WHAT IS IFRS?

International Financial Reporting Standards (IFRS), together with International

Accounting Standards (IAS), are a "principles-based" set of standards that establish
broad rules rather than dictating specific accounting treatments. From 1973 to 2001,
IAS were issued by the International Accounting Standards Committee (IASC). In
April 2001 the International Accounting Standards Board (IASB) adopted all IAS and
began developing new standards called IFRS.

STRUCTURE OF IFRS
IFRS are considered a "principles based" set of standards in that they establish broad
rules as well as dictating specific treatments.

International Financial Reporting Standards comprise:

•
1)International Financial Reporting Standards (IFRS) - standards issued after
2001
•
2)International Accounting Standards (IAS) - standards issued before 2001
•
3)Interpretations originated from the International Financial Reporting
Interpretations Committee (IFRIC) - issued after 2001
•
4)Standing Interpretations Committee (SIC) - issued before 2001

There is also a Framework for the Preparation and Presentation of Financial

Statements which describes of the principles underlying IFRS.

FRAMEWORK
The Framework for the Preparation and Presentation of Financial Statements states
basic principles for IFRS.

Objective of financial statements

The framework states that the objective of financial statements is to provide
information about the financial position, performance and changes in the financial
position of an entity that is useful to a wide range of users in making economic
decisions,and to provide the current financial status of the entity to its shareholders
and public in general.

UNDERLYING ASSUMPTIONS
The underlying assumptions used in IFRS are:
•
1)Accrual basis - the effect of transactions and other events are recognised
when they occur, not as cash is received or paid
•
2)Going concern - the financial statements are prepared on the basis that an
entity will continue in operation for the foreseeable future
Qualitative characteristics of financial statements

The Framework describes the qualitative characteristics of financial

statements as
being
•
1)Understandability
•
2)Relevance
•
2)Reliability and
•
4)Comparability.
Elements of Financial Statements
The Framework sets out the statement of financial position (balance sheet) as
comprising:-
•
1)Assets - resources controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity
•
2)Liabilities - a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits
•
3)Equity - the residual interest in the assets of the entity after deducting all its
liabilities

and the statement of comprehensive income (income statement) as

comprising:
•
4)Income is increases in economic benefits during the accounting period in
the
form of inflows or enhancements of assets or reductions in liabilities.
Expenses are decreases in such economic benefits.
Content of financial statements:-
IFRS financial statements consist of (IAS1.8)
•
1)a balance sheet
•
2)income statement
•
3)either a statement of changes in equity(SOCE) or a statement of recognised
income or expense ("SORIE")
•
4)a cash flow statement
•
5)notes, including a summary of the significant accounting policies
Comparative information is provided for the previous reporting period (IAS
1.36). 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
(IFRS1.7).

On 6 September 2007, the IASB issued a revised IAS 1 Presentation of

Financial Statements. The main changes from the previous version are to
require that an entity must:
•
A)present all non-owner changes in equity (that is, 'comprehensive income' )
either in one statement of comprehensive income or in two statements (a
separate income statement and a statement of comprehensive income).
Components of comprehensive income may not be presented in the
B)statement of changes in equity.
•
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 an accounting policy retrospectively or makes a
retrospective restatement.
•
C)disclose income tax relating to each component of other comprehensive
income.

•
D)disclose reclassification adjustments relating to components of other
comprehensive income.
IAS 1 changes the titles of financial statements as they will be used in IFRSs:
•
1)'balance sheet' will become 'statement of financial position'
•
'2)income statement' will become 'statement of comprehensive income'
•
'3)cash flow statement' will become 'statement of cash flows'.
The revised IAS 1 is effective for annual periods beginning on or after 1
January
2009. Early adoption is permitted.

NECESSITY OF IFRS:-
By adopting IFRS, a business can present its financial statements on the same
basis
as its foreign competitors,making comparisons easier.Furthermore,companies
with
subsidiaries in countries that require or permit IFRS may be able to use one
accounting langauge company – wide.Companies also may need to convert to
IFRS if
they are a subsidiary of a foreign company that must use IFRS,or if they have a
foreign investor that must use IFRS.Companies may also benefit by using IFRS
if
they wish to raise capital abroad.
How widespread is the adoption of IFRS around the
world?
More than 12000 companies in approximately 113 nations have adopted
IFRS,including listed companies in the European Union. Other countries,
including Canada and India, are expected to transition to IFRS by 2011.
Mexico plans to adopt IFRS for all listed companies starting in 2012. Some
estimate that the number of countries requiring or accepting IFRS could grow
to 150 in the next few years. Japan has introduced a roadmap for adoption
that it will decide on in 2012 (with adoption planned for 2016). Still other
countries have plans to converge (eliminate significant differences) their
national standards with IFRS
IFRS & INDIA:-
The issue of convergence with IFRS has gained significant momentum in India.
At
present, the ASB of the ICAI formulates Accounting Standards based on IFRS,
however, these standards remain sensitive to local conditions, including the
legal &
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.
At a meeting held in May 2006, the council of ICAI expressed the view that
IFRS may
be adopted in full at a future date, at least for listed and large entries.The ASB,
at a
meeting held in August 2006,considered the matter and supported the
council’s view
that there would be several advantages of converging with IFRS.Keeping in
mind the
extent of differences between IFRS and Indian Accounting Standards, as well
as the
fact, that convergence with IFRS would be important policy decision, the ASB
decided to form an IFRS Task Force .The objectives of the Task Force were to
explore:
•
The approach for achieving convergence with IFRS , and
•
Laying down a road map for achieving convergence with IFRS with a view to
make India IFRS – compliant.
Based on the recommendation of the IFRS Task Force, the council of ICAI, at
its 269th meeting decided to converge with IFRS, for accounting periods
commencing on or after 1 April 2011.IFRS will be adopted for listed and other
public interest entities such as banks , insurance, companies and large – sized
organizations.
With an objective to ensure smooth transition to IFRS from 1 April 2011,ICAI
is taking up the matter of convergence with IFRS with NACAS and other
regulators including RBI, IRDA and SEBI.The NACAS has been established by
the Ministry of Corporate Affairs, Government of India.ICAI is taking various
other steps as well as to ensure that IFRS is effectively adopted from 1 April
2011.
These include:
•
Formulations of work – plan, and
•
Conducting training programmes for members of ICAI and others
concerned to prepare them to implement IFRS.
•
ICAI will also discuss, with the IASB those areas, where changes in certain
IFRS may be required, to reflect conditions specific to India and areas of
conceptual differences.
In May 2008, the MCA issued a press release in which it committed to IFRS
convergence by 1 April 2011.
Recognizing the convergence efforts of ICAI & MCA, the European Union has
recently
allowed entries to use Indian GAAP for listing on a European securities market
without reconciliation through to 2011, and if the convergence plan is
achieved, to
continue to do so after 2011.

BENEFITS OF ADOPTING IFRS FOR INDIAN

COMPANIES:-
The decision to converage with IFRS is a milestone decision and is likely to
provide
significant benefits to Indian corporates.Some of them are listed below:
Improved access to international capital markets :
Many Indian entries are expanding or making significant acquisitions in the
global
arena, for which large amounts of capital is required.The majority of stock
exchanges
require financial information prepared under IFRS.Migration to IFRS will
enable
Indian entities to have international capital markets, removing the risk
premium that
is added to those reporting under Indian GAAP.

Lower Cost of Capital :

Migration to IFRS will lower the cost of raising funds, as it will eliminate the
need
for preparing a dual set of financial statements.It will also reduce accountants’
fees,
abolish risk premiums and will enable access to all major capital markets as
IFRS is
globally acceptable.
Enable benchmarking with global peers and improve brand value:
Adoption of IFRS will enable companies to gain a broader and deeper
understanding
of the entity’s relative standing by looking beyond country and regional
milestones.
Further,
adoption of IFRS will facilitate companies to set targets and milestones based
on
global business environment, rather than merely local ones.
Escape multiple reporting :
Convergence to IFRS, by all groups entities, will enable company
managements to
view all components of the groups on one financial reporting platform. This
will
eliminate the need for multiple reports and significant adjustment for
preparing
consolidated financial statements in different stock exchanges.
Reflects true value of acquisitions :
In Indian GAAP, business combinations, with few exceptions, are recorded at
carrying values rather than fair values of net assets acquired. Purchase
consideration
paid for intangible assets not recorded in the acquirer’s books is usually not
recorded
in the financial statements, instead the amount gets added to
goodwill.Hence,the
true value of the business combination is not reflected in the financial
statements.IFRS will overcome this flaw, as it mandates accounting for net
assets
taken over in a business combination at fair value.It also requires recognition
of
intangible assets, even if they have not been recorded in the acquiree’s
financial
statements.
New opportunities :
Benefits from the adoption of IFRS will not be restricted to Indian
corporates.In fact;
it will open up a host of opportunities in the service sector.With a wide pool of
accounting professionals, India can emerge as an accounting services hub for
the
global community.As IFRS is fair value focused it will provide significant
opportunities
to professionals including, accountants, valuers and actuaries, which in – turn,
will
boost the growth prospects for the BPO/KPO segment in India.
IFRS CHALLENGES:-
Some of the challenges are listed below:
Shortage of resources :
With the convergence to IFRS, implementation of SOX, strengthening of
corporate
governance norms, increasing financial regulations and global economic
growth,
accountants are most sought after globally. Accounting resources is a major
challenge.India; with a population of more than 1 billion has only
approximately
145000 Chartered Accountants, which is far below its requirement.
Training :
If IFRS has to be uniformly understood and consistently applied, training
needs of all
stakeholders, including CFOs, auditors, audit committees, teachers, students,
analysts, regulators and tax authorities need to be addressed. It is imperative
that
IFRS is introduced as a full subject in universities and in the Chartered
Accountancy
syllabus.
Training :
If IFRS has to be uniformly understood and consistently applied, training
needs of all
stakeholders, including CFOs, auditors, audit committees, teachers, students,
analysts, regulators and tax authorities need to be addressed. It is imperative
that
IFRS is introduced as a full subject in universities and in the Chartered
Accountancy
syllabus.
Information systems:
Financial accounting and reporting systems must be able to produce robust
and
consistent data for reporting financial information.The systems must also be
capable
of capturing new information for required disclosures, such as segment
information,
fair values of financial instruments and related party transactions.As financial
accounting and reporting systems are modified and strengthened to deliver
information in accordance with IFRS, entries need to enhance their IT security
in
order to minimize the risk of business interruption ,in particular to address
the risk of
fraud, cyber terrorism and data corruption.
Taxes:
IFRS convergence will have significant impact on financial statements and
consequently tax liabilities.Tax authorities should ensure that there is clarity
on the
tax treatment of items arising from convergence to IFRS.For example, will
government authorities tax unrealized gains arising out of the accounting
required by
the standards on financial instruments? From an entity point of view, a
thorough
review of existing tax planning strategies is essential to test their alignment
with
changes created by IFRS.Tax,other
regulatory issues and the risks involved will have to be considered by the
entities.
Communication:
IFRS may significantly change reported earnings and various performance
indicators.
Managing market expectations and educating analysts will therefore be
critical.A
company’s management must understand the differences in the way the
entity’s
performance will be reviewed, both internally and in the market place and
agree on
key messages to be delivered to investors and other stake holders.Reported
profits
may be different from perceived commercial performance due to the
increased use of
fair values, and the restriction on existing practices such as hedge accounting.
Consequently, the indicators for assessing both business and executive
performance
will need to be revisited.

Management compensation and debt covenants:

The amount of compensation calculated and paid under performance – based
executive, and employee compensation plans may be materially different
under
IFRS, as the entity’s financial results may be considered different. Significant
changes to the plan may be required to reward an activity that contributes to
an
entity’s success, within the new regime.Re – negotiating contracts that
referenced
reported accounting amounts,such as ,bank covenants or FCCB conversation
trigger,
may be required on convergence to IFRS.
Difference between IFRS and Indian GAAP
Some of them are listed below :-
Subject
IFRS
Indian GAAP
Historical cost
Generally uses historical cost, but
intangible assets, property plant
and equipment (PPE) and
investment property may be
revalued to fair value.
Derivatives, biological assets and
certain securities are revalued to
fair value.
Uses historical cost, but property,
plant and equipment may be
revalued to fair value. Certain
derivatives are carried at fair value.
No comprehensive guidance on
derivatives and biological assets.
Balance sheet
Does not prescribe a particular
Accounting standards do not