Introduction to International Financial Reporting Standards

By Govind Sekhar
(SRO
O211191)

Introduction

The Need for one globally accepted accounting standards that could provide
quality, reliability and transparency in financial reporting lead to the creation
of IASC (International Accounting Standards Committee) in the year of 1973.
IASC comprises of accounting bodies of over 75 countries. Within 1973- 2001
, IASC introduced a number of pronouncements, which were known by the
Name of International Accounting Standards and guidance note on the same.
In the year 2001, IASC was restructured and IASB (International Accounting
Standards Board) was born. IASB adopted all the Pronouncements issued by
its predecessor body and all subsequent pronouncements where Termed
IFRS. IFRS in a broad sense comprises of

• IAS – Standards issued before 2001 (29 Standards)

• IFRS –Standards issued after 2001( 8 IFRS)
• SIC-Interpretations of accounting standards , giving specific guidance
on unclear issues (11 SIC)
• IFRIC- Newer interpretations , issued after 2001 (15 IRIC)
All International Accounting Standards (IASs) and Interpretations issued by
the former IASC (International Accounting Standard Committee) and SIC
(Standard Interpretation Committee) continue to be applicable unless and
until they are amended or withdrawn.

Significance of IFRS adoption

During the last decade with the advent of Globalization , the need and
importance of IFRS has gained strength , especially after their adoption by
the European Union in 2005 and the Securities and Exchange commission of
the US allowing foreign listed companies to file financial statements with
IFRS (without reconciliation with the US GAAPS . At present more than 100
countries permit or require the use of IFRS, and many more look forward to
achieving convergence /adoption by 2011. This global recognition for IFRS is
on account of following benefits.

a. Comparability:-
Financial Statements of local entities can be easily and reliably be compared
with their Global peers; this feature allows prospective investors and
stakeholders, in assessing the performance of entities accurately

b. Cross – Border Investments:-

 Adoption/convergence with IFRS is likely to promote investments, because
of the goodwill which IFRS enjoys with the Global investor communities

c. Multiple-Reporting:-

Different entities within the group that reside in different jurisdictions may
be required to prepare a dual set of financial statements for external
financial reporting; one for local statutory financial reporting in the home
country and second for reporting to the parent company. This increases the
efforts of the finance function, introduces complexity in financial reporting
and increases costs of the finance function. Group-wide adoption of IFRS will
eliminate the need for such multiple reporting, if IFRS is accepted or required
in all countries of operation.

d. Cost of Capital:-

IFRS eliminates barriers to cross-border listings as it is accepted as a global

financial reporting framework and allows companies to seek admission to
almost all of the world's bourses. Even in cases where listing on overseas
exchanges is permitted using local GAAP, international investors generally
ascribe an additional risk premium if the underlying financial information is
not prepared in accordance with international standards.

Objective of IFRS

The objective of IFRS is to develop, 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
statements and other financial reporting to help participants in the world's
capital markets and other users make economic decisions and to o promote
the use and rigorous application of those standards taking into account of
the special needs of small and medium-sized entities and emerging
economies and thus bring about convergence of national accounting
standards and International Accounting standards .

Scope of IFRS

IFRS set out recognition, measurement, presentation and disclosure

requirements of transaction and events in general purpose financial
statements. General purpose financial statements are intended to meet the
common needs of shareholders, creditors, employees, and the public at large
for information about an entity's financial position, performance, and cash
flows. Other financial reporting includes information provided outside
financial statements that assists in the interpretation of a complete set of
financial statements or improves users' ability to make efficient economic
decisions.

IFRS applies to the general purpose financial statements and other financial
reporting by profit-oriented entities) regardless of their legal form. Entities
other than profit-oriented business entities may also find IFRSs appropriate.

IFRS apply to individual company and consolidated financial statements.

Some IFRS allows both a 'benchmark' and an 'allowed alternative'

treatment’.

Framework of IFRS

The IASB Framework was approved by IASC Board in April, 1989 for
publication in July 1989, and adopted by the IASB in April, 2001.

The framework :

• Defines the objective of financial statements;

• Identifies the qualitative characteristics that make information in

financial statements useful; and

• Defines the basic elements of financial statements and the concepts

for recognising and measuring them in financial statements

Classification of IFRS

The details of IFRS presently applicable and their corresponding Indian

Accounting Standards are given in Annexure. It could be seen that IFRS is
classified into:

• Financial Statements

• Assets

• Liabilities

• Revenue

• Expenditure

• Recognition & Measurement

 • Disclosure & Presentation

• Industry Specific IFRSs

• Others

The classification of IFRS is listed in Annexure2

Reasons for Divergence with IFRS – Indian Scenario

India has been the member of IASB/IASC for the past three decades, and
therefore many of our accounting standards are based on the corresponding
IFRS, to the extent possible. The reasons for deviations can be summarized
as follows:-

a. Economic Environment:
Several IFRS are based on fair value, which has to be considered in the
measurement of assets, liabilities, income and expenditure. The existence of
well established markets, which can be considered trustworthy in providing
reliably information regarding fair value, is a pre-requisite for the application
of these standards. Unless and until, such a mark is breached, deviations
were considered necessary, and as such many of our Standards, allow
accounting under historical cost basis.

b. Legal and Regulatory Environment: -

In India, the financial reporting of many entities coming under various
categories (e.g. companies, banks, insurance enterprises ...etc), are to a
very large extend governed by their corresponding regulatory authorities.
This is strengthening, by the fact that law prevails over the Standard setting
Body. Deviations, where therefore considered unavoidable to remain
consistent with the legal and regulatory requirements. For example the
Schedule XIV of the companies act prescribes the minimum rate of
depreciation for each class of assets – while IAS 16 mandates depreciation to
be worked out only after considering the useful life of the asset. To quote
another instance, reporting formats for companies, banks, insurance entities
etc are prescribed by their concerned regulatory body these are
substantitially different from the presentation and disclosure requirements
under the IFRS.

c. Level of Technical Preparedness

In a few stray cases, the Indian Accounting standards deviate from IFRSs
because
Adoption of IFRSs verbatim may cause hardship to the industry and, to avoid
the same,
Modifications are made in Accounting Standards until the industry is
prepared for the
IFRSs. For example, AS 15 (revised), Employee Benefits, permits deferment
of expenditure incurred on account of termination of services arising in a
voluntary retirement scheme for a transitional period, in view of the fact that
the Indian industry was undergoing a structural change at the time when the
standard was introduced, whereas the corresponding IAS 19, Employee
Benefits, does not allow the deferment of such expenditure even as a
transitional measure.

d. Conceptual Difference

In certain cases, deviations were made in view of genuine conceptual

differences with the IASB. For example AS 2 specifically excludes “selling and
distribution costs” from the cost of Inventories and provides that it is
appropriate to recognize them as expenses in the period in which they are
incurred. However IAS 2 excludes only “Selling Costs” and not “Distribution
Costs”. To take another Instance , According to AS -26 An intangible asset is
defined as an identifiable nonmonetary asset, without physical substance,
held for use in The production or supply of goods or services, for rental to
others, or for administrative purposes whereas IAS 38 defines an intangible
asset ‘as an identifiable non-monetary asset without physical substance’.

Implications on Convergence:-

Convergence, will change the way financial reporting is done in the country, it will
raise our standards and will help us keep pace with the requirements of the quickly
changing requirements of business and finance. The key difference with IFRS, which
we would all, as practisoners or users be required to unlearn on convergence is
summarized below:-

a. IAS -1:- Presentation of Financial Statements

• Financial Statement Format:-The structure of the financial statements
as required under IAS -1 various substantially with the format
requirements under the Companies Act, and other governing acts for
various other entities.
• True and Fair View :- May be overrided under IAS 1 , under exceptional
circumstances if management concludes that compliance would be
misleading rather than generating a fair view. No such relaxations are
permitted under the Indian GAAP
• Extra-ordinary Items :- IAS -1 Prohibits items to be classified as extra-
ordinary items .while AS-5 Specifically requires disclosure of the same

b. IAS – 10 :- Events after the balance sheet date

 • Treatment of Proposed dividend: - Not to be shown as a liability when
proposed or declared after the Balance sheet date. AS -4 requires
creation of provisions for proposed dividend and taxes thereon , even
though the same is declared after the balance sheet date

c. IAS 16-Property , Plant and Equipment

• Depreciation: - To be applied under component basis i.e. each part of an item

of property, plant and equipment with a significant cost in relation to the
total cost of the item is depreciated separately. Such a practice is
encouraged but not mandatory under AS 6. The depreciable amount of the
asset is allocated on a systematic basis over the useful life of the asset ,
where as limitations imposed by companies act , 1956 , makes it necessary
to provided a minimum amount of depreciation based on the prescribed
rates , that to under SLM and WDV only

• Review of Useful Life: - Under IFRS the same is to be done at least at each
financial year end. Under INDIAN GAAPS , the entity may review the same
periodically

d. IAS – 18 :-Revenue

• Measurement of Revenue :- Under IAS -18 revenue is to be recognized at

the fair value of the consideration received , while AS -9 requires
measurement of revenue at the gross value of consideration received /
receivable

• Revenue from services :- IAS -18 allows only percentage of completion

method whereas AS -9 allows Completed service contracts or
proportionate Completion method

e. IAS -21:-The Effects of changes in foreign exchange rates

• Restatement of Foreign Currency Advances:
Para 16 of IAS 21 suggests that advances received for further export of
goods are non monetary in nature. While AS -11 is supportive of
restatement of advances received for export of a fixed quantity of goods
adjusted against future supplies , by defining monetary items as “ money
held and assets and liabilities to be received or paid in fixed or
determinable amounts of money.

• Determination of Functional Currency: -

Entities in India prepare their financial statements in Indian Rupees.
However IAS 21 requires its entities to record its transactions in its
functional currency, which is the currency which best, reflects the
economic substance of the underlying events and circumstances relevant
to the entity i.e. the currency of the primary economic environment in
 which the entity operates. Functional currency of an entity may be
different from its local currency

f. IAS 27:- Consolidated and Separate Financial Statements

• Control: - The definition of control under the IAS 27 is different from AS
21.
• Exclusions from consolidation: - Subsidiaries may be excluded from
consolidation provided certain conditionals are satisfied under AS -21. No
such relaxations under IAS 27
• Gap between financial Periods of subsidiaries and parent : IFRS allows a
three month Gap between the financial statement of parent or investor
and subsidiary , associate or jointly controlled entity .IAS 21 allows a six
month Gap

g. IAS – 38 :-Intangible assets

• Useful life :- Under IAS -38 an intangible asset can have an indefinite
useful lift and accordingly the same need not be amortized , while under
AS -26 there is no concept of indefinite useful life and there is a
rebuttable presumption that the useful life of the intangible should not
exceed 10 years

• Amortization of Intangibles held for sale: - Under IAS – 38 amortization

should be stopped if the same is held for sale, while under AS -26 there
is no such stipulation.

• Revaluations :- Permitted under IAS -38 , the same is prohibited under

AS-26

h. IFRS -3:-Business Combinations

• Prohibition of Merger Method: - IFRS 3-Business combinations require
all Business combinations to be accounted as per the purchase method
and it prohibits merger method (which is permitted under AS-14).
• Valuation :- Net assets take over , including contingent liabilities is to
be recorded at fair value but Indian GAAPS requires recording of assets
at Carrying value and Contingent Liabilities are not recorded as liability
• Treatment of Negative Goodwill :- IFRS 3 requires the same to be
credited to the profit and loss account , while it is to be treated as a
capital reserve under the Indian GAAPS

Convergence: - The road ahead

The Term “convergence” means to achieve harmony with IFRS in precise

terms it would mean to design and maintain national accounting standards in
a way that financial statement prepared in accordance with national
accounting standards draw unreserved statement of compliance with IFRS. It
is important to note that to be IFRS compliant it is not necessary to

a. Adopt IFRS word by word: - The national standards should meet

all the requirements of IFRS and there is no prohibition on
including additional disclosure requirements or removing
optional treatment. This view is supported by IAS 1 and the
Statement of Best Practise :Working relationships between IASB
and other Accounting Standards-Setters issued by IASB
b. Make in mandatory to all entities :- IFRS need not be applied by
all entities of different sizes and nature , it is mandatory to only
public interested entities

The path to convergence is challenging and it is imperative that the

differences which have so far lead to the divergence should be bridged. In
this context , after considering the current economic environment , expected
time to reach the satisfactory level of technical preparedness and the
expected time to resolve conceptual differences with the IASB, the ICAI had
decided that IFRS should be adopted for public interest entities from the
accounting periods commencing on or after 1st April 2011 for certain defined
entities (listed entities ,banks and insurance entities and certain other large
sized entities .Large sized entices are defined as entities having a turnover
in excess of Rs 100 cores or borrowing in excess of Rs 25 cores.

One of the greatest challenges would be the amendment of laws in time and
in imparting effective training regarding the application of these standards to
accounting professionals. If not done expediently India can never achieve full
convergence (even if ICAI adopts IFRS ) and that entities in India having
global stakeholders , would be left with the unfortunate situation of
preparing a reconciliation statement between financial statements prepared
under converged IFRS under the Indian framework vis a vis IFRS financial
statements that are globally accepted

Accordingly, it is paramount for all the stakeholders, the government,

regulatory authorities, ICAI to work together in achieving full convergence
with IFRS. If the means are worked out well, the end is bound to come as
planned. If not, it is India Inc which will be the ultimate loser because;
convergence has become a necessity and not a choice.
List of IFRS issued vis a vis Indian Accounting Standards

This can be clubbed under the following categories

a. Indian Accounting Standards already issued by ICAI corresponding to IFRS

International Financial Reporting

SI.N Standards Indian Account Standards
o No: Title of standard No: Title of Standard
Presentation of
1 AS 1 Disclosure of Accounting Policies IAS 1 Financial Statements
2 AS 2 Valuation of Inventories IAS 2 Inventories
3 AS 3 Cash Flow Statements IAS 7 Cash Flow Statements
Contingencies and events
occurring after the balance sheet Events after the
4 AS 4 date IAS 10 balance sheet date
Net Profit or Loss for the Period , Accounting Policies ,
Prior Period Items and Changes in Changes in Accounting
5 AS 5 Accounting Policies IAS 8 Estimates , and Errors
Corresponding IAS has
been withdrawn since
the matter is now
covered by IAS 16 and
6 AS 6 Depreciation accounting IAS 38
7 AS 7 Construction Contracts IAS 11 Construction Contracts
8 AS 9 Revenue Recognition IAS 18 Revenue
AS Property , Plant and
9 10 Accounting for Fixed Assets IAS 16 Equipment
The Effects of changes
AS The Effects of Changes in Foreign in Foreign Exchange
10 11 Exchange Rates IAS 21 rates
Accounting for
Government Grants
and Disclosure of
AS Accounting for Government Government
11 12 Grants IAS 20 Assistance
 Corresponding IAS has
been withdrawn now
since the matter is now
AS covered by IAS 32 ,
12 13 Accounting for Investments 39 , 40 and IFRS 7
AS
13 14 Accounting for Amalgamations IFRS 3 Business Combinations
AS
14 15 Employee Benefits IAS 19 Employee Benefits
AS
15 16 Borrowing Costs IAS 23 Borrowing Costs
AS
16 17 Segment Reporting IFRS 8 Operating Segments
AS Related - Party
17 18 Related Party Disclosures IAS 24 Disclosures
AS
18 19 Leases IAS 17 Leases
AS
19 20 Earnings Per Share IAS 33 Earnings Per Share
Consolidated and
AS Separate Financial
20 21 Consolidated Financial Statements IAS 27 Statements
AS
21 22 Accounting for taxes on Income IAS 12 Income Taxes
Accounting for Investment in
AS Associates in Consolidated Investment in
22 23 Financial Statements IAS 28 Associates
Non Current Assets
held for sale and
Discontinued
Operations ( AS 10
deals with accounting
AS for fixed assets retired
23 24 Discontinuing Operations IFRS 5 from active use)
AS Interim Financial
24 25 Interim Financial Reporting IAS 34 Reporting
AS
25 26 Intangible Assets IAS 38 Intangible assets
AS Financial Reporting of Interests in Interests in Joint
26 27 Joint Ventures IAS 31 Ventures
AS
27 28 Impairment of Assets IAS 36 Impairment of Assets
Provisions , Contingent
AS Provisions , Contingent Liabilities Liabilities , and
28 29 and Contingent Assets IAS 37 Contingent Assets
Financial
AS Financial Instruments : Instruments
29 30 Recognitions and Measurement IAS 32 :Presentation
30 AS Financial Instruments : IAS 39 Earnings Per Share
 31 Presentation
AS Financial Instruments : Financial Instruments :
31 32 Disclosures IFRS 7 Disclosures

b. IFRS not considered relevant for issuance of accounting standards by ICAI

for the reasons indicated

International Financial Reporting

SI.N Standards
o No: Title of standard Reasons

Hyper inflationary conditions

does not prevail in India.
IAS Financial Reporting in Hyper Accordingly the subject is
1 29 Inflationary Economies not considered relevant
In India, Indian AS is being
adopted since the last many
years and IFRS are not being
First Time Adoption of adopted for the first time.
IFRS International Financial Reporting Therefore , the IFRS 1 is not
2 1 Standards relevant to India at present

c. Accounting Standards presently under preparation corresponding to IFRS

International Financial Reporting

SI.N Standards
o No: Title of standard
Accounting and Reporting by
1 IAS 26 Retirement benefits plans
2 IAS 41 Agriculture
3 IFRS 2 Share based Payment
4 IFRS 4 Insurance Contracts

d. Guidance Notes issued by ICAI corresponding to IFRS

SI.N International Financial Reporting Standards

o No: Title of standard Title of Guidance Note
 Guidance note on
Exploration for and Evaluation of Accounting for Oil and Gas
1 IFRS 6 Mineral Resources Producing Activites

Annexure 2

Classification of IFRS

Financial Statements
• IAS 1 Presentation of Financial Statements
• IAS 7 Cash flow statements
Business Combinations & Group Reporting
• IAS 27 Consolidated financial statements and accounting for
investments in subsidiaries
• IFRS 3 Business Combinations
• IAS 28 Investments in associate
• IAS 31 Financial reporting of interest in joint venture
Financial Instruments
• IAS 32 Financial instruments – presentation
• IAS 39 Financial instruments – recognition and measurement
• IFRS 7 Financial instruments - disclosures
Assets
• IAS 38 Intangible assets
• IAS 16 Property, plant and equipment
• IAS 40 Investment property
• IAS 23 Borrowing costs
 • IFRS 5 Non – current assets held for sale and discontinued
operations
• IAS 2 Inventories
• IAS 41 Agriculture
• IAS 20 Accounting for grants and disclosure of government
assistance
• IAS 17 Leases
Liabilities
• IAS 12 Income taxes
• IAS 37 Provisions,Contingent Liabilities and Contingent Assets
Recognition & Measurement
• IAS 21 The Effect of Changes in Foreign Exchange Rates
• IAS 36 Imapirement of Assets
• IAS 10 Events after the balance sheet date
Disclosure & Presentation
• IFRS 8 Operating Segments
• IAS 33 Earnings Per Share
• IAS 24 Related Party Disclosures
Revenue
• IAS 9 Revenue
• IAS 11 Construction Contracts
Expenses
• IAS 19 Employee Benefits
• IAS 2 Share Based Payments

Others
• IFRS 1 First –time Adoption of International Financial
Reporting Standards
• IAS 29 Financial Reporting In Hyperinflationery Economies
• IAS 34 Interim Financial Reporting

Industry Specific IFRSs

• IFRS 4 Insurance Contracts
• IFRS 6 Exploration for and Evaluation of Mineral Resources
• IFRIC 12 & SIC 29 Service Concession Arrangements