ifrs convergence in india

8/10/2019 IFRS Convergence in India

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IFRS Convergence in India

International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an

independent, not-for-profit organization called the International Accounting Standards Board (IASB). The goalof IFRS is to provide a global framework for how companies prepare and disclose their financialstatements. Having an international standard is especially important for large companies that have subsidiariesin different countries. Adopting a single set of world-wide standards will simplify accounting procedures byallowing a company to use one reporting language throughout. A single standard will also provide investors andauditors with a cohesive view of the position of the company.

IFRS is used in many parts of the world including European Nations, Australia, Hong Kong, Malaysia, Pakistan,GCC Countries, Russia, South Africa, Singapore and Turkey. As of December 2013, more than 110 countriesaround the world currently require or permit IFRS reporting. Approximately 92 of those countries require IFRSreporting for all domestic listed companies. More countries expected to transition to IFRS by 2015. Proponentsof IFRS as an international standard maintain that the cost of implementing IFRS could be offset by thepotential for compliance to improve credit ratings.

The story so far in India

India has come a long way since the issuance of the Concept Paper on Convergence with IFRSs in India bythe Institute of Chartered Accountants of India (ICAI, a statutory body established for the regulation of theprofession of Chartered Accountants in India) in 2007. In February 2011, the Ministry of Corporate Affairs(MCA, the regulator of Corporate affairs in India), issued 35 Ind ASs i.e. the Indian Accounting Standardsequivalent to the International Financial Reporting Standards (IFRSs). Though substantially similar to theIFRSs, the Ind ASs have some carve outs to ensure that these standards are suitable for application in Indianeconomic environment. The IFRS-converged accounting standards deal with mark-to-market projections and

valuation of financial assets among other things.

Initially these new standards were slated for use for accounting periods commencing on or after 1 April 2011 ina phased manner. However, the effective date for adoption of the Ind ASs was deferred pending resolution ofvarious implementation issues including tax related issues with the concerned departments to ensure a smoothtransition. Also, industry bodies had sought postponement arguing the industry needed more time to prepare.Since then, there have been two key developments.

First, is the issuance of Revised Schedule VI by the MCA, which is applicable to financial statements preparedfor accounting periods commencing on or after 1 April 2011. Revised Schedule VI provides the format andguidelines for preparation of Balance Sheet and Statement of Profit and Loss in India. Revised Schedule VIbrings in many concepts from IFRS like the Balance Sheet where assets and liabilities are required to beclassified as Current and Non-Current and additional disclosures. However, since the base standards i.e. thenotified Accounting Standards have not changed, there could be instances where there may be a conflictbetween the provisions of the Revised Schedule VI and the notified Accounting Standards. In such a scenario,the provisions of the notified Accounting Standards will prevail over the provisions of the Revised Schedule VIas explicitly stated therein.

Secondly, the Companies Act 2013 has come in force which contains many requirements aligned to IFRS. Forinstance, the new Act prohibits a prescribed class of companies from using Securities Premium (also called
http://searchdatamanagement.techtarget.com/definition/compliancehttp://searchdatamanagement.techtarget.com/definition/compliance


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Additional Paid-in capital) to write off the premium payable on redemption of debentures and preferenceshares. Under IFRS, such premium is typically charged to profit-and-loss as interest expense. The Act alsomandates component accounting for depreciation. Additionally, it permits the prescribed class of companies todepart from prescribed useful lives. These provisions allow companies to follow IFRS requirement.

Impact of IFRS in India

Adoption of IFRS by Indian corporates is going to be very challenging but at the same time could also berewarding. Indian corporates are likely to reap significant benefits from adopting IFRS. The European Union'sexperience highlights many perceived benefits as a result of adopting IFRS. Overall, most investors, financialstatement preparers and auditors were in agreement that IFRS improved the quality of financial statements andthat IFRS implementation was a positive development for EU financial reporting (2007 ICAEW Report on 'EUImplementation of IFRS and the Fair Value Directive').

Although a detailed analysis of the differences between IFRS and Ind AS is out of the scope of this write-up,following broad points of difference can be noticed between the two of them:

ccounting rea Treatment under current IndianG P

Treatment under IFRS

Business Combinations Acquisitions are accounted at bookvalues of identifiable assets andliabilities of the acquiree, with theexcess of consideration over thenet book value recognized asgoodwill

Accounting is done for all assetsincluding hidden intangibles at fairvalue. As the assets are recognizedat fair value, amortization of theseassets will reduce future year profit

Consolidation Many Indian companies, for legalor operational reasons, operatethrough structured entities knownas special purpose entities (SPEs).SPEs are common in securitizationtransaction, land acquisitions,outsourcing and sub-contractingarrangements. Many of thesearrangements are not consolidatedunder Indian GAAP as they do notmeet the definition of a subsidiary

Under IFRS, many such SPEs mayhave to be consolidated as theseentities are in substance controlledthrough an auto-pilot mechanismor through legal/contractualprovisions determined at inception.The consolidation of SPEs underIFRS may have a substantial impacton the P&L account, net asset andgearing position, and also certainkey ratios such as debt-equity.

Employee Stock Ownership Plans Indian GAAP permits ESOPs to beaccounted for using either the

intrinsic value method or the fairvalue method, and most entitiesfollow the intrinsic method. Theintrinsic method does not result ina P&L charge unless the ESOPs arepriced at a discount over theintrinsic price

ESOPs are accounted using the fairvalue method, which results in a

P&L charge. This will result inlower profits for companies thatuse ESOPs for remuneratingemployees

Financial Instruments Classification is normally based onform rather than substance. For

IFRS requires a financialinstrument to be classified as a


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example, redeemable preferenceshares are recorded as equity andthe preference dividend asdividend rather than as interestcost.

liability or equity in accordancewith its substance. redeemablepreference shares are treated as aliability and the preferencedividend is recognized as interestcost

Derivatives Companies do not have fair-valuedderivatives and embeddedderivatives on their books as thereare no mandatory standards. Manythat have fair-valued derivatives donot recognize losses as they claimthose to be for hedging purposes

All derivatives and embeddedderivatives are fair-valued, andhedging is permitted only wherestringent criteria relating todocumentation and effectivenessare fulfilled

Revenue Recognition Sales made on deferred paymentterms are recognized at thenominal value of consideration.

Sales made on deferred paymentterms are accounted as acombination of financing andoperating activity. The fair value of

the revenue is recognized in theperiod of sale whereas the imputedinterest amount is recognized asinterest income over the creditterm

The implementation is expected to cause some upheaval in companies' finances in the initial stage as thestandards call for projecting assets' real value. Various sectors, including banking and real estate would be hit,experts have argued. For instance, a realtor in India can currently account for his revenues as and when a unitof a real estate project is sold to a buyer. After the adoption of IFRS, however, revenues will be recognized only

after the buyer gets the possession.

IFRS requires application of fair value principles in certain situations and this would result in significantdifferences from financial information currently presented, especially relating to financial instruments andbusiness combinations. Given the current economic scenario, this could result in significant volatility inreported earnings and key performance measures like EPS and P/E ratios. Indian companies will have to buildawareness amongst investors and analysts to explain the reasons for this volatility in order to improveunderstanding, 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 assistIndian corporates in arriving at reliable fair value estimates. This is a significant resource constraint that couldimpact comparability of financial statements and render some of the benefits of IFRS adoption ineffective. Someother significant impacts that the implementation of IFRS could have in India are shown as under:


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Commitment by the authorities

After the enactment of the Companies Act, 2013, the Ministry of Corporate Affairs has now shifted its focus onrolling out international reporting standards for Indian companies. In July 2014, the Finance Minister of India,Mr. Arun Jaitley, in his Budget speech proposed the adoption of the new Indian Accounting Standards byIndian companies . The Council (governing body) of the ICAI, at its last meeting, held on March 20-22, 2014,has finalized the roadmap for the implementation. The revised roadmap recommends Ind AS to beimplemented for the preparation of Consolidated Financial Statements of listed companies and unlistedcompanies as per the following phases:

The stand-alone financial statements will continue to be prepared as per the existing notified AccountingStandards which would be upgraded over a period of time. The recommendation of the ICAI to implement IndAS for preparation of only the Consolidated Financial Statements would have the advantage that Ind AS wouldhave no tax implications as well as implications for computation of managerial remuneration and dividenddistribution etc., since, for these purposes, the existing notified Accounting Standards would continue to be

How willIFRS impact

Indiancompanies

Improvement incomparability of financialinformation and financialperformance with global

peers and industrystandards

More transparent financialreporting of a company's

activities, benefittinginvestors, customers andother key stakeholders in

India and overseas

Better quality of financialreporting due to consistentapplication of accounting

principles and improvementin reliability of financial

statements Better access to andreduction in the cost of

capital raised from globalcapital markets since IFRS

accepted as a financialreporting framework for

companies across the globe

Stringent income recognitionrules, specifically impacting

Banks and Real Estate sector

Phase 1: To be implemented by companies having net worth of over Rs. 1,000 crore foraccounting periods beginning from April 1,2015

Phase 2: To be implemented by both listed and unlisted companies having net worthof over Rs. 500 crore but less than Rs. 1,000 crore for accounting periods beginning

from April 1, 2016


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used as is the practice in almost all countries that have adopted or converged with IFRS. This approach wouldenable India also to be become an IFRS-converged country as promised by it as a part of its G-20 commitments.

The roadmap also proposes that the previous year comparatives for the year 2015-16 shall be prepared inaccordance with Ind AS as against the previous roadmap which required the same to be prepared in accordancewith the existing notified Accounting Standards, which was done at that time because the time forimplementation of Ind AS was very short. This proposal would also be another step to make Ind AS convergentwith IFRS, as without this, Ind AS would not be considered to be IFRS-converged. It is felt that for preparationof previous year comparatives also, the time presently proposed is sufficient.

Concluding Remarks

IFRS convergence, in recent years, has gained momentum all over the world. As the capital markets becomeincreasingly global in nature, more and more investors see the need for a common set of accounting standards.

India being one of the key global players, migration to IFRS will enable Indian entities to have access tointernational capital markets without having to go through the cumbersome conversion and filing process. It

will lower the cost of raising funds, reduce accountants fees and enable faster access to all major capitalmarkets. Furthermore, it will facilitate companies to set targets and milestones based on a global businessenvironment rather than an inward perspective. Furthermore, convergence to IFRS, by various group entities,will enable management to bring all components of the group into a single financial reporting platform. Thiswill eliminate the need for multiple reports and significant adjustment for preparing consolidated financialstatements or filing financial statements in different stock exchanges.

Conversion is much more than a technical accounting issue. IFRS in India may significantly affect a companysday-to-day operations and may even impact the reported profitability of the business itself. Conversion bringsa one-time opportunity to comprehensively reassess financial reporting and take a clean sheet of paperapproach to financial policies and processes. It is imperative for companies which have already performed a

diagnostic study for IFRS to revisit their diagnostic study, as IFRS itself is a moving target and gets regularlyupdated. Companies also need to consider that some IFRS may not be applicable when the diagnostic study inprocess, but their applicability in future may result in material changes to the financials. Understanding IFRSand its implications is a business imperative for Indian companies.

Tanul Mukesh Saxena


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CitationsThe facts and information supplied in this article at many places has been procured from thefollowing websites/reports:

1. www.livemint.com2. economictimes.indiatimes.com3. www.ey.com4. archive.indianexpress.com5. www.icai.org6. www.pwc.in7. www.mca.gov.in8. www.asa.in9. 2007 ICAEW Report on 'EU Implementation of IFRS and the Fair Value Directive'
http://www.livemint.com/http://www.icai.org/http://www.pwc.in/http://www.mca.gov.in/http://www.asa.in/http://www.asa.in/http://www.mca.gov.in/http://www.pwc.in/http://www.icai.org/http://www.livemint.com/

ifrs convergence in india

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