You are on page 1of 62

CHAPTER-1

INTRODUCTI
ON
1

1-INTRODUCTION:
Global accounting standards have been one of the main focuses of attention in the accounting
community since the 1970s. At the present time, over one hundred countries have adopted or
plan to adopt the International Financial Reporting Standards (IFRS) for listed companies. The
International Accounting Standards Boards (IASB) stated goal is to achieve harmonization
and convergence of accounting rules. However, it is well known that financial reporting
outcomes are determined by the interaction between accounting standards, preparers incentives,
regulation, enforcement, and other institutional features of the economy. In addition, it is difficult
to infer from voluntary IFRS adoption studies the implications of mandatory IFRS adoption.
Therefore, it is difficult to state with confidence that mandatory IFRS adoption is optimal and
leads to improved financial reporting quality.
In an increasingly interconnected global economy, many market participants
are considering the question of whether it is possible or desirable to move toward a more uniform
global language for financial reporting. The proponents of this idea argue that a uniform set of
global accounting standards, supported by strong governance, independent standard-setting and a
sound regulatory framework, could benefit investors and businesses alike. Others suggest that
trying to establish a uniform set of global standards would run the risk of overlooking the unique
economic, political, cultural, legal and regulatory realities that exist in different nations and
regions. Over the past decade, this global discussion has intensified. In 2001, the International
Accounting Standards Board (IASB) adopted the first International Financial Reporting
Standards (IFRS) to serve as a possible pathway for establishing uniform global accounting
standards. Since then, IFRS has been adopted or become accepted in over 100 countries. Over
this same period, the Financial Accounting Standards Board (FASB) and the IASB have begun
an effort to converge IFRS and the Generally Accepted Accounting Principles in the United
States (US GAAP), essentially working to make the two sets of accounting standards
increasingly similar to each other. More recently, some market participants have raised the
2

possibility of transitioning entirely from US GAAP to IFRS for public company financial
reporting in the United States. In the coming years, critical decisions will need to be made
regarding the use of global accounting standards in the United States. Market participants will be
called upon to determine whether achieving a uniform set of high-quality global accounting
standards is feasible, what sort of investments would be required to achieve that outcome, and
whether it is a desirable goal in the first place. This dialogue will be critical to the future of
financial reporting and of fundamental importance to the long-term strength and stability of the
global capital markets.
Convergence with IFRS has gained momentum in recent years all over the
World. 110+ countries including European Union, Australia, China, New Zealand, and Russia
currently require or permit the use of IFRS. Apart from India, countries like Japan, Sri Lanka,
Canada and Korea have also committed to adopt IFRS from 2011. United States of America has
announced its intention to adopt IFRS from 2014 and it also permits foreign private filers in the
U.S. Stock Exchanges to file IFRS complied Financial Statement, without requiring the
presentation of reconciliation statement.
In this scenario of globalization, India cannot insulate itself from the developments taking
place worldwide. In India, so far as the ICAI is concerned, its aim has always been to comply
with the IFRS to the extent possible with the objective to formulate sound financial reporting
standards. The ICAI, being a member of the International Federation of Accountants (IFAC),
considers the IFRS and tries to integrate them, to the extent possible, in the light of the laws,
customs, practices and business environment prevailing in India. The Preface to the Statements
of Accounting Standards, issued by the ICAI, categorically recognizes the same. Now, as the
world globalizes, it has become imperative for India also to make a formal strategy for
convergence with IFRS with the objective to harmonize with globally accepted accounting
standards.
In the present era of globalization and liberalization, the World has become an economic
village. The globalization of the business world and the attendant structures and the regulations,
which support it, as well as the development of e-commerce make it imperative to have a single
globally accepted financial reporting system. A number of multinational companies are
establishing their businesses in various countries with emerging economies and vice versa.
3

The use of different accounting frameworks in different countries, which


require inconsistent treatment and presentation of the same underlying economic transactions,
creates confusion for users of financial statements. This confusion leads to inefficiency in capital
markets across the world. Therefore, increasing complexity of business transactions and
globalization of capital markets call for a single set of high quality accounting standards. High
standards of financial reporting underpin the trust investors place in financial and non-financial
information. Thus, the case for a single set of globally accepted accounting standards has
prompted many countries to pursue convergence of national accounting standards with IFRS.
The ICAI as the accounting standard - setting body in the country has always made efforts to
formulate high quality Accounting Standards and has been successful in doing so. Indian
Accounting Standards have withstood the test of time. As the world continues to globalize,
discussion on convergence of national accounting standards with International Financial
Reporting Standards (IFRS) has increased significantly.

1.2-LITERATURE REVIEW:
IFRS have been recently developed due to expansion of boundaries of business and few
researcher conducted study on this issue. There is so many studies have been conducted in
outside India because of non-adoption of IFRS by the Indian organizations and also due to
continuous extension of convergence in India. However, ICAI recently announced to compliance
with IFRS by Indian organization since 2013. The following is a summary of research studies at
international context under different part of section viz.
Katarina Struharova, Karle steker, Milana Otrusinova (2011). In this paper they discuss what
the shift to IFRS mean for Czech companies and what is the impact of possible adoption or
convergence plans on Czech companies.
Dr. Naseem Ahmad and Professor Nawab Ali Khan (2010), define that all major economies
have established time lines to converge with or adopt IFRSs in the near future.

Amanda Paul and Eddy Burks (2009), provide a history of IFRS and discuss the timeline
of convergence, along with advantages and disadvantages. This paper will also address
the future impact on accounting education
George Iatridis(2010), This study investigates the impact of the implementation of the
International Financial Reporting Standards (IFRSs) on key financial measures of UK firms
and the volatility effects of IFRS adoption. The findings show that IFRS implementation has
favorably affected the financial performance (e.g. profitability and growth potential) of firms.
The study also demonstrates that following the fair value orientation of IFRSs the transition
to IFRSs appears to introduce volatility in income statement figures.
Ramona Dzinkowski(2007), this study provide the information that On March 6, the US
Securities and Exchange Commission (SEC) held a round table on the roadmap to IFRS
convergence. According to the panel of about 20 experts, not only was the general consensus a
resounding "yes", but reconciliation to US GAAP is looked upon as a mostly futile and
expensive exercise. Most investors both in and out of the US are not relying on the reconciliation
to US GAAP to make investment decisions; they use the IFRS or local country GAAP. If the
SEC takes the recommendations resulting from this forum, in the very near future people can
expect the reconciliation requirement to be dropped, potentially before 2009. In the interim it
will be thinking very carefully about whether it should give US firms the opportunity to file
under the IFRS should they wish to, or mandate that as of a certain date, US firms must be filing
under the IFRS.

1.3-IMPORTANCE OF THE STUDY:


There are many accounting standards in the world, with each country using a version of their
own generally accepted accounting principles, also known as GAAP. These allow firms to report
their financial statements in accordance to the GAAP that applies to them. The complication lies
within whether the firm does business in multiple countries. How can investors then deal with
multiple standards, which ones are accurate, and how can corporations be compared based upon
their financials? The answer to these questions lies within the adoption of the International

Financial Reporting Standards, or IFRS, which is being developed and supported by the
International Accounting Standards Board (IASB).
With more and more countries adopting the IFRS as their accounting standard, over 120 as of
April 2011, investors and analysts should be well advised on how this transition affects
company's reporting, and what it means moving forward. To do this, this study will look at the
background of IFRS, the benefits, its goals, the fundamental differences between IFRS and U.S.
GAAP &IAS, convergence of IFRS & its impact, challenges etc.
The past few decades have seen the advent of globalization whereby many entities have and
are expanding or making significant acquisitions in the global arena, for which huge capital is
required. One of the key challenges that faced by all such entities is the compliance requirements
imposed by various stock exchanges across the world for financial information. Today majority
of stock exchanges across the world will accept or require financial statements to be prepared
under IFRS. India being one of the key global players, migration to IFRS will enable Indian
entities to have access to international capital markets.

1.4-OBJECTIVE OF THE STUDY:

To Make a brief analysis of International Financial Reporting Standard ( IFRS )

To Examine the Convergence of International Financial Reporting Standard ( IFRS)

To establish the difference between the Indian accounting standards & International
accounting standard.

To make a case study of Wipro Ltd under Indian GAAP and IFRS to determine their
implications and impacts on financial statement

1.5-RESEARCH METHODOLOGY:
1.5.1-Scope of the study- scope is limited to an analysis of the convergence of IFRS
in Indian scenario taking the case study of Wipro.
6

1.5.2-Sources of data- Data are collected from the secondary sources such as
Published sources & unpublished sources. Published sources are Newspaper & Magazines,
research scholars, Government publications etc. Un-published sources are un-published material
found with research scholars and Referring various website.

1.5.3-Time frame: the study covers a period of 4 years.


1.5.4-Statistical tools: Table and bar graph have been used for the purpose of the study.
1.6-LIMITATION OF THE STUDY:
The project is subjected to limitation of inherent nature of secondary source of data that is
authenticity and accuracy.

1.7-CHAPTER PLAN:
CHAPTER-1: Chapter 1 is the introduction part. It includes literature review, importance of
the study, objective of the study, scope of the study, sources of data collection, time frame, and
limitation of the project and chapter plan.

CHAPTER-2: Chapter 2 deals with conceptual framework of IFRS. It includes background


of IFRS, objective of IFRS, importance of IFRS, scope of IFRS, requirement of IFRS.

CHAPTER-3: Chapter 3 is all about convergence of IFRS and its impact. It covers need for
global convergence with IFRS, challenges in the way of global convergence, benefits of
convergence with IFRS, major areas impacted by convergence with IFRS.

CHAPTER-4: Chapter 4 deals with comparative analysis of IFRS and IND AS.
CHAPTER-5: Chapter 5 is all about adoption of IFRS in Indian companies. The financial
data of WIPRO ltd was taken into consideration and how the company reports its financial
figures by using both IFRS and Indian GAAP which is clearly mention.

CHAPTER-6: It is the conclusion part. This chapter include summary of the project, findings
and suggestion.

CHAPTER-2
IFRSCONCEPTUAL
FRAMEWORK
8

2.1-INTRODUCTION OF IFRS:
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.
They are progressively replacing the many different national accounting standards. The rules to
be followed by accountants to maintain books of accounts which are comparable,
understandable, reliable and relevant as per the users internal or external.

2.2- BACKGROUND OF IFRS:


IFRS are the principle based standards issued by international accounting standard board
(IASB) and establish board rules as well as dictating specific treatments. A set of international
accounting standards stating how particular types of transactions and other events should be
reported in financial statements. Many of the standards forming part of IFRS are known by the
Board of the International accounting Standards Committee (IASC).On 1 April 2001; the new
Board adopted existing IAS and SICs. The IASB has continued to develop standards calling the
new standards IFRS.
Accounting standards issued by the IASB (International accounting standard board) are
known as International Accounting standards. Companies that are locally listed, as well as those
that are not under obligation to use their financial statements in the countries that have accepted
those standards.

2.3-OBJECTIVE OF IFRS:
The objective behind the IFRS is to create a common platform for better
understanding of accounting internationally.
9

By adopting IFRS, a business can present its financial statements on the same
basis as its foreign competitors, so that it is very easier for comparisons.
To bring about convergence of national accounting standards and international
accounting standards and IFRS to high quality solution.
To take account of, as appropriate, the special needs of small and medium sized entities
and emerging economies.

2.4-IMPORTANCE OF IFRS:
A single set of accounting standards would enable internationally to standardize training and
assure better quality on a global screen, it would be also permit international capital to flow more
freely, enabling companies to develop consistent global practices on accounting problems. It
would be beneficial to regulators too. As a complexity associated with needing to understand
various reporting regions would be reduced.

2.5-SCOPE OF IFRS:
IASB standards are known as International financial Reporting standards (IFRS).
All International Accounting Standards (IASS) and Interpretations issued by the former
IASC & SIC continue to be applicable unless and until they are amended or withdrawn.
IFRSS apply for the purpose of preparing financial statements and other financial
Reporting by profit oriented entities, those engaged in commercial, industrial and
financial activities.
IFRS is appropriate for all entities. Other than profit oriented business entities.
Here the financial statements are intended to meet the common needs of shareholders,
creditors, employees. As well as provide information regarding financial position,
performance and cash flows of business entity.
Other financial reporting includes information provided outside financial statements that
assist in the interpretation of a complete set of financial statements or improves users
ability to make efficient economic decision.
IFRS apply to individual company and consolidated financial statements.
A complete set of financial statements include a balance sheet, an income statements, a cash
flow statement, a statement showing either all changes in equity or changes in equity other than
10

those arising from investments and distributions to owners, a summer of accounting policies and
explanatory notes.

2.6- REQUIREMENTS OF IFRS:


IFRS financial statement consist of (IASI 8)
A statement of financial position.
A statement of Comprehensive income or two separate statements comprising an income
statement and separately a statement of Comprehensive income, which reconcile profit
and loss on the income statement to total comprehensive income reconcile profit or loss
on the income statement to total comprehensive income
A statement of changes in equity(SOCE)
A cash flow statement or statement of cash flow
Notes, including a summary of the significant accounting policies
Comparative information is required for the prior period (IAS1.36). An entity preparing IFRS
accounts for the first time must apply IFRS in full for the current and comparative period
although there are transitional exemptions (IFRS-7).
On 6 September 2007, issued a revised IAS 1 Preparation of financial Statements, the main
changes from the previous version are to require that an equity entity must:

Present all non-owner changes inequity that is comprehensive income either in one
statement or in two statements a separate income statement and a statement of
comprehensive income).components of comprehensive income may not be presented in

the statement of changes inequity.


Present a statement of financial position (balance sheet) as at the beginning of the earliest
comparative period in a complete set of financial statements when the entity applies the

new standard.
Present statement of cash flow.
Make necessary disclosure by the way of a note.
The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009.

Early adoption is permitted.

11

2.7-STRUCTURE OF IFRS:
IFRS are considered a principle based set of standards in that establish broad rules as well
As dictating specific treatments.

International Financial Reporting Standards comprises:


International Financial reporting Standards (IFRS)standards issued after 2001
International accounting standards (IAS) standards issued before 2001
Interpretation originated from the international financial reporting Interpretations
committee (IFRIC)issued after 2001
Standard Interpretation Committee (SIC)issued before 2001.
Conceptual Framework for the preparations and presentation of financial statements
(2010)

2.8: BENEFITS OF IFRS:


By adopting IFRS, you would be adopting a "global financial reporting" basis that will
enable your company to be understood in a global marketplace. This helps in accessing
world capital markets and promoting new business. It allows your company to be
perceived as an international player.
A consistent financial reporting basis would allow a multinational company to apply
common accounting standards with its subsidiaries worldwide, which would improve
internal communications, quality of reporting and group decision-making.
In increasingly competitive markets, IFRS allows a company to benchmark itself against
its peers throughout the world, and allows investors and others to compare the company's
performance with competitors globally.

2.9- DRAWBACK OF IFRS:


IFRS are international accounting standards developed by the International Accounting
Standards Board (IASB). The IASB is an independent international organization working to
improve and standardize the preparation and release of important international financial
information. With the increase of companies conducting business in a global environment, the
international financial reporting standards framework was developed to ensure standardized
12

accounting principle for companies with domestic and international business operations. United
States (U.S.) companies are still required to use generally accepted accounting principles
(GAAP), although they can report their global financial information under the international
framework as well.
The IASB is the international equivalent of the U.S. financial accounting Standards Board
(FASB). The IASB is a private, nonprofit organization responsible for assessing the financial
needs of the global business environment and developing accounting standards that meet the
needs of bankers, investors and other stakeholders. The IASB has 15 board members that help
guide and direct the organization on which international accounting situations should be
addressed through international financial reporting standards. The IASB creates the standards
using two basic assumptions: accrual basis and going concern. The accrual basis requires
companies to record transactions as they occur; a going concern means the entity will continue
into the foreseeable future. International financial reporting standards are created using a due
process that was developed and is monitored by the IASB. When developing new standards, the
IASB considers the relevance of information released to users, determines whether a current
guideline exists for the specific accounting information, assesses the possibility of creating a
quality accounting standard and identifies constraints that might exist. This process may be time
consuming since the IASB must consider all the countries that use international financial
reporting standards for reporting accounting information. The IASB usually allows individuals in
the international accounting community to provide input and comments during the due process
phase. This review and comment process allows the IASB to modify potential accounting rules
prior to releasing them as official reporting standards.
The IASB and FASB have been working on a convergence process to create a universal,
global set of accounting principles. This convergence process is attempting to merge the
international financial reporting standards and GAAP to create one set of accounting principles
companies can use when reporting financial information. While most U.S. companies must use
GAAP for reporting financial accounting information domestically, foreign countries are
commonly adopting international financial reporting standards for their standard accounting
principles overall. These dual accounting principle guidelines mean U.S. companies must spend

13

more time developing international financial statements and translating financial information to
meet the specific needs of domestic and international users of financial information.

2.10-IFRS ADOPTED AS GLOBAL STANDARDS:


The use of IFRS as a universal financial reporting language is gaining momentum across the
world. Every major nation is moving towards adopting IFRS to some extents. Large number of
authorities requires public companies to use IFRS for stock-exchange listing purposes, and in
addition, banks, insurance companies and stock-exchange may be using them for their statutorily
required reports. Therefore over the next few years, thousands of companies will adopt the
international standards. The increased use of IFRS is not limited to public company listing
requirements or statutory reporting. Many regulatory and government bodies are looking to IFRS
to fulfill local financial reporting obligations related to financing or licensing.
IFRS are used in many parts of the world, including the European Union, Australia, South
Africa and Russia. More than 100 countries have required or permitted the use of IFRS since
2001 and the number is expected to increases to 150 by 2015. The group of 20 leader countries
(G20) reaffirmed their commitment to global convergence in accounting standards in September
2009 in a meeting held a Pittsburgh (United States), calling on international accounting bodies
to redouble their efforts to achieve a single set of high-quality, global accounting standards
within the context of their independent standard setting process and complete their convergence
project by June 2011. Some of the major countries that are seeking to converge with IFRS by
2011 include Canada, Korea, India, and Brazil.
The task of facilitating the movements towards increasing comparability and harmonizing
world-wide was taken by International Accounting Standards Committee (IASC) [presently
known as International Accounting Standards Boards (IASB)], an independent body that was
formed in 1973 by professional accounting bodies in the United States and eight other
industrialized countries. The goal of IASC Foundation and the IASB is to develop, in the public
interest, a single set of high-quality global accounting standards. In pursuit of this goal, the IASB
14

works in the close corporation with stakeholders around the world, Including investors, national
standard-setters, regulators, auditors, intellectuals and others who have an interest in the
development of global standards. Between 1973 and 2001, the International Accounting
Standards Committee (IASC) released International Accounting Standards. The IASC
restructured its organization in years 1997 to 1999, which resulted in the formation of IASB.
Subsequently, IASB published its standards in a new series of pronouncements called
International Financial Reporting Standards (IFRS).

2.11-IFRS ROADMAP FOR INDIAN COMPANIES:


A meeting of core group constituted by the Ministry of corporate affairs for convergence of
Indian accounting standards with International Financial Reporting Standards (IFRS) was held
on 11th January, 2010. The meeting was attended by various officials from the Institute of
Chartered Accountants of India, Ministry of Finance, Securities and Exchange Board of India
(SEBI), Insurance Regulatory and Development Authority (IRDA), Reserve Bank of India (RBI),
Comptroller and Auditor General (C&AG), Pension Fund Regulatory and Development
Authority (PERDA), Industry representatives and other experts. The core group discussed the
report submitted by the Sub-Group headed by Mr. Malegam to finalize the roadmap for
achieving convergence of Indian Accounting standards with IFRS by April, 2011. The
amendment required in the companies Act, 1956, the related Schedules-VI and XIV and
Accounting Standards Rules for the purpose of Convergence were also discussed. There were
detailed deliberations on the implementation challenges especially those related to legal and
accounting framework and transitional issues.

2.11.1-TWO SEPARATE SET OF ACCOUNTING STANDARDS:


The core Group decided that there will be two separate sets of Accounting Standards under
Section 211(3C) of the companies Act, 1956, which are as follows:

Indian Accounting Standards converged with the IFRS

15

These are the standards which are being converged by eliminating the differences of the
Indian Accounting Standards vis--vis IFRS. These standards shall apply by all the companies
falling under the phase I to phase III.

Indian Accounting Standard notified in the companies (Accounting Standards) Rules,


2006

These are the standards used, at present, by Indian Companies under the Companies Act,
1956. Companies not falling within the threshold limits prescribed for IFRS compliance in the
respective phases shall continue to use these standards in the preparation and presentation of
financial statements.

CONCLUSION:
In this chapter it is tried to explain, detail background of International Financial
Reporting Standard & its scope & objective and its benefits to an organization. The Ministry
of Corporate Affairs had issued a press release setting different phase for adoption of IFRS.

16

CHAPTER-3
CONVERGENCE
OF IFRS & ITS
IMPACT

17

Accounting is the language of business, but every country has its own language which is
called generally accepted Accounting Principles (GAAP). Accounting standards would yield
financial statements that could be effortlessly interpreted by any user around the world.
However, different countries have local accounting standards or principles which spell out the
accounting treatment and disclosure requirements for preparing the financial statement. These
standards may have different accounting treatment for the same type of transaction in two
different countries. This makes difficult for the end user to understand the financial statements
for taking any economic decisions unless these are prepared based on uniform accounting
standard. Converging of domestic Accounting standard with IFRS will bring almost the entire
world on one single uniform accounting platform with good number of attendant benefits to large
number of entities for doing global business. Moving from Indian Accounting standard to IFRS
is not merely changing from one set of accounting policies to another but involves a number of
business implications. Basically there will be major change in the profitability and the way in
which business management is looked at by various stakeholders and calculation of various
leveraging ratios due to the convergence to IFRS. This chapter throws lights on need for global
convergence with IFRS, present status of its implementation, its impact on discloser
requirements and advantages in the Indian scenario.

3.1-NEED FOR GLOBAL CONVERGENCE WITH IFRS:


In general term, convergence means to achieve harmony in relation to IFRS; in precise
terms, convergence can be considered to design and maintain national accounting standards in a
way that financial statements prepared in accordance with national accounting standards draw
unreserved statement of compliance with IFRS.
International analysts and investors would like to compare the financial statements based on
similarity accounting standards, and this has led to growing support for an International accepted
set of accounting standards for cross-border filling. A strong need was felt by legislation to bring
about uniformity, comparability, transparency and adaptability in financial statements. Having
multiplicity of accounting standards around the world is against the public interest. It creates
confusion, encourages error and facilitates fraud. The cure for these ills is to have a single set of
high quality global standards. The goal of the IFRS is to create single set of accounting standard
18

so that can be applied anywhere in the world, allowing investors to compare the performance of
business entities across geographic boundaries.
The harmonization of financial reporting around the world will help to raise confidence of
investors in the information they are used to make their financial decision. If accounting for same
events and information produces divergent reported financial statements due to adoption of
different set of accounting standards, then it is self evident that accounting will be increasing
discredited in the eyes of users of the financial statements. Also for the companies with multiple
listing in both domestic and foreign country, the convergence is very much essential.

3.2-CHALLENGES IN THE WAY OF GLOBAL CONVERGENCE:


IFRS poses a great challenge to the drafters of financial statements and auditors. There is an
urgent need to understand the complexities in IFRS implementation. Cultural, legal and political
obstacles may exist in the convergence path. With the assistance of the appropriate authorities,
these intricacies can be minimized. Legislators, regulators and standard-setting bodies need to
aware of the technical faults in the current convergence process and, where appropriate, they
should taken action to ensure reasonable progress. Reconciliation and restatement of financial
statements is costly, not only in the monetary terms but also in terms of resources. There are
disagreements in some countries with the requirements of certain specific IFRS. The complicated
nature of some IFRS is perceived as a barrier to convergence in many countries. All entities will
have to consider their own road map and gear up for complying with IFRS differences.
Convergence to IFRS will be quite challenging and entities should ensure that their convergence
plans are designed in a phased manner.
The emergence of transnational corporations in search of money, not only for stimulating the
growth, but to maintain on-going activities has demanded flow of capital from all parts of the
globe. This has bought a million of new investors into the capital markets whose interests are not
constrained by national boundaries.
Each country has its own set of rule, regulations and reporting standards. When an entity
decides to raise the capital from the markets other than the country in which it is located, the
rules and regulation of other country will apply. This will require that the enterprise is in a
19

position to understand the differences between the rules governing financial reporting in the
foreign country as compared to own country. Translation and reinstatements of financial
statements are of extreme importance in a rapidly globalizing world.

3.3-BENEFITS OF CONVERGENCE WITH IFRS:

Improved access to international capital markets


Access to low-cost foreign funds
Elimination of multiple reporting costs
Opportunities for professionals
Easier comparability with global peers

3.4-MAJOR AREAS IMPACTED BY CONVERGENCE WITH IFRS:


Converging with IFRS will bring almost the entire world on one single uniform
accounting platform with good number of attendant benefits to large number of entities for
doing global business. Moving from Indian GAAP to IFRS is not merely changing from one
set of accounting policies to another. It is much more, since it not only has significant
accounting consequences but also has reaching business implications. Some of the major
areas impacted due to convergence with IFRS will be:

Business Combination
Group Accounts
Fixed Assets and Investment Property
Presentation of Financial Statements

Experts are of the opinion that there will be major impact on the profitability and the way in
which business management is looked at by various stakeholders due to the convergence to
IFRS. Also it is expected that there will be deviation in the way major leveraged ratios are
calculated after the convergence with IFRS. The following areas, where significant accounting
changes are anticipated are discussed below:
3.4.1

BUSINESS COMBINATION:

20

In case of amalgamation of business in the nature of merger or in the nature of purchase,


subsidiaries, associates and joint venture, assets are valued at their carrying cost or by following
interest pooling method if certain number of conditions are fulfilled. Contingent liabilities of the
acquire companies are not counted as liabilities under Indian GAAP. However as per IFRS3(Revised), all assets taken over are to be incorporated in the books at fair value including
contingent liabilities and intangible assets. Similarly, there is difference in treatment of
amortization of goodwill reserve acquisition which is not considered under Indian GAAP and
also in many areas of business combination.

3.4.2-GROUP ACCOUNTS:
There are many key differences with regard to the accounting for Group Accounts under
IFRS. Under IAS- 27(Revised), consolidated and separate Financial Statements, the preparation
of group accounts is mandatory, subject to a few exemptions, whereas, preparation of
consolidated financial statements (CFS) is required only for listed entities under Indian GAAP.
Also, the application of equity method or proportionate consolidation to associates /Jointventures is mandatory under IAS-27(Revised) whereas preparation of financial statements (CFS)
is required only for listed entities under Indian GAAP. The application of equity method or
proportionate consolidation to associates/ joint-ventures is mandatory, subject to a few
exceptions even if an entity does not have any subsidiaries as per IAS-27(Revised). Under Indian
GAAP, application of the equity method or proportionate consolidation is required only when the
entity has subsidiaries and prepares CFS. Under IAS-27(Revised), consolidation is required for
all subsidiaries, whereas, there are two exemptions from consolidation provided under Indian
GAAP. Potential voting rights, which are currently exercisable, are considered for determination
of control under IFRS; Indian GAAP is silent on whether potential voting rights are to be
considered for control. However, under AS-23, potential voting rights are not considered for
determining significant influence in the case of and associate. Thus, an analogy can be drawn in
the case of a subsidiary as well. Both, IFRS and Indian GAAP require use of uniform accounting
policies for preparation of CFS. However, Indian GAAP provides an exemption on the grounds
of impractically.
21

IFRS allows a 3 months time gap between financial statements of a parent or investor and its
subsidiary, associates or jointly controlled entity. Indian GAAP allows a 6 months time gap for
subsidiaries and jointly controlled entities. For associates, there is no time gap prescribed. Under
IFRS, changes in ownership interest of a subsidiary (that do not result in the loss of control) are
accounted for as an equity transaction and have no impact on goodwill or the income statement.
No Guidance is given in Indian GAAP for changes in ownership interest of subsidiary that do not
result in loss of control. IFRS requires losses incurred by the subsidiary to be allocated between
the controlling (parent) and non- controlling equity investment in the subsidiary. Under Indian
GAAP, excess losses attributable to minority shareholders over the minority interest are adjusted
against the majority interest unless, the minority has a binding obligation to, and is able to, make
good the losses.
3.4.3-FIXED ASSETS AND INVESTMENT PROPERTY:
As per the provision contained in IAS-16, property, plant and Equipment mandates
component accounting, whereas, AS-10 recommends, but does not require, component
accounting. IFRS requires depreciation to be based on the useful economic life of an asset. In
Indian GAAP, depreciation is based on higher of useful life or schedule-XIV rates. Major repairs
and overhaul expenditure are capitalized under IFRS as replacement costs, if they satisfy the
recognition criteria, whereas, in most cases, Indian GAAP requires these is to be charged off to
the profit and loss account as incurred. IFRS requires estimates of useful lives and residual
values to be reviewed at least at each financial year-end. In Indian GAAP, there is no need for an
annual review of estimates of useful lives and residual values.
Both IFRS and Indian GAAP permit the revaluation model for subsequent measurements. If
an asset is revalued, IFRS mandates revaluation to be done for the entire class of property, plant
and equipment to which that asset belongs, and the revaluation to be updated periodically. In
Indian GAAP, revaluation is not required for all the assets of the given class. It is sufficient that
the selection of the assets to be revalued is made on systematic basis, e.g. an entity may revalue a
class of assets at other location. Also there is no need to update revaluation regularly under
Indian GAAP.

22

Under IFRS, depreciation on the revaluation portion cannot be recouped out of revaluation
reserve and will have to be charged to the income statements over the useful life of the asset,
whereas Indian GAAP permits depreciation on revaluation portion to be recouped out of
revaluation reserve to the income statement.
IFRS provides details rules for classification of an asset as an investment property and allows
subsequent measurement of investment property at cost or at fair value. Indian GAAP requires
investment property to be recognized at cost less diminutions other than temporary diminutions
in value.
Under IFRS, intangible assets can have indefinite useful life. Such assets are required to be
tested for impairment and are not amortized. Under Indian GAAP, there is no concept of
indefinite useful life.
3.4.4-PRESENTATION OF FINANCIAL STATEMENTS:
IAS-1 (Revised 2007) Presentation of financial statements (effective from annual accounting
periods beginning on or after 1st January 2009) is significantly different from the corresponding
AS-1. While IAS-1 (Revised) sets out overall requirements for the presentation of financial
statements, guidelines for their structure and minimum requirements for their content, Indian
GAAP offers no standard outlining overall requirements for presentation of financial statements.
In Indian, for various entities, the statutes governing the respective entities lay down formats of
financial statements. For example, in the case of companies, format and disclosure requirements
are set out under schedule-VI to the companies Act, 1956. For entities such as partnership firms,
the statute governing those entities does not lay down any specific format of financial statements.
IAS-1 (Revised) recognizes the true and fair override provisions. The true and fair override
concept is generally not permitted under GAAP. While Clause 49 of the listing agreement
contains provision relating to the true and fair override, no practical guidance is available.
Further IAS-1(Revised) requires the presentation of a statement of comprehensive income as part
of the financial statements. This statement presents all the item of income and expense
recognized in profit and less, together with all other items of recognized income and expense.
Entities may present all item together in a single statement or present tow linked statements
displaying the items of income and expense recognized in profit and loss (the income statement),
23

and statement beginning with profit or loss and displaying all item included in other
comprehensive income (the statement of comprehensive income). The concept of other
comprehensive income does not prevail under Indian GAAP, however, information relating to
movement in reserves, etc. is generally presented the caption reserves and surplus in the balance
sheet.
3.4.5-ADDRESSING SENSITIVITY TO LOCAL CONDITIONS:
The issue of convergence with IFRS has gained considerable momentum in India. At present,
the accounting standards board (ASB) of the institute of Chartered accountants of India (ICAI)
formulates the accounting standards based on IFRS. However, these standards remain sensitive
to local conditions, including the legal and economic environment. Accordingly, the accounting
standards issued by the ICAI depart from the corresponding IFRS in order to ensure consistency
with the legal, regulatory and economic environments of India.
3.4.6-APPLICATION OF FAIR VALUE CONCEPT:
Further, the IFRS are principle-based standards and the application required the increased use
of fair value accounting (FVA) for valuation and measurement of assets and liabilities. Fair value
is defined as an estimate of the price an entity would have realized if it had sold an asset or paid
if it had been relieved of a liability on the reporting date in an arms length exchange motivated
by normal business considerations. Evidence shows that FVA would result in added volatility in
the earning and equity, especially for the banking and financial institutions. Possible reason for
many countries to delay adopting to the IFRS is attributed to the economic downslides being
faced by them of late, mainly in the us and other European countries, where there is formidable
opposition to the adoption of fair value concept, apprehension being that, applying fair value to
their assets and liabilities may results in triggering the contagion effect.
3.4.7-LEGISLATIVE CHANGE:
Important issue for detailed discussion is the one relating to the bringing in suitable
legislative changes required to various laws- compliance to which is mandatory for all the
entities whether in the public, government or private domain. For example, the format of
reporting of financial statements is as per the guidelines provided by IASB. IAS-1 requires
24

presentation of financial position in a flowing format. This is significantly different from the
provisions contained in the schedule VI of the companies Act, 1956 for public and private
limited companies and as per the banking Regulations Act for banking and insurance entities.
Suitable amendments needs to be brought in to these legal enactments enabling the entities
converging to IFRS to present the financial statements as prescribed. In addition to regulatory
challenges, IFRS convergence in India will face other challenges such as training, shortage of
resources, information systems, etc.
3.4.8-FINANCIAL STATEMENTS:
Under the new standards the complete set of financial statements comprises of the following:

Balance sheet as at the end of the period (along with the statement of changes in equity

annexed thereto)
Statement of profit and loss (including other comprehensive income)
Statement of Cash flows for the period
Notes comprising the summary of significant accounting policies and other explanatory

information
Balance sheet as at the beginning of the earliest comparative period when an entity
applies an accounting policy retrospectively or makes a retrospective restatement of items
in the financial statements or when it reclassifies items in its financial statements.

3.4.9-BALANCE SHEET:
The balance sheet or the statement of financial position as it is called in the international
accounting standards is to be drawn as per Schedule VI of the companies Act. The present
Schedule VI is proposed to be amended to make it in line with IAS-1. Each entity is required to
present current and non-current assets, and current and non-current liabilities, as separate
classifications in its balance sheet. As an exception to this general rule, an entity may provide the
classification based on the liquidity if such information is reliable and more relevant.
The current and non-current classification is aimed at providing useful information by
distinguishing the net asset that are continuously circulating as working capital from those used
in the entities long term operations. This classification highlights the assets that are expected to

25

be recovered within the current operating cycle and liabilities that are due for settlement within
the same period.
Thus the classification of liabilities will no longer be on the line of secured and unsecured.
Similarly the assets will be classified as non-current and current instead of the present
classification as fixed assets and current assets. Presently long term loans and advances are also
classified as current assets. In the proposed schedule VI they will be classified as Non-current
Assets.
3.4.10-STATEMENTS OF CHANGES IN EQUITY:
The statement of changes in equity is similar to the existing schedule of Reserves and
Surplus. Under the new statement, the entity shall present a statement of changes in equity
showing the following information:

Total comprehensive income for the period showing separately the total amounts

attributable to the owners of the parent and to the non-controlling interests


For each component of the equity, the effects of retrospective applications or

retrospective re-statement recognized in accordance with the Indian AS-8


For each component of the equity, a reconciliation between the carrying amount at the

beginning and at the end of the period separately disclosing the changes resulting from:a) Profit or loss
b) Each item of other comprehensive income and
c) Transactions with the owners in their capacity the owners, showing separately the
contribution by and the distributions to the owners and the changes in the ownership
interest in the subsidiaries that do not result in loss of control.
3.4.11-STATEMENT OF CASH FLOWS:
The Cash Flow statement provides information to assess the ability of entity to generate cash
and cash equivalents and also the needs of the entity.
3.4.12-STATEMENTS OF PROFIT OR LOSS:
The statement requires an entity to present all items of income and expenses in a period in
profit or loss unless other standards require/ permit otherwise. All material items of income and
expenses are required to be disclosed along with the nature and amount separately.
26

The IAS-1 permits presentation of expenses by using either their nature or their functions
within the entity. The general method adopted in India is to present expenses on the basis of their
nature. Accordingly Indian AS-1 requires the presentation only by the nature of expenses.
NOTES
The Notes to account present information about the basis of preparation of the financial
statement and the specific accounting policies, they disclose the information required by the
standards that is not presented elsewhere in the financial statements. Such information is relevant
to understand the financial statements. The notes should be present in a systematic manner. There
should be proper cross-referencing of the items in the financial statements with that in the notes.
Generally the orders in which the notes are to be presented are as under:

Statement of compliance with the IND AS


Summary of significant accounting policies applied.
Supporting information for items presented in the balance sheet and in the statement of

profit and loss, statement of changes in equity and the cash flow.
Disclosure of contingent liabilities and unrecognized contractual commitments and
Non-financial disclosure e.g. financial risk management objectives and policies

It may be useful to note that the information required to be disclosed currently under
schedule-VI such as quantitative details, CIF value of imports, FOB values, of exports etc. will
not be required to be disclosed in the notes to the accounts.
3.5-IMPACT:
This study seeks to establish if the adoption of International Financial Reporting Standards
(IFRS) in Kenya has been associated with higher accounting quality for listed companies. The
International Accounting Standards Board (IASB), in its objectives and preamble, supposes that
the beneficial effects from IFRS adoption include transparency, accounting quality and reduced
cost of capital. Based on these assumptions, this study applied accounting quality measures;
earnings management, timely loss recognition and value relevance to find out whether the
adoption of IFRS has led to improvements in accounting quality in companies listed in Kenya.
The methodology is based on prior literature definition of metrics of accounting quality mainly
earnings management, timely loss recognition and value relevance. The study differs from the
27

previous ones by overcoming difficulties in controlling for confounding factors faced in previous
studies which could have led to less reliable results. Three out of the eight metrics indicated that
quality had marginally improved while five indicated that it had marginally declined. These
mixed outcomes are very much in line with findings in other studies and the study contributes to
the debate by explaining why accounting quality outcomes are still not consistent with IFRS
promises in spite of improved test conditions.
CONCLUSION:
IFRS are help in to maintain a harmony, while preparing the financial statement. There are
certain challenges face by auditor & other while convergence the IFRS in global level. If the
company are adopted the IFRS, there are certain benefit can get in the form of presentation of
Financial Statement & treatment of Fixed Asset & other investment etc. The Impact in adoption
of IFRS help in Transparency, accounting quality & reduction cost of capital, reliability, accuracy
in presenting the Financial Statement.

28

CHAPTER4
COMPARATIVE
ANALYSIS OF
IFRS AND IND AS
29

Accounting standards are written documents, policy document issued by experts accounting
body or by government or other regulatory body covering the aspects of recognition,
measurement treatment, presentation and disclosure of accounting transaction in the financial
statement. Till now, 32 Accounting standards have been issued by the ICAI as against the 41
International Accounting standards out of which seven accounting standards are superseded
effectively now there are 34 International accounting standards. There are also eight international
financial reporting standards (IFRS).
Generally Accepted Accounting Principles (GAAPs) includes accounting conventions, rules,
procedures and accounting standards, accepted accounting practices both promulgated and non
promulgated. GAAPs consist of four components: the requirements of law, judgments of various
courts of law; pronouncements of the governing body from time to time; and requirements of
regulatory Authority SEBI.
In 2001, the international fraternity of accountants took stock of the situation and constituted
the International Accounting Standards Board (IASB) to evolve and prescribe norms for
treatment of several items in the preparation and presentation of financial statements. IASB
adopted all the 41 standards issued by the IASC till 2001. These standards were thoroughly
revised and updated in view of the changes in industry and the need for rationalization. Now
only 34 standards are functional. The US Finance Accounting Standards Boards (FASB) and the
IASB are in the process of eliminating the differences in some of the standards. The International
Finance Reporting Interpretations committee

(IFRIC) was constituted to replace the SIC.

This committee meets periodically to discuss and spell out their interpretations. Some of the
other major international bodies in the realm of international accounting are the European
Commission (EC), the UN, the International Federation of Accounts (IFAC) and the organization
for Economic Cooperation and Development (OECD).

OBJECTIVES OF THIS CHAPTER:


30

To study the accounting standards applicable at various level enterprises.


To establish the difference between the Indian accounting standards and international

accounting standards.
To analysis the applicability of accounting standards in respect of their size.

ANALYSIS AND INTERPRETATION:


The need for a speedy integration of the Indian accounting standards with the international
accounting standards cannot be over-emphasized. Assurance that financial statements are
prepared in accordance with internationally accepted accounting standards and audited on a basis
comparable with international accounting practice is a key plan in the system of regulation. In all
32 Accounting Standards have been prescribed. However, their applicability is dependent on its
size-Level I/II/III company. The following table I enumerate applicability level, prescriptions &
important content of accounting standards:

TABLE 1: LEVEL OF ENTERPRISES

LEVEL-1 ENTERPRISES

LEVEL-2
ENTERPRISES

31

LEVEL-3
ENTERPRISES

Enterprise not covered

Listed companies
To be listed companies
Banks
Financial institutions
Insurance companies
Enterprise having
Turnover more than INR

under level-1, but


Enterprise having

Enterprise not
Covered under level-1

turnover exceeding INR


4 million but less than

and level-2

500 million
Enterprise whose

500 million
Enterprises whose
borrowing exceeds INR

borrowing exceeds INR


10 million but less than
100 million

100 million
Holding or subsidiary
Companies of above
Listed companies

Level II and Level III enterprises are considered as SMES. Level I enterprises are required to
comply fully with all the accounting standards. No relaxation is given to Level II and Level III
enterprises in respect of recognition and measurement principles. Relaxations are provided with
regard to disclosures requirements. Accordingly, Level II and Level III enterprises are fully
exempted from certain accounting standards, which mainly lay down disclosure requirements.
INDIAN ACCOUNTING STANDARDS
TABLE 2: INDIAN ACCOUNTING STANDARDS AND ITS APPICABILITY LEVEL
AS

Particulars

no
AS-1

Applicability

Prescription and content

level
Disclosure

of

1,2,3

Disclosure of accounting policies means

accounting

disclosure of fundamental accounting assumptions,

policies

guide lines for selecting accounting policies, change


in accounting policies how to disclose them

32

AS-2

Valuation

of

1,2,3

inventories

Valuation of inventories means applicability,


measurement, determine cost, exclusion, net
realizable value and reporting

AS-3

Cash

flow

statement

Defining cash, cash equivalent, classifying cash


flow into operating financing and investing cash,
direct and indirect method of cash flow.

AS-4

Contingencies

1,2,3.

Contingencies are like, estimation of liability,

and events

events after B/S date, events affecting going concern,

occurring after

proposed dividend, how to report them are the feature

the balance sheet

of this standard.

date
AS-5

Net profit or loss

1,2,3.

Applicable to all enterprise the components of profit :

for the period,

ordinary and extraordinary activities, prior period

prior period items

items, change in accounting estimates & accounting

and accounting

policies disclosure.

policies
AS-6

Depreciation

1,2,3.

accounting

AS-7

Construction
contracts

Depreciable assets, calculation and method of


depreciation disclosures.

1,2,3.

Revenue recognition in long term construction


contracts, effect of change in estimate in contract,
percentage of completion or completion of contract
method, disclosure.

33

AS-8

Accounting for

Withdrawn

research and

As withdrawn now these standard has not been


applicable.

development(this
standard has been
withdrawn with
effect on
01.04.2004 for all
levels of
enterprises and
AAS 26 is
applicable)
AS-9

Revenue

1,2,3.

recognition

What is revenue, revenue from of sale, rendering


services, and from interest, dividend, royalty,
disclosure

AS10

Accounting

1,2,3.

for fixed assets.

It is related with defining fixed assets, recognition


and measurement, historical costs, revalued price,
upward and downward revaluation, disclosure.

AS11

The effect of

1,2,3

This standard defines foreign currency, exchange

changes in

rate, monetary and non monetary items, closing rate

foreign exchange

and transaction in foreign currencies, disclosure.

rates
AS12

Accounting

1,2,3.

Accounting for government grants recognize

for government

monetary & non-monetary grants, grants related to

grants

revenue, promoters contribution, refunds,


contingency, and disclosure.

AS13

Investments

1,2,3.

Investment in property, cost, carrying amount,


reclassification, disposal and disclosure.

34

AS14

Accounting

1,2,3.

for amalgamation

It includes amalgamation, merger, purchase


consideration, accounts methods: pooling of interest
& purchase. Statutory reserve, goodwill, disclosure.

AS15

AS-

Accounting

1,2,3.

This standard explains(retirement) benefits & its

for retirement

types short/long term during/post employment

benefits in the

benefits, defined contribution & defined benefit

financial

scheme, accrual valuation, PF, gratuity,

statements of

superannuating, pension benefit, funding and

employers

accounting, disclosure.

Borrowing costs

1,2,3.

16

Borrowing cost, interest, amortization of discounts,


provisions, ancillary costs, finance charges, exchange
difference,

qualifying

assets,

conditions

of

capitalizing

borrowing

costs,

commencement,

suspension, cessation of capitalization disclosure are


the treatment of this standard.
AS-

Segment

Segment

reporting

related

to

business

&

17

reporting

2-with

geographical, enterprise & segment revenue, segment

modification

expenses; segment results segment assets segment

3-with

liabilities, identification of reportable segment,

modification

disclosure.

AS-

Related party

What should be disclosed to related party, control /

18

disclosures

2-with

significant influence management or operating

modification

policies, related party transactions, exceptions,

3-with

disclosure.

modification
35

AS-

Leases

19

Define lease: finance & operating define: guaranteed

2-with

residual value for lessee & lessor, unwarranted

modification

residual value, accounting by lessee & lessor,

3-with

recognition of revenue, sale & lease back, disclosure

modification
AS-

Earnings per

The concept of basic & diluted EPS, calculation of

20

share

2-with

net profit or net loss for the period attributable to

modification

share holders weight age average no of outstanding

3-with

shares, right issue, diluted earnings share formula,

modification

right factor, restatement. Disclosure.

Format of consolidated financial statements, it is an

AS-

Consolidated

21

financial

additional information scope, consolidation

statements

procedure, minority interest, arrears of cumulative


preference share, disclosure.

AS-

Accounting for

1,2,3.

Accounting & income tax on profit, current &

22

taxes on income

AS-

Accounting for

23

investments in

accounting, carrying amount of investment,

consolidated

contingencies, disclosure.

deferred
1

Accounting for investments covers associate

financial
statements
AS-

Discontinuing

24

operations

Discontinuing operation define initial & updating


disclosure, recognition & measurement interim

36

financial report.
AS-

Interim financial

25

reporting

Financial statement for interim reporting shows


integral & discrete view, minimum content, form and
content materiality, seasonal / occasional revenue,
change in accounting policies, depreciation.
Disclosures.

AS-

Intangible assets

1,2,3.

26

In this standard difference between tangible &


intangible assets, unidentified & acquired intangible
assets cost, R & D, carrying amount, amortization
method, impairment losses, retirement & disposal,
disclosure.

AS-

Reporting of

Financial reporting of jointly control operation /

27

interests in joint

2-with

assets, transaction between venture & joint venture,

ventures

modification

disclosure.

3-with
modification
AS-

Impairment of

Impairment of asset include carrying amount,

28

assets

2-with

impairment loss, effect of depreciation, and

modification

impairment of cash generating asset, recoverable

3-with

amount, impairment loss & deferred tax, reversal,

modification

disclosure.

Concept of contingent liability and contingent asset

AS-

Contingent

29

liabilities and

and their recognition & measurement of provision,

contingent asset

disclosure.

37

AS-

Financial

From 1/4/2009

Financial instruments recognition & de recognition

30

instrument

recommendatory

include accounting recognition & measurement

recognition and

from 1/4/2011

initial & liabilities, fair value, reclassification, gains

measurement

mandatory

& losses, impairment, hedging & hedging

except SMEs

accounting, embedded derivatives.

AS-

Financial

Recommendator

The significance of financial instruments for the

31

instrument:

y form

entitys financial position presentation procedure.

presentation

01/04/2009

AS-

Financial

Recommendator

The significance of financial instruments for the

32

instrument:

y form

entitys financial position presentation procedure.

disclosures

01/04/2009

INTERNATIONAL ACCOUNTING STANDARDS:


As a result of global operations, financial statement produced in one country are used in other
more frequently, this has raised the issue of harmonization of accounting policies, presentation
and disclosure. In this situation, there is a strong need for legislation to bring about uniformity,
rationalization, comparability, transparency and adaptability in financial statements and this
underlines the need to have stringent norms for preparation and presentation of financial
statements.
TABLE-3: INTERNATIONAL ACCOUNTING STANDARDS AND ITS APPLICABILITY
LEVEL
IAS
sNO

PARTICULAR

APPLICABILIT
Y LEVEL

38

PRESCRIPTION AND CONTENT

IAS-

Presentation of

1,2,3.

The purpose of financial statements is to

financial

disclose the information required by the

statements

IFRSs that is not presently elsewhere in the


financial statements.

IAS-

Inventories

1,2,3.

The treatment for inventories, include the

recognition of the inventory cost, explanation


of net realizable value.

IAS-

Cash Flow

Statements

1.

It explains the definition of cash, cash


equivalent, classifying cash flow into
operating, financing & investing cash, direct
& indirect method of cash flow.

IAS-

Accounting

policies, changes

1,2,3.

It explains the criteria for selecting &


changing in accounting policies.

in accounting
estimates and
errors
IAS-

Events after the

10

balance sheet date

IAS-

Construction

11

contract

1,2,3.

Entity should adjust its financial statements


for events after the reporting period.

1,2,3.

Explain construction contract, prescribed the


accounting treatment of revenue and costs
associated with construction contract.

IAS-

Income Taxes

1,2,3.

Prescribe the accounting treatment for

12

income taxes. How to account for current and


future tax.

39

IAS-

Segment

14

Reporting

2-with

Related to all segment reporting.

modification
3-with
modification
IAS-

Property, plant,

16

and Equipment

1,2,3.

Accounting and measurement and


recognition of property, plant and equipment,
interests are charged.

IAS-

Leases

This standard shall be applied in accounting

2-with

for revenue arising from the sales of goods;

modification

tendering of services and use of others of

3-with

entity assets yielding interest, royalties and

modification

dividends.

Revenue

1,2,3.

Revenue determination and its measurement.

Employee benefits

1,2,3.

It includes all forms of consideration given

17

IAS18
IAS19

by an entity in exchange for service rendered


by employees.

IAS-

Accounting for

20

government grants

1,2,3.

Explain the government grants and disclosure


of government assistance.

and disclosure of
government
assistance.
IAS-

The effects of

1,2,3.

Explain reporting about foreign currency,

21

changes in foreign

exchange rate, monetary & non-monetary

exchange rates

items, closing rate, and transaction in foreign


currencies, translating GS of foreign
40

operation integral & non-integral, accounting


treatments, disclosure.

IAS-

Borrowing costs

1,2,3.

Define borrowing cost only.

IAS-

Related party

1,2,3.

This standard explains transfer of resources,

24

disclosures

23

services or obligations between related


parties.

IAS-

Accounting and

Explain retirement benefits plans how is it

26

reporting by

valuated and disclosed.

retirement benefit
plan
IAS-

Consolidated and

1.

Explain consolidated statements presentation

27

separate financial

of consolidated financial statements,

statements

consolidation procedures, non controlling


interest, changes in the ownership interests,
separate financial statements & disclosure.

IAS-

Investments in

28

associates

1.

It includes investment in associates and does


not include venture capital organizations,
mutual funds, unit trusts and similar entities
including investment-linked insurance funds.

IAS-

Financial

Applied on that entity whose functional

29

reporting in

currency is the currency of a

hyperinflationary

hyperinflationary economy.

economies

41

IAS-

Interests in joint

31

ventures

It explains measurement of jointly controlled


operations, jointly. Controlled assets, jointly

2-with

controlled entities etc.

modification
IAS-

Earnings per share

33

Determination and presentation of earning


per share and explains basic earnings per

2-with

share, diluted earnings per share and

modification
IAS-

Interim financial

34

reporting

retrospective adjustments.

Main feature is to identify an asset that may


be impaired, measuring recoverable amount,
recognizing and measuring an impairment
loss, reversing an impairment loss.

IAS-

Impairment of

36

assets

Prescribe the procedures that an entity


applies to ensure that its assets are carried at

2-with

no more than their recoverable amount.

modification
IAS-

Provisions,

1,2,3.

It covers only appropriate recognition criteria

37

contingent

and measurement applied for provisions,

liabilities and

contingent liabilities and contingent assets.

contingent assets
IAS-

Intangible assets

1,2,3.

Recognition and measurement, internally

38

generated intangible assets.

IAS-

Financial

39

instruments:

1,2,3.

Recognition and measurement of financial


instruments.

recognition and
measurement

42

IAS-

Investment

40

property

1,2,3.

It describes the accounting treatment for


investment property and related disclosures
related to agricultural activity.

IAS-

Agriculture

It describes the accounting treatment and

41

disclosures related to agricultural activity.

There are significant variations between the Indian and international accounting standards.
Prevailing laws of the land significantly contribute to the variances between accounting
standards of one country with the other.
Table 4: COMPARATIVE ANALYSIS OF ACCOUNTING STANDARDS (ISSUED BY
ICAI) IN INDIA Vs INTERNATIONAL ACCOUNTING STANDARDS
N.OF

LEVEL OF

TITLE OF ACCOUNTING

COMPARABLE

LEVEL OF

THE

COMPANIES

STANDARDS

IAS

COMPANIES

AS-1

1,2,3.

Disclosure of accounting

IAS-1

1,2,3.

Valuation of inventories.

IAS-2

1,2,3.

Cash flow statements.

IAS-7

1.

IAS-10

1,2,3.

IAS-8

1,2,3.

policies.
AS-2

1,2,3.

AS-3

1.

AS-4

1,2,3.

Contingencies

and

events

occurring after the balance sheet


date.
AS-5

1,2,3.

Net profit or loss for the period,


prior period and extraordinary
items and changes in accounting
policies.

43

AS-6

1,2,3.

Depreciation accounting.

IAS-16

1,2,3.

IAS-38
AS-7

1,2,3.

Accounting

for

construction

IAS-11

1,2,3.

contracts.
AS-8

With drawn

Accounting for research and


development

(irrelevant

Not applied

after

issuing AS 26)
AS-9

1,2,3.

Revenue recognition.

IAS-18

1,2,3.

AS-

1,2,3.

Accounting for Fixed assets.

IAS-16

1,2,3.

1,2,3.

Accounting for the effects of

IAS-21

1,2,3.

IAS-20

1,2,3.

10
AS11

changes in foreign exchange


rates.

AS-

1,2,3.

12
AS-

Accounting

for

government

grants.
1,2,3.

Accounting for investments.

1,2,3

Accounting for amalgamation.

1,2,3.

Accounting

1,2,3.

13
AS-

(IAS-22) IFRS 3

1,2,3.

IAS-19

1,2,3.

IAS-23

1,2,3.

14
AS15

benefits

for
in

retirement

the

financial

statements of employers.
AS-

1,2,3.

Borrowing cost.

16

44

AS17

AS18

AS19

AS20

AS-

1.

Segment reporting.

IAS-14

1.

2-with

2-with

modification

modification

3-with

3-with

modification

modification

Related party

IAS-24

2-with

2-with

modification

modification

3-with

3-with

modification

modification

leases

IAS-17

2-with

2-with

modification

modification

3-with

3-with

modification

modification

1.

Earnings per share

IAS-33

1.

2-with

2-with

modification

modification

3-with

3-with

modification

modification

Consolidated

financial

45

IAS-27

21
AS-

statements
1,2,3.

Accounting for taxes on income.

IAS-12

1,2,3.

Accounting for investments in

IAS-28

22
AS23

associating

in

consolidated

financial statements.
AS-

Discounting operations.

Interim financial reporting.

IAS-34

1,2,3.

Intangible assets.

IAS-38

1,2,3.

1.

Financial reporting of interests in

IAS-31

1.

24
AS25
AS26
AS27

AS28

2-with

joint ventures.

2-with

modification

modification

3-with

3-with

modification

modification

1.
2-with

Impairment of assets interests in


joint ventures.

IAS-36

1
2-with

modification

modification

3-with

3-with

modification

modification

46

AS-

1.

and

IAS-37

From 1/4/2009

Financial instrument recognition

IAS-36

recommendatory.

& measurement.

29
AS30

Contingent

liabilities

contingent asset.

From1/4/2011
mandatory
except SMEs
AS31

AS32

Recommendatory Financial
form 01/04/2009

instrument

presentation and disclosures.

Recommendatory Financial
from 01/04/2009

Partly covered
IAS-13

instrument

presentation and disclosures.

CONCLUSION:
There is a need for continued improvement in accounting standards and disclosure rules to
resolve various accounting aspects and to simplify, to a greater extent, the financial reporting
system. In our country in the light of above, it is found that effort is on to match Indian standards
with the international accounting standards, through there are significant variations between the
Indian and international accounting standards.

47

CHAPTER-5
ADOPTION OF IFRS

48

A CASE STUDY ON
WIPRO

49

5.1-WIPRO: COMPANY AT A GLANCE


Wipro Limited is amongst the largest global IT services, BPO and Product Engineering
companies in India. In addition to Information Technology business Wipro also has leadership
position in niche market segments of consumer products and lighting solutions. The company
has been listed since 1945 and started its technology business in 1980. Its equity shares are listed
in India on the Bombay Stock Exchange and the National Stock Exchange; as well as on the
New York Stock Exchange in US. The 2009-2010 Annual Report of Wipro presented the
consolidated financial statement in both Indian GAAP and IFRS. Reconciliation of equity as per
IFRS and Indian GAAP was reported for the year ended 2009, which is considered in this study.

TABLE-5: BALANCE SHEET OF WIPRO 31ST MARCH 2009


COMPARISION OF IFRS & INDIAN GAAP STATEMENT

PARTICULAR

Opening balance April 2009


IGAAP

IFRS

rupees in millions
CHANGE %

Goodwill
PPE & Intangibles
Available for sale investment
Investment in equity accounted
Inventories
Trade receivables
Unbilled revenue
Cash & cash equivalents
Net tax assets
Other assets
TOTAL ASSETS

56521
52563
16426
1670
7587
50370
14108
49117
2672
20984
272018

56143
53287
16293
1670
7587
50123
14108
49117
5759
23203
277290

378
-724
133
0
0
247
0
0
-3087
-2219
-5272

CHANGE
0.67
-1.38
0.81
0
0
0.49
0
0
-115.53
-10.57
-1.94

Share capital & share premium


Share application money pending

29667
15

29667
0

0
15

0
100

allotment
50

Retained earnings
Cash flow hedging reserve
Other reserves
TOTAL EQUITY
Minority interest
Loan & borrowings
Trade payables
Unearned revenues
Other liabilities & provisions
TOTAL LIABILITIES

119957
-16886
3546
136299
237
56892
40191
8734
29665
135719

126646
-14533
5601
147381
0
56892
40191
8734
24092
129909

-6689
-2353
-2055
-11082
237
0
0
0
5573
5810

-5.58
13.93
-57.95
-8.13
100
0
0
0
18.79
4.28

5.2: INTERPRETATION:
Analyzing the financial statements of WIPRO for the year 31.3.2009. It is observed
there is 1.94% increase in the total assets value as per IFRS when compared with the
total assets value as per Indian Accounting Standards.
There is increase in the value of Net tax asset including deferred taxes in IFRS
reporting by 115.53% when compared with the amount reported under Indian
Accounting Standard. The reason being as per IAS 12, A deferred tax asset should be
recognized for deductible temporary differences, unused tax losses and unused tax
credits to the extent that is probable that taxable profit will be available in the future
to realize the tax benefits and Balance sheet approach is followed in recognizing
deferred taxes . Whereas in Indian Accounting standards the deferred tax asset in
respect of carry forward losses is recognized if it is virtually certain that sufficient
future taxable income would be available in the future to realize the tax benefits and

Income statement approach is followed in recognizing deferred taxes.


There is 10.57% increase in other assets in IFRS reporting compared to Indian
Accounting standards. The reasons are because of IAS 17 Leases, IAS 18(revenue),
IAS 39(Financial instruments: Recognition and Measurement), IAS 37(Provisions,
51

contingent liabilities and contingent assets) and IFRS 2 (Share based payment). Under
IAS 17 Leases, leases of land are classified as operating leases unless the title to the
leasehold land is expected to be transferred to the company at the end of lease term.
So, there is a reclassification of land from Property Plant and equipment to other
assets under IFRS reporting resulting in this no impact on equity. Under IAS 18
Revenue, in respect of multiple element arrangement comprising delivered products
and installation services, the Company defers and recognizes revenue relating to
installation services when those services are rendered. Earlier in Indian Accounting
standard the entire revenue is recognized when the products are delivered in
accordance with the contractual terms and the expected cost of installation is also
accrued. This has an impact on the income statement. Under IAS 39(Financial
instruments: Recognition and Measurement), loans and receivables are recognized at
amortized cost, which is carried at historical cost under Indian Accounting standards.
This has an impact on the equity.
The total equity has increased by nearly 8.13% in IFRS when compared to the Indian
accounting standards. IFRS 2 share based payment each tranche of vesting interest is
treated as a separate reward and the stock compensation expense relating to that
tranche is amortized over the vesting period of the underlying tranche. Earlier Indian
standard permits an entity to recognize the stock compensation expense, relating to
share option which vest in a graded manner on the straight line basis over the
requisite vesting period for the entire award. Under IFRS minority interest is reported
as a separate item within equity whereas under Indian standards minority interest is to
be presented separately from equity.

52

The total liability has decreased by 4.28% in IFRS when compared to Indian
accounting standards. Under IAS 10 Events after the balanced sheet date, the liability
for dividend is recognized only when it is approved by shareholders. Under Indian
accounting standards the liability is recognized in respect of proposed dividend on
company's equity share even though the dividend is expected to be approved by the
shareholders subsequent to the reporting date.
Under IAS 1 Presentation of financial statement, share application money received
and pending allotment is reported under other liabilities whereas in Indian Accounting
standards share application money pending allotment to be presented as a separate
item within equity.

5.3: FINDINGS:
The total assets under IFRS is more than the Indian accounting standards by 1.94%
which shows that Indian accounting is more conservative. The most probable reasons are
its fair value measurement, difference in the basis of interest capitalization, deferred tax
asset recognition and difference in accounting for foreign currency forward contracts. It
shows that the Indian accounting standards are conservative.
The equity under IFRS has increased by 8.13% when compared to Indian accounting
standard. Minority interest are treated as part of equity and under IFRS 1 First time
adoption, adjustments required to move from previous GAAP to IFRS should be
recognized directly in retained or if appropriate another category of equity at the date of
transition to IFRS.
The total liabilities under IFRS are decreased by 4.28% when compared to the Indian
accounting standards. The provision for proposed dividend is recognized in IFRS only
when it is approved by shareholders who resulted in reduction of provision.

CHART-1: COMPARISON OF IGAAP AND IFRS ON


FINANCIAL POSITION AS AT 31ST MARCH 2009

53

300000
250000
200000
IGAAP

150000

IFRS
100000
50000
0
ASSETS

Equity

Liabilities

5.4: EFFECTS OF CONVERGENCE TO IFRS ON FINANCIAL RATIOS:


It is examined five ratio that rely on financial statements for the year as at March 31, 2009
(1) Return on Equity=net income\book value of equity
(2) Return on Assets=net income\total assets
(3) Total Asset Turnover=sales revenue\total assets
(4) Leverage=total liabilities\book value of equity
(5) Net Profit ratio=net income\sales revenue

TABLE-6: FINANCIAL RATIOS FOR THE YEAR ENDED 31ST MARCH


2009 OF WIPRO
RATIOS
AS PER IGAAP
AS PER IFRS
Return on Equity
Return on Assets
Total asset Turnover
Leverage
Net Profit Ratio

0.29
0.14
0.94
1
0.15

ANALYSIS:

54

0.26
0.14
0.93
0.88
0.15

We examine that the Return on Equity and Net profit ratio as reported under IGAAP and
IFRS remains the same. There is a decrease in the leverage or debt equity ratio in IFRS
accounting when compared to IGAAP accounting. The reduction in this ratio in IFRS is due
to increase in value of Equity by 8.13% in IFRS accounting and reduction in value of Total
Liabilities by about 4.28% in IFRS accounting when compared with IGAAP accounting.
There is reduction in return on equity mainly because of increase in the equity value by about
8.13% and decrease in Net profit by about 0.61% in IFRS reporting when compared to
IGAAP reporting.
There is reduction in Total asset Turnover mainly because of increase in Total assets by
about 1.94% and decrease in turnover by about 0.04% in IFRS reporting when compared
with IGAAP reporting.

CONCLUSION:
The study investigates the financial statement implications of adopting IFRS by Wipro. It is
observed that the net income position in IFRS reporting and Indian GAAP is not much varied.
But there are differences in the Total liability and Equity position which is mainly because of
reclassification between Equity and Total liability. The provision under IFRS is reduced mainly
because dividend provision is not recognized in IFRS. Fair value measurement of Available for
sale investment and the share compensation expense recognized in IFRS is higher, as in IFRS
reporting accelerated amortization of stock compensation expense in the initial years following
the grant of options, whereas in Indian GAAP reporting recognizes the stock compensation
expenses in graded manner on a straight line basis over the requisite vesting period for the entire
award which resulted in increase in share based payment reserve. Overall the return on equity,
return on asset, total asset turnover and net profit ration are not significantly affected by
converging to IFRS but the leverage ratio shows significant change on converging with IFRS.
There are also significant changes in the Total Equity and total liability position on convergence
to IFRS but not prominent changes in the Total Asset Position. All these observations make us
conclude that IFRS is fair value oriented and Balance Sheet oriented accounting where there are
more transparent disclosures and Indian GAAP is conservative approach.

55

56

CHAPTER-5
SUMMARY AND
CONCLUSION

SUMMARY AND FINDINGS:


Keeping in view the complex nature of IFRSs and the extent of differences between the
existing ASs and the corresponding IFRSs and the reasons there for, we point out that
IFRSs should be adopted for the public interest entities such as listed entities, banks and
insurance entities and large-sized entities from the accounting periods beginning on or
57

after 1st April, 2011.The countries which have adopted IFRSs have done so for similar
types of entities.

In the public interest, a single set of high quality, understandable and enforceable global
accounting standards that require high quality, transparent and comparable information
in financial statement and other financial reporting to help participants in the world
capital markets and others users make economic decision.

The IASBs has produced so far a high quality global standard acceptable all over the
world and the progress remained steady and focused.

International Accounting Standards Board (IASB) and its member countries are
committed towards promoting the use and rigorous application of those standards.

IFRS apply to individual company and consolidated financial statements.


A complete set of financial statements includes a balance sheet, and income statement, a
cash flow statement, a statement showing either all change in equity or change in equity
other than those arising from investment by and distributions to owners, a summary of

accounting policies, and explanatory notes.


IFRS helps in improved access to the international Capital Markets through raising fund
internationally.

The perception of stakeholders & the markets likely to be affected by these changes
Further this would provide high quality, transparent and comparable information in
financial statement and other financial reporting to help participants in the world capital
markets and others users make economic decision.

Conversion to IFRS will have unique repercussion for each country, depending on how
each national GAAP differs. In the case of India, there are a number of differences &
similarities that need to be carefully looked at.

A common set of accounting principles will help companies with operations in different
countries & facilitates cross border transactions.

58

In our study of financial statements of Wipro Ltd, follows Indian GAAP as well as IFRS,
due to its operation in different country. It is found out that deviations are prominent in
some areas and not so prominent in others.

IFRS will potentially better reflect the underlying economics of a transaction

SUGGESTION:
Currently the IFRS is not complete as it does not contain:

IFRS common practice or industry concept reflects disclosures & relational structures
commonly observed in the financial statements in practice.

Description or definition of concepts is not complete

There should be proper disclosure & feedback to the management, so that management

should keep their account properly.


At global level accounting principles vary from country to country due to which the

reporting practices also vary.


International Financial Reporting Standards (IFRS) are a high quality accounting

standards that are acceptable all over the world.


This would bring more accountability, transparency and comparability in preparation,

presentation and reporting of financial statements.


This would further facilitate all the stakeholders in better decision making.
This would further promote international trade and business all over the world.
India being a developing country with high economic growth, must take a strong step in
implementation of IFRS to be in pace with other countries.

In order to improving the IFRS, the above point must keep in mind.
CONCLUSION:
The convergence of financial reporting and accounting standards is a valuable process that
contributes to the free flow of global investment and achieves substantial benefits for all capital
market stakeholders. It improves the ability of investors to compare investments on a global
basis and, and thus, lowers their risk of errors of judgment. It has the potential to create a new
59

standard of accountability and greater transparency, which are of significant value for market
participants including regulators. Focused on realistic economic representation, financial
reporting should address the legitimate needs of key stakeholders and provide a comprehensive
overview of financial information. Every stakeholder should gain from active participation in
shaping the successive phases of the convergence process.
The convergence with IFRS is now at a very crucial stage in India. There is a need to develop
an enabling regulatory framework and infrastructure that would assist and facilitate IFRS
convergence. The government would need to frame and revise laws in consultation with the
NACAS and the ICAI. Similarly, regulatory such as IRDA, RBI, SEBI, and CBDT would have
to consider accepting IFRS in place of the existing set of prescribed accounting rules.
Convergence is lengthy process and it may take years to reach the important goal of a single set
of accounting standards.

BIBLIOGRAPHY

60

REFERENCES:
1) Katarina Struharova, Karle steker, Milana Otrusinova (2011), Shift to IFRS what
(Katarina Struhaovss, Shift to IFRS what would this mean for Czech, Issue 2,
Volume 5, 2011)would this mean for Czech companies
2) Dr. Naseem Ahmad and Professor Nawab Ali Khan (2010), Global convergence of
financial reporting this article define that all major economies have established
3)

time lines to converge with or adopt IFRSs in the near future.


Amanda Paul and Eddy Burks (2009), Preparing for international financial
reporting standards The accounting profession is on the precipice of one of the

biggest changes to face it since the 1930s.


4) George Iatridis(2010), IFRS Adoption and Financial Statement Effects: The UK
Case This study investigates the impact of the implementation of the International
Financial Reporting Standards (IFRSs) on key financial measures of UK firms and
the volatility effects of IFRS adoption.
5) Ramona Dzinkowski(2007), A roadmap to US IFRS convergence this study
provide the information that On March 6, the US Securities and Exchange
Commission (SEC) held a round table on the roadmap to IFRS convergence.
6) .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 92107
7) . Lantto A.M and Sahlstrom P (2009) Impact of International Financial Reporting
Standard Adoption on Key Financial Ratio, Accounting and Finance Vol 49, pp 341361
8) Students Journal of ICAI March 2010, June2011, Septmber2011 & October2011
9) The Orissa journal of commerce 2011-2012
10) Indian journal of accounting, December 2010
11) The Institute of Charted Accountants India,Oct10, 2007 Concept Paper on
Convergence with IFRSs in India.
12) The Charted Accountant, Feb 2005, Indian Accounting Standards and IFRSs: A
Comparative Study.
13) Prof Vishwanathan Bharathan, May2005, Indian and International Accounting
Standard practices.
14) http://www.icai.org
15) http://www.icwai.org
16) http://www.icsi.org
17) http://www.iasb.org
61

18) http://en.wikipedia.org

62

You might also like