IFRS AND INDIA

*Raavi.Radhika,
Assistant Professor,
Gitam University,
Hyderabad.

Abstract

Since the turn of the new century there has been a wind of change blowing cross
the Accounting profession. Convergence of National accounting standards to
International Financial Reporting Standards is already underway in many countries. The
introduction of IFRS represents a fundamental change in financial reporting. It is not
something that can be handled in a few weeks prior to adoption. Planning for it,
generating the necessary awareness, educating stakeholders and managing the required
changes will take considerable management commitment and time to achieve a
successful transition. IFRS brings groups and collective working to achieve profits, bring
about fair value in the business. Outsourcing becoming important IFRS will give leverage
to Indian companies to understand international accounting. This paper highlights the
requirements under IFRS which are mandated under the Indian Accounting Standards.
And also the differences between Indian GAAP and IFRS.

*Assistant Professor, Gitam University, Hyderabad. Mail:radhika.ramanchi@gmail.com.

 Introduction:

IFRS Origin and Structure:

International Financial Reporting Standards (IFRS) are standards and

interpretations adopted by the International Accounting Standards Board (IASB). Many
of the standards forming part of IFRS are known by the older name of International
Accounting Standards (IAS). IASs were issued between 1973 and 2001 by the board of
the International Accounting Standards Committee (IASC). In April 2001 the IASB
adopted all IAS and continued their development, calling the new standards IFRS.
IFRSs are considered a “Principles bases” set of standards in that they establish broad
rules as well as dictating specific treatments. International Financial Reporting Standards
comprise:
• International Financial Reporting Standards (IFRS)- Standards issued after 2001
• International Accounting Standards(IAS)- Standards issued before 2001
• Interpretations originated from the International Financial Reporting
Interpretations Committee (IFRIC)- issued after 2001
• Standing Interpretation Committee (SIC)- Issued before 2001.

There is also a Frame work for the preparation and presentation of Financial
Statements which describes some of the principles underlying IFRS.
 The use of international financial reporting standards (IFRS) as a universal
financial reporting language is gaining momentum across the globe. Over a 100 countries
in the European Union, Africa, West Asia and Asia-Pacific regions either require or
permit the use of IFRS. The Institute of Chartered Accountants of India (ICAI) has
recently released a concept paper on Convergence with IFRS in India, detailing the
strategy for adoption of IFRS in India with effect from April 1, 2011. This has been
strengthened by a recent announcement from the ministry of corporate affairs (MCA)
confirming the agenda for convergence with IFRS in India by 2011.
Convergence to IFRS would mean India would join a league of more than 100
countries, which have converged with IFRS. But, Indian Accounting Standards have not
kept pace with changes in IFRS. There are significant differences between IFRS and I-
GAAP, because Indian standards remain sensitive to local conditions, including the legal
and economic environment.
It is not clear how IFRS convergence would be achieved in India. Answers of followings
questions are being solicited by CFO ,CEO and Auditors-
• Whether it would be convergence or adoption (adoption may result in nil or
negligible departure from IFRS whereas convergence may result in significant
departures from IFRS)?
• Whether appropriate amendments would be made to Companies Act?
• Whether exceptions to IFRS would be made so as to take care of India-specific
issues in the rarest of rare circumstances?
• Whether on adoption of IFRS, would IFRS standards continue to be notified
under the Act?
• What standards would apply to small-and medium-size enterprises?
 Full Convergence would be a welcome step and it should happen early. The decision to
adopt IFRS has major public policy implications and will particularly impact India’s
systems of accounting and disclosure, corporate governance, tax/company law and
securities regulation. Adoption IFRS by Indian corporate is going to be very challenging
but at the same time could also be rewarding. Indian corporate is likely to reap significant
benefits from adopting IFRS.

Benefits of IFRSs to Indian Corporate:

Adopting IFRS by Indian corporate is going to be very challenging but at the same time
could also be rewarding. Indian corporate is likely to reap significant benefits from
adopting IFRS.

Absolute Transparency:-
IFRSs will improve the comparability of financial information and financial performance
with global peers and industry standards. This will result in more transparent financial
reporting of a company’s activities which will benefit investors, customers and other key
stakeholders in India and overseas.

World Class Peer Standards for Financial Reporting:-

The adoption of IFRS is expected to result in better quality of financial reporting due to
consistent application of accounting principles and improvement in reliability of financial
statements. This, in turn, will lead to increased trust and reliance placed by investors,
analysts and other stakeholders. Superior financial reporting could be useful in
convincing a firm’s present and potential employees of its financial soundness, so that as
key users of firm’s accounting information they can trust the firm as a dependable
employer. The rising use of pay for performance plans and the need for international
tradability of employees stocks and stock options further underscore the need for
respectable accounting rules.

Harmonisation with Global Financial Market:-

Increasingly, Indian accountants and businessmen feel the need for convergence with
IFRS. Capital markets provide an important explanation for this change. Some Indian
companies are already listed on overseas stock exchanges and many more will list in the
future. Internationally acceptable accounting standards will then become the language of
communication for Indian companies. Better access to and reduction in the cost of capital
raised from global capital markets since IFRS are now accepted as a financial reporting
framework for companies seeking to raise funds from most capital markets across the
globe. A recent decision by the US Securities and Exchange Commission (SEC) permits
foreign companies listed in the US to present financial statements in accordance with
IFRS. This means that such companies will not be required to prepare separate financial
statements under Generally Accepted Accounting Principles in the US (US GAAP).
Therefore, Indian companies listed in the US would benefit from having to prepare only a
single set of IFRS compliant financial statements, and the consequent saving in financial
and compliance costs.

However, the perceived benefits from IFRS adoption are based on the experience of
IFRS compliant countries in a period of mild economic conditions. The current decline in
market confidence in India and overseas coupled with tougher economic conditions may
present significant challenges to Indian companies.

Challenges to Indian Corporate:

The transition will be a tough challenge for the country as it requires a shift in the
academic approach, along with regulatory challenges. The Institute of Chartered
Accountants of India (ICAI) and the government will have to play a larger role in
countering industry problems.

There are several impediments and practical challenges to adoption of and full
compliance with IFRS in India. These are:

IFRS requires application of fair value principles in certain situations and this would
result in significant differences from financial information currently presented, especially
relating to financial instruments and business combinations. Given the current economic
scenario, this could result in significant volatility in reported earnings and key
performance measures like EPS and P/E ratios. Indian companies will have to build
awareness amongst investors and analysts to explain the reasons for this volatility in
order to improve understanding, 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 assist Indian corporate in arriving at reliable fair value estimates. This
is a significant resource constraint that could impact comparability of financial statements
and render some of the benefits of IFRS adoption ineffective.
Although IFRS are principles-based standards, they offer certain accounting policy
choices to preparers of financial statements. For example, the use of a cost-based model
or a revaluation model in accounting for investment properties. This could reduce
consistency and comparability of financial information to a certain extent and therefore
reduce some of the benefits from IFRS adoption. IFRS are formulated by the
International Accounting Standards Board (IASB) which is an international standard-
setting body.
However, the responsibility for enforcement and providing guidance on
implementation vests with local government and accounting and regulatory bodies, such
as the ICAI in India. Consequently, there may be differences in interpretation or practical
application of IFRS provisions, which could further reduce consistency in financial
reporting and comparability with global peers. The ICAI will have to make adequate
investments and build infrastructure to ensure compliance with IFRS.

Amendments in Laws and Regulations:

Without regulatory approvals the whole thing will fall flat. Certain regulatory
amendments have to be taken up quickly. IFRS is not only going to help Indian
companies benchmark their performance with global counterparts but also escape from
filing multiple reports for Indian companies who have gone global.
There is a great need for changes in several laws and regulations governing financial
accounting and reporting in India. In addition to accounting standards, there are legal and
regulatory requirements that determine the manner in which financial information is
reported or presented in financial statements.
For example:
Company law and Accounting Standards:
A study of the requirement of company law regarding the financial statements reveal
several lacunae like earning per share, information about future cash flows, consolidation,
mergers, acquisitions etc. Apart from this, Companies Act, 1956 determines the
classification and accounting treatment for redeemable preference shares as equity
instruments of a company, whereas these may be considered to be a financial liability
under IFRS. The Companies Act (Schedule VI) also prescribes the format for
presentation of financial statements for Indian companies, whereas the presentation
requirements are significantly different under IFRS. Similarly, the Reserve Bank of India
regulates the financial reporting for banks and other financial institutions, including the
presentation format and accounting treatment for certain types of transactions.
Income Tax Act and Accounting Standards: The Income Tax Act does not recognize the
accounting standards for most of the items while computing income under the head
"Profits & Gains of Business or Profession". Section 145(2) of the I.T. Act has
empowered the Central Government to prescribe accounting standards. The standards
prescribed so far constitute a rehash of the related accounting standards prescribed by
ICAI for corporate accounting. On a close scrutiny of these standards one is left
wondering about the purpose and value of this effort. Examples are application of
prudence substance over form, adherence to principles of going concern etc.

Other regulations and accounting standards:-

In respect of banks, financial institutions, and finance companies the Reserve Bank of
India (RBI) pronounces policies among others, revenue recognition, provisioning and
assets classifications. Similarly the Foreign Exchange Dealers Association (FEDAI)
provides guidelines regarding accounting for foreign exchange transactions. Since the
Securities & Exchange Board of India (SEBI) is an important regulatory body it would
also like to have its own accounting standards and in fact, it has started the process by
notifying cash flow reporting format. It is also in the process of issuing a standard on the
accounting policies for mutual funds. It appears as if several authorities in our country are
keen to have a say in the matter of framing accounting rules of measurement and
reporting. The tentative and half hearted legal and regulatory intervention in accounting
in our country, has come in the way of development of robust, continuously evolving and
dynamic accounting theory and standards.
The recent announcement by the MCA is encouraging as it indicates government
support for the timetable for convergence with IFRS in India. However, the
announcement stops short of endorsing the roadmap for convergence and the full
adoption of IFRS that is discussed in ICAI’s concept paper. In the absence of adequate
clarity and assurance that Indian laws and regulations will be amended to conform to
IFRS, the conversion process may not gain momentum.

Inadequate Professionals:
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. This
is magnified by a lack of preparedness amongst Indian corporate as this project may be
viewed simply as a project management or an accounting issue which can be left to the
finance function and auditors. However, it should be noted that IFRS conversion will
involve a fundamental change to an entity’s financial reporting systems and processes. It
will require a detailed knowledge of the standards and the ability to consider their impact
on business transactions and performance measures. Further, the conversion process will
need to disseminate and embed IFRS knowledge throughout the organisation to ensure its
application on an ongoing basis.

Replacement and Up gradation in systems:

Many Indian organizations are having legacy financial systems that will need to be
evaluated to determine whether they are capable of handling the transition process. Some
systems will require extensive upgrades or total replacement to handle the conversion to
IFRS. For organizations with older systems, this is potentially a very expensive
proposition. That’s why it is important to evaluate redesign and replacement options
early, so major system replacements can be planned for and implemented cost-
effectively. Ideally, and with sufficient planning, upgrades and replacements can occur as
part of the overall strategic technology planning and procurement process.
Determine the impact
The transition to IFRS will affect more than just the general ledger and subsidiary ledger
systems; it will impact all business systems that feed data to accounting systems. This
includes departmental systems and even spreadsheets used to capture and upload
financial information. To make sure a successful conversion to IFRS, it is very important
to identify all touch points within the organization that require modification.
Convert historical data:-
Historical data from recent prior periods will have to be recast for comparative purposes.
This is necessary to permit accurate and comparative trend and ratio analysis. Record
retention requirements should be reviewed to ensure that data currently being retained is
detailed enough to permit proper restatement of prior-period financials.
Update key controls:-
IFRS will affect many key business processes and may lead to changes in the
administration of some key technology controls. Techniques for testing these key controls
also may change. In addition, it is possible new controls will have to be added,
particularly during the financial periods when critical changes are taking place. This has
the potential to not only affect internal audit and Sarbanes-Oxley testing, but affect
testing related to regulatory reviews, financial statement audits and SAS 70 reviews as
well.

Coordination of Conversion System:-

For many organizations, the conversion to IFRS will be a multi-year exercise with
numerous changes to technology infrastructure and systems. Development of new
technology systems should be carefully examined so IFRS requirements can be
incorporated. Since rollouts of new systems must be coordinated to avoid conflict with
changes to the accounting systems, project coordination between technology and
accounting will be essential. As a result, it is important to have people with technical and
accounting skills, as well as project and change management skills, on IFRS impact
assessment and implementation teams.

Significant differences between Indian GAAP and IFRAS:-

Revenuen Recognition:
Indian GAAP:
• Revenues are recognized when all significant risks and rewards of ownership are
transferred or on a percentage of completion basis. No detailed industry specific
guidelines.
IFRS:
• Revenues are recognized when all significant risks and rewards of owner ship are
transferred.
Balance sheet:
• Conforms to statute and captions are in the following order:
Equity and reserves
Debt
Fixed Assets
Investments
 Net Current Assets
Deferred expenses
Accumulated losses.
• Balance sheet captions are presented in the inverse order of liquidity i.e, illiquid
items appear earlier, requires disclosure of either changes in equityor changes
equity other than those arising from capital transactions with owners and
distribution of owners.
Correction of fundamental errors:
• Include effect in current year income statement.
• Include effect in current year income statement and for material items, restate
comparatives.
Derivatives and other financial instrument.
• No definitive standard yet New standards on financial instruments recognition and
measurement is presently under formulation.
• Gains/losses on hedges of foreign entity investments recognized in equity. All
hedge ineffectiveness recognize in the income statement gains/losses held in
equity must be transferred to the income statement on disposal of investment.
Except ineffectiveness of non-derivatives recognized in equity

Comprehensive income:
• No standards not required.
• Option to present a statement that shows all changes in equity that did not arise
from capital transactions with owners or distributions to owners.

Derivatives and other financial instruments measurement of derivative instruments and

hedging activities:
• No definitive standard yet.
• Gains lossed on hedge instruments used to hedge forecast transaction, included in
the cpst pf asset/ liability (basis adjustment).
Business combinations:
• Restricts the use of pooling of interest method to circumstances which meet thwe
criteria listed for an amalgamation in the nature of a merger. In all other cases the
purchase method is used.
• Business combinations under IFRS should be amounted for as an acquisition
(purchase method) where an acquirer cannot be identified then the pooling of
interests method should be adopted.

Cash flow statement:

• Mandatory only for listed companies and companies certain turnover conditions.
• Mandatory For all entities.

Property plant and equipment:

• Use historical costs or revalued amounts on revaluation an entire claw of assets
are revalued or selection of 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.
• Use historical cost or revalued amounts on revaluation an entire class of assets is
revalued.

Share issue expenses:

• May be accounted for as deferred expenses and amortized.
• There is no specific requirement under IFRs.
Dividends:
• Dividends are reflected in the financial statement of the year to which thy relate
even if proposed or approved after the year end.
 • 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.

Leases:
• Leases are classified as capital and operating leases capital leases are included
under property plant and equipment of the lessor. Lease rentals on operating
leases are expensed as incurred but no quantitative thresholds defined
• Similar to US GAAP except that the criteria for distinguishing between capital
and revenue leases are different.
Prior period adjustments:
• Prior period items are separately disclosed in the current statement of profit and
loss account together with their nature and amount in a manner that their impact
on current profit and loss can be perceived.
• Prior period errors are generally corrected in the current financial statements
however where the error is of such. Significance that the prior period financial
statement cannot Be considered to have been reliable at the date of their issue the
error should be corrected by adjusting the opening retained earnings.
Accounting for foreign currency transactions:
• Exchange differences on foreign currency transactions are recognized in the profit
and loss account with the exception that exchange differences related to the
acquisition of Fixed Assets adjusted to the carrying cost of the relevant Fixed
Assets.
• All exchange differences are included in determining net income for the period in
which differences arise.
Good will
• It is capitalized and tested for impairment annually. Except for goodwill from
amalgamation which is amortized over 3to5 years.
• Goodwill is amortized to expense on a systematic basis over its useful life with a
maximum of 20 years the straight line method should be adopted unless the use of
any other method can be justified.
Negative Good will
• It is credited to the capital reserve account which is a components of stakeholders
equity

• Negative good will that relates to expectation of future losses and expenses
should be recognized as income when the future losses and expenses are
recognized. Where it doesn’t 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 balances if any
immediately charge to income.

Related parties:
• Determined by ability to control or to exercise significant influence over the other
party detailed disclosure require of all material related party transactions.
Mandatory for listed companies and companies meeting certain turnover
threshold.
• Related parties are determined based on common ownership and similar to US
GAAP except that the existence of related parties are to be disclosed even if there
are no transactions during the period.
Pension Gratuity/Post retirement benefits

• Required to be mandatorily provided post retirement benefits. Based on either

actuarial valuation or contribution to a defined plan. Follows AS-15 actuarial
gain/losses are recognized immediately.
• To be provided for and funded based on auctorial valuation significant disclosure
requirements exist. Actuarial gains/losses are amortized.
Stock options to non employees
• No specific guidance
• Disclosures required but no guidance on recognition and measurement.
Balance sheet
• Does not need segregation of current and non current portions of assets and
liabilities.
• Disclosed only as part of the footnotes
Stock based compensation
• SEBI requires compensation cost to be recognized based on intrinsic value or fair
value. Not mandatory for unlisted companies.
• Compensation costs to be disclosed reorganization of compensation costs is not
mandatory.

Investment and marketable securities:

• Only unrealized depreciation on AFS (available for sale) securities is recognized
in the income statement.
• Both appreciation and depreciation is recognized as other comprehensive income
separate standard for treatment of cost of development of computer software.

Segment information
• Specific requirements govern the format and contents of a reportable segment and
the basis of identification of a reportable segment the information for disclosure is
to be prepared inconformity with the accounting standards used for the companies
as a whole.
• Disclose revenues profits and assets identified by product and geographically of
each reportable segment it is mandatory for listed companies.
Joint ventures jointly controlled
• Allows proportionate consolidation assets or corporation
• Allows either equity method or proportion consolidation.

Research and development costs:

• Deferred where technical or commercial feasibility is established and the
enterprise has adequate resources to enable the product or process to be marketed.
• Deferred where technical or commercial feasibility is established and the
enterprise has adequate resources to enable the product or process to be marketed.

Conclusion:
Convergence to IFRS will greatly enhance an Indian entities’ ability to raise and attract
foreign capital at a low cost. A common accounting language, such as IFRS, will help
Indian companies benchmark their performance with global counterparts. Early adoption
of IFRS gives companies the opportunity to anticipate challenges, manage outcomes and
implement the best solutions. Without careful study, the full impact of converting to
IFRS will not be clear. Companies need to conduct a diagnostic study before proceeding
for a full IFRS conversion. After completing the preliminary assessment, the
management should prepare a detailed IFRS conversion programme. Given the enormity
of the exercise, companies should consider a dedicated team that will work on the
conversion exercise. For successful implementation of IFRS in India, the regulator should
immediately announce its intention to convert to IFRS and make appropriate regulatory
amendments.

References:
• Reports of Institute of Chartered Accountant of India (ICAI)
• Reports of International Accounting Standard Board, IFRIC,SIC
• Economics Times, Business Standard, Financial Express
• Web Support- Price Water Cooper, Ernst and Young and Wikipedia.