AMAN

A3923009045

IFRS:

International Financial Reporting Standards (IFRS) was issued by International

Accounting Standards Board (IASB). The International Standard setting

process began long ago as an effort to Standardize and make easier to adopt

by the developing and smaller nations which feel difficult to set and establish

their own standards on Accounting and Reporting. The importance of having

one standard was felt by the regulators, investors, large entities and audit firms

as the business becomes more global. Convergence with IFRS issued by IASB

has recently gained momentum all over the world. So far 109 countries

presently require or permit use of IFRS in preparation of financial statements in

their countries. By 2011, the number is expected to reach 150. Due to the

complex nature of IFRS, Institute of Chartered Accountants of India (ICAI) in its

2006 concept paper expressed its view that IFRS should be adopted from

01.04.2011. Implementation will be done in a phased manner. Adoption of

IFRS is mandatory for the following entities:

1.      Public and Private Companies listed and in the process of listing.

2.      Private Companies who have issued debt instruments in a public market

and.

3.      Private companies which hold assets in fiduciary capacity (ex: Banks and

Insurance companies)

General Differences

Different terminology is used in Ind AS e.g. the term ‘balance sheet’ is used instead of ‘Statement of financial position’ and ‘Statement of Profit and Loss’ is used instead of ‘Statement of comprehensive income’. The words ‘approval of the financial statements for issue’ have been used instead of ‘authorisation of the financial statements for issue’ in the context of financial statements considered for the purpose of events after the reporting period.

The transitional provisions given in IFRS have not been given in Ind AS, since all transitional provisions related to Ind ASs, wherever considered appropriate, have been included in Ind AS 101 First-time Adoption of Indian Accounting Standards.

Under Ind AS, IFRIC and SIC have not been issued separately from Ind AS but included as an appendix to Ind AS.

Convergence with IFRSs - Benefits

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: Investors want the information that is more relevant, reliable, timely and comparable across the jurisdictions. Financial statements prepared using a common set of accounting standards help investors better understand investment opportunities as opposed to financial statements prepared using a different set of national accounting standards. For better understanding of financial 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. Convergence with IFRS contributes to investors' understanding and confidence in high quality financial statements.

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. Convergence of accounting standards 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 IFRS 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 IFRS to clients to give them backing for recommending certain ways of reporting.

Implementation of IFRS is a herculean task in India.

Following are a few challenges faced during adoption and implementation of IFRS:

Awareness about international practicesAdoption of IFRS means that the entire set of financial statements will be required to undergo a drastic change. There are a number of differences between the two GAAP’s (discussed below). This may cause the users of financial statements to look at them from a new perspective. It would be a challenge to bring about awareness of IFRS and its impact among the users of financial statements.

TrainingProfessional accountants are looked upon to ensure successful implementation of IFRS. The biggest hurdle for the professionals in implementing IFRS is the lack of training facilities and academic courses on IFRS in India. As the implementation date draws closer (2011), it is observed that there is acute shortage of trained IFRS staff. The solution to this problem is that all stakeholders in the organization should be trained and IFRS should beintroduced as a full time subject in the universities.

Amendments to the existing lawIt 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, banking laws and regulations and the insurance laws and regulations. Currently, the reporting requirements are governed by various regulators in India and their provisions override other laws. IFRS does not recognize such overriding laws. Although steps to amend these laws have been initiated, the authorities need to ensure that the laws are amended well in time.

TaxationIFRS convergence would affect most of the items in the financial statements and consequently the tax liabilities would also undergo a change. Thus the taxation laws should address the treatment of tax liabilities arising on convergence from Indian GAAP to IFRS. It is extremely important that the taxation laws recognize IFRS compliant financial statements otherwise it would duplicate administrative work for the organizations.

Fair valueIFRS uses fair value as a measurement base for valuing most of the items of financial statements. The use of fair value accounting can bring a lot of volatility and subjectivity to the financial statements. It also involves a lot of

hard work in arriving at the fair value and valuation experts have to be used. Moreover, adjustments to fair value result in gains or losses which are reflected in the income statements. Whether this can be included in computing distributable profit is also debated.

Management compensation planThe terms and conditions relating to management compensation plans would also have to be changed. This is because the financial results under IFRS are likely to be very different from those under the Indian GAAP. The contracts would have to be re-negotiated which is also a big challenge.

Reporting systemsThe disclosure and reporting requirements under IFRS are completely different from the Indian reporting requirements. Companies would have to ensure that the 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, segment disclosures, related party transactions, etc. Existence of proper internal control and minimizing the risk of business disruption should be taken care of while modifying or changing theinformation systems.

Challenges in Adoption of Ifrs

1. The differences between Indian GAAP and IFRS are wide and very deep routed, to say a few -Plant Property and Equipment (PPE) accounting, Financial Instruments accounting, Investment accounting, Business combination, Share based payment, current and noncurrent classification of asset and liabilities, presentation of financial statements, all are not dealt under Indian GAAP.

2. Fair Value Measurement under IFRS requires application of fair value in various situations. This would increase the volatility in reported earnings and related performance measures such as EPS, P/E ratio, etc. There may be interpretation issues of IFRS among businesses and accounting bodies.

Various adjustments to the fair value may result in gains or losses which are reflected in the income statements.

3. IFRS compliance would require changes right from the grassroots level, beginning with academic inputs and training. And this is not going to be an easy task, given the limited time frame before the new standards come into force.

4. The transition will be a tough challenge for the country as it requires a shift in the academic approach, along with regulatory challenges.

5. The major problem that industries are likely to face is a talent crunch since, even in the current scenario, there is a scarcity of qualified resources.

6. There is a need to give accounting staff appropriate training. Companies need to draw up detailed plans for migrating to IFRS as early as possible, to make the transition smooth and flawless.

7. Accounting teams should be conversant not only with new standards but also with information technology to support the new financial reporting architecture.

8. 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.

9. The potential tax impact areas under the IFRS converged reporting can be categorized under the following broad heads.

Recognition Issues such as whether the imputed interest on credit sales would be considered as sales or interest income? Whether tax withholding needs to be done on imputed interest? Classification Issues in terms of whether the payment on redeemable preference shares / convertibles be treated as dividend or interest? Point of recognition as to whether the services contract would be taxed only upon completion or at the point of accrual? Tax Base in terms of will the tax assessments and Minimum Alternate Tax Computation be based on IFRS accounts or would the same continue on Indian GAAP? Indirect tax levies impact on account of IFRS characterization / point of recognition? Transition Issues on the tax treatment for the one-time adjustments on IFRS convergence?

Addressing the above clearly requires a policy directive followed with amendments in existing tax laws.

10. Amendments in Regulations Accounting standard are not only issued by ICAI but also issued by but also by various other regulatory bodies, such as SEBI, RBI and IRDA and National Advisory Committee on Accounting Standards (NACAS) established by the Ministry of Corporate Affairs. There is a critical need that all such regulatory bodies need to be consistent.

11. Financial statements more complex under IFRS and thereby would pose challenge making useful decision.

Challenges for banks and non-banking financial companies

In respect of banks and NBFCs, in view of the special issues involved (finalization of IFRS 9 expected in the middle of 2011), a separate road map was prepared in March 2010 for convergence with IFRS for the banking industry and NBFCs. The convergence process would be from period beginning April 1, 2013, with a phased approach for urban banks and NBFCs. This gives the banking system some time to adopt to the standards in a smooth and non-disruptive manner.

It has to be noted, however, that banks will be significantly affected by the IAS 39 replacement project and a number of other accounting developments including those relating to financial instruments, fair value measurement, financial statement presentation and consolidation. Some of the major changes pertain to certain critical areas such as classification and measurement of financial assets, classification and valuation of liabilities, impairment provisions and fair value measurement. One area of concern has been the drawback of the incurred loss model of IAS 39 and the need to introduce more forward looking provisioning.

The IFRS convergence process will involve significant challenges for the banking system in general. Banks would need to upgrade their infrastructure, including IT and human resources, to face the complexities and challenges of IFRS. Some major technical issues arising for Indian banks during the convergence process would be differences between the IFRS and current regulatory guidelines on classification and measurement of financial assets, focus in the standard on the business model followed by banks and the challenges for management in this area, application of fair values for transactions where not much guidance is available in India in terms of market practices or benchmarks, and expected changes in impairment rules.