IFRS – THE ROAD AHEAD

By Jameskutty Antony FCA, DISA, CISA

Introduction
The financial reporting in India is formulated based on the accounting standards
issued by the Institute of Chartered Accountants of India. The Institute of Chartered
Accountants of India (ICAI) being a member body of the IASC, constituted the
Accounting Standards Board (ASB) on 21st April, 1977, with a view to harmonize the
diverse accounting policies and practices in use in India. After the much debated
adoption of liberalization and globalization as the corner stone‘s of Indian economic
policies in early 90’s and the growing concern about the need of effective corporate
governance of late, the Accounting Standards have increasingly assumed importance.

While formulating accounting standards, the ASB takes into consideration the
applicable laws, customs, usages and business environment prevailing in the country.
The ASB has also given due consideration, while formulating the Accounting
Standards, to the International Financial Reporting Standards (IFRS) and International
Accounting Standards (IAS), to the extent possible, considering the conditions and
practices prevailing in India.

ICAI has issued 32 Accounting Standards so far. These Standards are mandatory in
nature and has also been recognized by Section 211 (3C) of the Companies Act, 1956.
The mandatory status forces the business entities to adhere to these standards vis-à-vis
the accounting and disclosure of financial information. The auditors are also required
to give adequate disclosure in their audit report, if there is any deviation from
standards by the auditee.

Why IFRS?
With globalisaiton and the foreign direct investment in India and foreign investments
by Indians abroad, the concept of ‘open economy’ has come into being. Movement of
capital and investment from one country to another has become a common
phenomenon. So the question of ‘readability’ or compatibility across two financial
statements prepared two different countries has become more significant, in the recent
days. Thus arose the need for a financial reporting language which can be universally
read and understood.

The use of international financial reporting standards (IFRS) as a universal financial

reporting language is gaining momentum across the globe. Over a 100 countries in the
European Union, Africa, West Asia and Asia-Pacific regions either require or permit
the use of IFRS.
Most of the Europe adopted IFRS in 2005. India and Canada plan to converge in
2011, Brazil in 2010 and USA in 2014

IFRS – A bane or a boon?

Adopting IFRS by Indian corporates is going to be very challenging but at the same
time could also be rewarding. There are different opinions on whether Indian
corporates are likely to reap significant benefits from adopting IFRS. The European
Union’s experience highlights many perceived benefits as a result of adopting IFRS.

The areas such as corporate governance, revenue recognition, use of financial

statements, budgeting, management reporting etc. is going to witness a sea-change, on
the adoption of IFRS.

IFRS assists in cross border transactions and with business spread across geographies
as consistency can be achieved in financial statements.

Following are some of the benefits perceived for companies converging to IFRS, in
the Indian context:

For multinational companies, it will be easier to prepare accounts according to IFRS

especially if subsidiaries or branches are located in countries which have adopted
IFRS.

Companies can obtain easy and cheap finance from the international markets if they
have prepared their accounts based on IFRS as IFRS are now accepted as a financial
reporting framework for companies seeking to raise funds from most capital markets
across the globe. US Securities and Exchange Commission (SEC) recently permitted
foreign companies listed in the US to present financial statements in accordance with
IFRS. This means that such companies will not be required to prepare separate
financial statements under Generally Accepted Accounting Principles in the US (US
GAAP). Therefore, Indian companies who are listed in the US or who are planning to
tap the investment market in US would benefit from having to prepare only a single
set of IFRS compliant financial statements, and the consequent saving in financial and
compliance costs

The financial statements of all the companies in countries adopting IFRS will be
comparable. This will result in more transparent financial reporting of a company’s
activities which will benefit investors, customers and other key stakeholders in India
and overseas.

The adoption of IFRS is expected to result in better quality of financial reporting due
to consistent application of accounting principles and improvement in reliability of
financial statements. This, in turn, will lead to increased trust and reliance placed by
investors, analysts and other stakeholders in a company’s financial statements.
However, there may be a few drawbacks; some companies may face certain setbacks
such as disruption in the day to day business, shortage of accounting professionals
who are trained in IFRS etc. In addition, IFRS will probably affect tax accounting and
reporting in terms of deferred taxation, tax filing etc.

So, what is different in IFRS?

One of the major differences between IFRS and Indian GAAP is that the IFRS lays
more emphasis on the balance-sheet disclosures than the profit & loss account.

IFRS is a new concept that in many cases is vastly different from the manner in which
it treats the accounting of items in a company’s profit and loss account and the
balance sheet. Since some of these reporting standards are market sensitive, they
sometimes have material impact on reported results which could lead to stock price
volatility. The impact is also on the tax and operating structures, which could alter
once IFRS comes into place.

IFRS carries a “Global Approach” compared to the “Indian Approach” of Indian

GAAP. It is based on ‘Fair Value Accounting’ rather than ‘Historical Cost’
Accounting’. It is more concerned about the ‘Group of Entities’ rather than the
‘Individual or stand alone entities’.

It follows the concepts of Substance Over Form, Principles Over Rules And The
Entity Over Company.

Convergence to IFRS – Major Issues

It will be a grave mistake to presume convergence as a mere technical accounting
exercise.

But the biggest challenge in convergence with IFRS is that our chartered accountants
and finance professionals will have to unlearn all that they have spent the past 20-30
years practicing. This puts a big emphasis on training.

Surprisingly, the stakeholders have given the tax impact of conversion of Indian
GAAP financial statements to IFRS financial statements little or no importance.
Conversion to IFRS could have a significant impact on all aspects of the tax lifecycle -
tax planning, provisioning, tax compliance and litigation. It could also have a
combined impact on various accounting policies and change the way accounting
income is determined. This, in turn, would alter the face of the balance sheet.

The most important area where corporates would be locking horns with the taxmen
will be the fair value accounting is that it gives rise to the recognition of unrealised
profits and losses. The difficulty for companies would arise when unrealised profits &
losses on account of fair value accounting are brought to tax without the company
having the cash to pay for it.
For instance, real estate companies would have to take a re-look at their construction
agreements for the purposes of revenue recognition. Under IFRS, a company would be
able to recognise revenue with reference to stage of completion, if and only if, the
agreement transfers control to the buyer, as well as the significant risks and rewards of
the ownership of the work.

The Roadmap to Convergence

The Institute of Chartered Accountants of India (ICAI) has recently a concept paper
on Convergence with IFRS in India, detailing the strategy for adoption of IFRS in
India with effect from April 1, 2011. The Ministry of Corporate Affairs (MCA) issued
a press release on 22nd January 2010, detailing the roadmap and the plan of
convergence of Indian GAAP to IFRS, confirming the agenda for convergence with
IFRS in India by 2011. It is known that there will be two sets of accounting standards
under Section 211 (3C) of the Companies Act, 1956.

The agenda for convergence is made in a phased manner as below:

Applicable to entities Form

NIFTY Companies

SENSEX Companies Opening Balance Sheet

Companies whose securities are listed outside India as at 1st-April-2011

Entities with Net Worth is more than Rs.1000 Crores [Financial Year 2011-
[Companies (private or public) or other entities – 12]
whether listed or not]
Opening Balance Sheet

Entities with Net Worth is more than Rs.1000 Crores
as at 1st-April-2013
[Companies (private or public) or other entities –
[Financial Year 2013-
whether listed or not]
124]
Opening Balance Sheet

All listed companies as at 1st-April-2014

Specified SME’s* [Financial Year 2014-
15]

* There will be a separate set of IFRS for SME’s.

Separate road map will be notified for Banks and Insurance Companies. However,
there is no clarity yet as to the applicability of IFRS to NBFC’s.

Applicable IFRS’s
There are 8 International Financial Reporting Standards (IFRS) and 29 International
Accounting Standards (IAS) which are collectively called the IFRS in common
parlance.
The list of IFRS is as follows:

1. IFRS 1: First time adoption of IFRS

2. IFRS 2: Share based Payment
3. IFRS 3: Business Combinations
4. IFRS 4: Insurance Contracts
5. IFRS 5: Non-current Assets held for Sale and Discontinued Operations
6. IFRS 6: Exploration for and Evaluation of Mineral Resources
7. IFRS 7: Financial Instruments: Disclosures
8. IFRS 8: Operating Segments

The 29 IAS are:

1. IAS 1: Presentation of Financial Statements.

2. IAS 2: Inventories
3. IAS 7: Cash Flow Statements
4. IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
5. IAS 10: Events after the Balance Sheet Date
6. IAS 11: Construction Contracts
7. IAS 12: Income Taxes
8. IAS 14: Segment Reporting
9. IAS 16: Property, Plant and Equipment
10. IAS 17: Leases
11. IAS 18: Revenue
12. IAS 19: Employee Benefits
13. IAS 20: Accounting for Government Grants and Disclosure of Government
Assistance
14. IAS 21: The Effects of Changes in Foreign Exchange Rates
15. IAS 23: Borrowing Costs
16. IAS 24: Related Party Disclosures
17. IAS 26: Accounting and Reporting by Retirement Benefit Plans
18. IAS 27: Consolidated Financial Statements
19. IAS 28: Investments in Associates
20. IAS 29: Financial Reporting in Hyperinflationary Economies
21. IAS 31: Interests in Joint Ventures
22. IAS 33: Earnings per Share
23. IAS 34: Interim Financial Reporting
24. IAS 36: Impairment of Assets]
25. IAS 37: Provisions, Contingent Liabilities and Contingent Assets
26. IAS 38: Intangible Assets
27. IAS 39: Financial Instruments: Recognition and Measurement
28. IAS 40: Investment Property
29. IAS 41: Agriculture
Impact of Convergence
The age-old nomenclature of Balance Sheet will give way to “Statement of Financial
Position” (SOFP) and the Profit and Loss Account will give way to “Statement of
Comprehensive Income” (SOCI).

The ‘Rule Driven’ Indian GAAP and US GAAP will change to the ‘Principle Driven’
IFRS.

As per the Indian GAAP, the concept is of ‘True and Fair’ presentation of the
financial statements. But in IFRS the concept is whether the accounts are ‘IFRS
compliant’. Henceforth there will not be any qualified audit report or disclaimer of
opinion. Audit report has to state that whether the accounts are IFRS complaint or not.
The gimmicks

However, major impacts are expected in processes and systems, operations, taxation
planning, treasury and forex operations, debt covenants, compensation plans, revenue
contracts, joint ventures and alliances and investor communications.

Conclusion
The roll over to IFRS is time and cost consuming and needs extensive planning and
detailing. Conversion is much more than a technical accounting issue. IFRS adoption
may significantly affect company’s 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.

In the tax planning front, companies need to start identifying the differences that will
arise and consider what the potential tax implications maybe. With the deadline fast
approaching , IFRS conversion should be taken as an opportunity to align the tax
provisioning and reporting processes.

Correct implementation will ensure that IFRS convergence results in tangible benefits,
whereby financial statements prepared using the converged Indian framework are
useful to meet all relevant purposes within and outside India.

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