International Financial Reporting Standards

Financial Accounting - 2010

Submitted To Prof. Madhu Vij

Submitted By Ankit Agarwal (F-095) Chan dni Khundia (F-) Inderj eet (F- ) Sanc

hita Gupta (F-144) Shini e Dutta (F-149) Shrut i Jain (F-150) Vivek Kumar (F-159)

Table of Contents
Table of Contents....................................................................................................... 2 International Financial Reporting Standards (IFRS)....................................................3 Basic Differences.................................................................................................... 3 Qualitative characteristics of financial....................................................................4 Convergence with IFRS in India..................................................................................4 Applicability.............................................................................................................4 Convergence........................................................................................................... 5 Need for IFRS............................................................................................................. 5 Characteristics of IFRS............................................................................................... 8 IFRS around the globe................................................................................................9 IFRS implementation: Challenges in India................................................................10 Knowledge on International practices...................................................................10 Gap in Training......................................................................................................10 Law and Amendments...........................................................................................10 Taxation................................................................................................................ 11 Fair value.............................................................................................................. 11 Management compensation plan..........................................................................11 Information system and Reporting........................................................................11 Transition to IFRS..................................................................................................... 12 First time adoption................................................................................................12 Major differences in Indian GAAP and IFRS...............................................................13

.... They are standards...... India is one among the 100 countries that have or are moving towards implementation of IFRS convergence with a view to bring uniformity in reporting globally and making ways for its business.... ICAI and Ministry of Corporate Affairs have announced for implementation and convergence of it...... finances and funds for larger opportunities......Survey Analysis – Banking Sector.. concept and framework issued by International Accounting Standards Board (IASB) based in London... Accounting treatment is governed by the substance of the transaction and entirely driven by accounting principles and not by legal framework..........................16 International Financial Reporting Standards (IFRS) IFRS is a set of international accounting standard stating how particular types of transactions and other events should be reported in financial statements. Both premier bodies in India i.. The basic idea behind convergence of IFRS in India was to give a wider route for FDIs...... FIIs as they are more comfortable and compatible with globally recognized accounting standards.e.. Basic Differences ACCOUNTING STANDARDS Cost Reliability Accounting driven by value IFRS Fair Value Relevance Accounting driven by principles International Financial Reporting Standards (IFRS) is a global accounting language.... .................

public interest entities are the entities falling under the Category level 1 as defined by ICAI except that turnover should exceed Rs . Insurance entities and large size entities from the Accounting period beginning on or after April 2011. • For this purpose.Qualitative characteristics of financial Convergence with IFRS in India Applicability • ICAI is of the view that IFRS to be adopted for public interest entities such listed Co. Banking Companies. The view is further strengthened by convergence process being initiated by Ministry of Corporate Affairs.

Need for IFRS Switching to IFRS will offer many advantages to a company.” But convergence doesn’t mean that IFRS should be adopted word by word. Companies that are global would be benefited by complying with international financial reporting requirements.. ‘Presentation of Financial Statements’. Reporting costs would be reduced and a common reporting system will be developed. 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. • Early adoption of IFRS is encouraged but it should be the adoption of all IFRS and should not be on selective basis. IFRS are not mandatory but recommendatory. Furthermore. e.100Crs (Instead of Rs 50 Crs) and borrowing should exceed Rs 25 Crs (instead of Rs 10Crs) and holding and subsidiary of above. comparison and benchmarking of financial data with international competitors would be possible.g. Convergence Convergence means to achieve harmony with IFRSs. the application of IFRS is mandatory. . This will ensure consistency in statutory reporting. • For other entities. • Even if listed company does not fulfill the above criteria for level 1 enterprise. Such changes do not lead to non-convergence with IFRS. replacing the term ‘true & fair’ for ‘present fairly’.

To trade their shares and securities on stock exchanges world-wide. the company will improve and strengthen the brand value of the company. India is an emerging market and globalization is at its peak. The implementation of IFRS in the corporate world would require trained accountants. This would ensure greater transparency in the financial statements. . It will also help provide access to foreign capital. Business acquisition would be reflected at fair value in IFRS rather than the carrying values. most of the stock exchanges require companies to make financial statements under IFRS. Indian companies are in seeking of fund raising and also the flow of FII and FDI is increasing at a galloping rate. This will boost job growth in the service sector and India can emerge as an accounting services hub. Hence in order to make the investments easier and to make easy for the foreign companies to assess the financial statements of the Indian companies we need convergence of IFRS. This is because majority of stock exchanges require financial information presented according to the IFRS. Thus. A major advantage implementing IFRS is that the management of a company can view all the companies in a group on a common platform. a single set of accounting standards worldwide would ensure that auditing firms standardize their training and quality of work is maintained globally.Acquisitions and joint ventures between countries will be possible due to adoption of IFRS. auditors and actuaries. Moreover. Some companies can gain advantage over their competitors by adopting IFRS relatively earlier. This will reduce the time and efforts involved to adjust the accounts in order to comply with the requirements of the national GAAP.

Secondly many Indian companies have their subsidiaries in different countries. In order to remove this extra cost. If one of the branches use accounting standard pertaining to that particular country then it is difficult for the parent/other subsidiaries to assess the financial position of it. Implementation of IFRS would thus ensure the following benefits: • • • Same language across the world Cross border investments leading to economic growth Comparability of financial statements of any two companies of different countries • • Globalization of and improve in world trade For multinational companies: o o o Consolidation of group financial statements made easier Accounting and audit functions made easier and cheaper Compliance with regulatory requirements of bodies such as stock exchanges o o Mergers and acquisitions made easier Access to multinational funds . Till now crores of many are spent in changing the representation of one national GAAP to another GAAP. an international standard is to be adopted which is IFRS.

• The job of governments and standard setters in the developing countries made easier • • The job of tax authorities made easier Time and money saved by international professional accounting firms in planning and execution of accounting and audits • • Administrative costs of accessing the capital markets around the world reduced. To facilitate cross border capital raising and trade. To make a common platform for better understanding of accounting internationally. and transparent financial statements. • • • • Synchronization of accounting standards across the globe. To create comparable. Having company wide one accounting language that has subsidiaries in different companies. reliable. Characteristics of IFRS • • • • Reliability Understandability Relevance Comparability .

Some parts of the world have accepted IFRS as their National GAAP such as some parts of Africa and Caribbean. IFRS has been adopted. In UK and Ireland. national GAAP is converging to IFRS. But EU. Currently more than 100 countries are following IFRS. for listed companies it is mandatory to follow IFRS and for others it is permitted. Europe was the first ones to adopt it.• • • • Materiality True and fair value Consistency Completeness IFRS around the globe Almost all over the globe. but by 2011 approximately 150 countries will be following .

Currently. it is observed that there is acute shortage of trained IFRS staff. . As the implementation date draws closer (2011). Law and Amendments It is observed that implementation of IFRS may result in a number of inconsistencies with the existing laws which include the Companies Act 1956. SEBI regulations.IFRS implementation: Challenges in India Though there are various benefits of adopting IFRS. There are a number of differences between IFRS and Indian GAAP. It would be a challenge to bring about awareness of IFRS and its impact among the users of financial statements. The biggest hurdle for the professionals in implementing IFRS is the lack of training facilities and academic courses on IFRS in India. IFRS does not recognise such overriding laws. Challenges faced during adoption of IFRS in India are listed below: Knowledge on International practices Adoption of IFRS means that the entire set of financial statements will be required to undergo a drastic change. The solution to this problem is that all stakeholders in the organization should be trained and IFRS should be introduced as a full time subject in the universities. the reporting requirements are governed by various regulators in India and their provisions override other laws. implementation of IFRS is a massive task in India. banking laws and regulations and the insurance laws and regulations. This may cause the users of financial statements to look at them from a new perspective. Gap in Training Professional accountants are looked upon to ensure successful implementation of IFRS.

the authorities need to ensure that the laws are amended well in time. This is because the financial results under IFRS are likely to be very different from those under the Indian GAAP. Whether this can be included in computing distributable profit is also debated. Management compensation plan The terms and conditions relating to management compensation plans would also have to be changed. Fair value IFRS uses fair value as a measurement base for valuing most of the items of financial statements. adjustments to fair value result in gains or losses which are reflected in the income statements. Moreover.Although steps to amend these laws have been initiated. It is extremely important that the taxation laws recognize IFRScompliant financial statements otherwise it would duplicate administrative work for the organizations. Information system and Reporting The disclosure and reporting requirements under IFRS are completely different from the Indian reporting requirements. The use of fair value accounting can bring a lot of volatility and subjectivity to the financial statements. Companies would have to ensure that the . Taxation IFRS convergence would affect most of the items in the financial statements and consequently the tax liabilities would also undergo a change. It also involves a lot of hard work in arriving at the fair value and valuation experts have to be used. The contracts would have to be renegotiated which is also a big challenge. Thus the taxation laws should address the treatment of tax liabilities arising on convergence from Indian GAAP to IFRS.

segment disclosures. First time adoption For first time adoption.existing business reporting model is amended to suit the reporting requirements of IFRS. The information systems should be designed to capture new requirements related to fixed assets. Therefore. etc. Transition date.It is the beginning of the earliest period for which an entity presents its first full IFRS compliant financial statements. Existence of proper internal control and minimizing the risk of business disruption should be taken care of while modifying or changing the information systems. two key terms need to be understood: Reporting date. related party transactions. stage-wise approach would be preferable.It is the end of the latest period covered by the financial statements. Transition to IFRS The Institute of Chartered Accountants of India has proposed two options for convergence: • • All at once Stage-wise approach It has been observed that there are certain implementation dangers and compliance problems with IFRS in adopting the all at once approach. .

It is mandatory for entities to include at least one comparative period in IFRS compliant financial statements. the first set of financials will be for the period 01-04-2011 to 31-03-2012 with IFRS comparables which are to be provided for the period 01-04-2010 to 31-03-2011. 2011. After considering the current economic environment. ICAI has decided that IFRS should be adopted for public interest entities such as listed companies. Major differences in Indian GAAP and IFRS The major focus of IFRS is on getting the balance sheet right.ICAI has proposed that in the case of Indian corporate. This can bring significant volatility in the income statement. insurance companies and other large size identities from the accounting periods commencing on or after 1st April. the first reporting date will be 31-03-2012 and transition date will be 01-04-2010. banking companies. Therefore. There are quite a lot of differences between the Indian GAAP and IFRS with respect to the presentation of financial .

extraordinary to items are the comprehensive and expenses for the period. disclosure requirements. As a considered determine Presentation of extraordinary items income or in the notes. proposed after of the reporting period but before Dividends declared after the end of the end of the the reporting period authorised statements.statements. Exempted for Level 3 entities as prescribed by ICAI. Dividends Dividends declared after the end financial for statements issue are are the reporting period but before the not financial statements are approved financial statements. in Schedule VI to the Companies Act 1956. Banking Regulation Act for Banks etc. recorded as liability in the financial are recorded as liability in the . and accounting policies: it is difficult to summarize all the differences here. SUBJECT Components of Comprises of Financial Statements • • • • Format Income Statement Statement Cash Flows of Mandatory for all entities • Statement Position Statement Comprehensive Income Statement of Cash flow Notes to Accounts Statement of Changes in of of Financial IFRS • • • • INDIAN GAAP Comprises of Balance sheet Profit and Loss A/c Cash flow statement Notes to Accounts Equity of IAS 1 prescribes the format of According to the format prescribed income statement. However a few of the major differences are presented here. profit / loss for the period. Indian GAAP requires extraordinary items to be presented in the profit IFRS prohibits the presentation of and loss statement of the entity extraordinary statement of items in the distinct from the ordinary income result.

The standard contains detailed guidance on this.Depreciation rates Allocated on a systematic basis to Depreciation useful life of the asset. plant and An entire class of assets can be rebe re-valued equipment is re-valued. Functional and presentation currencies may be different. currency of the primary economic environment in which the entity operates. for all the relevant previous years. the Treated Change in the Treated depreciation method as a change in as a change in the accounting estimate and hence is accounting policy and is accounted accounted for prospectively. Any excess/deficit in the case of this kind of recalculation must be adjusted in the period in which the change is affected. Goodwill 14 provides that goodwill arising on amalgamation in the nature of purchase is amortised over a period of 5 years. the entire valued. or the rates prescribed by Schedule VI of The Companies Act 1956. Are measured at cost only. Functional and Functional currency is foreign currency systematic basis. Goodwill is not amortised under AS IAS 38 but is subject to annual impairment test under IAS 36. . the No concept of functional currency. or selection of assets for class of assets to which that asset revaluation can be made on a belongs should be re-valued. is based on the each accounting period during the higher estimate of useful life of the asset. Measurement of intangible assets Can be measured at cost or revalued amount. Entire class to If an item of property.

To Tax authorities Excellent Good Average Bad 8 9 3 1 38% 43% 14% 5% How would you rate the advantage of IFRS to the following? .Survey Analysis – Banking Sector How would you rate the advantage of IFRS to the following? .To Management Excelle nt Good 4 19% 1 67% 4 3 14% Averag e Bad 0 0% How would you rate the advantage of IFRS to the following? .To Accountants .

Excellen t Good Average Bad 6 29% 10 48% 5 24% 0 0% How would you rate the advantage of IFRS to the following? . we find that majority of the respondents are positive on the implementation of IFRS.Regulatory Issues Major Challenge 7 33 % 1 62 3% 0 0% Significant Challenge Not a huge concern .To Shareholders Excellent Good Average Bad 9 7 5 0 43% 33% 24% 0% Analysis: As can be seen from the graph. accountants and stakeholders. management. This is a welcome sign as India goes for IFRS convergence April 2011 How would you rate the following with respect to implementation of IFRS? . There is recognition of the fact among the people surveyed about the impact of IFRS wrt to tax authorities.

IRDA rules and regulations and Ministry of Corporate Affairs( Companies Act). as stated by ICAI.Irrelevant Analysis: 0 0% Implementation of IRFS poses a significant challenge due to regulatory issues as more than one government body is involved namely RBI (banking regulation act). This requires a concerted effort from the above mentioned agencies. IFRS is itself an evolving concept and India is trying to converge with IFRS whereas IFRS itself keeps evolving with participants from various international accounting agencies contributing for the same.Lack of skilled manpower Major Challenge 1 62 3% 3 14 % 4 19 % 1 5% Significant Challenge Not a huge concern Irrelevant Analysis: Most of the current accounting firms are finding it tough to cope up with the demand pressure on IFRS implementation for all their clients due to lack of competent manpower. SEBI. How would you rate the following with respect to implementation of IFRS? . How would you rate the following with respect to implementation .

However in the long run.Delivering the market expectation Major Challenge 2 10 % 6 29 % 1 57 2% 0 0% Significant Challenge Not a huge concern Irrelevant Analysis: People resistance will be there to a new change being brought about as the concept is new to India and will take time for the organizations to develop .of IFRS? .Huge cost of establishment Major Challenge 524 % 838 % 629 % 15% Significant Challenge Not a huge concern Irrelevant Analysis: A complete implementation of IFRS will require initial investment which is the changeover cost. when the companies go in for single reporting standards as per IFRS norm. the cost will come down. How would you rate the following with respect to implementation of IFRS? .

How would you rate the following with respect to implementation of IFRS? . 0 0% 8 38 % 1 57 2% 0 0% How would you rate the following with respect to implementation of IFRS? .Difficulty level ( for the companies) Major Challenge 314 % 838 % 629 % 314 % Significant Challenge Not a huge concern Irrelevant .Managing Business Major Challenge Significant Challenge Not a huge concern Irrelevant Analysis: Managing business is does not seem to be a huge concern for many organizations because to stay in business they need to be compliant with the regulations in place.competency.

Some respondents replied with “irrelevant” because they are already IFRS compliant in case they are currently reporting back to their parent company in the country which requires IFRS.Highest 0 0% 1 5% 8 38% 9 43% 3 14% What would be the cost of adapting IFRS in an Indian Company? .Analysis: Overall the difficulty level remains high for most of the companies.Lowest 2 3 4 Lowes t Analysis: The general trend is that IFRS implementation is difficult due to factors discussed as part of previous question. How would you rate the difficulty level for implementing IFRS on a scale of 1-5? 1 . It poses a challenge in terms of change over cost involved and competent personnel. Highest 5 .

Rate the following features based on the level of difference of the following attributes of accounting standards between IFRS & current accounting practice . as a one time changeover cost.Contingent liabilities 1-Lowest Difference 2 15% 419 % 629 % 314 % 3 4 . It will be manageable if companies don’t have to prepare statement of accounts based on Indian GAAP and IFRS. Training and development of skilled manpower. The cost covers the IT systems changeover needed to match expectations of IFRS .Very high 5 24 % High 13 62 % 3 14 % 0% Average Low Analysis: 0 The cost of implementation is high.

Goodwill 1-Lowest Difference 2 15% 419 % 838 % 419 % 210 % 3 4 5-Highest Difference Rate the following features based on the level of difference of the following attributes of accounting standards between IFRS & current accounting practice .Highest Difference 524 % Rate the following features based on the level of difference of the following attributes of accounting standards between IFRS & current accounting practice .5.Highest Difference 00% 314% 733% 419% 524% Rate the following features based on the level of difference of the following attributes of accounting standards between IFRS & current accounting practice .Special Purpose Entities (SPE) 1.Intangible assets .Lowest Difference 2 3 4 5.

Depreciation on revalued portion 1-Lowest Difference 2 314 % 524 % 838 % 15% 210 % 3 4 5-Highest Difference Will the affect be huge on banking and investment sector? Yes No 17 3 81% 14% .1-Lowest Difference 2 00% 419 % 629 % 838 % 00% 3 4 5-Highest Difference Rate the following features based on the level of difference of the following attributes of accounting standards between IFRS & current accounting practice .

In your opinion. is it the right time for India to accept IFRS? Ye s No 1 76 6% 4 19 % Analysis: Majority of the respondents feel that it is the right time for India to accept an converge with IFRS as we move into a globalized era whereby we have foreign subsidiary companies operating in India can get benefit of single Accounting standards Does India have the necessary trainers who can conduct IFRS training? . Revenue recognition and dividend payout are two examples of the same.Analysis: Banking sector will be affected in major areas of • • Loan provisioning Derivatives accounting There is change with respect to structure of the financial statements.

Only big MNCs which had already been using IFRS are now at a competitive cost advantage. . It is imperative then for skilled personnel to collaborate and train others which would help the industry as a whole. This is because there is evident lack of manpower to handle the current work load. Do you think that India would manage to train enough accountants by the time IFRS is implemented? Ye s No 7 33 % 1 67 4% Analysis: Demand for accountants which can help in changeover to OFRS is surging as the deadline for implementation comes closer.Ye s No 5 24 % 1 76 6% Analysis: Lack of skilled manpower remains a concern.

This is because costs involved are huge and small companies might be able to absorb the same right now. smaller companies can learn and adopt IFRS. by seeing some of the bigger companies implementing IFRS.Do you think it should be made mandatory for all companies in India to follow IFRS? Ye s No 9 43 % 1 52 1% Analysis: As per the response and our analysis. Once there is a ready framework in country to match with. Is there a need for a proper discussion between economists and members from trade and industry before implementation of IFRS? Ye s No 1 90 9% 1 5% The concept of mark-to-market in IFRS is being debated in the very country of its origin. coming out of a recession. Do you think that we are overlooking . it is better not to implement IFRS for all the companies in a single go because IFRs is an evolving concept.

If yes. Though there are some guesstimates for the same.the risks of IFRS? Ye s No 1 48 0% 1 48 0% Will IFRS improve consistency between internal and external financial information? Yes No 19 90% 2 10% Have you calculated the cost for preparation of information under IFRS? Yes No 7 14 33% 67% Analysis: Most companies haven’t figured out the exact cost of implementation. is it greater as compared to current accounting practices? .

Ye s No 524 % 943 % Will there be a positive impact of foreign investments in India due to implementation of IFRS? Ye s No 2 95 0 % 1 5% Analysis: Yes. This is because of similar standards that investing companies have to deal with in India vis a vis their home country. The FDI and FII are expected to increase due to IFRS implementation. . This saves cost on preparing one report for their operations.

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