ACCT29083 THEORY OF ACCOUTNING LITERATURE REVIEW

PROS AND CONS OF ADOPTING IFRS IN INDIA:

A LITERATURE REVIEW

Submitted By:

Ganesh Bahadur Gaire

Student ID: s0251931

Assignment extension request ID: 66318

Submitted to:

Tek Lama

Lecturer

CQUnivesity

Sydney

Campus

PREPARED BY: GANESH BAHADUR GAIRE

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ACCT29083 THEORY OF ACCOUTNING LITERATURE REVIEW

EXECUTIVE SUMMARY

This literature review emphasized on the advantages and disadvantages while adopting IFRS
(International Financial Reporting System) generally and particularly in India. The analysis is
done to identify obvious benefits while adopting IFRS system in contemporary business
environment. Similarly, some considerable drawbacks that IFRS may have have been
described in simplistic format.

The major concern is to identify issues and conflict relevant to the Indian Accounting
Standards (IAS). This report analysed the key impact while adopting IFRS and discussed the
positive and negative aspect of it in relation to the factors associated with Indian economy
and socio-cultural environment.

PREPARED BY: GANESH BAHADUR GAIRE

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ACCT29083 THEORY OF ACCOUTNING LITERATURE REVIEW

INTRODUCTION

There are different accounting standards in the world portraying various policies and
guidelines. The requirement of IFRS arises because of the different companies are investing
to multiple countries. In such circumstances, company may face difficulties while adopting
suitable accounting standards. Consequently, this problem can be solved by adopting IFRS
guided by International Accounting Standard Board (IASB).

The trend of investment has been increasing towards globalization. Wyatt and Yospe, 2003
suggest that the concept of globalization became versatile and capital market becoming more
and more homogeneous, the demand of universal financial report standards has increased
significantly. Therefore, IFRS is prominent to make the efficient reporting system for several
companies operating internationally.

The effect of IFRS on Indian economy has been analysed. Generally, the approach of looking
at Indian economy and factors stimulating investors are discussed. On the contrary, demerits
of IFRS comprise changing legislative system of India, multiple reporting difficulties and
diverse culture of India.

PREPARED BY: GANESH BAHADUR GAIRE

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LITERATURE REVIEW

This study is based on the analytical aspects of various journals, newsletter, and books.
Different pros and cons of Indian adoption of IFRS in preparation of financial statements are
studied and analysed. Considering the benefits of IFRS adoption, the socio-cultural and
economic part of Indian economy may generate controversy towards the highest level
(Armstrong C S, Riedl E J 2008).

The study was carried out to comprehend the advantages and challenges faced by Indian
companies while adopting the IFRS. The outcome of the study revealed that the economy as a
whole will be benefitted by the acceptance and implementation of IFRS in India. The study of
Muhammad Z I and Summon B (2009) have highlighted on the Indian perspective of IFRS
adoption and its underlying effect on the financial exposure. The emerging economy like
India has most possibility of high level of Industrial and expertise growth that will demand
the investment from all around the world. For this, a single set of accounting standard is
essential to make the reporting system more logical, comparable and consistent.

Therefore, adoption of IFRS is not only in demand but it is a must which will generate
compatibility in the accounting system of India (ICAI). Moreover, higher information quality
of IFRS implications is expected though the economic and cultural dimension is more prone
to be unsupportive considering the perspective of Indian society.

PREPARED BY: GANESH BAHADUR GAIRE

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1. IFRS CONCEPTUAL FRAMEWORKS & IT’S BENEFITS

Accounting authority attempts to develop a set of accounting framework to define accounting

statement with guidance for all accounting practices in the world. Convergence to IFRS may
have many benefits to companies. IFRS suggest that conceptual set of international standards
promotes economic development, harmonisation and standardization on financial
performance.

1.1 Consistency, transparency and logical :

The reporting necessities will be more consistent and logical. This is because of the
orderly set of concepts. The requirements of IFRS are consistent concept with the set
of standards of different accounting standards (Bradbury M, 2003). Also, IFRS states
that qualitative characteristics of the financial statements need to be efficient.
Likewise, efficient allocation of capital globally attracts investment through
transparency.
1.2 Economic growth:

The convergence to IFRS can be more important for the growth of different nation’s
economic aspect. Solomons D (2005) identified that conceptual frameworks also
facilitates standardising information systems by eliminating wasteful reconciliation
and it will increase audit efficiencies through education and training. Furthermore,
the transparency on reporting system brings confidence level in the international level
thereby increasing the prospects of increase in foreign direct investment.

1.3 International compatibility of accounting standards:

According to Ball R (2006), “IFRS has the potential to facilitate cross-border

comparisons, increase reporting transparency, decrease information costs, and reduce
information asymmetry in different accounting standards”. All these factors
consequently increase the liquidity, competitiveness and efficiency of international
markets from the economic prospective of view (Nulla Y M, 2014). The acceptance

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of a set of accounting standards minimizes the risk of over-regulation and specific

requirement to prepare reports.

1.4 Understandability and Decision usefulness:

It is widely accepted that accounting data are for decision making process in relation
to s specific entity. IFRS also assist on decision making process to the foreign
investors by providing reliable and comparable financial statements. Lack of
comparability due to informational externalities can be eliminated by accepting
uniform set of standards like IFRS to improve the decision making ability and
develop alternatives choices of consequences (Choi F & Meek G K, 2005).
Correspondingly, SFAC No. 2 and the IASB framework explain the qualitative
characteristics. Understandability refers to the ability of information revealed by
financial reports to be understood by the stakeholders. Therefore, financial
information should faithfully represent transactions and event without material bias
and errors to help users for decision making (IASB Framework).

1.5 Economical development of accounting standards:

Similarly, Jermakowicz E K & Tomasezewski G (2006) argues that, IFRS plays

eminent role to reduce the prolonged process in cross-border trading and cross-border
accounting. In developing countries, IFRS adoption could be helpful to lift up the
economic growth. The reasons include time and cost minimization, improved
integrity of reports of listed companies (Mir M Z & Rahaman A S, 2005).

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2. DRAWBACKS OF IFRS CONCEPTUAL FRAMEWORKS

There are different approaches to evaluate conceptual framework which can vary country
wise i.e. Scientific criticism and descriptive & non-operational. Even if the assumption is
scientific approach, it has been questionable to various entities. And other qualitative
approaches are given below.

2.1 Ignorance of cultural and socio-economic differences:

The critics of IFRS state that adoption of the framework in developing countries will
negatively impact on the various accounting requirements and the disparity in their cultural,
political, social-economic development (Zaidi S & Paz V 2014). IFRS on the other hand,
reinforces the economic performance rather than social performance.

2.2 Costly and burdensome process:

The process of transitioning from restricted accounting standards to IFRS is troublesome and
costly because of the complexity of IFRS frameworks. Moreover, the process of reporting
can be problematic especially for small organization. Larson R K & Street D L (2004),
suggest that the barriers to convergence is due the complicated nature of IFRS frameworks.

2.3 Fair value approach increase volatility:

Faire value approach is the requirement of IFRS accounting system. Based on the faire value
approach, the volatility on both reported assets and earnings becomes high (Jermakowicz E
K, 2004). Likewise, the market values of assets are considered to maintain the liabilities of
the company to value of actual assets. It provides the clear understanding of assets and
liabilities that company required to report on financial statements at the end of accounting
periods.

2.4 Codification issue in convergence with IFRS:

The codification of local or national accounting standards for convergence with IFRS will
bring some issues and discrepancies because of the differences in cultural, economical and
social issues (Andor G & Rozsa I, 2013).

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2.5 Ontological and Epistemological Assumptions:

To provide financial information to users of reports in an unbiased and objective manner is

the objective of IFRS frameworks. The ontological assumption is that the usefulness of
accounting reports will provide a truth and reality to the users to believe it. Chua W F (2000)
argued that most accounting methodologies are undertaken about ‘test of truth’.

3. ADVANTAGES OF IFRS ADOPTION IN INDIA

India is the most uniformly developing country in the world in terms of economic and social
aspects. The investors all around the world are attracted to put their investment in different
sectors such as software development, electronic product sectors and so on. The Indian
accounting standard board called Institute of Chartered Accountant of India (ICAI) developed
supplementary accounting standard and harmonizing existing standards with IFRS. Beside
advantages of IFRS adoption India has big challenges comprising incompatible legal,
business environment and lock of industry and accounting professionals. Some of the
advantages and disadvantages are outlined below:

3.1 IFRS standards assist in eliminating cross-border barriers:

It is obvious that investment from throughout the world is necessary to grow and
expansion of capital markets. Company requires to present report of financial statement
on the basis of provision of IFRS to be listed on global capital market. For this purpose,
IFRS removes the barriers of cross-border to bring transparency in the financial report
prepared by business firms. Pasquariello P 2007, states that international accounting
standards facilitate harmonization of subjective comparability across national borders
between firms and markets. For instance, the adverse performance of one country may

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lead to financial distress which may cause investor’s to suspect the financial health of
another country.

3.2 Facilitate ease access to global market:

In the last decade, Indian economy has turned into a dominant economy in the world.
Companies are expanding globally through merger and acquisition and establishing new
franchises. Senapaty S C (2008) remarked that in comparison with global companies,
IFRS will facilitate better reporting system for Indian companies for reasonable
performance.

3.3 Increasing trend of Cross-border acquisition:

IFRS excelled drive to global acquisitions, partnership and joint venture with cross-border
corporations which also tend to reduce the cost of integration. The investigation of
Bhattacharjee S Hossain S M (2010), revealed that adoption of IFRS had increase the
reliability of financial reports, reduced information differences among different entities of
the company.

3.4 Escape multiple reporting system:

The multinational companies registered in India and in other countries need to prepare
accounting statement based on the provision of particular country. In such circumstance,
adoption of a single set of standards (i.e. IFRS) will ensure elimination of multiple
reporting systems (Tendeloo V B & Vanstraelen A 2005). For instance, company
established in Indian and in Australia will adopt a single set of IFRS provision for
preparing and reporting of financial statement which enable company to end the
difficulties of multiple reporting problems.

3.5 Global uniformity of standards:

Companies established in multiple countries can compare financial information by

adopting the uniform standards of IFRS. The complication of different accounting
standards will be resolved and the reports become transparent and comparable. Similarly,

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the quality of report is enhanced which enable the better communication of financial
performance to stakeholders’.

3.6 Economic development beneficial in industrial and accounting sector:

The international business becomes easier with the acceptance of IFRS. The increasing
capital flow will enhance thrusting economic development. Ultimately, it will expand the
opportunity for accounting professional as the demand of the accounting expert increases
and the industrial sector will become wider.

3.7 Enable benchmarking and increase brand value:

IFRS adoption will enable companies to extend their business in the international market
by understanding the relative benefits. Singh A K & Diwan S (2014) states that IFRS
acceptance will facilitate corporations to extend their market globally rather than in local
markets. Many multinational companies such as Unilever, Microsoft, Honda, Toyota and
more are interested to invest in Indian due to the cheap labour and resources to produce.
This helps to expand companies and increase the value of capital as the IFRS system will
help to minimize cost of capital and make ease foreign investment procedures.

3.7 Decreases cost of capital:

IFRS will minimize the cost of capital by eliminating the need for preparation of multiple
reporting systems. Furthermore, it will decrease the risk associated with premiums and
accountants’ fees and makes the company’s access to global capital market easier.

3.8 Noble opportunities:

The service sectors of Indian companies are gradually expanding to global market. On
the other hand, wide pool of accounting professionals and IT experts Indian can emerge
in international market to focus on significant opportunities. Bhanu S P & Achalpathi K
V (2015), remarked that the approach of IFRS has been significantly changing the trend
of outsourcing expertise system in the field of IT and software development in India.
Many Indian accounting professional are working in foreign countries as an auditors and
accountant. This has become possible due to the uniform standards of IFRS and enable
Indian professional to be able to work globally.

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4. CHALLENGES OF ADOPTION AND IMPLEMENTAION OF IFRS

Considering several advantages of IFRS, accounting professionals and auditors benefitted

with the compatibility, uniformity and other several aspects. However, convergence and
adoption of IFRS the companies is facing many difficulties and challenges.

4.1 Difficulties in comprehension of International Financial Reporting Practices:

The reporting system based on IFRS need to be understood by corporations, banks,

stock exchanges and other financial institutions. Ali R & Ustundag C H (2009)
observed the initial phase of worldwide accounting system and execution. The study
identified lots of difficulties at the beginning of acceptance of IFRS such as difficulty
of international standards and lack of regulation.

4.2 Consideration of legal and regulatory differences:

The legislation and regulatory of accounting system in India is different from the
requirement of IFRS which result in various legal complexities. Street L (2003)
remarked that combined practices are necessary from all local and national
authorities, stock market regulators, and other users of the financial reports. The effort
of different sectors will help to minimize the complexities of implications of
international standards in local level.

4.3 Complexity in reporting process:

As per Indian accounting standards, the adoption of IFRS will bring complexity in
preparation of different financial reports. Achalapathi K V (2015) remarked that, the
fair value approach of IFRS will affect many companies if the accounting system is
prepared based on the standards. The users and the auditors are required to take

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training to comprehend the different method of faire value approach. It will continue
at the beginning of early periods of adoption.

4.4 Economic environment of the country:

The trade policy, monetary policy, taxation law and regulations may not be supportive
to IFRS adoption. This is because of the lacking in accuracy on calculation of faire
market value would be difficult to adopt the approach of fair market based on IFRS
standards. Rakesh H M (2013) argued that Indian economic environment will affect
the prevailing account systems; so that there should be a suitable approach that is
needed on settling accounting differences.

4.5 Lack of skilful resources:

Considering the Indian business environment, there are enormous lacks of resources
that are required to meet the standards of IFRS. It seems that the government
authorities are responsible for formulation of appropriate legislation to make
successful implementations of international standards. Particularly, IFRS implications
may generate some shortage of accounting authorities to make the Indian standards
compatible with IFRS.

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ACCT29083 THEORY OF ACCOUTNING LITERATURE REVIEW

CONCLUSION

The approach of IFRS adoption in Indian focuses of several advantages and criticism.
As noted in the overall literature review the benefits in a precise way comprises
consistency, comparability, cost-saving and efficient approach. However, IFRS have
several drawbacks that exist in the adoption phase to implementation phase such as
lack of skilful resources, burdensome, different accounting system and so on.

There are several factors that many investors are keen to establish and run the
business in India. Since Indian has great population of around 1.5 billion, goods and
services are steady in demand. Furthermore, government of India has also made the
policies of FDI easier and efficient. The domestic production level is also increasing
rapidly. The cheap resources available in India also attract investors. However, there
are enormous challenges that need to be faced by multinational corporations in India.
The bureaucratic system of India has central and state policy and regulation which
multinational companies need to comply with. Other factors are diverse market
structure like rural-urban divide, unorganized market structure and multiple legal and
administrative systems. Similarly, lacks of proper infrastructure also magnify
challenges to be more severe.

IFRS framework, therefore, has made the accounting standards more consistent,
logical, comparable and easy to adopt and implement in countries having diverse
socio-cultural and economic environment like India. Nevertheless, it has many issues
to consider due to the differences in accounting standards of particular country,
legislative system and political system as well.

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ACCT29083 THEORY OF ACCOUTNING LITERATURE REVIEW

REFERENCES

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