accounting Standards applicable to Indian enterprises. Initially, the Accounting Standards were recommendatory in nature. After gaining sufficient experience, the Council of the Institute gradually started making the Accounting Standards mandatory for its members, i.e., requiring the members to report on whether an enterprise subject to audit had followed a mandatory Accounting Standard. The legal recognition to the Accounting Standards was accorded for the companies in the Companies Act, 1956, by introduction of section 211(3C) through the Companies (Amendment) Act, 1999, whereby it is required that the companies shall follow the Accounting Standards notified by the Central Government on a recommendation made by the National Advisory Committee on Accounting Standards (NACAS) constituted under section 210A of the said Act. The proviso to section 211(3C) provides that until the Accounting Standards are notified by the Central Government the Accounting Standards specified by the Institute of Chartered Accountants of India shall be followed by the companies. The Government of India, Ministry of Company Affairs (now Ministry of Corporate Affairs), issued Notification dated December 7, 2006, prescribing Accounting Standards 1 to 7 and 9 to 29 as recommended by the Institute of Chartered Accountants of India, which have come into effect in respect of the accounting periods commencing on or after the aforesaid date with the publication of these Accounting Standards in the Official Gazette. It may be mentioned that the Accounting Standards
27

IFRS
notified by the Government are virtually identical with the Accounting Standards, read with the Accounting Standards Interpretations, issued by the Institute of Chartered Accountants of India. The Reserve Bank of India (RBI), being the regulator of banks in India, requires all the banks, through its circulars/guidelines, to follow the Accounting Standards issued by the Institute of Chartered Accountants of India. Further, the Securities and Exchange Board of India (SEBI), through the Listing Agreement with stock exchanges, requires all listed entities to comply with the Accounting Standards issued by the Institute.Also, the Insurance Initially, Accounting Standard (AS) 4, Contingencies and Events Occurring After the Balance Sheet Date, and Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Periods Items and Changes in Accounting Policies, were made mandatory in respect of accounting periods commencing on or after 1.1.1987. Five more Accounting Standards, namely, AS 1, AS 7, AS 8, AS 9, and AS 10 were made mandatory from 1st April, 1991. Thereafter, Accounting Standards were generally made mandatory on the dates indicated in the standards themselves upon their issuance Insurance Regulatory and Development Authority (IRDA), which regulates the financial reporting practices of insurance companies under the Insurance Regulatory and Development Authority Act, 1999, through IRDA (Preparation of Financial Statements and Auditor’s Report of the Insurance Companies) Regulations, 2002, requires compliance with the Accounting Standards issued by the Institute of Chartered Accountants of India for preparing and presenting their financial statements by insurance companies. Presently, the Accounting Standards Board (ASB) of the ICAI endeavors to formulate Indian Accounting Standards (ASs) on the basis of IFRSs as it has been categorically recognised in the Preface to the Statements of Accounting Standards, issued by the ICAI, that “The ICAI, being a full-fledged member of the International Federation of Accountants (IFAC), is expected, inter alia, to actively promote the International Accounting Standards Board’s (IASB) pronouncements in the country with a view to facilitate global harmonization of accounting
28

IFRS
standards. Accordingly, while formulating the Accounting Standards, the ASB will give due consideration to International Accounting Standards (IASs) issued by the International Accounting Standards Committee (predecessor body to IASB) or International Financial Reporting Standards (IFRSs) issued by the IASB, as the case may be, and try to integrate them, to the extent possible, in the light of the conditions and practices prevailing in India.” Accordingly, the Accounting Standards issued by the ICAI are based on the IFRSs. However, where departure from IFRS is warranted keeping in view the Indian conditions, the Indian Accounting Standards have been modified to that extent. The major differences between the two are indicated in the Appendix to the Accounting Standard itself, in respect of the recently issued/revised Accounting Standards. Further, the endeavour of the ICAI is not only to bridge the gap between Indian Accounting Standards and IFRSs by issuance of new Accounting Standards but also to ensure that the existing Indian Accounting Standards are in line with the changes in international thinking on various accounting issues. In this regard, the ICAI makes a conscious effort to bring the Indian Accounting Standards at par with the IFRSs, including the Interpretations issued by International Financial Reporting Interpretations Committee (IFRIC), by revising the existing Accounting Standards. Indeed, of late, in respect of certain recently issued/revised Indian Accounting Standards, no material difference exists between the Indian Accounting Standards and the IFRSs, for example, Accounting Standard (AS) 7, Construction Contracts. Apart from the ICAI ensuring compliance with the IFRSs to the extent possible, the National Committee on Accounting Standards (NACAS) constituted by the Central Government for recommending accounting standards to the Government, while reviewing the Accounting Standards issued by the ICAI, considers the deviations in the Indian Accounting Standards, if any, from the IFRSs and recommends to the ICAI to revise the Accounting Standards wherever it considers that the deviations are not appropriate.
29

IFRS

STRATEGY FOR CONVERGENCE WITH IFRS
Formulation of convergence strategy to achieve the objective specified in requires cognisance of reasons for departure of Indian Accounting Standards from the corresponding IFRSs as discussed in the previous chapter as well as the complexity of the recognition and measurement requirements and the extent of disclosures required in the IFRSs with a view to enforce these on various types of entities, viz., public interest entities and other than public interest entities (hereinafter referred to as ‘small and medium-sized entities’). Convergence with IFRSs − Public Interest Entities Various IFRSs were examined from the point of view of their complexities in terms of recognition and measurement requirements and the extent of disclosures required therein to consider their application to various types of entities. It is noted that those countries which have already adopted IFRSs, i.e., countries which are fully IFRS-compliant, have done so primarily for public interest entities including listed and large-sized entities. It is also noted that the International Accounting Standards Board also considers that the IFRSs are applicable to public interest entities in view of the fact that it has recently issued an Exposure Draft of a proposed IFRS for Small and Mediumsized Entities3. The ICAI, therefore, is of the view that India should also become IFRS compliant only for public interest entities. With a view to determine which entities should be considered as public interest entities for the purpose of application of IFRSs, the criteria for Level I enterprises as laid down by the Institute of Chartered Accountants of India4 and the definition of ‘small and medium sized company’ as per Clause 2(f) of the Companies (Accounting Standards) Rules, 2006, as notified by the Ministry of Company Affairs (now Ministry of Corporate Affairs) in the Official
30

IFRS
Gazette dated December 7, 2006, were considered. The ICAI is of the view that in view of the complexity of recognition and measurement principles and the extent of disclosures required in various IFRSs, and the fact that about four years have elapsed since the ICAI laid down the criteria for Level I enterprises, as far as the size is concerned, it needs a revision. Accordingly, the ICAI is of the view that a public interest entity should be an entity: 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 (ii) which is a bank (including a cooperative bank), financial institution, a mutual fund, or an insurance entity; or (iii) whose turnover (excluding other income) exceeds rupees one hundred crore in the immediately preceding accounting year; or (iv) which has public deposits and/or borrowings from banks and financial institutions in excess of rupees twenty five crore at any time during the immediately preceding accounting year; or (v) which is a holding or a subsidiary of an entity which is covered in (i) to (iv) above. It was considered whether it would be appropriate not to apply full IFRSs to listed entities which do not fulfill the minimum turnover and/or borrowings criteria, which do not fall in these criteria would not be required to follow IFRSs. The ICAI is of the view that once an entity gets listed on a stock exchange it assumes the character of a public interest entity and, therefore, it would not be appropriate to exempt such entities from the application of IFRSs. Similarly, a bank, a financial institution, a mutual fund, an insurance entity and holding or subsidiary of a public interest entity also assumes the character of a public interest entity. Accounting Standards for Small and Medium-sized Entities Once the IFRSs are applied to entities identified, an issue arises as to which Accounting Standards should be applicable to entities which are not covered
31

IFRS
by (i.e., ‘Small and Medium-sized Entities’ (SMEs). The following three alternatives were considered: (i) The IFRSs should be modified to provide exemptions/relaxations as has been done in the existing Accounting Standards issued by the ICAI/notified by the Government of India; (ii) The existing Accounting Standards with exemptions/relaxations as at present, should continue to apply; (iii) Apply the IFRS for SMEs (the Exposure Draft of which has been issued recently) with or without modifications to suit Indian conditions. The ICAI is of the view that since the IASB itself recognizes that the IFRSs are too onerous for small and medium-sized entities, it would not be appropriate to apply the IFRSs with exemptions/relaxations to SMEs. The ICAI is also of the view that to continue to apply the existing Accounting Standards in India to SMEs with the existing exemptions/relaxations would not be appropriate as it would mean that the ICAI/the Government would have to keep on modifying the existing Accounting Standards as soon as a change is made in the corresponding IFRSs after considering the appropriateness thereof in the context of Indian SME conditions. The ICAI is, therefore, of the view that it may be appropriate to have a separate standard for SMEs. It was noted that the proposed IFRS for SMEs was still at the Exposure Draft stage and it may undergo changes when finally issued. Accordingly, whether the IFRS for SMEs should be adopted in to or with modifications, should be examined when the said IFRS is finally issued. The ICAI is of the view that a separate standard for SMEs would be more useful from the following perspectives also: (i) The small and medium-sized entities would not have to consider all the IFRSs which are too voluminous; and (ii) it would ensure convergence, to the extent possible, with the proposed IFRS for Small and Medium-sized Entities being issued by IASB, even for this class of entities.

32

IFRS
In this context, it is noted that in order to be an IFRS-compliant country, it is not necessary to adopt the IFRS for Small and Medium-sized Entities to be issued by IASB. Whether the IFRSs should be adopted for Public Interest Entities stage-wise or all at once from a specified future date The ICAI examined the IFRSs and the existing Accounting Standards with a view to determine the extent to which they differ from the IFRSs and the reasons therefore to identify which IFRSs can be adopted in near future, which IFRSs can be adopted after resolving conceptual differences with the IASB, which IFRSs can be adopted after the industry and the profession is ready in terms of the technical skills required, and which IFRSs can be adopted after the relevant laws and regulations are amended. On the basis of this examination, the ICAI has classified various IFRSs into the following five categories: Category I - IFRSs which do not involve any legal or regulatory issues nor have any issues with regard to their suitability in the existing economic environment, preparedness of industry and any conceptual differences from the Indian Accounting Standards. This category has further been classified into two parts as follows: Category I A - IFRSs which can be adopted immediately as these do not have any differences with the corresponding Indian Accounting Standards. The following IFRSs have been identified in this category:  IAS 11, Construction Contracts  IAS 23, Borrowing Costs Category I B - IFRSs which can be adopted in near future as there are certain minor differences with the corresponding Indian Accounting Standards. The following IFRSs have been identified in this category:
33

IFRS
 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 II - IFRSs which may require some time to reach a level of technical preparedness by the industry and professionals keeping in view the existing economic environment and other factors. This category also includes those IFRSs corresponding to which Indian Accounting Standards are under preparation/revision. The following IFRSs have been identified in this category:  IAS 18, Revenue  IAS 21,The Effects of Changes in Foreign Exchange Rates  IAS 26, Accounting and Reporting by Retirement Benefit Plans
 IAS

40,

Investment

Property

(Corresponding

Indian

Accounting

Standard is under preparation)
 IFRS

2, Share-based Payment (Corresponding Indian Accounting

Standard is under preparation)
 IFRS 5, Non-current Assets Held for Sale and Discontinued Operations

(Corresponding Indian Accounting Standard is under preparation)

Category III - IFRSs which have conceptual differences with the corresponding Indian Accounting Standards. This category has further been divided into two parts as follows:

34

IFRS
Category III A - IFRSs having conceptual differences with the corresponding Indian Accounting Standards that should be taken up with the IASB. The following IFRSs have been identified in this Category:  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 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. The following IFRSs have been identified in this Category:  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 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.  The following IFRSs have been identified in this Category:
35

IFRS
 IAS 1, Presentation of Financial Statements  IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors  IAS 10, Events After the Balance Sheet Date  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 Category V - IFRSs corresponding to which no Indian Accounting Standard is required for the time being. However, the relevant IFRSs, when adopted upon full convergence, can be used as the “fallback” option where needed.  IAS 29, Financial Reporting in Hyper-inflationary Economies Convergence with IFRS – Stage-wise Approach The ICAI examined whether convergence with IFRSs can be achieved stagewise as below:
 Stage I: Convergence with IFRSs falling in Category I immediately  Stage II: Convergence with IFRSs classified in Category II and Category

III after a certain period of time, say, 2 years after various stakeholders have achieved the level of technical preparedness and after conceptual differences are resolved with the IASB.

36

IFRS
 Stage III: Convergence with IFRSs classified in Category IV only after

necessary amendments are made in the relevant laws and regulations.
 Stage IV: Convergence with IFRSs classified in Category V by way of

adoption on full convergence. The ICAI considered in-depth the stage-wise adoption approach and its views thereon are as below:
 If some IFRSs are adopted in the initial stages and the other IFRSs are

adopted later, this may result in mis-match between the requirements of the adopted IFRSs in the first stage and the accounting standards issued by ICAI/notified, corresponding to those IFRSs which are not adopted. This is because many accounting standards are inter-related.
 Another problem can be that IFRSs adopted in one stage may not be

possible to be implemented fully until the adoption of the IFRSs to be adopted at the later stage in view of their inter-relationship.
 Even, at present, it is found that when one IFRS is adopted, it results in

a number of changes in the corresponding Indian Accounting Standards. For example, the issuance of ED of AS 30, ‘Financial Instruments: Recognition and Measurement’, corresponding to IAS 39, ‘Financial Instruments: Recognition & Measurement’, has resulted in proposed limited revisions to many other accounting standards such as AS 2, AS 11, AS 13, AS 21, AS 23, AS 27, AS 28 and AS 29. Such an approach is fraught with the danger of missing out certain minute aspects in other standards which may also require revision.
 Further changes in IFRSs will also make the process more complex as

with every revision in IFRS, revisions may be required in the existing Accounting Standards apart from the changes in the adopted IFRSs. Though IASB has decided not to issue any revised IFRS or new IFRS effective till January 1, 2009, but after that date this problem will become acute.
37

IFRS
Convergence with IFRS – All-at-once Approach In view of the above difficulties, the ICAI is of the view that it would be more appropriate to adopt all IFRSs from a specified future date as has been done in many other countries. After considering the current economic environment, expected time to reach the satisfactory level of technical preparedness and the expected time to resolve the conceptual differences with the IASB, the ICAI has decided that IFRSs should be adopted for public interest entities from the accounting periods commencing on or after 1st April, 2011. This will give enough time to all the participants in the financial reporting process to help in building the environment supporting the adoption of IFRSs. Insofar as the legal and regulatory aspects are concerned, the ICAI is of the view that, on adoption of those IFRSs, having certain requirements in conflict with the laws/regulations, the latter will prevail. The ICAI is further of the view that this approach is appropriate because to wait for full convergence until the relevant laws/regulations are amended would not be practicable as such amendments may not take place for many years. The ICAI also examined whether an entity should have a choice to become fully IFRS compliant before 1st April, 2011. The ICAI is of the view that an early adoption of IFRSs should be encouraged. However, such an adoption should be for all IFRSs and that it cannot be on selective basis. Format of converged Accounting Standards The ICAI considered whether the existing Accounting Standards should be revised to make them fully compliant with IFRSs by the specified date or on the specified date the IFRSs themselves should be adopted. In either case, Indian-specific regulatory/legal aspects may be included in a separate section, where appropriate. The ICAI is of the view that it would be more cumbersome to follow the first approach, i.e., revising the Accounting Standards. Therefore, the second approach should be, i.e., IFRSs, including
38

IFRS
the IFRS numbers, should be adopted from the specified date of 1st April, 2011. The IFRSs should be issued as Indian ASs, which would be considered IFRS-equivalent. In order to facilitate reference to the existing Indian Accounting Standards, along with the IFRS number, in the brackets, the existing Accounting Standard number may also be given. Role of various stakeholders to ensure convergence with IFRSs from the specified date, i.e., accounting periods commencing on or after 1st April, 2011 The following sections deal with the role of various stakeholders in the standard setting process to ensure smooth transition to the IFRSs from 1st April, 2011, in respect of the listed and other public interest entities.

Role of the ASB of the ICAI The ICAI considered whether it should altogether stop formulating Accounting Standards hereinafter in view of the fact that from 1st April, 2011, the IFRSs existing on that date would come into force for public interest entities. For SMEs, IFRS for SMEs may similarly become applicable. In this context, it is noted that, at present, the ICAI is in the process of formulating certain new accounting standards corresponding to the IFRSs such as Accounting Standard (AS) 30, ‘Financial Instruments: Recognition and Measurement’, and Accounting Standard (AS) 31, ‘Financial Instruments: Presentation’, and that Exposure Drafts in respect thereof have already been issued. It was also noted that certain existing Accounting Standards such as Accounting Standard (AS) 10, ‘Accounting for Fixed Assets’, is being revised and has reached advanced stage of issuance. The ICAI feels that to stop work on such Accounting Standards would deprive the country of converging with IFRSs before the specified date of 1st April, 2011. The ICAI is, therefore, of the view that it should continue to issue Accounting Standards in conformity with the corresponding IFRSs which have, at present, reached advanced stage of
39

IFRS
formulation even if they fall within Category IV. This would also make the transition to IFRSs from 1st April, 2011 smoother. The ASB may consider revising Accounting Standards corresponding to IFRSs indicated in Category IB and Category II on priority basis. For this purpose, ASB may consider issuing a composite exposure draft of modifications in the Accounting Standards corresponding to the IFRSs listed in Category IB and issue exposure drafts of Accounting Standards corresponding to IFRSs falling in Category II so that by the time the convergence date arrives, in respect of these standards the country is already in convergence with IFRSs. While this is a broad suggestion, the ASB may consider in-depth its work plan as to which of these accounting standards are capable of being revised/issued keeping in view various factors such as extent of changes required. Another advantage of this process could be that certain International stock exchanges, say, London Stock Exchange, may decide to allow listing on their stock exchanges without requiring preparation of reconciliation statement even prior to 1st April, 2011. For instance, the London Stock Exchange may allow Indian companies to get listed without reconciliation statement from 1st April, 2009 in case the convergence in respect of Categories IB and II and the new accounting standards which are in the process of formulation are issued by that time. The ASB of ICAI should take up the conceptual differences with the IASB in respect of IFRSs falling in Category III and it should resolve these differences as soon as possible by either convincing the IASB to modify IFRSs or to satisfy itself that the requirements in the concerned IFRSs are appropriate even in the Indian conditions. In respect of IFRSs falling in Category IV, i.e., IFRSs the adoption of which would require changes in laws/regulations, the ICAI should initiate a dialogue with the relevant departments of the Government or the authorities set up by the Government such as the National Advisory Committee on Accounting Standards which formulate laws and with the relevant regulatory authorities
40

IFRS
to convince them that either the legal provisions/regulations related to recognition, measurement and disclosure requirements in the financial statements should be withdrawn by 1st April, 2011, or the same should be appropriately amended to ensure convergence with IFRSs. The IASB has declared a stable platform for IFRSs up to January 1, 2009, i.e., the IASB will not make any IFRS effective before that date, which is issued prior to that date. Thus, after 1st January, 2009, the IASB may issue new IFRSs or revise the existing ones on frequent basis. The ASB of the ICAI should play a more effective role by sending comments on the discussion papers/Exposure Drafts of the proposed IFRSs. The ASB should also participate in the Round-tables organized by the IASB on various drafts of proposed new IFRSs/revised IFRSs. In other words, the ASB should play a greater role in influencing the future IFRSs. The ASB should also play a similar role in respect of the drafts of the Interpretations issued by the International Financial Reporting Committee (IFRIC). In this context, the section related to the ‘Role of ASB of ICAI in Post-convergence Scenario’ may also be referred to. The ASB can also play a greater role in influencing future IFRSs in the following ways:
 By identifying experts on IFRSs in India, who can be appointed on the

IASB through the selection process followed by the IASB so that the Indian concerns are expressed at the Board level.
 By nominating ASB staff on the IASB projects, on secondment basis or

otherwise. The ICAI notes that IASB welcomes such participation as is evident from the fact that the staff of certain national standard-setters is presently involved in various IASB projects. Also, IASB’s Statement of Best Practices: Working Relationships between the IASB and other Standard-Setters encourages the national standard setters to do so .
41

IFRS

Role of ICAI as an educator/trainer With a view to prepare its existing and prospective members for the impending adoption of the IFRSs from 1st April, 2011, the ICAI should formulate strategies with regard to the following:
 To revise the syllabi of the pre-qualification Chartered Accountancy

Course to include IFRSs as a part of its curriculum;
 The Continuing Professional Education (CPE) Committee and the

Committee for Members in Industry should hold intensive workshops on IFRSs to train the members in practice as well as in industry. In order to encourage members to participate in the IFRS-specific workshops, the ICAI may consider laying down minimum CPE hours requirements in this regard, e.g., the ICAI may make it mandatory for its members to attend a minimum number, say, 50 CPE hours of workshops on IFRSs every year till 1st April, 2011 including those members who are in industry;
 Preparation of educational material to guide its members on various

intricacies involved in the implementation of IFRSs. The educational material may focus on those areas which are new compared to the existing Accounting Standards. Role of the Government and Regulators The ICAI considers that the Government and the Regulators should play the following role in making the country IFRS-compliant:
 The Government and the Regulators should establish legal and

regulatory environments that provide for compliance with all the IFRSs.
 The Government should frame/ revise laws in consultation with NACAS

to reflect the IFRSs. Similarly, various Regulators should frame/revise regulations in consultation with ICAI. This should be considered as a high priority.
42

IFRS

Role of Reporting Entities The reporting entities to which IFRSs are recommended to be applied should prepare themselves in the following ways:
 All the affected entities should design and implement an IFRS transition

programme and allocate the necessary resources. This includes obtaining the commitment from the top down, i.e., from those charged with governance to those responsible for financial reporting by individual reporting
 The

business projects,

units.

Also,

they

should

consider with laws

the and

interdependencies between the transition to IFRSs and other financial if any, such as compliance regulations. entities should prepare to implement IFRSs by identifying and addressing design required and financial reporting plans to system change differences changes.
 The

entities

should

implement

management reporting system used to monitor the performance of the business from the previously applied Accounting Standards to IFRSs.
 The entities should also provide IFRS training to staff at all levels

affected by the transition to IFRSs.
 The entities should actively contribute to the international standard-

setting process, in particular, to identify practical implementation issues.
 The entities should consider at an early stage changes proposed by the

Exposure Drafts of IFRSs with a view to gauge the potential impact thereof on their financial statements so that they are able to provide informed comments on the drafts to the IASB/ICAI. Role of Industry Associations Industry associations such as Federation of Indian Chambers of Commerce and Industry (FICCI), Associated Chambers of Commerce (Assocham) and
43

IFRS
Confederation of Indian Industries (CII) can also play an important role in preparing their constituents for the adoption of the IFRSs in the following ways:
 Holding round-tables on the Exposure Drafts of the IFRSs so that the

views of the Association can be sent to the IASB/ICAI.
 Conducting seminars/workshops on IFRSs for the industry participants

to provide them appropriate training.
 Provide industry-specific forums to their constituents to discuss the

industry specific issues in implementation of IFRSs. Role of ASB in the post-convergence scenario With regard to the role of ASB of the ICAI in the post-convergence scenario, the ICAI decided to generally endorse the role of the national standardsetters as envisaged in the Statement of Best Practices: Working Relationships between the IASB and other Accounting Standard-setters, issued by the IASB, as follows: Role in formulation of IFRS- equivalent Indian Accounting Standards 1. ASB should undertake one or more of the following processes in adopting IFRSs:
 determine whether each IFRS meets specified criteria set out in local

legislation/regulations;
 endorse the IFRS in the form of IFRS-equivalent Indian Accounting

Standards for the local regulatory framework, with changes, if necessary, as mentioned at 2 and 3 below;
 present the standards for approval of NACAS for the purpose of

Government notification Therefore, adopting IFRSs would be an ongoing process. 2. In general, working with the Government and regulators for adoption/ implementation of IFRSs, including deciding in rare circumstances whether
44

IFRS
any carving out of the IFRS requirements in the existing local conditions is warranted in the public interest . 3. In some cases, as at present, the ASB may continue the policy of removing optional treatments and adding disclosure requirements to IFRSs when it believes that doing so provides more comparable and useful information in the country. When ASB makes any change to an IFRS, for example, adding a disclosure that is considered necessary in the local environment, or removing an optional treatment, this should be made clear so that users of the IFRS are aware of the changes. In some cases, certain changes in terminology in IFRS may be required keeping in view legal requirements, 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. 4. Inevitably, questions of interpretation will arise when IFRSs are applied. Accordingly, ASB should be familiar with the implementation of IFRSs in the country. This familiarization process may involve, or depend upon, close liaison with local capital market and industry regulators. If ASB believes that an issue requires interpretation of IFRSs, it should request the IFRIC to address the issue. If IFRIC includes the matter for interpretation on its Agenda, interpretation/guidance on the matter should not be issued. If IFRIC does not include the matter on its Agenda, it issues reasons therefore including what a particular requirement of an IFRS means. This itself can provide guidance to various stakeholders. The IFRIC or IASB staff may decide that an amendment to an IFRS is the more appropriate course to follow. As part of this process, other accounting standard setters that face a common issue could work together to formulate a possible approach to the issue for resolution by the IFRIC or the IASB. IFRSs are intended to apply worldwide regardless of local legislative and regulatory environments. However, some issues may relate to particular legislative or other local requirements. In these cases, ASB may decide to
45

IFRS
issue guidance. Care needs to be exercised, however, to ensure that the issues are not more widely relevant. In considering such issues, ASB should liaise with the IFRIC, and if it believes it is necessary to issue any guidance, it should avoid incompatibility with IFRSs.

Role of ASB in influencing IFRSs before their finalization 1. ASB should have a role in communicating IASB activities and outputs to the industry and other stakeholders through educational and promotional activities, including publishing or distributing IASB consultative documents in the jurisdictions, and in both providing the IASB with feedback on these activities and outputs themselves and encouraging them to provide feedback to the IASB. 2. ASB should encourage various stakeholders to comment on IASB consultative documents direct to the IASB as well as to the ASB. 3. Forums of communicating views other than comment letters are increasingly important in gathering views, including forums on specific issues. ASB should use these forums as a mechanism for encouraging the stakeholders to participate in the IASB’s standard-setting process. 4. ASB can assist the IASB in identifying constituents who can be involved in round-table discussions and other forums and the issues of particular relevance to the stakeholders. 5. Without limiting the direct communication of ideas to the IASB, ASB has a role in communicating the views and ideas of the stakeholders to the IASB through the consultation process—providing a forum for views. Other organizations, such as representative bodies with an interest in financial reporting, may also contribute to this process. ASB should make its own
46

IFRS
submissions to the IASB on consultative documents and should convey its views to the IASB rather than provide merely a synthesis of the views expressed by the stakeholders. 6. ASB should make the IASB aware of any major conceptual differences of opinion it may have with a project as early as possible in the life of a project. This would require ASB to monitor closely the development of the project. 7. The IASB’s work programme is a subject on which it would be particularly helpful for ASB to channel its views and those of the stakeholders in a constructive manner. Since the IASB is unable to respond to every interested party’s request to deal with a topic, ASB should seek the views of the stakeholders on work programme priorities and collect and summarize them for consideration by the IASB. 8. Direct involvement of ASB in the IASB’s projects would help to ensure that a wide range of views and ideas are considered in the early stages of the development of a project. The IASB may provide opportunities to ASB to be directly involved with IASB projects in the following ways:
 Involvement in a ‘research project’ alone, or, in partnership with a team

of other standard-setters (either as a leader of the team or as team member), under the guidance of IASB staff and selected Board advisers.
 Involvement of the ASB staff in a ‘project team’ on an active IASB

project under the direction of the IASB directors. 9. ASB may conduct research or develop thinking on a topic that has not been identified by the IASB as a current priority, and then present the results of that work for consideration by the IASB and/or other national accounting standard setters. For there to be an expectation that those materials would be considered there would need to be some advance agreement both that
47

IFRS
the topic is worthy of consideration and that the IASB and/or other standardsetters have a common interest in the topic. 10. The IASB would welcome offers of staff assistance from the ASB. To be effective, from both the IASB’s perspective and that of the ASB, this involvement needs to be undertaken with a clear understanding of the staff member’s role and responsibilities. 11. The IASB establishes working groups for some projects, and invites constituents to nominate candidates for membership of these groups. The working groups are a source of expert advice and ideas for the staff in progressing a particular project. ASB may be able to assist in the process of making nominations to, and in facilitating the operations of, working groups by identifying and encouraging suitable individuals to nominate themselves and, if appointed, to liaise actively with those individuals and assist them when needed. 12. The views of ASB can be a valuable source of independent thought in the development of IASB documents. ASB should provide comments to the IASB on consultative documents such as Exposure Drafts and Discussion Papers. If time does not permit ASB-level input, comment from staff of the ASB can be provided. If ASB is unable to comment on each consultative document it should focus on those projects that are of particular importance to the country, or those on which the ASB believes it can best contribute. It may also be helpful for ASB to comment on other IASB documents, such as issues papers and draft Discussion Papers when it believes that the IASB would benefit from their input at an early stage. Expectations from the IASB To ensure smooth convergence with IFRSs, upto 2011 and thereafter also, IASB is also expected to play an important role as follows:
48

IFRS
 Provide guidance on issues emerging on adoption of IFRSs on timely

basis at least upto 2011.
 Address

concerns

about

the

complexity

and

structure

of

the

international standards.
 Write standards in simple English that is understandable, clear and

capable of translation and consistent application.
 In developing the IFRS and setting effective dates, be cognizant of the

fact that the final standards are required to be translated in India for the purpose of Government Notification.
 In considering changes to the IFRS, be cognizant of the cost vs. the

benefits of the proposed changes.
 Establish a process, or enhance the existing process to respond in a

timely manner to requests for interpretations.  Consider the development of implementation guidance.

49

IFRS DIFFERENCES BETWEEN INDIAN GAAP AND IFRS
Presentation of Financial Statements –
Particulars

Standard Balance Sheet

Standards followed under Indian GAAP AS 1 – Disclosure of Accounting Policies Required. The balance sheet is neither classified into current and non-current nor is it in order of liquidity.

On transition to IFRS IAS 1 – Presentation of Financial Statements Required. An entity is required to present current and non-current assets, and current and noncurrent liabilities, as separate classifications in the statement of financial position. Required Required A separate statement of changes in shareholder’s equity is required. Required Required Required Financial statements are presented on a consolidated basis. On a voluntary basis, an entity may present single-entity parent company (standalone) financial statements along with its consolidated financial statements. The nature of the uncertainty and the carrying amounts of such assets and liabilities at the
50

Income Statement Statement of Comprehensive Income Statement of changes in equity Cash flow statement Accounting Policies Notes to financial statements Preparation and Presentation

Required Not required No separate statement of changes in shareholder’s equity is required. Required Required Required Financial statements are presented on a single-entity parent company (standalone) basis. It is not mandatory to prepare consolidated financial statements but must use the consolidation standard if prepared. Not required.

Estimation Uncertainty

IFRS
end of the reporting period are required to be disclosed. Fringe Benefit tax is included as a part of related expense which gives rise to incurrence of tax. Prohibited. All items of income and expense are considered to derive from an entity’s ordinary activities.

Income Statement Format Extraordinary items

Disclosed as a separate item after profit before tax on the face of income statement. Defined as events or transactions clearly distinct from the ordinary activities of the entity and are not expected to recur frequently and regularly.

Inventories – Standards followed under Indian GAAP Standard AS 2 – Valuation of Inventories Cost Formulae Stated at cost on weighted average basis. Consistency of Not specified cost formulae for similar inventories
Particulars

On transition to IFRS IAS 2 – Inventories No change required. Same cost formulae is used for all inventories that have similar nature and use to the entity

51

IFRS

Cash Flow Statements –
Particulars

Standard Cash and equivalents

Standards followed On transition to IFRS under Indian GAAP AS 3 – Cash Flow IAS 7 – Statement of Statements Cash Flows Cash No provision in AS 3 for Cash may include bank classification of bank overdrafts repayable on overdrafts. demand but not shortterm bank borrowings; these are considered to be financing cash flows. Indirect method. Separately disclosed. Interest paid should be disclosed as financing cash flow and interest received should be disclosed as investing cash flow. No change required. Prohibited. Interest paid should be disclosed as operating or financing. Interest received is disclosed as either operating or investing cash flow.

Format and content of cash flow statement Cash flows associated with extraordinary items Disclosure of interest paid and received

52

IFRS
Disclosure of dividend paid Disclosure of dividend received Disclosure of taxes paid Disclosure of cash payments Financing. Investing. Operating. No such requirement. Operating or financing. Operating or investing. Similar. Additional disclosure of cash payments by a lessee relating to finance lease under financing activities, additional disclosures in CFS and for acquisition of subsidiaries.

Events after the Reporting Period – Particulars Standard Standards followed On transition to IFRS under Indian GAAP AS 4 – Contingencies and IAS 10 - Events After the Events Occurring after the Reporting Period Balance Sheet Date

Accounting Policies, Changes in Accounting Estimates and Error – Particulars Standards followed under Indian GAAP Standard AS 5 - Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies Definition of AS 5 covers only items of prior period income and expenses under items the definition of prior period items. AS 5 do not include balance sheet misclassification, which do not have an income statement impact. On transition to IFRS IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors IAS 8 covers all the items in financial statements.

53

IFRS
Prior items period Reported as a prior period adjustment in current year results. Comparatives are not restated. An entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue by restating the comparative amounts for the prior period(s) presented in which the error occurred. Material prior period errors are corrected retrospectively by restating the comparative amounts for prior periods presented in which the error occurred or if the error occurred before the earliest period presented, by restating the opening statement of financial position.

Errors

Prior period errors are included in determination of profit or loss of the period in which the error is discovered.

Property, Plant and Equipment – Particulars Standard Method depreciation Standards followed On transition to IFRS under Indian GAAP AS 6 – Depreciation IAS 16 - Property, Plant Accounting and Equipment of Straight- Line basis Method. Similar but other methods such as diminishing balance method and the units of production method are also available. Changes in useful life is considered as change in accounting estimate and applied prospectively.

Change method depreciation

in Requires retrospective reof computation of depreciation and any excess or deficit on such re-computation be required to be adjusted in the period in which such change is effected. (*)Reassessment Not currently required. of useful life and

Requires annual reassessment of useful life.
54

IFRS
depreciation method Revenue Recognition – Particulars Standard Standards followed On transition to IFRS under Indian GAAP AS 9 – Revenue IAS 18 - Revenue Recognition IFRIC 13 - Customer Loyalty Programmes Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities from the scheduled services (such as passenger, excess baggage, mail, and cargo), and from the use by others of enterprise resources yielding handling and servicing revenue, manufacturers credit and incidental revenue. Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Amounts collected on behalf of third parties such as sales and service taxes and value-added taxes are excluded from revenues. (IAS 18) Fair value of revenue from sale of goods and services when the inflow of cash and cash equivalents is deferred is determined by discounting all future receipts using an imputed rate of interest. (IAS 18)

Revenue Definition

Measurement of Passenger revenue is revenue recognized on flown basis. While Cargo revenue is recognized on uplift basis after making the necessary adjustments for estimated cargo carriage beyond the year-end. The Pool Revenue is accounted on accrual basis as per the arrangement with the airlines concerned. Interest Interest is recognized on a time proportion basis taking into account the amount outstanding and the rate applicable.

Interest income is recognized using the effective interest method. (IAS 18)
55

IFRS
(*)Customer Loyalty Programmes No specific guidance. The company operates joint “Frequent Flyer Programme” for which the estimated food cost and legal liability if any for free travel under this programme is provided for and charged to Profit and Loss Account. Award credits granted to customers as part of a sales transaction are accounted for as a separately identifiable component of the sales transaction(s), with the consideration received or receivable allocated between the award credits and the other components of the sale.

Fixed Assets – Particulars Standard Component accounting Standards followed under Indian GAAP AS 10 - Accounting for Fixed Assets AS 10 does not require full adoption of the component approach. Aircraft are stated at purchase price. Other assets including aircraft rotables are capitalized and stated at historical cost. of Gain or loss arising out of sale/scrap of Fixed Assets including aircraft over the net depreciated value is taken to Profit & Loss account as Non-Operating Revenue or Expenses. On transition to IFRS IAS 16 - Property, Plant and Equipment IAS 16 mandates component accounting. Under component accounting approach, each major part of an item of equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. Non-current assets classified as held for sales are measured at the lower of its carrying value and fair value less costs to sell. Non-current assets to be disposed of are classified as held for sale when the asset is available for immediate sale and the sale is highly probable.

Sale/scrap Fixed Assets

Foreign Exchange – Particulars Standards followed On transition to IFRS
56

IFRS
Standard under Indian GAAP AS 11 - The Effects of IAS 21 - The Effects of Changes in Foreign Changes in Foreign Exchange Rates Exchange Rates Exchange differences on conversion of foreign currency loans/liabilities taken/incurred after April 01, 2004 in respect of qualifying assets is recognized in the Profit & Loss Account; or before 31 March 2004 are capitalized in the carrying amount of these assets. Foreign currency denominated current assets and current liabilities balances at the year-end are translated at the year end exchange rate circulated by Foreign Exchange Dealers Association of India (FEDAI), and the gains/losses arising out of fluctuations in exchange rates are recognized in the Profit and Loss Account. Forward exchange contract intended for trading or speculation purposes: The premium or discount on the contract is ignored and at each balance sheet date, the value of the contract is marked to its current market value and the gain or loss on the contract is recognized. Similar to Indian GAAP, exchange differences arising on translation or settlement of foreign currency monetary items are recognized in profit or loss in the period in which they arise.

Exchange Differences

Translation in the consolidated financial statements

Forward Contracts

Assets and liabilities should be translated from functional currency to presentation currency at the closing rate at the date of the statement of financial position; income and expenses at actual/average rates for the period; exchange differences are recognized in other comprehensive income and recycled to profit or loss on disposal of the operation. Accounted as a derivative. It is covered in IAS – 39: Financial Instrument – Recognition and Measurement.

Accounting for Investments –
57

IFRS
Particulars Standard Investments Standards followed On transition to IFRS under Indian GAAP AS 13 - Accounting for IAS 39 Financial Investments Instruments: Recognition and Measurement Investments are classified Financial instruments are as long-term or current. classified as at fair value through profit or loss if it is Long-term investments are held for trading or has carried at cost less provision been designated as at fair for diminution in value. value through profit or loss upon initial recognition. Current investments are carried at lower of cost and Financial instruments are fair value. classified as held for trading if these are acquired or incurred principally for the purpose of selling or repurchase in the near future, is part of a portfolio that is managed together and for which there is evidence of recent actual pattern of shortterm profit taking or derivative that is not a financial guarantee contract or is not designated as an effective hedging instrument. Financial instruments can be designated at fair value through profit or loss only if it eliminates or reduces measurement or recognition inconsistency or a group of financial instruments are managed and its performance evaluated on a fair value basis in accordance with a documented risk management strategy and information about this group of instruments are
58

IFRS
provided to key management personnel. Held-to-maturity investments are nonderivative financial assets with fixed or determinable payments and fixed maturity that an entity has positive intent and ability to hold to maturity. Held to maturity investments is measured at amortized cost using effective interest method. in The entire instrument is The holder may: accounted for as debt ♦ designate the hybrid investment. instrument as at fair value through profit or loss subject to certain conditions, or ♦ designate the debt element as available for sale with changes in fair value recognized in equity and the conversion option as a derivative with changes in fair value recognized in profit or loss, or ♦ recognize the debt element as loans and receivables and measure at amortized cost and the conversion option as a derivative with changes in fair value recognized in profit or loss.

Investment convertible bonds

Employee Benefits – Particulars Standards followed On transition to IFRS under Indian GAAP
59

IFRS
Standard AS 15 (Revised 2005) Employee Benefits - IAS 19 - Employee Benefits IFRIC 14 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Similar, but detailed actuarial valuation to determine the present value of defined benefit obligation and the fair value of plan assets is performed with sufficient regularity so that the amounts recognized in the financial statements do not differ materially from the amounts that would have been determined at the end of the reporting period. Recognized immediately in profit or loss; Recognized immediately in other comprehensive income; or Deferred up to a maximum with any excess of 10% of the greater of the defined benefit obligation or the fair value of the plan assets at the end of the previous reporting period being recognized over the expected average remaining working lives of the participating employees
60

IAS 19, Actuarial Detailed actuarial valuation valuation to determine present value of the benefit obligation is carried out at least once every three years and fair values of plan assets are determined at each balance sheet date.

IAS 19, Employee benefits actuarial gains and losses

Recognized immediately in the statement of profit and loss as an income or expense. -

-

IFRS
or other basis. (*)IFRIC 14, The No specific guidance. Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction accelerated

Addresses when refunds or reductions are regarded as available for recognition of an asset; how funding requirements in future may effect the availability of reductions in future contributions and when minimum funding requirement may give rise to a liability. An entity should recognize termination benefits as a liability and an expense only when it is demonstrably committed to either: (i) terminate the employment of an employee before the normal retirement date; or (ii) provide termination benefits as a result of an offer made in order to encourage voluntary redundancy. Similar but asset is limited to the lower of the net total of any unrecognized actuarial losses and past service cost and the present value of any available refunds from the plan or reduction in future contributions to the plan.

(*)Termination Benefits

(*)Asset Ceiling

An entity should recognize termination benefits as a liability and an expense when, and only when (a) the entity has a present obligation as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If the net amount determined to be recognized in the balance sheet is negative (an asset), recognition of the asset is limited to the lower of: (a) the asset resulting from applying the standard, and (b) the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

61

IFRS
Borrowing Costs – Particulars Standard Recognition Standards followed under Indian GAAP AS 16 - Borrowing Costs Borrowing cost that are directly attributable to acquisition, construction or production of qualifying assets including capital work-in-progress are capitalized up to the date of commercial use of the assets. Recognizing, as an expense when incurred is not permitted. No disclosure required. On transition to IFRS IAS 23 - Borrowing Costs Similar but borrowing costs are also expensed as incurred (not permitted for qualifying assets for which the capitalization date falls in annual periods beginning on or after 1 January 2009).

(*)Capitalization Rate

The disclosure requirements of IAS 23 require the entity to disclose separately the capitalization rate used to determine the amount of borrowing costs.

Segment Reporting – Particulars Standard Standards followed On transition to IFRS under Indian GAAP AS 17 - Segment Reporting IFRS 8 – Operating Segments IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. For each operating segment profit or loss needs to be recognized by the chief
62

Determination of AS 17 requires an enterprise segments to identify two sets of segments (business and geographical), using a risks and rewards approach. The company is engaged in airline related business, which is its primary business segment, and hence, segment results are not disclosed. The details of geographical wise revenue earned based on either the location of production or

IFRS
service facilities and other decision-maker. assets of an enterprise; or the location of its customers are specified for areas such as USA/Canada; UK/Europe; Asia, Africa, & Australia; and India. Measurement Segment profit or loss is reported on the same measurement basis as that used by the chief operating decision-maker. There is no definition of segment revenue, segment expense, segment result, and segment asset or segment liability. Entity wide Disclosures of airline related Requires disclosure of (a) disclosures business as its primary external revenues from business segment. each product or service; (b) revenues from customers in the country of domicile and from foreign countries; (c) geographical information on non-current assets located in the country of domicile and foreign countries. The major revenue-earning asset of the company is the aircraft fleet, which is flexibly deployed across its worldwide route network. There is no suitable basis for allocation of assets to geographical segments. Consequently, area-wise assets are not disclosed.

Related Party Disclosures Particulars Standard Identification Standards followed On transition to IFRS under Indian GAAP AS 18 – Related Party IAS 24 - Related Party Disclosures Disclosures Post employment benefit Related party includes post plans are not included as employment benefit plans related parties. for the benefit of employees of the reporting
63

IFRS
entity or any entity that is a related party of the reporting entity. Compensation of key management personnel is disclosed in total and separately for (a) shortterm employee benefits; (b) post-employment benefits; (c) other longterm benefits; (d) termination benefits; and (e) share-based payments.

Key Management Personnel

No other transactions with key managerial personnel except Remuneration and Perquisites to Chairman & Managing Director and Functional Directors. Transactions such as providing Airline services in the normal course of Airline business are not included. However, compensation of key management personnel needs to be disclosed in total as an aggregate of all items. Close relatives AS 18 includes specific IAS 24 adopts a more relations as relatives. 'substance over form' based approach in defining relatives as close members of the family, i.e., who influence and can be influenced by the individual in his/ her dealings with the reporting entity. Information to Name of the related party Relationships between be disclosed and nature of the related parents and subsidiaries party relationship where shall be disclosed and if control exists is disclosed neither the entity's parent for key managerial nor the ultimate controlling personnel and relatives. party produces financial statements available for public use, the name of the next most senior parent that does so shall also be disclosed. The reporting entity should An entity shall disclose the disclose the name, nature of the related party relationship, nature, volume relationship as well as of transactions and any information about the other elements of the transactions and related party transactions outstanding balances necessary for an necessary for an

64

IFRS
understanding of the financial statements. Any outstanding items pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date and amounts written-off or written-back in the period in respect of debts due from or to related parties. understanding of the potential effect of the relationship on the financial statements. At a minimum, disclosures shall include the amount of the transactions, amount of outstanding balances and their terms and conditions, provisions for doubtful debts related to the amount of outstanding balances and the expense recognized during the period in respect of bad or doubtful debts due from related parties.

Leases – Particulars Standard Standards followed On transition to IFRS under Indian GAAP AS 19 - Leases IAS 17 - Leases IFRIC 4 - Determining Whether an Arrangement Contains a Lease SIC 15 – Operating Leases - Incentives SIC 27 – Evaluating the Substance of Transactions Involving the Legal Form of a Lease IFRIC 12 Service Concession Arrangements Interest in Leasehold land is recorded Recognized as operating leasehold land as fixed assets. lease (i.e. prepayment) unless the leasehold interest is accounted for as investment property and the fair value model is adopted. (IAS 17)
65

IFRS
Sale and Lease If sale and leaseback Back transaction results in an operating lease, and it is clear that the transaction is established at fair value, any profit or loss shall be recognized immediately. If sale and leaseback results in finance lease, AS 19 requires excess/deficiency both to be deferred and amortized over the lease term in proportion to the depreciation of the leased asset. Initial direct Initial direct costs are either costs of lessors recognized immediately in for assets under the statement of profit and a finance lease loss or allocated against the finance income over the lease term. Initial lease costs incurred by manufacturer or dealer lessors are recognized as expense at the inception of the lease. Initial direct costs of lessors for assets under a operating lease Initial direct costs incurred by lessors are either deferred and allocated to income over the lease term in proportion to the recognition of rent income, or are recognized as an expense in the statement of profit and loss in the period in which they are incurred. (*)Determining There is no such guidance. whether an Payments under such arrangement arrangements are contains a lease recognized in accordance with the nature of expense incurred. No change. (IAS 17)

If a sale and leaseback transaction results in a finance lease, any excess of sales proceeds over the carrying amount shall be deferred and amortized over the lease term. (IAS 17) Initial direct costs are included in the measurement of the finance lease receivable and reduce the amount of income recognized over the lease term. Initial lease costs incurred by manufacturer or dealer lessors are recognized as expense when selling profit is recognized. (IAS 17) Initial direct costs incurred by lessors are added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as lease income. (IAS 17) Arrangements that do not take the legal form of a lease but fulfillment of which is dependent on the use of specific assets and which convey the rights to use the assets are accounted for as lease.
66

IFRS
(*)Evaluating the No specific guidance. Substance of Transactions Involving the Legal Form of a Lease (*)Service No specific guidance. Concession Arrangements – recognition (IFRIC 4) If a series of transactions involves the legal form of a lease and can only be understood with reference to the series as a whole, then the series is accounted for as a single transaction. (SIC 27) Depending on the terms of the arrangement, a financial asset is recognized where an operator has the unconditional right to receive cash or other financial asset from the grantor over the life of the arrangement. (IFRIC 12)

Earnings per share – Particulars Standard Basic EPS Standards followed On transition to IFRS under Indian GAAP AS 20 – Earnings Per Share IAS 33 - Earnings per share Basic earnings per share are calculated by dividing the net profit or loss for the period attributable to equity shareholders by the weighted average number of equity shares outstanding during the period. An entity shall calculate basic earnings per share amounts for profit or loss attributable to ordinary equity holders of the parent entity and, if presented, profit or loss from continuing operations attributable to those equity holders. IAS 33 permits that such disclosure be made only in the consolidated financial statements of the parent i.e. an entity being a parent who presents consolidated financial
67

Disclosure separate financial statements

in AS 20 requires disclosure of basic and diluted EPS information both in the separate and consolidated financial statements of the parent.

IFRS
statements may elect not to make these disclosures in its separate financial statements. (*)IAS Earnings share disclosure 33, AS 20 does not per these disclosures. require IAS 33 requires additional disclosures for EPS from continuing and discontinued operations. Disclosure is also required for instruments that could potentially dilute basic earnings per share in the future, but were not included in the calculation of diluted earnings per share because they are anti-dilutive for the periods presented. The control number for determining dilution is net profit or loss from continuing activities since no item can be presented as extraordinary item.

IAS 33, Earnings Per Share Extraordinary items

The control number for determining dilution is net profit or loss from continuing ordinary activities. EPS with and without extraordinary items is to be presented.

Consolidated Financial Statements – Particulars Standard Standards followed On transition to IFRS under Indian GAAP AS 21 Consolidated IAS 27 (2008) Financial Statements Consolidated and Separate Financial Statements SIC 12 Consolidation Special Purpose Entities Indian GAAP does not A parent is required to specify entities that are prepare consolidated required to present financial statements to consolidated financial consolidate all its statements. subsidiaries. A parent need not prepare
68

(*)Scope

IFRS
consolidated financial statements only if all the following conditions are met: ♦ the entity's debt or equity instruments are not traded in a public market; ♦ the entity is not in a process of filing its financial statements for the purposes of issuing any class of instruments in a public market; and ♦ any intermediate parent of the entity produces consolidated financial statements available for public use that comply with IFRS’s. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Control

Control is: (a) the ownership, directly or indirectly through subsidiaries, of more than one-half of the voting power of an enterprise; or (b) control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body so as to obtain economic benefits from its activities. Potential voting Potential voting rights are The effect of potential rights not considered in assessing voting rights that are control. currently exercisable or convertible, including potential voting rights held by another entity, are considered when assessing control. Exclusion of Excluded from If on acquisition a subsidiaries, consolidation, equity subsidiary meets the

69

IFRS
associates and accounting or proportionate joint ventures consolidation if the subsidiary was acquired with intent to dispose of within twelve months or if it operates under severe longterm restrictions which significantly impair its ability to transfer funds to the parent. Reporting dates The difference between the reporting date of the subsidiary and that of the parent shall be no more than six months. Accounting for Accounted at cost less investments in impairment loss. subsidiaries in separate financial statements of the parent (*)Goodwill Goodwill or capital reserve is determined on historical cost basis. criteria to be classified as held for sale in accordance with IFRS 5, it is included in the consolidation but is accounted for under that standard.

The difference between the reporting date of the subsidiary and that of the parent shall be no more than three months. Accounted either at cost less impairment loss or as available for sale with changes in fair value recognized in other comprehensive income. Goodwill or capital reserve is determined on the basis of assets or liabilities considered at their fair value, amortization is also provided.

Deferred Tax Asset – Particulars Standard Standards followed under Indian GAAP AS 22 - Accounting for Taxes on Income Guidance Note on Accounting for Fringe Benefits Tax On transition to IFRS IAS 12 - Income Taxes SIC 21 - Income Taxes Recovery of Revalued NonDepreciable Assets SIC 25 - Income Taxes Changes in the Tax Status of an Entity or its Shareholders Deferred income Deferred taxes are Deferred taxes are
70

IFRS
taxes computed for timing differences in respect of recognition of items of profit or loss for the purposes of financial reporting and for income taxes. computed for temporary differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. Deferred income taxes are recognized for all temporary differences between accounting and tax base of assets and liabilities. Current tax and deferred tax is recognized outside profit or loss if the tax relates to items that are recognized in the same or a different period, outside profit or loss. Therefore the tax on items recognized in other comprehensive income or directly in equity, is also recorded in other comprehensive income or in equity, as appropriate. Deferred tax asset is recognized for carry forward unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and tax credits can be utilized.

Recognition of Deferred taxes are generally deferred tax recognized for all timing assets and differences. liabilities (*)Recognition of No specific guidance in AS taxes on items 22 recognized in other comprehensive income or directly in equity

Recognition deferred assets

of Deferred tax asset for tax unused tax losses and unabsorbed depreciation is recognized only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realized. (*)Deferred tax No specific guidance. If the potential benefit of business the acquiree's income tax combinations loss carry-forwards or other deferred tax assets did not satisfy the criteria in IFRS 3 for separate recognition when the business combination was

71

IFRS
initially accounted but if such benefit is subsequently recognized, goodwill is reduced to record pre-acquisition deferred tax assets which are recognized within 12 months of the acquisition date as result of new information on facts and circumstances that existed on the acquisition date. Always classified as noncurrent, if current and noncurrent classification is presented.

Classification

(*)Disclosure

Fringe Benefit tax

(*)SIC 21, Recovery of Revalued NonDepreciable Assets (*)SIC 25, Changes in Tax

Deferred tax assets are to be disclosed on the face of the balance sheet separately after the head 'Investments'. Deferred tax liabilities are to be disclosed after the head 'Unsecured Loans'. No such requirement. Reconciliation is presented between the income tax expense (income) reported and the product of accounting profit multiplied by the applicable tax rate. Unrecognized deferred tax liability on undistributed earnings of subsidiaries, branches, associates and joint ventures. Fringe benefit tax is to be Does not meet definition of disclosed as a separate item income taxes and is after determining profit reported as part of the before tax for the period in underlying expense. which the related fringe benefits are recognized. No specific guidance. Measurement of deferred tax liability or asset arising from revaluation is based on the tax consequences from the sale of asset rather than through use. No specific guidance. Current and deferred tax consequences are included
72

IFRS
Status of an Entity or its Shareholders in the profit or loss of the period of change unless the consequences relate to transactions or events recognized outside profit or loss either in other comprehensive income or directly in equity in the same or a different period.

Investments in Associates – Particulars Standard Standards followed On transition to IFRS under Indian GAAP AS 23 - Accounting for IAS 28 - Investments in Investments in Associates in Associates Consolidated Financial Statements Potential voting rights are The existence and effect of not considered in assessing potential voting rights that significant influence. are currently exercisable or convertible are considered when assessing significant influence. Currently there is no exemption for investments made by venture capital organizations, mutual funds, unit trusts and similar entities from applying equity method. Investments by venture capital organizations, mutual funds, unit trusts and similar entities including investmentlinked insurance funds are exempted from applying equity method, if an election is made to measure such investments at fair value through profit or loss under IAS 39. Similar but if the reporting entity does not prepare consolidated financial statements because it has no subsidiaries, its associates should be equity accounted.
73

Significant influence

Scope

Accounting The Consolidated Financial Statements

In Equity method. If the reporting entity does not have subsidiaries but has an associate, it would not be required to prepare consolidated financial statements.

IFRS
(*)Capital Reserve/Negativ e Goodwill Capital reserve arising on the acquisition of an associate by an investor should be included in the carrying amount of investment in the associate but should be disclosed separately. At cost less impairment loss. Negative goodwill is excluded from the carrying amount of investment and is included as income in determination of the investor's share of associate's profit or loss. Either at cost or at fair value as available for sale with changes in fair value recognized in other comprehensive income.

Separate Financial Statement The Investor

Of

Discontinuing Operations – Particulars Standard Standards followed On transition to IFRS under Indian GAAP AS 24 Discontinuing IFRS 5 - Non-current assets Operations held for sale and discontinued operations An operation is classified as discontinuing at the earlier of (a) binding sale agreement for sale of the operation and (b) on approval by the board of directors of a detailed formal plan and announcement of the plan. An operation is classified as discontinued when it has either been disposed of or is classified as held for sale.

(*)Classification

Interim Financial Reporting – Particulars Standard Standards followed On transition to IFRS under Indian GAAP AS 25 - Interim Financial IAS 34 - Interim Financial Reporting Reporting. Similar and there are no material differences between two standards.
74

IFRS
(*)Compliance Condensed Balance Sheet, Similar but Condensed with Condensed Income Statement of Changes in requirements of Statement, Condensed Cash Equity is required. law, etc. Flow, Explanatory Notes and disclosures like EPS etc. is required. (*)Minimum content of Interim financial reporting A statute governing an entity or a regulator may require an entity to prepare and present certain information at an interim date, which may be different in form and /or content as required by AS 25. Does not recognize law/ regulator prescribing format of financial statements.

Intangible Assets – Particulars Standard Standards followed On transition to IFRS under Indian GAAP AS 26 - Intangible Assets IAS 36 – Impairment of Assets IAS 38 – Intangible Assets Measurement Measured only at cost. Intangible assets can be measured at either cost or revalued amounts.

Useful life

Intangible assets are Useful life may be finite or amortized over their useful indefinite. life or five years whichever is lower. Goodwill and indefinite life intangible assets are required to be tested for impairment at least on an annual basis or earlier if there is an impairment indication.
75

Annual Intangible assets are impairment test amortized over their useful for goodwill and life or five years whichever intangibles is lower to be assessed for impairment at least at each financial year end.

IFRS

Particulars Standard

Standards followed On transition to IFRS under Indian GAAP AS 27 - Financial Reporting IAS 31 – Interests in Joint of Interests in Joint Ventures Ventures SIC 13 - Jointly Controlled Entities - Non-Monetary Contributions by Venturers Either at cost or at fair value as available for sale investment with changes in fair value recognized as a component of comprehensive income. If the reporting entity does not prepare consolidated financial statements because it has no subsidiaries, its jointly controlled entities should be either proportionately consolidated or equity accounted. Investments in jointly controlled entities can be proportionately consolidated or equity accounted by the venturer. IAS 31 is not applicable for investments made by venture capital organisations, mutual funds, unit trusts and similar entities including investment-linked insurance funds that upon initial recognition are classified as at fair value through profit or loss under IAS 39. Recognition proportionate share gains or losses of of on
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IAS 31, Interests in Joint Ventures – separate financial statement of the venture IAS 31, Interests in Joint Ventures – consolidated financial statements

At cost less impairment loss.

At cost less impairment if consolidated financial statements are not prepared.

IAS 31, Interests Equity method accounting is in Joint Ventures not permitted. – alternative accounting methods. IAS 31, Interests There is no such exemption. in Joint Ventures other arrangements

SIC 13 - Non- No specific guidance. Monetary Contributions by

IFRS
Ventures contributions of nonmonetary assets in exchange for an equity interest is generally appropriate.

Impairment of Assets –

Particulars Standard

Standards followed On transition to IFRS under Indian GAAP AS 28 - Impairment of IAS 36 – Impairment of Assets Assets IFRIC 10 – Interim Reporting and Impairment Allocated to cash generating units that are expected to benefit from the synergies of business combination. Allocated to the lowest level at which goodwill is internally monitored by management, which should be larger than an operating segment. Where an entity has recognized an impairment loss in an interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost, that impairment is not reversed in subsequent interim financial statements nor in annual financial statements.

Goodwill

Uses "bottom-up/ top-down" approach under which the goodwill is, in effect, tested for impairment by allocating its carrying amount to each cash-generating unit to which portion of that carrying amount can be allocated on reasonable and consistent basis.

(*)IFRIC 10, No corresponding Interim pronouncement to IFRIC 10. Reporting and Impairment

Provisions, Contingent Assets and Contingent Liabilities – Particulars Standard Standards followed On transition to IFRS under Indian GAAP AS 29 Provisions, IAS 37 Provisions,
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IFRS
Contingent Liabilities Contingent Assets and Contingent Liabilities and Contingent Assets IFRIC 1 – Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 5 - Rights to Interests arising from Decommissioning, Restoration and Environmental Funds IFRIC 6 - Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment of Provisions involving a No change. substantial degree of estimation in measurement are recognized when there is a present obligation as a result of past events and it is probable that there will be an outflow of resources. Provisions are adjusted for changes in the amount or timing of future costs and for changes in marketbased discount rates. Deals with the accounting in the financial statements of the contributor for interests in decommissioning, restoration and environmental rehabilitation funds established to fund some or all of the costs of
78

Recognition provisions

(*)IFRIC 1, No specific guidance. Changes in Existing Decommissionin g, Restoration and Similar Liabilities (*)IFRIC 5, No specific guidance. Rights to Interests arising from Decommissionin g, Restoration and Environmental Funds

IFRS
decommissioning assets or to undertake environmental rehabilitation. (*)IFRIC 6, No specific guidance. Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment (*)Contingent assets Provides guidance for liabilities for waste management costs and requires recognition of an obligation to contribute to the costs of disposing of waste equipment based on the entity's share of market in the measurement period. Contingent assets are not Contingent assets are disclosed in the financial disclosed in the financial statements. statements where an inflow of economic benefits is probable. Requires recognition based on general recognition criteria for provisions i.e. when the entity has a present obligation as a result of past event and the liability is considered probable and can be reliably estimated. IAS 37 requires provisions on the basis of constructive obligations. A constructive obligation to restructure arises only when an entity has a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.

(*)Restructuring cost

New standards AS 30, AS 31 and AS 32 are recently being proposed by Indian GAAP Financial Instruments: Recognition and Measurement – Particulars Indian GAAP On transition to IFRS
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IFRS
Standard AS 30 Financial IAS 39 Financial Instruments: Recognition Instruments: Recognition and Measurement and Measurement IFRIC 9 - Reassessment of Embedded Derivatives All financial assets, financial liabilities and derivatives are recognized in the statement of financial position when these meet the definition and recognition criteria of a financial instrument.

General Recognition Principle

There is no definition of financial instrument. Currently, derivatives are not required to be recognized in the balance sheet except for certain forward exchange contracts within the scope of AS 11.

Derivatives embedded derivatives Derivatives hedge accounting

A financial instrument is a contract that gives rise to a financial asset in one entity and a financial liability or equity in another entity. and No equivalent standard on Measured at fair value. derivatives. and No equivalent standard on Hedge accounting derivatives. (recognizing the offsetting effects of fair value changes of both the hedging instrument and the hedged item in the same period's profit or loss) is permitted in certain circumstances, provided that the hedging relationship is clearly defined, measurable, and actually effective. IAS 39 provides for three types of hedges: • fair value hedge: if an entity hedges a change in fair value of a recognized asset or liability or firm commitment, the change in fair values of
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IFRS
both the hedging instrument and the hedged item are recognized in profit or loss when they occur; • cash flow hedge: if an entity hedges changes in the future cash flows relating to a recognized asset or liability or a highly probable forecast transaction, then the change in fair value of the hedging instrument is recognized in other comprehensive income until such time as those future cash flows occur. The ineffective portion of the gain or loss on the hedging instrument is recognized in profit or loss in the period of such change; and

hedge of a net investment in a foreign entity: this is treated as a cash flow hedge. A hedge of foreign currency risk in a firm commitment may be accounted for as a fair value hedge or as a cash flow hedge. Derecognition of No specific guidance on Financial liabilities are financial derecognition of financial derecognized only when liabilities liabilities, the obligation specified in the contract is discharged or cancelled or have expired.

81

IFRS
Financial Instruments Presentation– Particulars Standard Indian GAAP On transition to IFRS AS 31 Financial IAS 32 Financial Instruments: Presentation Instruments: Presentation Capital instruments are classified as liability or equity depending on the issuer's contractual obligation to deliver cash or other financial asset, for example redeemable preference shares will be classified as financial liability. If an entity reacquires its own shares (treasury shares), these are shown as deduction from equity.

Classification Of Capital instruments are Financial classified based on legal Liabilities form redeemable preference shares will be classified as equity.

Treasury Shares

Acquiring own shares is permitted only in limited circumstances. Shares repurchased should be cancelled immediately and cannot be held as treasury shares. There are no offset rules.

Offsetting

Financial asset and financial liability can only be offset if the entity has a legally enforceable right to set off the recognized amounts and intends to either settle on a net basis, or to realize the asset and settle the liability simultaneously.

Classification of Currently, the entire Split the instrument in Convertible instrument is classified as liability and equity Debts debt based on its legal form component at issuance. and any interest expense is recognized based on the coupon rate.

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IFRS

IFRS IMPLEMENTATION AT NACIL---ANALYSIS
Introduction of NACIL – National Aviation Company of India Limited (NACIL) is a Government Company within the meaning of Section 617 of the Companies Act, 1956 and is under the administrative control of the Ministry of Civil Aviation. National Aviation Company of India Limited has been established as a Government Company to be engaged in the business as an airline for providing air transport and allied services. This Scheme proposes the amalgamation of AI and IA in the Transferee Company, which would result in consolidation of the business of all in one entity (i.e. National Aviation Company of India Limited, the Transferee Company). AIR INDIA Limited (“AI” or the “Transferor No 1 Company”) is a Company incorporated under the Companies Act, 1956, having its registered office at Air India Ltd, 3rd Floor, Tower-II, Jeevan Bharati, 124, Connaught Circus, New Delhi - 110 001. AI is a Government Company, within the meaning of Section 617 of the Companies Act, 1956 and is under the administrative control of the Ministry of Civil Aviation, Government of India. AI is an unlisted Company. AI is primarily engaged in the business as an airline for providing air transport and allied services. Indian Airlines Limited (“IA” or the “Transferor No 2 Company”) is a public company registered under the Companies Act, 1956 and having its registered office at 113, Gurudwara Rakabganj Road, New Delhi 110 001. IA is a Government Company within the meaning of Section 617 of the Companies Act, 1956 and is under the administrative control of the Ministry of Civil Aviation. IA is an unlisted company. IA is primarily engaged in the business as an airline for providing air transport and allied services. National Aviation Company of India Limited (the Transferee Company) is a Company incorporated under the Companies Act1956, having its registered office at Airlines House, 113 Gurudwara Rakabganj Road, New Delhi 110 001.
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IFRS

PROFILE OF FINANCE DEPARTMENT OF NACIL (I) The present competitive environment of business has put the focus on availability of finance for an operation of the company and as such Finance department plays a major role in growth and survival of the company. The Finance department has become an integral part of the management decision making process for planning, organizing & implementing operations of the company. Finance department has to analyze the past & current data/performances/trends to forecast future planning. One of the main activities of Finance besides sourcing of finance for operations is to relate the entire activity of the airlines into financial terms and relate expenditure into its category and recognize revenue. By booking the revenue and expenditure into appropriate heads the finance department has to describe the company. The Balance Sheet & a Profit & Loss a/c duly audited has to be prepared as on March 31st every year. ROLE OF FINANCE DEPARTMENT IN NACIL (I)  Management of Financial Resources  Planning & Budgetary Control  Advisory Functions  Financial Scrutiny and Checks  Maintain Financial & Cost Accounts  Analysis of various costs and submitting reports. OBJECTIVES OF FINANCE DEPARTMENT  Submitting the Regional Profit & Loss a/c & Balance Sheet as on 31st March every year.  Ensuring standards.  Ensuring audit of Annual accounts & Dealing with Statutory Auditors/Government Auditors/ Internal auditors.
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Compliance

of

Statutory

laws

-

Taxation/Accounting

IFRS
 Preparing yearly Revenue Budget & Capital Budget of the Region.  Advisory role to the Regional Director in financial matters.  Conveying financial sanctions, analysis of financial data/and also as a Finance nominee in various contracts. ACCOUNTING SYSTEM OF WESTERN REGION IN NACIL The accounting at Western Region can be divided into: 1. Expenditure Accounting including Non-traffic revenue. 2. Foreign Station Accounting 3. Revenue Accounting I] Expenditure Divisions:  Expenditure on aircraft fuel, insurance, aircraft spares, aircraft loan interest payments are taken care at headquarters.  All other expenditures viz. Salaries, staff payments, landing, housing, parking to AAI(Airport Authority of India), maintenance of aircraft, outside repairs are taken care at regions. Expenditure Division is further divided into different sections as under:
1. Stores Accounting:

Dealing with transactions routed through Stores

department by means of Purchase Orders. Further Divided into :
a. Foreign Accounting: Dealing with receipt and dispatch of goods

monitored by Purchase/Repair orders in respect of aircraft items imported from foreign vendors. The payments advices received from headquarters through Debit/Credit notes are linked to GRAN by this section. Accounting of all foreign transactions related to store expenditure is done by this section along with reconciliation of stock accounts, accounting of duty, freight, and export freight are carried out.
b. Local Purchase:

Dealing with receipt, dispatch and payment of transactions routed through
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Local

Purchase

IFRS
Purchase/Repair/Maintenance orders. Accountings of transactions into respective accounts along with reconciliation of Stock accounts are being done.
c. Costing section: Raising of Bills in respect of jobs undertaken for

Outside parties, Loan items, and monitoring expenditure related to accident jobs undertaken on aircraft work orders. Plus accounting for Material issues and preparation of six monthly Cost statements like Labor Utilization, Material costs.
2. Bill Passing Division: Deals with payments of Contractual nature and

Staff claims including medical bills:
a. Outside Party payments: Payments like Catering bills,

Crew Taxes,

Accommodation Navigation,

bills,

paying License

of

AAI

charges

like

Landing,

Parking,

Fees,

Rentals,

Property

Electricity, Water, Telephone, Canteen , Hire of Transport, etc. which are being done by scrutiny, certification etc. Also deals with raising of bills on Other Operators for handling services rendered. Also deals with imprest accounting of cash floats given to different locations/stations.
b. Staff Claims: Traveling allowances, Claims for meals, conveyances,

and settlement of all medical bills, CFMS claims, and Hospitalization bills of serving/retired personnel.
3. Pay-Rolls:

Deals with salary processing of the Western Region staff by

means of change advices in respect of any change in the salary quantum of each staff. The section is divided into category wise reporting of the salary. Also deals with Income-tax matters of staff like declarations, payments of tax deducted to Income Tax department. Have regionally implemented the salary processing and printing of pay slips of the staff.

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IFRS
A Final settlement section deals with all payments/recoveries of staff that cease to be in service. Payment of Gratuity, Provident Fund, and Encashment of Leave etc in respect of cess staff is done by the section. Also deals with the monitoring of Loans granted to any employee by the company.
4. Cash

&

Bank:

Headquarters

makes

periodical the

transfer

to

the of

Disbursement

account

through

which

payments

cheques/withdrawals of cash are made. Processing of all payments by cheques to outside parties, cash payments towards staff claims, salary payments. Monitoring of cash/bank balances at base and at different locations. Has implemented the Electronic Clearing system for clearances of salary.
5. Finance & Budget: To draw the yearly Trial Balance, Balance-sheet as

per Corporation format, Schedule VI format and getting the same audited. Monitoring of sanctions conveyed for various expenditure, Deals also with settlement of Civil Engineering bills of various projects. Also deals with settlements of baggage/cargo claims of passengers, coverage of insurance in respect of cash/staff etc. Provide for depreciation of assets of Western region. Reconciliation of all assets with stores ledger. Have adopted a customized computerized system of financial accounting package for their work. Miscellaneous: Besides, finance nominees are in various tender committees constitutes a part of regular committees for Stores tender & Civil tenders. Finance also deals with various mandatory agencies & authorities like Income tax, Sales tax, Service tax, Government auditors, statutory auditors, Tax auditors, PF auditors etc.
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IFRS
II] Foreign Station Accounting  Established in Western Region to cater to the needs of Foreign Stations under the region.  Gulf region accounting is done in Western Region.

At present, the following stations in Gulf with NACIL (I) are managed through GSA (General Sales Agency): Sr. No. 1 2 3 4 5 Station UAE (SHJ, DXB, FUJ, RAS) Muscat – Oman Bahrain Kuwait Riyadh – Kingdom of Saudi Arabia GSA M/s. M/s. M/s. M/s. M/s. Ltd. Arabian Travel Agency Ltd. National Travel & Tourism Dadabhai Travel House of Travel Naba Tourism & Transport Co.

In Israel (off-line station), we have M/s.Turbo Tourism & Aviation Ltd. as Passenger Sales Agent. PAYMENTS: a. GSA makes all payments in the Station on the approval of Country Manager/Accounts Manager out of Revenue collection at the station. b. The Statement for Payments along with supporting Bills/vouchers is forwarded by GSA to the Regional Office on monthly basis except Kuwait where the Reports are prepared on fortnightly basis. c. On scrutiny of the payments accounting action is taken at the Regional Finance Dept. and entries are booked in INR. d. Debit Notes are raised in respect of the following paymentsi. ii.

Fuel- Debit Note is forwarded to headquarters on monthly basis. Advance to Cabin crew/ Engineers, technician- amount paid to staff from other Region is debited to concerned Region through Debit Notes.
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IFRS
iii.

Local Taxes-Debit Note is forwarded to CRA.

e. The major heads of account are -Hotel Accommodation, Traveling

Advance, Fuel, Airport Taxes, Reimbursement of out of pocket expenses to Flying Crew, Sales Promotion, Publicity, Food Service (Cabin Crew, Cockpit Crew), Meal to Passenger, Handling Expenses, Landing Fees, Navigation Charges, Salary, Hire of Transport, Conveyance, Housing & Parking Fee, Telephone etc. The above mentioned accounts are reflected in Regional Trial Balance, Profit and Loss Statement & Balance-Sheet. In case it is proposed to have Regional Trial Balance for Gulf including NACIL (A), the above accounting procedure needs to be followed in respect of accounts maintained by NACIL (A) at respective stations. III] Revenue Accounting i. ii. Revenue collections of these stations (including agents) are sent to headquarters on day to day basis. Central revenue accounts (CRA) situated at headquarters compile the various revenue collections of all stations and work out the revenue of the company. iii. Other revenue viz. handling, outside party works etc are accounted for at the regions. Types of Revenue in NACIL (I):  Traffic - passenger, excess baggage, freight, mail, charter and aircraft lease.  Incidental - handling, outside party repair, Cancellation fee and Commission  Non-operating – Bank interest, sale of surplus assets Sections in Revenue Department  Outstation Screening
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IFRS
 Station Accounts  Bills Receivables  Agency Section  Cargo Agency 1. Outstation Screening • • • • Screening, cross-checking and verifying all revenue documents Maintenance of CVD control statement at outstations & reported at Outstations reconciliation. Dispatch of documents to EDP/CRA. Raising debit notes for short collection/billing.

2. Station Accounts • • • • • Independent accounting unit set up at all stations in the NACIL Reports the sales in appropriate forms and deposits the collection Meeting the petty cash expenditure. Station Debit Recovery. Various activities : Issuing CVDs, receiving F/N sales reports. Realization of dues and verifying stock statement. Dispatch of reports to ARD/CRA. network to service the agents and direct sales. in banks.

3. Bills Receivables • • Screening & cross-checking of bills & invoices through EDP Controlling & Accounting of Credit Sales
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IFRS
• • • • 4. Agency Agency is a retailer of travel and related products. Whilst this refers to the sales person employed to sell travel products, the term is often applied in reference to the business that is established to sell travel products (the travel agency). Agency means a person / group of persons / body who is an interface between the customer and the airlines by selling the airlines product i.e. Space. In airlines the space sold is in form of passenger seats or cargo space. Today almost 85% of the sales of passenger tickets of NACIL (I) are through agents. As such agency accounting forms a very important function. 5. Cargo Revenue Cargo sales are generated from different Airports and through Agents. Cargo sales of Airport are being accounted at CRA. ARD reports for sales generated through agents and their realization to CRA. The cargo system has been automated through which automated Airway Bills are generated through system developed by M/s. Kale Consultancy. It provides airlines with full financial control and automation of their revenue accounting process. It delivers business value by helping to maximize revenue, minimize costs, and shorten the time span to billing, thereby enabling increased cash flow. Dispatch of bills Billing & Accounting of charter revenue Controlling & Accounting of to-pay transactions Compilation of various reports.

STEPS FOR TRANSITION TO IFRS FOR NACIL
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IFRS

IFRS -1 (First-Time Adoption of IFRS) IFRS 1, First Time Adoption of International Financial Reporting Standards is the guidance that is applied during preparation of a company’s first IFRS-based financial statements. NACIL need to apply IFRS 1 when they transition from Indian GAAP to IFRS and prepare their first IFRS-based financial statements. The date of transition to IFRS is defined as the “the beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS financial statements”. A first-time adopter is required to prepare an opening balance sheet at the date of transition. This opening balance sheet is prepared in accordance with IFRS 1, including the general principle of retrospective application, the optional exemptions and mandatory exceptions. The opening IFRS balance sheet need not be published as part of the first IFRS financial statements; however it is used as a basis for preparation of those financial statements. The following timetable illustrates first-time adoption of IFRS in 2010 for financial year where comparative statements is prepared for one year –
Opening IFRS Balance Sheet Approach 2010 01.04.2010 01.04.2010
Previous Indian GAAP Reporting Reporting Date

2011 31.03.2011 31.03.2012

2012 Time

Date of Transition to IFRS

In short, the entity’s first IFRS financial statements shall include at least three statements of financial position, two statements of comprehensive income,
92

First IFRS with IFRS comparatives for 2011

IFRS
two separate income statements (if presented), two statements of cash flows and two statements of changes in equity and related notes, including comparative information. A first time adopter of IFRS is required to comply with all IFRS standards effective at the reporting date with preparation of opening balance sheet in accordance with the provisions of IFRS 1. A first-time adopter is required to:  Recognize all assets and liabilities whose recognition is required by IFRS;  Not recognize items as assets and liabilities if IFRS does not permit such recognition;  Reclassify items recognized under previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under IFRS; and  Apply IFRS in measuring all recognized assets and liabilities. All IFRS presentation and disclosure requirements shall be fulfilled in the first IFRS financial statements. In particular, some of the standards, which may have a significant impact on an entity’s presentation and disclosure requirements, are;  IAS 14 Segment Reporting,  IAS 19 Employee Benefits,  IAS 32 Financial Instruments,  IAS 33 Earnings per Share,  IAS 36 Impairment of Assets,  IAS 38 Intangible Assets,  IFRS 2 Share-based Payment,  IFRS 3 Business Combinations, and  IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

93

IFRS
Optional exemptions In a number of areas, retrospective application of IFRS will require significant resources and may in certain situations be impracticable. IFRS 1 therefore provides ten optional exemptions to the general principle of retrospective application. As these exemptions are optional, entities may change their accounting policies retrospectively in these areas if they desire, provided that they are able to calculate the effects reliably. An entity that elects to apply one of the below exemptions is not required to apply any or all of the other exemptions. Analogous application of the above exemptions to other areas is not permitted.  Business combinations An entity may apply IFRS 3 to business combinations prior to the date of transition provided that it obtained the information necessary to apply IFRS 3 at the date of the business combination. Business combinations before the date from which IFRS 3 are applied are accounted for in accordance with IFRS 1, Appendix B2. Assets and liabilities acquired in a business combination shall be recognized and measured in the opening balance sheet in accordance with IFRS. Goodwill written off against equity under Indian GAAP shall neither be recognized as an asset in the opening IFRS balance sheet nor included in the gain or loss on subsequent disposal or impairment of the subsidiary that gave rise to it.  Fair value or revaluation as deemed cost A first-time adopter may elect to measure individual items of property, plant and equipment at fair value at the date of transition to IFRS. Fair value is then deemed cost at that date. Deemed cost is an amount used as a surrogate for cost or depreciated cost at a given date. Deemed cost forms the basis for the cost of the asset under IFRS at the date the valuation was performed and not the date of transition. Depreciation under IFRS is determined from the date deemed cost is applied up until the
94

IFRS
date of transition. An adjustment is recognized in retained earnings if the amount recognized under Indian GAAP is materially different to the amount that would have been recognized under IFRS.  Employee benefits Under IAS 19 Employee Benefits, pension plans are classified as either defined contribution plans or defined benefit plans. Accounting for defined benefit plans is significantly more complex than for defined contribution plans. Provisions for defined benefit plans are calculated on the basis of a number of actuarial assumptions, and cumulative actuarial gains and losses are recognized in accordance with IAS 19. IFRS 1 requires that the entity identify all defined benefit plans and compares Indian GAAP with IAS 19. Any changes in applied accounting policies are made retrospectively except for an optional exemption concerning actuarial gains and losses and the accumulated effect of the changes is taken to equity in the opening balance sheet. Cumulative translation differences On translation of a foreign operation in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates, certain exchange differences are recognized as a separate component of equity as well as requires to disclose reconciliation of the opening and closing balances. Under IFRS 1 a first-time adopter may elect not to calculate this translation difference retrospectively and thereby set corresponding translation differences at the date of transition, determined in accordance with previous GAAP, to zero. The gain or loss on subsequent disposal of a foreign operation then includes only foreign exchange differences that arose subsequent to the date of transition.

95

IFRS
Compound financial instruments The general principle in IFRS 1 requires a first-time adopter to apply IAS 32 retrospectively and separate all compound financial instruments into a debt and equity portion. The classification of the components is based on conditions that existed at the date when the instrument first satisfied the criteria for recognition in IAS 32 without considering events subsequent to that date. If the liability component is no longer outstanding at the date of transition, retrospective application of IAS 32 results in two categories of equity, the cumulative interest in retained earnings and the original equity component. Assets and liabilities of subsidiaries If a subsidiary makes the transition to IFRS at a later point in time than its parent, the subsidiary may in its own opening IFRS balance sheet continue with the same carrying amounts that are used in the parent's consolidated financial statements before any consolidation adjustments. Alternatively, the subsidiary itself may choose to apply IFRS 1 at its date of transition. A similar election is available to an associate or joint venture that becomes a first-time adopter later than an entity that has significant influence or joint control over it. The associate or joint venture may then continue with the same carrying amounts that were used as a reporting basis under IFRS by the entity that has significant influence or joint control over it. Designation of previously recognized financial instruments IAS 39 Financial Instruments: Recognition and Measurement permits an entity to designate a financial asset or financial liability as at fair value through profit or loss or as available-for-sale. Despite this requirement, IFRS 1 permits a first-time adopter, at the date of transition, to designate a financial asset or financial liability as at fair value through profit or loss or as available-for-sale. The basis for this exemption is that a first-time adopter applied previous GAAP at the date of initial recognition and would therefore
96

IFRS
not have been able to take advantage of the election, which was available to entities already reporting under IFRS. If an entity uses this exemption it shall disclose certain information. Share-based payments A first-time adopter has an option not to apply IFRS 2 Share-based Payment retrospectively to equity instruments (equity-settled transactions) granted on or before 7 November 2002. IFRS 1 provides an additional exemption from retrospective application of IFRS 2 for equity instruments that were granted after 7 November 2002 and that vested before the later of (a) the date of transition and (b) 1 January 2005. If a first-time adopter elects to apply the exemption it is nevertheless required to disclose information that enables users of the financial statements to understand the nature and extent of share-based payment arrangements that existed during the reporting and comparative periods. Insurance contracts In contrast to the general principle of IFRS 1, an entity issuing insurance contracts (insurer) may elect on first-time adoption to apply the transitional provisions of IFRS 4 Insurance Contracts. These transitional provisions require an insurer to apply IFRS 4 prospectively for reporting periods beginning on or after 1 January 2005 with optional earlier application. Changes in existing decommissioning, restoration and similar

liabilities In terms of IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities, changes in the estimated timing or amount of the outflow of resources embodying economic benefits required to settle an existing decommissioning, restoration or similar liability, or a change in the discount rate, shall be added to, or deducted from, the cost of the related asset. The adjusted depreciable amount of the asset is depreciated prospectively over
97

IFRS
its remaining useful life. For a first-time adopter, retrospective application of these requirements would require an entity to construct an historical record of all such adjustments that would have been made in the past, which in many cases will not be practicable. Mandatory exceptions IFRS 1 contains four mandatory exceptions to the general principle of retrospective application. Derecognition of financial assets and financial liabilities Financial assets and liabilities shall be recognized and measured in the opening IFRS balance sheet in accordance with the version of IAS 39 that is effective on the reporting date. However, a first-time adopter may elect to apply the IAS 39 derecognition requirements retrospectively from an earlier date provided that the information required to do so was obtained at the time of initial accounting for the transaction. Hedge accounting A first-time adopter is required in its opening IFRS balance sheet, to: Measure all derivatives at fair value; and Eliminate all deferred gains and losses arising on derivatives that were reported under previous GAAP as assets and liabilities. In terms of IAS 39 a hedging relationship only qualifies for hedge accounting if a number of restrictive criteria are satisfied, including appropriate designation and documentation of effectiveness at inception of the hedge and subsequently. As a result, in order for a hedging relationship to qualify for hedge accounting at the date of transition, the hedging relationship must have been fully designated and documented as effective in accordance with IAS 39 at the date of the transaction A first-time adopter may under previous GAAP have deferred or not recognized gains and losses on a designated fair value hedge of a hedged
98

IFRS
item that is not measured at fair value. In that case the hedged item is adjusted in accordance with the implementation guidance to IFRS 1. If the forecast transaction is not highly probable, but is still expected to occur, the entire deferred gain or loss is recognized in equity. Accounting estimates Accounting estimates required under IFRS that were made under previous GAAP are not adjusted except for differences in accounting policies or unless there is objective evidence that they were in error. When restating the opening IFRS balance sheet, the entity may have information available that was not available at the time the estimate was made. The primary objective of this exception is to prevent entities from adjusting estimates that were made, based on the circumstances and information available at a particular date, with the benefit of hindsight. An estimate required under IFRS that was not required under previous GAAP should reflect conditions that exist at the date of transition. In particular, estimates of market prices, interest rates or foreign exchange rates shall reflect market conditions at the date of transition. Assets classified as held for sale and discontinued operations Retrospective application of IFRS 5 requires an entity to reverse depreciation on non-current assets classified as held for sale from the date those assets satisfied the held for sale criteria. However, an entity that has a date of transition prior to 1 January 2005 shall not reverse previous depreciation of non-current assets classified as held for sale because it applies IFRS 5 prospectively in accordance with the transitional provisions of IFRS 5.

99

IFRS
The transitional provisions of IFRS 5 require prospective application from 1 January 2005. However, if the valuation and other information needed to apply IFRS 5 retrospectively was obtained at the time the non-current assets originally met the criteria to be classified as held for sale, an entity may select an earlier date from which IFRS 5 is applied prospectively.

 Presentation and disclosure requirements: The first IFRS financial statements shall be presented in accordance with the presentation and disclosure requirements in IAS 1 Presentation of Financial Statements and the other standards and interpretations under IFRS. A number of reconciliation between previous GAAP and IFRS are required in the first IFRS financial statements. These include reconciliation of equity at the date of transition and the beginning of the current reporting period as well as of the net profit or loss for the comparative period as illustrated below for an entity with a reporting date of 31 March 2010 disclosing one year of comparatives. Furthermore, supplementary explanations necessary for understanding the transition to IFRS are also required in the first IFRS financial statements. The reconciliation shall distinguish between errors made under previous GAAP (if any) and adjustments arising due to changes in accounting policies.

 Interim reporting
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IFRS
IFRS does not require an entity to publish interim reports. If, during the reporting period, the entity elects to prepare interim reports under IAS 34, IFRS 1 requires a range of further information in the interim report, including reconciliation between previous GAAP and IFRS as well as presentation of restated comparative information in accordance with IAS 34. Comparative information To comply with IAS 1 an entity's first IFRS financial statements shall include at least one year of comparative information under IFRS. If an entity elects or is required to present more than one year of full comparative information prepared in accordance with IFRS, the date of transition is the beginning of the earliest period presented. All comparative information subsequent to the date of transition is restated and presented in accordance with IFRS. If an entity presents more than one year of comparative information not in accordance with IFRS, the entity shall a) label the previous GAAP information clearly and b) provide qualitative disclosure of the nature of the main adjustments that would make the information IFRS compliant. Other disclosures required by IFRS 1 A first-time adopter is required to disclose the fair value and the classification and carrying amount in the previous financial statements of financial assets and financial liabilities that are designated either as at fair value through profit or loss or as available-for-sale. If the election to use fair value, revalued amount or an event driven value is applied to an item of property, plant and equipment, investment property or intangible asset, the following disclosure is required in the entity's first IFRS financial statements:

 Aggregate of those fair values; and
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IFRS
 Aggregate adjustment to the carrying amounts reported under previous GAAP.  Indian GAAPAccounting principles should be consistent for financial information presented in comparative financial statements. US GAAP does not give specific guidance on first-time adoption of its accounting principles. However, first-time adoption of Indian GAAP requires full retrospective application. Some standards specify the transitional treatment upon firsttime application of a standard and specific rule for carve-out entities and first-time preparation of financial statements for the public. There is no requirement to present reconciliation of equity or income statement on first-time adoption of Indian GAAP.

CONCLUSION
Though convergence with IFRS will improve the overall financial reporting and transparency of companies and safeguard the interests of stakeholders, there are various challenges which Indian Inc will have to face while converging with IFRS. The major challenge is to train the staff according to new accounting standards and to make sure that there is proper mechanism for implementing such strategy. ICAI, ASB and government have taken various steps and have drafted proper implementation strategy to ensure effective and efficient convergence of I-GAAP to IFRS.

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IFRS REFERENCES
BOOKS – 1. Taxmann’s “Student’s Guide to Accounting Standards” By D. S. Rawat 2. Paper on “Concept Paper on convergence with IFRSs in India” by Institute of Chartered Accountants of India (ICAI) 3. Research report on IFRS by Delloitt 4. Research report on IFRS by KPMG WEBSITES –
1. www.iasplus.com 2. www.caclubindia.com 3. www.wikipedia.com 4. www.feeismind.com 5. www.icai.org

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