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IFRS : An Overview

BY:SUMAT SINGHAL

http://www.iasb.org/index.asp

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Section 1 Present Status of Indian Accounting Standard

Section 2 What is IFRS?

Section 3 Convergence to IFRS: Meaning and Proposed Timelines

Section 4 Entities impacted with Convergence

Section 5 Format of IFRS for India

Section 6 Role of ASB in Post Convergence Scenario

Section 7 Benefits and Challenges of Convergence

Section 8 Critical success factors for IFRS conversion projects

Section 9 Categorization of IFRS by ICAI

Section 10 Project Management for IFRS Convergence Project

Section 11

Conclusion

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Present Status of Indian Accounting Standard

Accounting Standards are being issued by the Institute of Chartered Accountants of India (ICAI) in India.

Presently, the Accounting Standards Board (ASB) of the Institute of Chartered accountants of India (ICAI) formulates Accounting Standards(ASs) based on the IFRSs keeping in view the local conditions includinglegal and economic environment, which have recently been notified bythe Central Government under the Companies Act, 1956.

Accordingly, the ASs depart from the corresponding IFRSs to maintainconsistency with legal, regulatory and economic environment, and

keeping in view the level of preparedness of the industry and theaccounting professionals.

In some cases, departures are made on account of conceptualdifferences with the treatments prescribed in the IFRSs.

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ICAI is also revising some of its existing Accounting Standards tobring them at par with the IFRSs. To illustrate:

AS 1, Disclosure of Accounting PoliciesAS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in

Accounting Policies

AS 10, Accounting for Fixed Assets

Some recent ASs, issued by the ICAI, are totally at par with thecorresponding IFRSs, e.g., the Standards on Impairment of Assets andConstruction Contracts .

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COMPLIANCE WITH ACCOUNTING STANDARDS IS ALEGAL REQUIREMENT !!

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**With a view to further enhance the level of convergence with the IFRSs,the ICAI is formulating certain new ASs, examples include:

Financial Instruments: Presentation (corresponding to IAS 32)Financial Instruments: Recognition and Measurement (corresponding to IAS 39)Financial Instruments: Disclosures (corresponding to IFRS 7)Agriculture (corresponding to IAS 41)Insurance Contracts (corresponding to IFRS 4)

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What is IFRS?

IFRS is a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements.

IFRS are generally principles-based standards and seek to avoid a rule-book mentality.Application of IFRS requires exercise of judgment by the preparer and the auditor inapplying principles of accounting on the basis of the economic substance of

transactions.

IFRS are issued by the International Accounting Standards Board.

The term IFRS comprises IFRS issued by IASB; IAS issued by IASC; and Interpretationsissued by the Standing Interpretations Committee (SIC) and the International FinancialReporting Interpretations Committee (IFRIC) of the IASB.

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InternationalFinancial

ReportingInterpretations

Committee (IFRIC)

StandingInterpretationsCommittee (SIC)

International

AccountingStandard (IAS)

InternationalFinancial

reportingStandard (IFRS)

IFRS

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Convergence To IFRS

Adopting international accounting standards in India

IFRSs so adopted would apply only to listed and other public interest entities asdefined (such as banks, insurance companies and large sized entities)

Instead of prescribing exemptions/relaxations in full IFRS or existing Indianaccounting standards, convergence by SMEs in India will be achieved by applying

the proposed IFRS for SMEs (with or without modifications).Around 102 countries permit or require the use of IFRSs by some or all of theirdomestic listed companies or have announced plans to do so

Convergence to IFRS would mean India would join a league of more than 100countries, which have converged with IFRS.

ICAI has recently decided to fully converge with IFRSsfrom accounting periods commencing on or after 1 April2011

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Meaning of Convergence with IFRS

Convergence means to achieve harmony with IFRSs; in precise termsconvergence can be considered to design and maintain national accountingstandards in a way that financial statements prepared in accordance withnational accounting standards draw unreserved statement of compliance withIFRSs, i.e., when the national accounting standards will comply with all therequirements of IFRS.

But convergence doesnt mean that IFRS should be adopted word by word, e.g.,replacing the term true & 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 Relationshipsbetween the IASB and other Accounting Standards- Setters that addingdisclosure requirements or removing optional treatments do not createnoncompliance with IFRSs. But additional disclosures or removing of optionaltreatment should be made clear so that users of the IFRS are aware of thechanges.

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Why Convergence to IFRS?

A single set of accounting standards would enable internationally to standardize

training and assure better quality on a global screen.

It would also permit international capital to flow more freely, enablingcompanies to develop consistent global practices on accounting problems.

It would be beneficial to regulators too, as a complexity associated with needingto understand various reporting regimes would be reduced.

to develop , in the public interest, a single set of high quality, understandable andenforceable global accounting standards that require high quality, transparentand comparable information in financial statements and other financial reportingto help participants in the world's capital markets and other users makeeconomic decisions;

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IFRS Reporting In India: Proposed TimelinesReporting under IFRS, as proposed by ICAI, would be applicable for accounting periodsbeginning on or after April 1,2011.

The first set of IFRS financial statements for the year ending March 31, 2012 would requirepreparation of:

Opening balance sheet as on April 1, 2010Comparative financial statements year ending March 31, 2011

Reporting enterprises would need to ensure preparedness for IFRS reporting as early asApril 2010.

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Which Entities will be covered under Convergence Strategy

Keeping in view the complex nature of IFRSs and the extent of differences between theexisting ASs and the corresponding IFRSs and the reasons therefore, the ICAI is of theview that IFRSs should be adopted for the public interest entities from the accountingperiods beginning on or after 1st April, 2011.

Public Interest

ListedEntities

BankingEntities

InsuranceCompanies

Large SizeEntities

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PublicInterestEntities

a) whose equity or debtsecurities are listed or arein the process of listing on

any stock exchange,whether in India or

outside India; or

d) which has public deposits

and/or borrowingsfrom banks and financialinstitutions in excess of

rupees 25 croreat any time during the

immediately precedingaccounting year; or

e) which is a holding or asubsidiary of an entity

mentioneda) to d) points.

c) whose turnover(excluding other income)exceeds rupees 100 crore

In the immediatelypreceding accounting year;

b) which is a bank (includinga cooperative bank),financial institution,

a mutual fund, oran insurance entity; or

Which Entities are Public Interest Entities

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IFRS for Small and Medium Sized Entities (SMEs)

SMEs need not adopt all the IFRS as it will be too voluminous for them.

A separate standard for SMEs will be formulated based on the IFRS for SMEswhich is still in exposure draft stage.

The proposed standard represents a simplified set of standards for SME's withdisclosure requirements reduced, methods for recognition and measurementsimplified and topics not relevant to SME's eliminated.

IFRS for SMEs will be adopted in toto or with modifications, if necessary.

Compliance with this IFRS for SMEs is not necessary to make India IFRS-compliant.

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Format of IFRS for India

The format of IFRSs to be adopted for public interest entities should be the sameas that of IFRSs, including their numbers.

The numbers of the existing Accounting Standards may be given in brackets forthe purpose of easier identification.

Wherever required, a section may be added at the end of the adopted IFRSindicating the Indian legal and regulatory position.

The IFRSs when adopted will also take into account the International FinancialReporting Interpretations issued by the IFRIC of the IASB.

Only in rare circumstances of public interest a carve out from an IFRS may bemade.

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Role of ASB in Post Convergence Scenario

Endorse the IFRSs inthe form of IFRS-equivalent

Indian Accounting Standardsfor the local regulatory framework with

changes such as removing optionaltreatments and adding disclosurerequirements, where appropriate

Present the Indian AccountingStandards so developed for

approval of National AdvisoryCommittee on AccountingStandards (NACAS) for the

purpose of Governmentnotification

Determine whether eachIFRS meets specified

criteria set out inlocal legislation/regulation

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Benefits of Convergence

Benefits for theIndustry

Single Reporting Increase Comparability Access to GlobalCapital Markets

Benefits forInvestors

IFRS balance sheet will becloser to economic value

Benefits to theaccounting professional

Improvement infinancial reporting

Convergence with IFRSeliminates multiple reportingsuch as Indian GAAP, IFRS, USGAAP

Convergence to IFRS willincrease the opportunities forIndian professionals in abroadas they will be able to selltheir services as experts indifferent parts of the world

Historical cost will be substitutedby fair values for several balancesheet items, which will enable acorporate to know its true worth

IFRS will give more comparabilityamong sectors, countries andcompanies.

This will result in more transparentfinancial reporting of a companysactivities which will benefit

investors, customers and other keystakeholders in India and overseas

Convergence with IFRS willenable Indian entities to haveeasier access to global capitalmarkets and eliminates barriersto cross-border listings.

It encourages international

investing and thereby leads tomore foreign capital flows to thecountry.

Financial statementsprepared using a common setof accounting standards helpinvestors better understandinvestment opportunities asopposed to financial

statements prepared using adifferent set of nationalaccounting standards

Currently companies need toprepare additional financialstatements based on multiplereporting formats to arisecapital in global market.

Convergence with IFRS willeliminate the requirement fordual set of financialsstatements and therebyreduces the cost of raisingfunds by the companies

Better quality of financialreporting due to consistentapplication of accountingprinciples and improvement inreliability of financial statements.

This, in turn, will lead toincreased trust and relianceplaced by investors, analysts andother stakeholders in acompanys financial statements

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Challenges of ConvergenceChange to regulatoryenvironment Lack of Preparedness

EducatingStakeholders

Impact on financialperformance

Complexity in thefinancial reportingprocess

For the success of convergence inIndia, certain regulatory amendment isrequired.

For example, The Companies Act(Schedule VI) prescribes the format forpresentation of financial statements forIndian companies, whereas thepresentation requirements aresignificantly different under IFRS. So, thecompanies act needs to be amended inline with IFRS.

Under IFRS, companieswould need toincreasingly use fair valuemeasures in thepreparation of financialstatements. Companies,auditors, users andregulators would need toget familiar with fairvalue measurement

techniques

Adoption of IFRS byapproximately 5000 listedcompanies by 2011 would resultin a significant demand for IFRSresources. Corporate India andaccounting professionals need tobe trained for effective migrationto IFRS. Additionally auditorswould need to train their staff toaudit under IFRS environment

Educating Stakeholderscomprising of investors,lenders, employees,auditors, audit committeeand etc would be a bigchallenge as this wouldrequire a considerable timeand effort

Due to the significantdifferences between IndianGAAP and IFRS, adoption of IFRS is likely to have asignificant impact on thefinancial position andfinancial performance of most Indian companies

Communication of Impactof IFRS to investors

Companies also need tocommunicate the impact of IFRS convergence to theirinvestors to ensure theyunderstand the shift fromIndian GAAP to IFRS.

Significant one-time costsof converting to IFRS(including costs of internalpersonnel time, adapting ITsystems, implementingrevised reporting policies

and processes, trainingpersonnel and educatinginvestors, analysts andmembers of the board)

Significant cost

Conceptualdifferences

For example, the Indianstandard on intangibles isbased on the concept that allintangible assets have adefinite life, which cannotgenerally exceed 10 years;while IFRS acknowledge thatcertain intangible assets mayhave indefinite lives and usefullives in excess of 10 years arenot unusual

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Legal and/ or regulatory framework To illustrate:As per IAS 32, Financial Instruments: Presentation , preference

shares that provide for mandatory redemption by theissuer are considered as liability, based on the substance,

whereas as per the Companies Act, 1956, these are a partof equity.

IAS 27, Consolidated and Separate Financial Statements ,defines the terms control in a manner which is different

from that followed in the definitions of the holding andsubsidiary companies under section 4 of the CompaniesAct, 1956.

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Critical success factors for IFRSconversion projects

Leadership

Communication

Resources

Knowledge Project Management

Time

Strategy

Critical SuccessFactors

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Categorization of IFRS by ICAIICAI has categorize the IFRS in five categories based on the extent of changes or the extent

of support required from the regulatory authorities:

Categories of IFRS

Category I Category II Category III Category VCategory IV

Category I A Category I B Category III A Category III B

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Category I IFRS

IAS 11, Construction Contracts

IAS 23, Borrowing Costs

Category I A

IFRSs which do not have any differenceswith the corresponding Indian

Accounting Standards

IAS 2 Inventories

IAS 7,Cash Flow Statements

IAS 20, Accounting for GovernmentGrants and Disclosure of GovernmentAssistance

IAS 33, Earnings Per Share

IAS 36, Impairment of Assets

IAS 38, Intangible Assets

Category I B

IFRS which has certain minordifferences with the corresponding

Indian Accounting Standards

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Category II IFRS

Category II: IFRSs which mayrequire some time to reach a

level of technical preparedness bythe industry and professionals

keeping in view the existingeconomic environment and other

factors

IAS 18, Revenue

IAS 21,The Effects of Changes in Foreign

Exchange Rates

IAS 26, Accounting andReporting by

Retirement BenefitPlans

IFRS 5, Non-current AssetsHeld for Sale and

Discontinued Operations(Corresponding IndianAccounting Standard is

under preparation)

IFRS 2, Share-basedPayment

(Corresponding IndianAccounting Standard is

under preparation)

IAS 40, Investment

Property(Corresponding IndianAccounting Standard is

under preparation)

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Category III IFRS

IAS 17,Leases

IAS 19, Employee Benefits

IAS 27,Consolidated and SeparateFinancial Statements

IAS 28, Investments in Associates

IAS 31, Interests in Joint Ventures

IAS 37, Provisions, ContingentLiabilities and Contingent Assets

Category III A

IFRSs having conceptual differences withthe corresponding Indian AccountingStandards that should be taken up with theIASB

IAS 12, Income Taxes

IAS 24, Related Party Disclosures

IAS 41, Agriculture (CorrespondingIndian Accounting Standard is underpreparation)

IFRS 3, Business Combinations

IFRS 6, Exploration for and Evaluationof Mineral Resources

IFRS 8, Operating Segments

Category III B

IFRSs having conceptual differences with thecorresponding Indian Accounting Standardsthat need to be examined to determinewhether these should be taken up with theIASB or should be removed by the ICAI itself

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Category IV and V IFRS

IAS 1, Presentation of Financial Statements IAS 8, Accounting Policies, Changes in

Accounting Estimates and Errors IAS 10, Events After the Balance Sheet Date IAS 16, Property, Plant and Equipment IAS 32, Financial Instruments: Presentation

(Exposure Draft of the Corresponding IndianAccounting Standard has been issued)

IAS 34, Interim Financial Reporting IAS 39, Financial Instruments: Recognition

and Measurement (Exposure Draft of theCorresponding Indian Accounting Standardhas been issued)

IFRS 1, First-time Adoption of InternationalFinancial Reporting Standards

IFRS 4, Insurance Contracts IFRS 7, Financial Instruments: Disclosures

Category IV

IFRSs, the adoption of which would requirechanges in laws/regulationsbecause compliance with such IFRSs is notpossible until the regulations/laws areamended.

IAS 29, Financial Reporting in Hyper-

inflationary Economies

Category V

IFRSs corresponding to which no IndianAccounting Standard is required for the timebeing.

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Which way of Adoption of IFRS is preferred: stage wise on the basis of category of IFRS or all at once from a specified future date

The ICAI examined whether a stage-wise approach to convergence should befollowed whereby certain IFRS are adopted immediately (Category I) and certainother IFRS are adopted within a short period of time, say two years (Category IIand III) and the balance standards are adopted only when the laws andregulation are changed.

However, the ICAI concluded that such a stage-wise approach may result inseveral application complexities because many accounting standards are inter-related. So, considering the challenges to transition, the ICAI has opted for anapproach whereby all IFRS should be adopted for the defined entities foraccounting periods commencing on or after April 1, 2011.

The ICAI believes that this transition period till April 1, 2011 will enable all

participants in the financial reporting process to help in building the environmentsupporting the adoption of IFRS.

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Project Management for IFRS Convergence Project

Complex tasks are easier when divided into manageable pieces and it is true forIFRS convergence project also. Project can be broken down into three key

phases.

10. Prepare an opening IFRSbalance sheet at the date of transition to IFRS

11 Explain the impact of transitionfrom previous GAAP to IFRS asrequired by IFRS 1

12 Apply IFRS as business as usual.

5 Redevelop reporting manual i.e., developIFRS accounting manual modifying chartof accounts and containing detailedinstructions.

6 Measure the impact of the differencesidentified on the latest financialprepared under Indian GAAP.

7 Apply latest version of IFRS consistently8 Apply IFRS 1 which deals with first-time

adoption of IFRS.9 Identify permitted exemptions from

specified IFRS as per IFRS 1.

1. Identify the key dates and the dateof transition to IFRS

2 Develop an IFRS training plan foraccounting and finance personnel.

3 Identify differences in the relevantaccounting policies.

4 Identify gaps in systems andprocesses to gather informationneeded under IFRS and the currentlyavailable information.

Assess

Design

Implement

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Conclusion

Benefits derived from convergence are lot but also the challenges. The success of theconvergence to IFRS in India will depend on cooperation from government, regulators andtax departments.

Ultimately, it is imperative for Indian entities to improve their preparedness for IFRSadoption and get the conversion process right. Given the current market conditions, anyrestatement of results due to errors in the conversion process would be detrimental to the

company involved and would severely damage investor confidence in the financial system.

The transition to IFRS is likely to be challenging for corporate India. However, if thetransitioned is planned and managed successfully, it will generally be positive for financialreporting in India. This will improve the quality and transparency of the financial reportingprocess and further align corporate India to the global economy and the global capitalmarkets.

There is an urgent need to address these challenges and work towards full adoption of IFRSin India. The most significant need is to build adequate IFRS skills and an expansiveknowledge base amongst Indian accounting professionals to manage the conversionprojects for Indian entities . This can be done by leveraging the knowledge and experiencegained from IFRS conversion in other countries and incorporating IFRS into the curriculumfor professional accounting courses.

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Thank you