Meaning: International Financial reporting Standards (IFRS) is a set of Accounting Standards developed by fi independent, not-for-profit organisation called the International Accounting Standards Board (IASB), International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry specific reporting. Having an international standard is especially important for large companies that have subsidiaries in different countries. Objectives of Accounting Standards: 1. To standardize accounting methods, procedures, treatments and policies globally. 2. To lay down principles for preparation and presentation of financial statements uniformly over the world to suit the needs of diverse audience. 3. To establish benchmarks for evaluating the quality of earnings and reporting intemationally. 4, To ensure that international community of users of financial statements get creditable financial information. Need for Uniform Global Financial Reporting: 1. Globalization of economics and the requirements of more transparency and stringency in the financial reporting to match the requirements of much wider, diverse and demanding audience. 2. Companies raising capital overseas from the public, FIls, venture capitalists and strategic capital partners, all wanting information either in accordance with US GAAP, in the US, or International Financial Reporting Standards (IFRS) formulated by the IASB in Europe. 3. Dual Responsibility of capital market regulators to monitor companies operating in their domiciles as well as overseas. 4. Investors having invested in the capital markets of different economies finding it difficult to understand and compare results based on different accounting standards. 5. Harmonization needs of MNCs operating beyond their shores to present consolidated financial picture of their world wide operations being carried out and measured in terms of the native diverse from country to country accounting standards. 6. Likewise, harmonization needs of Indian MNCs operating offshore. Significant Differences between IFRS, Indian GAAP and US GAAP. Basis of IFRS Indian GAAP US GAAP Difference a [1 Revenue Revenues are recognized | Revenues are recognized Industry sp revenue Recognition when all significant risks | when all significant risks and | recognition guidelines. and rewards of ownership | rewards of ownership are Could be different from | are transferred. transferred or on a percentage | what I-GAAP has | of completion basis. No recognized. detailed industry specific guidelin 2. Balance Sheet | Balance Sheet captions are | Conforms to statute and | Balance sheet eaptions order of liquidity i.e. order : liquidi illiquid items appear | Equity and reserves most | ts, cash, presented in the inverse | captions are in the following | are presented in order of y starting with the i3. Correction of fundamental errors "4 Derivative other financial instrument Measurement of e edges of foreign entity investments. earlier. Requires disclosure of either changes in equity or changes in equity other than those arising from capital transactions with ‘owners and distnbution of owners “Include cumulative effect in current year income statement. For material Similar to US GAZ Except, inettecti ~Debt ixed assets vestments ~-Net current assets ~-Deferred expenditure and Accumulated losses Required only for the current year with the prior year | comparatives, Include effect in current year income Statement. | Also requires disclosure of movements in stockholders’ equity, including the number of shares outstanding for all years presented Restate comparatives Adjustments required to be made to previously issued financial statements. No definitive standard yet New standard on financial non-derivatives recognized | instruments: Recognition and in equity Measurement is presently under formulation. Gains/losses on hed of foreign entity investments recognize im equity. All hedge 5. Comprehensive Income 6, Derivatives and other financial instruments ~ measurement of derivative instruments and hedging acti | Combinations Option to present a statement that shows all changes in equity that did not arise from capital transactions with owners or distributions to owners. | Similar to US GAAP. Gains/losses on hedge instrument used to hedge forecast transaction, included in the cost of | asseU/liability (basis adjustment). | Business combinations | under IFRS should be _ accounted for as an acquisition (purchase method). | Where an acquirer cannot __be identified then the No standards, not required No definitive standard yet. New Standard on financial instruments: Recognition and Measurement is presently under formulation. / Restricts the use of pooling of interest method to circumstances which meet the criteria listed for an | amalgamation in the nature of amerger. In all other cases, __| the purchase method is used Unrealized gains losses on investment and Forciga currency | translation disclosed as 2 separate component of equity. | Measure derivatives and hedge instrument at fair value: recognize changes in fair value in income statement except for effective cash flow hedges, defer in equity until effect of the underlying transaction is recognized in the income | statement. Gains losses on hedge instrument used to hedge forecast transaction, included in _costof assevliability. Only accounted for by the purchase method. Several differences can arise in terms of date of combination, calculation | Of share value to use for | purchase price, ciallypooling of if the GAAP method is interests method should be ‘amalgamation’. L | adopted. 8. Cash Flow Mandatory for all entities. | Mandatory only for listed Mandatory for all | Statement companies and companies entities. meeting certain turnover conditions. 9. Property, Plant and Equipment Use historical cost or revalued amounts. On revaluation, an entire class of assets is revalued. Use historical costs or revalued amounts. On revaluation, an entire class of assets is revalued, or selection of assets for revaluation is made on a systematic basis. No current restriction on frequency of valuation. Revaluations not permitted. Tested for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. "10. Share Issue Expenses There is no specific requirement under IFRS. May be accounted for as deferred expenses and amortized. Expenses are written off when incurred against proceeds of capital. ‘IL. Dividends Dividends are classified as a financial liability and are reported in the income | statement as an expense. If dividends are declared | subsequent to the balance | sheet date, it is not recognized as a liability. Dividends are reflected in the financial statements of the year to which they relate even if proposed or approved after the year end. 12. Leases — Similar to US except that | the criteria for | distinguishing between capital and revenue leases are different. Dividends are accounted for when approved by the | Board/shareholders. If | the approval is after the year end, the dividend is not considered as a subsequent event to adjust the financials. Similar to US GAAP but, no quantitative threshoids defined. Leases are classified as capital and operating | leases as per certain criteria. Capital leases are included under | property, plant and equipment of the lessor. | Lease rentals on operating leases are expensed as incurred. Quantitative thresholds have been defined. 13. Prior period | adjustments Prior period errors are generally corrected in the current financial | statements. However, where the error is of such | significance that the prior period financial statements cannot be considered to have been reliable at the date of their issue, the | error should be corrected by adjusting the opening retained earnings. Prior period items are separately disclosed in the current statement of Profit and Loss together with their nature and amount in a manner that their impact on current profit and loss can be perceived. Correction of an error in previously issued | financial statement is recognized by restating | previously issued financial statements. 14, Accounting _for Foreign | All exchange differences | are included in Exchange differences on foreign currency transactions All exchange differences are included inCurrency Transactions 15. Goodwill 16. Negative Goodwill (i.e. the excess of the fair value of _ method | determining net income for the period in which differences ari Goodwill is amortized to expense on a systematic basis over its useful life with a maximum of twenty years. The straight line method should be adopted unless the use of any other n be justified. Ne goodwill that relates to expectations of future losses and expenses should be recognized as are recognized in the profit and loss account with the exception that exchange differences related to the quisition of fixed assets adjusted to the carrying cost of the relevant fixed asset. Goodwill is capitalized and tested for impairment | annually, Except for goodwill | from amalgamation, this is amortized over 3-5 ye: Negative goodwill i to the capital reserve account, which is a component of stockholders” equity. determining net income for the period in which differences arise. | Goodwill is not amortized but goodwill is to be tested for impairment annually. | Soueen | mecca ereeenen ere Negative goodwill is allocated to reduce proportionately the value assigned to non-current peony income when the future assets. Any remaining acquired over the 1.0 and expenses are fi idered to peace Josses and expenses are excess is considered pm | recognized. Where it does be extraordinary gain. Consideration) | NOt relate to identifiable future losses and expenses, an amount not exceeding the fair values of the acquired identifiable non | monetary. Assets should be recognized as income | on a systematic basis over | | the remaining weighted | average useful life of such | assets and the balance, if | any immediately charged : _to income. | | aa 17. Related Similar to US GAAP | Determined by ability to Related parties are | parties except that the existences | control or to exercise determined basedon | of related parties are to be significant influence over the | common ownership and disclosed even if there are | other party. Detailed control. Disclosure | no transactions during the disclosure required of all required of all material | period. material related party related party transactions, transactions. Mandatory for | in particular, the nature listed companies and of relationship involved, | | companies meeting certain _| a description of the tumover threshold. transactions, the amounts of the transactions, the | amounts of the transactions for the | financial year and the | amount due from or to | | related parties at the end | oe a | of the financial year. 1 18.Pension / To be provided for and | Required to be mandatorily | To be provided for and Gratuity /Post | funded based on acturial _| provided Based on either _| funded based on actu| Retirement valuation. Significant | actuarial valuation or valuation. Significant | to Non-Employees no guidance on recognition and measurement. Benefits disclosure requirements Contribution to a defined disclosure requirements exist. Acturial gains/losses | plan. Follows AS-15, Acturial | exist. Acturial are amortized. gain/losses are recognized _| gains/losses are L immediately. _| amortized. 19. Stock Options | Disclosures required but, | No specific guidance Complex guidance with respect to measurement date and timing of recognition of expense. 20. Stock based | Compensation Compensation costs to be disclosed. Recognition of compensation costs is not mandatory. SEBI requires compensation cost to be recognized based | on intrinsic value or fair value. Not mandatory for un- listed companies. | US GAAP had similar + rules as what SEBI later | required. However, there | is new standard effective | 2005, which requires fair value to be expense for all options. 21. Investment | Similar to US GAAP. Only unrealized depreciation | Both appreciation and and Marketable | Except option to recognize | on AFS (Available-For-Sale) | depreciation (if Securities. gains/losses in AFS either | securities is recognized in the | unrealized) is recognized _ (| income statement or income statement. as Other Comprehensive _ equity. However, the Income. Separate selection is a one-time standard for treatment of option. No guideline under cost of development of : IERS. _ computer software. 22. Segment Largely similar to US Specific requirements govern | Disclose revenues, | Information GAAP requirements the format and content of a profits and assets | however, mandatory only _| reportable segment and the identified by product and | for listed companies, basis of identification of2 | geographically of each Segment liabilities are also | reportable segment. The reportable segment. to be shown. | information for disclosure is | Segments based on | to be prepared in conformity | information reviewed by with the accounting standards | CODM (Chief Operating | used for the company asa __| Decision Maker) 23.JV (Jointly | Allows either Equity Allows proportionate Generally only uses | @& controlled assets | method or proportionate _ consolidation Equity method of | or corporation) | consolidation. accounting except certain specified industries such | L_ | : _ as Oil and Gas. | 24, Research and | Deferred where technical | Deferred where technical or _| Research costs canbe | development costs or commercial feasibility | commercial feasibility is capitalized and amortized is established andthe _| established and the enterprise | as intangible assets in the enterprise has adequate | Tesources to enable the product or process to be marketed. has adequate resources to enable the product or process to be marketed. following cases: Research costs related to activities conducted for others, costs unique to extractive industries and cost of intangibles which have alternative future uses. All other costs are charged to expense as | , | and when incurred. —_|Strengths and Benefits of US GAAPs: The following are the strengths of US GAAPs: 1 E; years figures to f xcept the balance sheet (two years). other annual financial statements to provide three tate better comparative analys 2. Multi ~ step income statement presentation as an option. 3. Detailed accounting standards on: (i) Accounting for spin-off /carve out units. (ii) Specific industries (iii) Transactions between entities under common control. (iv) Barter advertising arrangements. (vy) Volume- based rebates’ Sales incentives. 4. Upward valuation of any of the fixed assets not permitted. 5. Deferral of expenses, except direct response advertising, not permitted. 6. Segment reporting to be based on internal financial reporting policies even if different from group accounting policy Benefits of US GAAPs: 1. Wider acceptability among the investor community, 2. Better international credit rating. 3. Internationalization of company’s brand. 4. US listing. Reduced cost of capital 5. Improved internal decision making proce 6. Improved financial discipline