THE INDIAN LANDSCAPE IFRS CONVERGENCE

IRJMST Vol 5 Issue 9 [Year 2014] ISSN 2250 – 1959 (0nline) 2348 – 9367 (Print)

International Research Journal of Management Science & Technology http://www.irjmst.com 1

THE INDIAN LANDSCAPE IFRS CONVERGENCE

Anju Dagar (Assistant Professor, IITM)

ABSTRACT

A financial reporting system supported by strong governance, high quality standards and firm regulatory

framework is the key to the economic development. Indeed, sound financial reporting standards

underline the trust that investors place in financial reporting information and thus play an important role

in contributing to the economic development of a country. However, with the fast changing economy,

liberalization, increasing foreign investment in the country, it has become now necessary for India to

comply with International Financial Reporting Standards (IFRS). Though there will be an adoption of

IFRS in a phased manner and the process of implementation is not as smooth and easy as it appears.

Therefore, this paper attempts to find out up to what extent IFRS has been adopted by the organizations,

what is the approach for achieving convergence with IFRSS, what challenges and opportunities

companies are facing in the implementation of IFRSS and what are the benefits of achieving

convergence with IFRSS. Apart from that, this paper also highlights the some of the key differences

between IFRS and Indian GAAP.

Key words: Convergence, Reporting, Standards, Liberalization, Corporate, International

Financial Reporting Standards

INTRODUCTION

Globalization and liberalization of economic policies initiated by the Government since 1991 have

brought about significant changes in the attitudes and perceptions of investors, management financial

institutions, financial and stock markets, Bankers and the corporate world as a whole. With Global

capital markets companies are getting listed at several stock-exchanges located in different countries, the

decision regarding investments in companies of other countries requires an understanding, analysis and

interpretation of financial statements of these companies which are primarily based on the accounting

concepts, conventions and practices of that country. Hence, the difference in accounting practices and

reporting requirements make the financial statements and reports ambiguous and unfriendly for the

global investors. Hence there is an urge to converge accounting information into global common


International Research Journal of Management Science & Technology http://www.irjmst.com Page 12

reporting standards. There has been significant progress towards global convergence of the International

Financial Reporting Standards (IFRS) in recent years. Adopting a single global accounting language will

ensure relevance, completeness, understandability, reliability, timeliness, neutrality, verifiability,

consistency, comparability and transparency of financial statements and these bring about a qualitative

change in the accounting information reports which will strengthen the confidence and empower

investors and other users of accounting information around the world. With the growth of Indian

Economy and increasing integration with the global economies, it would be imperative for Indian

companies to adopt IFRS for their financial reporting.

BACKGROUND TO THE PROBLEM

The Accounting Standards Board of the Institute of Chartered Accountants of India ('ICAI') was

constituted on 21 April, 1977, to formulate Accounting Standards applicable to Indian enterprises.

Initially, the Accounting Standards were recommendatory in nature and gradually the Accounting

Standards were made mandatory. The legal recognition to the Accounting Standards was accorded for

the companies in the Companies Act, 1956, by introduction of Section 211(3C) through the Companies

(Amendment) Act, 1999, whereby it is required that the companies shall follow the Accounting

Standards notified by the Central Government on a recommendation made by the National Advisory

Committee on Accounting Standards (NACAS) constituted under section 210A of the said Act.

The Government of India, Ministry of Company Affairs (now Ministry of Corporate Affairs) notified

Accounting Standards in Companies (Accounting Standards) Rules, 2006 by Notification No. G.S.R.

739(E), dated 7 December, 2006, prescribing Accounting Standards 1 to 7 and 9 to 29 as issued by

ICAI. It also issued Companies (Accounting Standards) Amendment Rules,2008 by notification no.

G.S.R. No. 212 (E), dated 27 March, 2008 making some modification in existing rules so as to

harmonize them with accounting standards issued by ICAI. These standards are applicable to

preparation of general purpose financial statements for accounting periods commencing on or after 7

December, 2006. It may be mentioned that the Accounting Standards notified by the Government are

virtually identical with the Accounting Standards, read with the Accounting Standards Interpretations,

issued by ICAI.

The Reserve Bank of India ('RBI') in case of banks, the Insurance Regulatory and Development

Authority (IRDA) in case of insurance companies and the Securities and Exchange Board of India

(SEBI) in case of all listed companies, requires compliance with the Accounting Standards issued by



ICAI.ICAI, being a full-fledged member of the International Federation of Accountant (IFAC), while

formulating the Accounting Standards (ass), the ASB gives due consideration to International

Accounting Standards (IASS) issued by the International Accounting Standards Committee or

International Financial Reporting Standards (IFRS) issued by the IASB, as the case may be, and try to

integrate them, to the extent possible. However, where departure from IFRS is warranted keeping in

view the Indian conditions, the ass have been modified to that extent.

Further, the endeavor of the ICAI is not only to bridge the gap between ass and ifrss by issuance of new

AS but also to ensure that the existing ass are in line with the changes in international thinking on

various accounting issues. The National Committee on Accounting Standards (NACAS) constituted by

the Central Government for recommending accounting standards to the Government, while reviewing

the AS issued by the ICAI, considers the deviations in the AS, if any, from the IFRSS and recommends

to the ICAI to revise the AS wherever it considers that the deviations are not appropriate.

The term International Financial Reporting Standards (IFRSS) includes IFRSS, IASS and interpretations

originated by the IFRIC or its predecessor, the former Standing Interpretations Committee (SIC). IFRS

are increasingly being recognized as Global Reporting Standards for financial statements. 'National

GAAP' is becoming rare. As global capital markets become increasingly integrated, many countries are

moving to IFRS. More than 100 countries such as European Union, Australia, New Zealand and Russia

currently permit the use of IFRS in their countries. ICAI / MCA has also expressed their view that

IFRSS should be adopted in India for the public interest entities such as listed entities, banks and

insurance entities and large-sized entities from the accounting periods beginning on or after 1 April,

2011. As a consequence the Indian entities will need to start preparing for convergence to IFRS,

preferable much earlier. The next few years will be exciting, but challenging at the same time.

OBJECTIVES OF THE STUDY

The prerequisite for achieving convergence successfully is to lay down the convergence strategy

including the roadmap for achieving convergence in a systematic and consistent way keeping in view

the legal, economic and other peculiarities of the country.

This Paper is the first step in this direction in India with the objective of exploring:

The approach for achieving convergence with IFRSS

To find out up to what extent IFRS has been adopted by the organizations



To understand challenges and opportunities companies are facing in the implementation of

IFRSS

To provide the benefits of adopting IFRSS

To show up the some of the key differences between IFRS and Indian GAAP and

Laying down a road map for achieving convergence with IFRSS, with a view to make India

IFRS-compliant.

RESEARCH METHODOLOGY

Research methodology used in this paper is based on “Qualitative Research”, studied many press

releases and circulars are issued by Ministry of Corporate Affairs for application of Converged

Accounting standards by companies, Conceptual paper given by ICAI, and studied Economic times

where the news covered on IFRS to get deep understanding of convergence of IFRS in India. This paper

is developed while keeping in mind that it will be useful to all companies and mankind, who keep an

interest in knowing about IFRS and its working mechanism so as to start first time adoption of IFRS in

their financial reporting. This is basically a common approach paper, which provide over all inside and

outside structure of IFRS in India.

WHAT IS IFRS?

IFRS stands for “International Financial Reporting Standards” and is a single set of high quality,

understandable and

enforceable global accounting standards. It is a "principles based" set of standards which are drafted

lucidly and are easy to understand and apply.

International Financial Reporting Standards comprise of:

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 Interpretations Committee (SIC) - issued before 2001

In addition to the above, there is a “Framework for the Preparation and Presentation of Financial

Statements”, which describes the principles underlying the IFRS.



DIFFERENCE BETWEEN IFRS AND IAS

Majority of the standards which form part of IFRS were issued between 1973 and 2001 by the board of

the International Accounting Standards Committee (IASC). The standards issued by IASC were known

as IAS. In 2000, IASC Member Bodies approved the restructuring of the IASC's foundation and in

March 2001, the new IASB took over the responsibility of setting the International Accounting

Standards from the IASC. IASB adopted the standards set by IASC and continued to develop new

standards and called the new standards - IFRS. Thus, practically there is no difference between IFRS

and IAS and both are equally enforceable. The list of IFRS and IAS are given in the annexure for

reference.

MEANING OF ‘CONVERGENCE’ WITH IFRS

In general terms, „convergence‟ means to achieve harmony with IFRSS; 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 IFRSS”,. I.e., when the national accounting standards will comply with all the

requirements of IFRS. But convergence does not mean that IFRS should be adopted by word by word,

e.g. Replacing the term „true and fair‟ for „present fairly‟, in IAS 1, Presentation of Financial

Statements, such changes do not lead to non convergence with IFRS.

The IASB accepts in its „Statement of Best Practice: Working Relationships between the IASB and other

Accounting Standards- Setters‟ that adding disclosure requirements or removing optional treatments do

not create noncompliance with IFRSS. But additional disclosures or removing of optional treatment

should be made clear so that users of the IFRS are aware of the changes.

WHY IFRS?

Conversion to IFRS offers companies a number of important benefits. Companies that operate in a

global environment and comply with foreign reporting requirements can streamline their financial

reporting. This will reduce related reporting costs by developing common reporting systems and will

ensure consistency in statutory reporting.

Furthermore, comparison and benchmarking of financial data with international competitors would be

possible. Adoption of IFRS will make cross border acquisitions and joint venture possible, and also

provide access to foreign capital. This is because majority of stock exchanges require financial

information presented according to the IFRS. Early adoption of IFRS may offer an edge to the

companies over their competitors as they can claim early adoption. This, in turn, will enhance the brand



value of the company. The companies can trade their shares and securities on stock exchanges

worldwide. For this, most of the stock exchanges require financial statements prepared under IFRS.

Another major benefit of convergence is that the management of a company can view all the companies

in a group on a common platform. This will reduce the time and efforts involved to adjust the accounts

in order to comply with the requirements of the national GAAP.

Business acquisition would be reflected at fair value in IFRS rather than the carrying values. This would

ensure greater transparency in the financial statements. The implementation of IFRS in the corporates

would require trained accountants, auditors, valuers and actuaries. This will boost the growth of the

service sector also as India can emerge as an accounting services hub. Moreover, a single set of

accounting standards worldwide would ensure that auditing firms standardize their training and quality

of work is maintained globally.

IFRS IMPLEMENTATION - CHALLENGES

In spite of the various benefits of adopting IFRS, implementation of IFRS is a herculean task in India.

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

Awareness about international practices Adoption of IFRS means that the entire set of financial

statements will be required to undergo a drastic change. There are a number of differences between the

two GAAP‟s (discussed below). This may cause the users of financial statements to look at them from a

new perspective. It would be a challenge to bring about awareness of IFRS and its impact among the

users of financial statements.

Training

Professional accountants are looked upon to ensure successful implementation of IFRS. The biggest

hurdle for the professionals in implementing IFRS is the lack of training facilities and academic courses

on IFRS in India. As the implementation date draws closer (2011), it is observed that there is acute

shortage of trained IFRS staff. The solution to this problem is that all stakeholders in the organization

should be trained and IFRS should be introduced as a full time subject in the universities.

Amendments to the existing law

It is observed that implementation of IFRS may result in a number of inconsistencies with the existing

laws which include the Companies Act 1956, SEBI regulations, banking laws and regulations and the

insurance laws and regulations. Currently, the reporting requirements are governed by various regulators

in India and their provisions override other laws. IFRS does not recognize such overriding laws.



Although steps to amend these laws have been initiated, the authorities need to ensure that the laws are

amended well in time.

Taxation

IFRS convergence would affect most of the items in the financial statements and consequently the tax

liabilities would also undergo a change. Thus the taxation laws should address the treatment of tax

liabilities arising on convergence from Indian GAAP to IFRS. It is extremely important that the taxation

laws recognise IFRS-compliant financial statements otherwise it would duplicate administrative work

for the organisations.

Fair value

IFRS uses fair value as a measurement base for valuing most of the items of financial statements. The

use of fair value accounting can bring a lot of volatility and subjectivity to the financial statements. It

also involves a lot of hard work in arriving at the fair value and valuation experts have to be used.

Moreover, adjustments to fair value result in gains or losses which are reflected in the income

statements. Whether this can be included in computing distributable profit is also debated.

Management compensation plan

The terms and conditions relating to management compensation plans would also have to be changed.

This is because the financial results under IFRS are likely to be very different from those under the

Indian GAAP. The contracts would have to be renegotiated which is also a big challenge.

Reporting systems

The disclosure and reporting requirements under IFRS are completely different from the Indian

reporting requirements. Companies would have to ensure that the existing business reporting model is

amended to suit the reporting requirements of IFRS. The information systems should be designed to

capture new requirements related to fixed assets, segment disclosures, related party transactions, etc.

Existence of proper internal control and minimising the risk of business disruption should be taken care

of while modifying or changing the information systems.

TRANSITION TO IFRS

The Institute of Chartered Accountants of India has proposed two options for convergence:

• All at once

• Stage-wise approach

It has been observed that there are certain implementation dangers and compliance problems with either

AS or IFRS in adopting the all at once approach. Therefore, stage-wise approach would be preferable.



ROADMAP FOR IFRS CONVERSION

The Ministry of Corporate Affairs (MCA) laid out a roadmap for IFRS convergence to be conducted in

phases for first-time adoption in India.

Phase Date Coverage

Phase I Opening balance sheet as of 1 April 2011*

1. Companies which are part of BSE - Sensex 30 and NSE -Nifty 50

2. Companies whose shares or other securities are listed

outside India

3. Companies whether listed or not, having net worth of more than Rs. 1,000 Crores Phase II Opening

balance sheet as at 1 April, 2013* Companies not covered in Phase 1 and having net worth exceeding

Rs. 500 Crores. Phase III Opening balance sheet as at 1 April, 2014* Listed companies not covered in

earlier phases *If the financial year of a company commences at a date other than 1 April, then it shall

prepare its opening balance sheet at the

commencement of immediately following financial year

IFRS ROADMAP OVERVIEW

The MCA roadmap has provided specific dates for adoption of IFRS in India on the basis of a

company‟s net worth as indicated by the exchange on which they are traded. The IFRS conversion

roadmap for Banks and Insurance companies will follow separately.

• Phase 1 companies are required to start reporting IFRS results from the first quarter of year beginning

1 April, 2011. Also, depending on how a company elects to present comparative information in the first

year, the actual date of transition could be as early as 1 April 2010.

• The core group and its sub-group 1, constituted by the MCA for IFRS convergence, shall determine

IFRS conversion

roadmap for banking and insurance companies separately by 28 February 2010.

• Non-listed companies with net worth of less than INR 500 crore and other small and medium-sized

companies (SMCS) have been given an option to continue to either follow non converged standards

(Indian GAAP) or to adopt IFRS.

• The draft of the Companies (Amendments) Bill, proposing for changes to the Companies Act, 1956,

will be prepared by February, 2010.

• The Institute of Chartered Accountants of India (ICAI) has submitted to the MCA revised Schedule VI

to the Companies Act, 1956. The NACAS shall review the draft and submit a revised Schedule VI to the



MCA by 31 January 2010. Amendments to Schedule XIV will also be carried out in a time bound

manner.

• Convergence of all the accounting standards with IFRS will be completed by the ICAI by 31 March

2010 and the NACAS will submit its final recommendations to MCA by 30 April 2010.

FIRST TIME ADOPTION

For first time adoption, two key terms need to be understood:

Reporting date-It is the end of the latest period covered by the financial statements.

Transition date- It is the beginning of the earliest period for which an entity presents its first full IFRS

compliant financial statements.

ICAI has proposed that in the case of Indian companies, the first reporting date will be 31-03-2012 and

transition date will be 01- 04-2010. Therefore, the first set of financials will be for the period 01-04-

2011 to 31-03-2012 with IFRS comparables which are to be provided for the period 01-04-2010 to 31-

03-2011. It is mandatory for entities to include at least one comparative period in IFRS compliant

financial statements.

After considering the current economic environment, ICAI has decided that IFRS should be adopted for

public interest entities such as listed companies, banking companies, insurance companies and other

large sized entities from the accounting periods commencing on or after 1st April, 2011.

MAJOR DIFFERENCES IN INDIAN GAAP AND IFRS

The major focus of IFRS is on getting the balance sheet right. This can bring significant volatility in the

income statement. There are quite a lot of differences between the Indian GAAP and IFRS with respect

to the presentation of financial statements, disclosure requirements, and accounting policies: it is

difficult to summarise all the differences here. However a few of the major differences are given below

for your reference.

Subject IFRS Indian GAAP

Components of Financial Statements Comprises of

Statement of Financial Position (SOFP)

Statement of Comprehensive income

Statement of Cash flow

Notes to Accounts

Statement of Changes in Equity Comprises of

Balance Sheet



Profit and Loss A/c

Cash flow Statement and

Notes to Accounts

Format of SOFP No particular format prescribed.

However IAS prescribes disclosure on the basis of current and non-current assets and liabilities.

According to the format prescribed in Schedule VI to the Companies Act 1956, Banking Regulation Act

for Banks etc.

Format of Income Statement IAS 1 prescribes the format of income statement. According to the format

prescribed in Schedule VI to the Companies Act 1956, Banking Regulation Act for Banks etc.

Statement of Cash Flows Mandatory for all entities Exempted for Level 3 entities as prescribed by ICAI.

Presentation of Extraordinary items IFRS prohibits the presentation of extraordinary items in the

statement of

comprehensive income or in the notes.

Indian GAAP requires extraordinary items to be presented in the profit and loss statement of the entity

distinct

from the ordinary income and expenses for the period. As a result, extraordinary items are considered to

determine the profit / loss for the period. Dividends proposed after The end of the reporting Period

Dividends declared after the end of the reporting period but before the financial statements are

authorised for issue are not Recorded as liability in the financial statements. Dividends declared after the

end of the reporting period but before the financial statements are approved are recorded as liability in

the financial statements. Depreciation rates Allocated on a systematic basis to each accounting period

during the useful life of the asset. Depreciation is based on the higher estimate of useful life of the asset,

or the rates prescribed by Schedule VI of The Companies Act 1956. Change in the depreciation Method

Treated as a change in the accounting estimate and hence is accounted for prospectively. Treated as a

change in the accounting policy and is accounted for retrospectively (i.e. For all the relevant previous

years). Any excess / deficit in the case of this kind of recalculation must be adjusted in the period in

which the change is effected. Entire class to be revalued If an item of property, plant and equipment is

revalued, the entire class of assets to which that asset belongs should be revalued .An entire class of

assets can be Revalued, or selection of assets for revaluation can be made on a systematic basis.

Component accounting Mandates component accounting. Recommends component accounting.



Functional and foreign Currency Functional currency is the currency of the primary economic

environment in which the entity operates. Functional and presentation currencies may be different. The

standard contains detailed guidance on this. No concept of functional currency. Goodwill Goodwill is

not amortised under IAS 38 but is subject to annual impairment test under IAS 36. AS 14 provides that

goodwill arising on amalgamation in the nature of purchase is amortised over a period of 5 years.

Measurement of intangible assets Can be measured at cost or revalued amount. Are measured at cost

only.

Actuarial gain or loss IAS 19 gives three choices for the treatment of actuarial gains or losses arising on

measurement of employee benefits. Actuarial gains and losses should be recognised immediately in the

statement of profit and loss as an income or expense. Contingent asset disclosure Contingent assets are

disclosed in the financial statements only if the inflow of economic benefit is probable. Contingent

assets are disclosed as part

of the director‟s report (approving authority)and are not disclosed in the financial statement.

MAJOR FINDINGS OF THE STUDY

Rapid start to implementing work without a structured Rapid start to implementing work without a

structured assessment

Time to complete and/ or resources are underestimated: We will just switch to IFRS”

Accounting rules are seen as “pretty similar pretty similar”, but small , but small differences can

matter a lot

Impacts of IFRS conversion are not addressed with stakeholders

Lack of clarity about strategies for selecting the various accounting options

Inability to provide information on all areas impacted by IFRS (e.g. To analysts)

Lack of sufficient communication with auditors Lack of sufficient communication with auditors

RECOMMENDATIONS OF THE STUDY

Understand the IFRS impact early in the project lifecycle – accounting, process, people and IT

Complexities not to be underestimated – it cannot be done in isolation

Not just a finance project – adopt a holistic approach

Post conversion activities – the hard work may just be beginning – develop a sustainable

approach



ANNEXURE 1 – LIST OF IFRS

IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 2 Share-based Payment

IFRS 3 Business Combinations

IFRS 4 Insurance Contracts

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

IFRS 6 Exploration for and Evaluation of Mineral Resources

IFRS 7 Financial Instruments: Disclosures

IFRS 8 Operating Segments

ANNEXURE 2 – LIST OF IAS

IAS 1 Presentation of Financial Statements

IAS 2 Inventories

IAS 7 Statement of Cash Flows

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 10 Events after the Reporting Period

IAS 11 Construction Contracts

IAS 12 Income Taxes

IAS 16 Property, Plant and Equipment

IAS 17 Leases

IAS 18 Revenue

IAS 19 Employee Benefits

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 23 Borrowing Costs IAS 24 Related Party Disclosures

IAS 26 Accounting and Reporting by Retirement Benefit Plans

IAS 27 Consolidated and Separate Financial Statements

IAS 28 Investments in Associates

IAS 29 Financial Reporting in Hyperinflationary Economies

IAS 31 Interests in Joint Ventures

IAS 32 Financial Instruments: Presentation



IAS 33 Earnings per Share

IAS 34 Interim Financial Reporting

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments: Recognition and Measurement

IAS 40 Investment Property

IAS 41 Agriculture

REFERENCES:

1. The Economic Times, New Delhi, October 08, 2008.

2. The Economic Times, New Delhi, July 07, 2008.

3. A Management Guide to Better Financial Reporting – Duff and Phelps Inc. – Arthm Anderson and

Co. 1976 – p.4.

4. Financial Accounting Standards Board – Concept 2 Qualitative characteristics of Accounting

Information 1980 – p. 26.

5. The Economic Times, New Delhi, July 14, 2008.

6. International Accounting Standards – Frame work Qualitative characteristics of Financial statements

– Para 26 (2001).

7. International Valuation Standards: Standards and Applications and Performance Guidance

International Valuation

Standards Committee – 1997 ivs 3-7.

8. Http://www.articlesbase.com/accounting-articles/working-towards-a-global-convergence-of

accounting- standards- 1379167.html

9. Http://www.ifrs.org/Use-around-the-world/Education/Pages/Education.aspx

10. The Economic Times, New Delhi, 5th March, 2011

11. Http://www.pwc.com/in/en/services/ifrs/ifrs-in-india.jhtml

12. “Concept Paper on Convergence with IFRSS in India” given by ICAI

13. Article on “Challenges in converging to IFRS” given by KPMG

THE INDIAN LANDSCAPE IFRS CONVERGENCE

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