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Registrar & Assistant Professor, ACCMAN Institute of Management, Uttar Pradesh, India, pawaninbox@gmail.com
Qualitative Characteristics
Understandability
Financial information that is classified, characterized and presented in a clear and concise way is understandable.
Relevance
Relevant financial information is capable of making a difference to the decision made by users. In order to make a
difference, financial information has predictive value, confirmatory value or both.
Reliability
Financial information that faithfully represents economic phenomena has three characteristics: It is complete, it is
neutral, and it is free from error.
Comparability
Comparability enables users to identify similarities and differences among items, both between different periods
within a set of financial statements and across different reporting entities.
Consistency
Consistent application of methods to prepare financial statements helps to achieve comparability.
Figure-1
It is transparent for users and comparable over all the periods presented.
Provides a suitable starting point for accounting under International Financial Reporting Standards (IFRS).
Can be generated at a cost that does not exceed the benefits to users.
Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquire,
Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and
Determines what information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination.
Assets that meet the criteria to be classified as held for sale to be measured at the lower carrying amount and fair value
less costs to sell, and depreciation on such assets to cease.
Assets that meet the criteria to be classified as held for sale to be presented separately in the statement of financial
position and the results of discontinued operations to be presented separately in the statement of
comprehensive
income.
Exploration and evaluation expenditures are expenditures incurred by an entity in connection with the exploration for
and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral
resource are demonstrable.
Exploration for and evaluation of mineral resources is the search for mineral resources, including minerals, oil, natural
gas and similar non-regenerative resources after the entity has obtained legal rights to explore in a specific area, as
well
as the determination of the technical feasibility and commercial viability of extracting the mineral
resource.
The significance of financial instruments for the entitys financial position and performance.
The nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at
the reporting date, and how the entity manages those risks. The qualitative disclosures describe managements
objectives, policies and processes for managing those risks. The quantitative disclosures provide information about the
extent to which the entity is exposed to risk, based on information provided internally to the entity's key management
personnel. Together, these disclosures provide an overview of the entity's use of financial instruments and the
exposures to risks they create.
It builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be
included within the consolidated financial statements of the parent company. The standard provides additional guidance to
assist in the determination of control where this is difficult to assess.
To develop in public interest, a single set of high quality, understandable & enforceable global accounting standards
that require high quality, transparent & comparable information in financial statements & other financial reporting to
help participants in the various capital markets of the world & other users of the information to make economic
decisions.
2. To promote the use & rigorous application of those standards.
3. In fulfilling the objectives associated above to take account of, as appropriate, the special needs of small & mediumsized entities & emerging economies.
4. To bring about convergence of national accounting standards & IFRSs to high quality solutions.
5. To encourage international investing & thereby increase in foreign capital inflow.
6. To benefit the economy by increased international business.
7. To provide more relevant, reliable, timely & comparable information to investors.
8. Better understanding of financial statements would benefit investors who wish to invest outside the country.
9. Capital at lesser cost from foreign market.
10. To reduced accounting requirements prevailing in various countries & hence reduced cost of compliance.
11. Professional opportunity to serve international clients.
12. Increased mobility to work in different parts of the world in industry or practice.
THE DEATH OF LIFO
Few differences between IFRS and U.S. GAAP loom larger than accounting for inventories, particularly the disallowance of the
last-in, first-out (LIFO) method in IFRS. The proposed shift of U.S. public companies to IFRS could affect many companies
currently using LIFO for both financial reporting and taxation. This is because the conformity rule of IRC 472(c) requires
taxpayers who apply LIFO for tax purposes to also apply it for income measurement in financial reporting, and IFRS does not
permit LIFO for book accounting.
Therefore, CPA may be called upon to help manage inventory method changes. Companies using LIFO would have to switch to
FIFO or average cost. The change would place companies in violation of the conformity requirement. Absent relief from the
Treasury Department, it would require them to change their tax method of inventory reporting. Thusa typical change in inventory
method, such as from average cost to FIFO, is treated retrospectively. The entity reflects a change from LIFO to FIFO in the
same manner. The result is:
An increase in inventory.
An increase in current income taxes resulting from the effective increase in income.
An adjustment to retained earnings for the effect of the increase in net income.
The entity may need to show a deferred tax liability for the temporary difference between the accounting and tax bases for the
inventory change if it were to remain, for example, on average cost for tax purposes yet switch from average cost to FIFO for
book purposes. A change from LIFO will normally have a significant positive income effect because the accumulation of prior
years costs in beginning inventory will replace cost of goods sold valued at current costs. Assuming that the inventory turns over,
income for the year of change would increase by the entire amount of the LIFO reserve.
CHALLENGES TO IFRS
Convergence to IFRS has created understandable nervousness both in industry and in profession. Without underestimating; the
problems involved, it is perhaps true to say that much of this nervousness arises out of a fear of unknown. Thus, it is necessary to
have a clear understanding of the issues involved and the steps necessary in this connection.
What is required is the awareness of the manner in which Indian Accounting Standards are
formulated?
The differences between International standards and Indian standards fall in three broad groups
namely:
Action has already been taken to identify the conflicting requirements in the Companies Act and Schedule V1and steps to make
necessary amendments have already been taken. What therefore, needs to be addressed are the differences in substance. This is
somewhat complicated by 2 factors:
1.
2.
The international standards on which the Indian Standards are based have themselves been the subject matter of
extensive revision.
In the revisions made by IASB and the new standards which have been issued, recognition has been given to new
concepts which have fundamentally altered the basis of recognition and measurement.
An exit price.
Existence of an active market.
Transaction in the active market.
b) Concept of Time Value of Money: This requires that where the expected date of recovery of an asset or payment of a
liability is deferred, it is recorded not at its face value but at its discounted value using an effective rate of interest.
c) Concept of Comprehensive Income: A further change is needed in the said concept contained in IAS 1- Presentation of
Financial Statements. Until this standard was issued, items of income and expense were recognized in the profit and loss account
and items not co recognized were presented in a statement of changes in equity.
However, other comprehensive income has to be separately disclosed. Besides these, some other areas to be taken care of which
are as follows:
Increase in cost due to dual reporting requirement till full convergence is achieved.
Changes are required in various regulatory requirements such as Companies Act, Income Tax Act, SEBI, RBI, etc.
Training may be required to all stakeholders such as employees, auditors, to understand IFRS thoroughly.
Additional cost towards modification in IT systems & Procedures.
Difference between Indian GAAP & IFRS may impact business decision & financial performance.
Limited pool of trained resource & persons having expert knowledge on IFRSs.
Transition to IFRS
Although 2014 may seem a long way off, it is not too early to prepare for IFRS conversion. Here are some key activities that will
contribute to a successful conversion:
Conversion is much more than a technical accounting issue. IFRS may significantly affect any-number of a companys day-to-day
operations and may even impact the reported profitability of the business itself. Conversion brings a one-time opportunity to
comprehensively reassess financial reporting and take a clean sheet of paper approach to financial policies and processes.
IFRS Proposed Roadmap for India
Figure-2: Opening Balance sheet as at April 1, 2012 using IFRS-Converged Accounting Standards.
201
1
2012
All
Insurance
Companies
201
3
201
4
Companies not covered in the above chart will apply Existing Indian Accounting Standards OR voluntarily opt to apply
the
IFRS-converged accounting standards.
Note 1: These exclude insurance companies, banks and non-banking finance companies
(NBFCs).
*If the financial year of the companies commence on a date other than April 1, then opening balance sheet need to be prepared
from the beginning of the new financial year of the companies.
Who gets affected by the change?
A countrys intention to adopt IFRS or converge with IFRS is highly admirable and to be applauded. However, the accounting
profession, governments, regulators, national accounting standard setters, and other constituents must continue to work together to
eliminate differences between national and international standards. The principal actions needed to support convergence are
outlined below:
The Accounting Profession needs to assist governments and standard setters in formulating and enacting convergence
plans, provide IFRS training and education and support the preparation of national language translations of IFRS.
Pezzottaite Journals, Jammu & Kashmir, India.
Regulators should set up efficient and effective enforcement mechanisms to increase the consistency and quality of
application of IFRS as well as support the International Financial Reporting Interpretations Committee (IFRIC) and the
IASB as the sole clearing house for interpretation of IFRS.
National Standard Setters must decide on a strategy and timetable for achieving convergence and develop an active
standard setting agenda aimed at eliminating existing differences with IFRS.
The IASB is required to address concerns about the complexity and operational practicality of IFRS, prioritize the SME
project as an agenda item and oversee and authorize translations of IFRS in various languages.
The Preparers of financial statements must actively participate in the standard setting process, in particular to identify
practical application concerns, as well as providing IFRS training for staff and managers, including those in nonfinancial roles.
Universities need to include IFRS in the core accounting curriculum.
Analysts and Investors are required to promote convergence of national accounting standards with IFRS. They should
also actively participate in the IASBs standard setting process, in particular to identify users needs, and educate their
staff regarding the IFRS reporting model.
CONCLUSIONS
The adoption of new accounting standards in line with International Financial Reporting Standards, or IFRS, may increase the
cost of raising debt through instruments such as debentures, preference shares and foreign currency convertible bonds (FCCBs)
as the rules get tighter. IFRS are balance sheet driven standards which are more than likely to create volatility in the year-to-year
income statements and that is a hard reality which the Indian companies will be confronting with convergence. In the case of
debentures, under Ind-AS, the redemption premium plus coupon interest are amortized to the profit and loss account over the term
of these instruments based on the Effective Interest Rate (EIR) method.
Transitioning to IFRS would allow companies to compete for capital in other countries, while reducing cost and complexity for
companies operating internationally; we also think that embracing a single set of global accounting standards would contribute
to a higher degree of investor understanding and confidence. Also IFRS is very important for US Investors as they own 2/3 rd of
securities issued by foreign companies. Because of IFRS there will be greater comparability and greater confidence in the
transparency of financial reporting for the US investors.
REFERENCES
1.
Barry, J. Epstein, and Eva. K. Jermakowicz, (WILEY) Interpretation and Application of International Financial
Reporting, Published by John Wiley & Sons Inc, Hoboken, New Jersey, ISBN No: 978-0470-45322 3.
2.
Nandakumar, Kalpesh; J. Mehta; T. P. Ghosh, and Yass. A. Alkafaji, Understanding IFRS Fundamentals:
International Financial Reporting Standards, Published by John Wiley & Sons Inc, Hoboken, New Jersey, ISBN
No:
978-0-470-39914-9.
3.
4.
5.
6.
http://www.ifrs.org/NR/rdonlyres/9E3D1C87-8FB8-48DF-9A66-3CD6CDC4B5B7/0/MoreAnnualImpMar11.pdf
7.
http://www.articlesbase.com/accounting-articles/what-is-ifrs-and-why-are-global-economics-looking-at-oneaccounting-standard-573896.html#ixzz1MrhfYzD1
8.
www.pwc.com
9.
http://thegaap.net/articles/AccountingfornewFinancialStatementsIFRS.html
10.
http://www.ifrsbox.com/blog/post/how-to-learn-ifrs-part-1
11.
http://www.ey.com/Publication/vwLUAssets/Supplement_86_GL_IFRS/$File/Supplement_86_GL_IFRS.pdf
12.
http://www.charteredclub.com/what-is-ifrs/
13.
http://www.ifrs.org/Home.htm
14.
http://wircicai.org/wirc_referencer/Acconting%20&%20Auditing/Comparison%20of%20IFRS%20and%20Indian%20
Accounting%20Standards.htm
15.
http://articles.economictimes.indiatimes.com/2011-07-7/news/29820849_1_implementation-indiancompanies- accounting-advisory-services
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