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B S RB S R
IFRS Convergence in India
Group 1Section ‘F’
B S RB S R
CONTEXT FOR DISCUSSION IFRS: The Global Perspective
IFRS India Roadmap
Challenges and practical insights
Best practices for convergence
IFRS – The Global Perspective
3
IFRS – Now a Truly Global Standard
By 2011, 150 countries have adopted IFRS, including China, Brazil and Korea
Accepted and adopted across more than 100 countries
Push by U.S. SEC’s decisions
To drop reconciliation requirement for Foreign Private Issuers preparing IFRS financial statements
Proposal for IFRS transition for U.S. domestic companies between 2014 to 2016; with early adoption option for certain very large companies
IASB-FASB convergence programme
Ongoing convergence programme
Convergence Drivers
• Capital Markets
• Regulatory requirements
• Internal controls
• Performance evaluation
5
IFRS comprises
Overview of IFRS
• International Accounting Standards• International Financial Reporting Standards • Standing Interpretations Committee • International Financial Reporting
Interpretations Committee
Benefits of convergence
Widespread agreement on improvement in comparability
Improvement of quality of financial reporting and trust in the financial statements
Alignment of external and internal reporting
Globalization of capital markets and reduced cost of capital
One financial language across different locations
IFRS India Roadmap
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Why IFRS Convergence?
Unavoidable in globalised economy
Condition for listing abroad including GDRs and ADRs
Pre requisite for any joint venture or business relationship
Assists in external borrowing and in-bound investment
Better model worthy of emulation
On adoption – we can play a role in the standard setting process
Need to have a “common language”
Two separate sets of Accounting Standards to co-exist
Announcement by the Ministry of Corporate Affairs (MCA) dated January 22, 2010
IFRS converged standardsExisting Indian Accounting
Standards
Other amendments to the Companies Act (including, e.g. Schedule VI and Schedule XIV) will be undertaken in a time bound manner to facilitate the process of convergence.
Timelines for convergence
Phase 2
1st April 2011 1st April 2013 1st April 2014
Phase 3 Companies included in the Nifty
50; Companies included in the Sensex
30; Companies which have shares or
other securities listed on stock exchanges outside India and
Companies (whether listed or not) which have a net worth in excess of Rs1,000 crores.
Phase 1 All companies (whether
listed or not) with a net worth in excess of Rs.500 crores but less than Rs1,000 crores.
All listed companies with net worth less than Rs.500 crores
Clarifications:Non-listed companies which have a net worth less than Rs.500 crores and whose shares or other securities are not listed on stock exchanges outside India; and other defined Small and Medium Companies (SMC) will not be required to follow the IFRS converged standards. However, such entities may also voluntarily opt to follow the IFRS converged standards.
Indian approach to IFRS
Convergence not adoption Two sets of accounting standards Public Interest Entities Phased approach
IFRS ConvergenceIndia – Opted for convergence & not adoption of IFRS
Two sets of Accounting Standards •IFRS Converged Indian Accounting Standards – Ind-AS •Existing Accounting Standards – AS
PRESESNT STATUS35 Ind AS have been notified on 25-2-2011Applicability date yet to be notified
IND ASScheme of Ind ASNumbering pattern
IAS/IFRS convergedInd AS No. Title IAS/IFRS
01 Presentation of Financial Statements IAS 1
02 Inventories IAS 2
07 Statement of Cash Flows IAS 7
08 Accounting Policies, Changes in Accounting Estimates and Errors
IAS 8
10 Events after the Reporting Period IAS 10
11 Construction Contracts IAS 11
12 Income taxes IAS 12
16 Property, Plant and Equipment IAS 16
17 Leases IAS 17
IAS/IFRS converged18 Revenue IAS 18
19 Employees Benefits IAS 19
20 Accounting for Government Grants and Disclosure of Government Assistance
IAS 20
21 The Effects of Changes in Foreign Exchange Rates
IAS 21
23 Borrowing Costs IAS 23
24 Related party disclosures IAS 24
27 Consolidated and Separate Financial Statements
IAS 27
18 Revenue IAS 18
19 Employees Benefits IAS 19
28 Investments in Associates IAS 28
IAS/IFRS converged29 Financial Reporting in Hyperinflationary
EconomiesIAS 29
31 Interest in Joint Ventures IAS 31
32 Financial Instruments: Presentation IAS 32
33 Earnings per share IAS 33
34 Interim Financial Reporting IAS 34
36 Impairment of assets IAS 36
37 Provisions, Contingent Liabilities and Contingent Assets
IAS 37
29 Financial Reporting in Hyperinflationary Economies
IAS 29
31 Interest in Joint Ventures IAS 31
32 Financial Instruments: Presentation IAS 32
IAS/IFRS converged38 Intangible Assets IAS 38
39 Financial Instruments: Recognition and Measurement
IAS 39
40 Investment Property IAS 40
101 First time adoption of Indian Accounting Standards
IFRS 1
102 Share-based payment IFRS 2
103 Business Combinations IFRS 3
104 Insurance Contracts IFRS 4
105 Non-current Assets Held for and Discontinued Operations
IFRS 5
106 Exploration for and Evaluation of Mineral Resources
IFRS 6
IAS/IFRS converged
107 Financial Instruments: Disclosures IFRS 7
108 Operating Segments IFRS 8
IFRIC/SIC ConvergedIndAS No. Annexure
No.Annexure to –Ind AS and Title IFRIC/SIC
10 A Distributions of Non-cash Assets to Owners
IFRIC 17
11 A Service Concession Arrangements* IFRIC 12
11 B Service Concession Arrangements: Disclosures*
SIC 29
12 A Income Taxes—Recovery of Revalued Non-Depreciable Assets
SIC 21
12 B Income Tax: Changes in the tax status Income Taxes — Changes
SIC 25
16 A Changes in Existing Decommissioning, Restoration and Similar Liabilities
IFRIC 1
17 A Operating leases-Incentives SIC 15
17 B Evaluating the Substance of Transactions
Involving the Legal Form of a Lease
SIC 27
17 C Determining whether an Arrangement contains a Lease*
IFRIC 4
IFRIC/SIC Converged18 A Revenue—Barter Transactions Involving
Advertising ServicesSIC 31
18 B Customer Loyalty Programmes IFRIC 13
18 C Transfers of Assets from Customers IFRIC 18
19 A Ind AS 19-The limit on a Defined Benefit Asset, Minimum Funding requirements and their interaction
IFRIC 14
20 A Government Assistance: No Specific Relation to Operating Activities
SIC 10
27 A Consolidation––Special Purpose Entities SIC 12
29 A Applying the Restatement Approach under Ind AS 29 Financial Reporting in Hyperinflationary Economies
IFRIC 7
31 A Jointly Controlled Entities–– Non-Monetary Contributions by Venturers
SIC 13
34 A Interim Financial Reporting and Impairment IFRIC 10
37 A Rights to Interests arising from decommissioning, Restoration and Environmental Rehabilitation Funds
IFRIC 5
IFRIC/SIC Converged37 B Liabilities arising from
Participating in a Specific Market— Waste Electrical and Electronic Equipment
IFRIC 6
38 A Intangible Assets—Web Site Costs
SIC 32
39 C Reassessment of Embedded Derivatives
IFRIC 9
39 D Hedges of a Net Investment in a Foreign Operation
IFRIC 16
39 E Extinguishing Financial Liabilities with Equity Instruments
IFRIC 19
Key Carve Outs in Ind AS
1. IAS/IFRS not converged withWhile converging with IFRS, the following IAS/IFRS have not been converged with:IAS 26: Accounting and Reporting by Retirement Benefit Plans (not applicable for Companies)IAS 41: Agriculture (carve out)IFRS 9: Financial Instruments (not mandatory at present)
23
Key Carve Outs in Ind AS2. SIC/IFRIC not converged withSIC 7: Introduction of the Euro (not required for India)SIC 29: Service Concession Arrangements: Disclosures (applicability deferred, carve out)IFRIC 2: Member's Shares in Co-operative Entities and Similar Instruments (not applicable for Companies)IFRIC 4: Determining Whether an Arrangement Contains a Lease (applicability deferred, carve out)IFRIC 12: Service Concession Arrangements (applicability deferred, carve out)IFRIC 15: Agreements for the Construction of Real Estate (carve out)
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Key Carve Outs in Ind AS3. Removal of options not amounting to carve out or departure from IFRSSingle statement presentation of the statement of profit and lossClassification of expenses in the statement of profit and loss by nature of expense methodNo option of carrying investment property at fair valueRecognition of actuarial gains and losses in Other Comprehensive Income
25
Key Carve Outs in Ind AS
4. Additional options provided which if exercised will lead to carve out/departure from IFRSOption to use Indian GAAP carrying values on the date of transition as the deemed cost for property, plant and equipment, intangible assets and investment propertyOption to defer exchange differences on long term foreign currency monetary assets and liabilities and recognizing the same over the period of such asset or liability
26
Key Carve Outs in Ind AS
5. Mandatory carve outs as no option is provided in Ind AS Revenue recognition for real estate sector on the basis of percentage completion methodAccounting for the equity conversion option of a FCCB as an equity componentBargain purchase in case of business combination to be treated as capital reserve except in certain cases where it can be credited to Other Comprehensive Income
27
IFRS in Europe
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• Since 2005 all listed companies in the E.U. must comply with IFRS
• In Continental Europe, IFRS adoption represents a major change: replacement of stakeholder-oriented accounting regulations by market-oriented standards heavily influenced by the Anglo-Saxon accounting model
• Aim of this presentation: Review the empirical evidence on the economic consequences of IFRS adoption
The expected consequences of IFRS adoption
• Information asymmetry should decrease:– IFRS are more market-oriented– IFRS disclosure requirements are larger
• Earnings management should decrease:– IFRS are more precise– They admit a limited number of options– Hidden reserves are prohibited
• Accounting data should be more value relevant– Value relevance: Ability of accounting data to
reflect contemporaneous market prices or returns– IFRS-based earnings should be more value
relevant:• IFRS are more market-oriented• Earnings management is more difficult under IFRS• IFRS make a larger use of fair value
• The cost of capital should decrease
Effect on information asymmetry
• Has the bid-ask spread declined?– YES:
• Germany: Leuz & Verrecchia (JAR 2000), Gossen & Sellhorn (WP 2006): Companies using IFRS exhibit smaller bid-ask spreads than those using German GAAP
• Europe: Platikanova & Nobes (WP 2006): On average, the bid-ask spread declines after IFRS adoption
– BUT:• Switzerland: The effect is limited to small companies: Dumontier &
Maghraoui (CCA 2006)
• Are analysts' forecasts more accurate?• YES:
– Ashbaugh & Pincus (JAR 2001): Analyst forecast accuracy improves after IFRS adoption
– Hodgdon et al. (JIAAT 2008): Compliance with IFRS reduces analyst forecast errors
– Germany: Ernstberger et al. (WP 2008): Forecast accuracy is higher for estimates based on IFRS or US GAAP data than for those based on German GAAP figures
• NO:– Germany: Maghraoui (PhD 2008): Compliance with IFRS does not
reduce the dispersion of analyst forecasts or forecast errors– Europe: Cuijpers & Buijink (EAR 2005): Dispersion of analyst forecasts
is higher for firms using IFRS or US GAAP than for those using local GAAPs
Effect on earnings management
• Does IFRS compliance restrict earnings management?– NO:
• Germany: Van Tendeloo & Vanstraelen (EAR 2005): IFRS adopters do not present different earnings management behavior compared to companies reporting under German GAAP
• Sweden: Paananen (WP 2007): IFRS adoption does not reduce income smoothing.
• Germany: Lin & Paananen (WP 2008): Earnings management is higher in the post IFRS-adoption period
– YES:• Barth et al. (JAR 2008): In the post-adoption period, firms applying
IFRS evidence less earnings management
Effect on the value relevance of accounting data• Has value relevance of earnings increased following
IFRS adoption?– YES:
• Barth et al. (JAR 2008): Firms applying IFRS exhibit more value relevant accounting figures than other companies
• Germany: Bartov et al. (JAAF 2005): The value relevance of IFRS-based earnings is higher than that of German GAAP-based earnings
• Germany: Jermakowicz et al. (JIFMA 2007): The value relevance of earnings is higher for DAX-30 companies using IFRS or US GAAP
– NO:• Germany: Hung & Subramanyam (RAS 2007): IFRS adoption has no
effect on the value relevance of book value and net income• Sweden: Paananen (WP 2008): The value relevance of accounting
figures is not affected by IFRS adoption• Germany: Lin & Paananen (WP 2008): The value relevance of
equity and earnings decreases after IFRS adoption
Effect on the cost of capital• Has the cost of equity capital declined after IFRS adoption?
– YES:• Germany: Ernstberger & Vogler (WP 2008): The cost of equity
capital is lower for companies that adopted IFRS or US GAAP• Kim & Shi (WP 2007): The cost of equity capital is significantly
lower for IFRS adopters– NO:
• Europe: Cuijpers & Buijink (EAR 2005): No evidence of a lower cost of equity capital for IFRS adopters
• Germany: Daske (JBFA 2006): Voluntary IFRS adopters do not exhibit lower cost of equity capital
• Has the cost of debt declined after IFRS adoption?– YES:
• Kim et al. (WP 2007): IFRS adopters have lower interest rates, larger amount of loan facility, less restrictive loan covenants, and they attract more foreign lenders
Summary of the empirical evidence
• No clear conclusion can be drawn from these studies because:– The evidence is mixed– Many studies were conducted in a single country
(Germany in particular)– Most studies deal with voluntary adoption
Explaining the conflicting evidence• The impact of IFRS adoption is a function of the
degree of compliance with IFRS– Vogel et al. (WP 2008): There is considerable variation in
the level of IFRS compliance among European companies (compliance index ranging from 13% to 100%)
– Daske et al. (WP 2007): "Serious" IFRS adopters experience stronger effects on the cost of capital and market liquidity than "label" adopters
– Hodgdon et al. (JIAAT 2008): Compliance with the disclosure requirements of IFRS enhances the ability of financial analysts to provide more accurate forecasts
• The impact of IFRS adoption is a function of the firm's incentives to comply with IFRS
– Germany: Christensen et al. (WP 2008): Improvements in accounting quality are confined to firms with incentives to adopt IFRS
– Daske et al. (JAR 2008): The capital-market benefits of IFRS adoption occur only in countries where firms have incentives to be transparent and where legal enforcement is strong
– Wang & Yu (WP 2008): Better accounting standards are helpful only in countries with proper reporting incentives i.e. in common-law countries, in countries with better shareholder protection and effective legal enforcement
– Kim & Shi (WP 2007): The cost of capital-reducing effect of IFRS adoption is greater when the IFRS adopters are from countries with weak institutional infrastructures
European Effects…
• The adoption of IFRS will probably not be sufficient to standardize the quality of earnings throughout Europe
• Strong enforcement mechanisms (laws and corporate governance systems) also are necessary
• Adopting high quality standards might be a necessary condition for high quality information, but not a sufficient one (Ball et al., JAE 2003)
Case StudyWipro
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Scope
The study is based on secondary data on selected variables sourced from the published annual reports of Wipro for the year ended 31st March 2010. Wipro had voluntarily prepared its annual report on the basis of Indian GAAP and IFRS for the year ended 31st March 2010, wherein reconciliation of equity based on Indian GAAP and IFRS is presented for the opening Balance Sheet as at 1st April 2008 and for Balance Sheet ended 31st March 2009
Hypothesis
1. There is no significant difference between financial statement items based on Indian GAAP and IFRS for the opening Balance Sheet as at 1st April 2008 by Wipro
2. There is no significant difference between financial
statement items based on Indian GAAP and IFRS for the opening Balance Sheet as at 31st March 2009 by Wipro
3. There is no significant difference between Indian GAAP
and IFRS based accounting ratio for the fiscal year 31st March 2009 by Wipro
Effect on Financial Ratio’s
Leverage ??
Leverage ………………… 12.00%
Value of Equity …………. 8.13%
Total Liabilities ….………. 4.28%
Debt – Equity Ratio
Reason:
Return on Equity ??ROE ……………………… 10.34%
Value of Equity …………. 8.13%
Net Profit ………...……… 0.61%
Amount of net income returned as a percentage of shareholder’s equity
Reason:
Total Liability and Equity
Dividend provision not recognized under IFRSFair value measurement of Available for sale investment Share compensation expense
Reclassification between Equity and Total Liability
Accelerated amortization of stock compensation expense in the initial years following the grant of options
Stock compensation expenses recognized in graded manner on a straight line basis over the requisite vesting period for the entire award
Share based payment reserve
IFRS
IGAAP
Learning's …
IFRS
IGAAP
Fair value Oriented AccountingBalance Sheet Oriented AccountingMore Transparent Disclosures
Conservative Approach of Accounting
Challenges and practical insights
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What challenges to anticipate?
Skill Sets Judgment Fair valueGroup transition
Data Capture
IFRS Updates
Finance team to be conversant with IFRS – end objective to churn out timely IFRS Financial Statements for regular reporting
Training finance personnel
Robust support of decisions taken
Application of management judgment in accounting policies, evaluation of options under IFRS (Eg, determining useful life of assets / loan provisioning in absence of rules)
Extensive use of fair value measurements in certain areas of financial instruments, business combinations, etc.
Changes in recognition criteria & extensive disclosure requirements need redesigning of accounting systems to provide timely information
IFRS itself is evolving, leading to constant updates and changes in existing standards
Specialization in fair valuation
Regular IFRS accounting updates
IFRS compliant data requirements from subsidiary, joint ventures and associates for consolidation purposes
Modification in reporting systems
Structured & consistent approach for transition
What are the changes that have to be dealt with?
Technical GAAP difference
– Conceptual
• Embedded Derivatives
• Fair value
• Revenue recognition
• Business combinations etc etc
– Operational challenges
• Estimated useful life of the assets Sch XIV?
• ESOP – intrinsic value v/s fair value
Disclosures
– Schedule VI – Not applicable
– Additional disclosures – IFRS 7, risk management, consolidation, etc.(quantitative as much as qualitative)
Key decision to be taken
– Early adoption
– Comparatives
Key impacts on financial statements
Business combinations and consolidation
Financial Instruments
Changes in accounting policies and correction of errors
Presentation of financial statements
Business combinations and consolidation
Adoption of ‘purchase’ accounting for almost all amalgamations (accounted for at fair values)
‘Pooling-of-interests’ method severly restricted
Fair values on acquisition to be taken also on consolidation
Would reflect true “goodwill”
Goodwill and indefinite life intangibles – No amortisation, annual impairment testing
Impact of EBITA, P/E ratio, ROCE
IFRS Accounting ImpactIFRS Accounting Impact
Financial Instruments
Most financial instruments in balance sheet at FV
Investments to be categorized – at fair value through profit or loss, available for sale, held to maturity
Hedge accounting – detailed conditions and documentation required
Debt-equity classification – preference share capital meeting specified conditions classified as liability
Impact of EBITA, P/E ratio, ROCE, debt – equity ratio
IFRS Accounting ImpactIFRS Accounting Impact
Changes in accounting policies and correction of errors
Changes in accounting policy generally made by adjusting opening equity and restating comparatives
Correction of errors generally made by adjusting opening equity and restating comparatives
Restatement of comparatives and adjusting opening equity generally not part of Indian GAAP at present
Impact of EBITA, P/E ratio, ROCE
IFRS Accounting ImpactIFRS Accounting Impact
Presentation of financial statements
Consolidated Statements
Primary statements include ‘Statement of changes in equity’ or ‘statement of recognised income or expense’
No strict format but
– Balance sheet classified as current/non-current or based on liquidity
– income statement by nature or function
Detailed accounting policy and disclosures
IFRS Accounting ImpactIFRS Accounting Impact IFRS Accounting ImpactIFRS Accounting Impact
Stand-alone, but listed companies and banks present CFS also
No statement of changes in equity or statement of recognised income and expense
Schedule VI format:
– not fully on current/non-current basis
– Expense classification by nature
Disclosures not as elaborate as per IFRS
First time adoption – when and what to start
Date of transition = IFRS opening balance sheet
1 April 2010
Comparative period
31 March 2011 31 March 2012
Reporting dateFirst IFRS financial statements
IFRS
Recognise IFRS assets / liabilities
Remove non-IFRS assets / liabilities
IFRS measurements
Adjust opening retained earnings
Comply with latest IFRS
Remember consistency
STA
RT
BY
Apply IFRS 1 standard
Ignore transitions in the individual standards
WH
ICH
IFR
S?
Breaking through some common myths…
IFRS requires fair valuation of everything
IFRS lays too much emphasis on management judgment
IFRS reporting can be managed as a reconciliation / ‘out of book’ exercise
IFRS was an important cause of the global financial crisis
Global standards like IFRS do not take into account local conditions
First-time transition rules allow an entity to ‘clean up’ its act
IFRS will not change business actions
Best practices for convergence
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How does one approach IFRS transition?
Rapid start to implementing work without a structured assessment
Time to complete and/ or resources are underestimated: “We will just switch to IFRS”
Accounting rules are seen as “pretty similar”, but small differences can matter a lot
Impacts of IFRS conversion are not addressed with stakeholders
Lack of clarity about strategies for selecting the various accounting options
Inability to provide information on all areas impacted by IFRS (e.g. to analysts)
Lack of sufficient communication with auditors
Strong leadership and support for the IFRS implementation project
Timing – starting sufficiently in advance
Strong project management
– Steering committee
– Initial impact assessment
– Training and knowledge transfer
– Communication strategy
Holistic approach to evaluate impact beyond accounting changes
Keeping Board involved and investors and analysts informed
Involve professionals with the right subject matter specialization relating to IFRS, local GAAP, systems and processes
Transfer of knowledge from advisors to the Company should start early and occur regularly
IFRS is not just an accounting project…
IFRS implementation requires a structured approach to conversion
Critical successfactors
Project planning
Project structure and governance
Auditor involvement
stakeholders
Resource management
Training
IT systems
IFRS will not be just an accounting project….
The use of IFRS will change how a business is managed and it will change how and what companies communicate with their marketplace
How a company’s peers use IFRS, and what policies they adopt, will influence how that company is perceived and valued in the marketplace
How a company manages its IFRS conversion will affect its business and , potentially, market confidence in its reported information and its share prices
“It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.” Charles Darwin
Questions?Questions?
Thank you
References1. Stent W, Bradbury M. and Hooks J.(2010) “IFRS in New Zealand: Effects on Financial Statements and Ratios”, Pacific
accounting Review, Vol 22, No 2, pp 92-107 2. Lantto A.M and Sahlstrom P (2009) “Impact of International Financial Reporting Standard Adoption on Key
Financial Ratio”, Accounting and Finance Vol 49, pp 341-361 3. Ball R.(2008) “ What is the Actual Economic Role of Financial Reporting” available at http://ssrn.com/ abstract=1091538 4. Mingyi Hung, K.R. Subramanyam (2004) “Financial Statement Effects of Adopting IFRS: The case of Germany
available at http://ssrn.com/abstract=622921 5. Amir,E.T.Harris and E.Venuti 1993 A comparison of the Value relevance of Us versus Non US GAAP Accounting
measure using Form 20F reconciliations. Journal of Accounting Reseearch 31(supplement):230-264 6. M.S. Turan and Dimple “Transition from GAAP to IFRS An evidence from uk “ Journal of Accounting and Finance Volume
25, No 2 ,pp57-66 7. Capkun V. Jeny A.C Jeanjean T. and Weiss L.A (2008) “Earnings management and value relevance during the
Mandatory Transition from Local GAAP to IFRS in Europe” available at http://ssrn.com/abstract=1125716 8. Lantto A.M (2007) Does IFRS improve the usefulness of Accounting information on code law country?' available at
http:// ssrn.com/abstract=905218 retrieved on 10 August2010 9. Horton J.Serafeim G (2008) “Does Mandatory IFRS adoption improve the information envirnmnet” Harvard Business
School working paper No 1264101 available at http:// ssrn.com/abstract=1264101 retrieved on 7 August 2010 10. Hope O.k Jin and Kang (2006) “Empirical Evidence on Jurisdictions that Adopt IFRS’available at http://
ssrn.com/abstract=751264 retrieved on 7 August 2010 11. Sujatha B Accounting Standards in India: Towards convergence published by ICFAI 12. http:// www.article base.com/accounting-articles/working towards a global convergence of accounting standards-
1379167.html 13. IFRS: A quick reference Guide by Robert Krik 14. http:// online library.wiley.com/doi/10.1002/jcaf.20406/abstract 15. http://icai.org/resoucre 16. http://www.pwc.com/en-GX/gx/ifrs-reportingservices/pdf/viewpoint_convergence.pdf
IFRS impact beyond Financial Statements
Most aspects of the business can be affected:
Processes and systems Operations Tax Treasury
Examples include impact on: Debt covenants Compensation plans Revenue contracts Joint ventures and alliances Investor communication