CHAPTER-1

INTRODUCTI

ON1

1-INTRODUCTION:

Global accounting standards have been one of the main focuses of attention in the accounting

community since the 1970s. At the present time, over one hundred countries have adopted or

plan to adopt the International Financial Reporting Standards (IFRS) for listed companies. The

International Accounting Standards Board’s (IASB) stated goal is to achieve “harmonization”

and “convergence” of accounting rules. However, it is well known that financial reporting

outcomes are determined by the interaction between accounting standards, preparers’ incentives,

regulation, enforcement, and other institutional features of the economy. In addition, it is

difficult to infer from voluntary IFRS adoption studies the implications of mandatory IFRS

adoption. Therefore, it is difficult to state with confidence that mandatory IFRS adoption is

optimal and leads to improved financial reporting quality.

In an increasingly interconnected global economy, many market participants

are considering the question of whether it is possible or desirable to move toward a more uniform

global “language” for financial reporting. The proponents of this idea argue that a uniform set of

global accounting standards, supported by strong governance, independent standard-setting and a

sound regulatory framework, could benefit investors and businesses alike. Others suggest that

trying to establish a uniform set of global standards would run the risk of overlooking the unique

economic, political, cultural, legal and regulatory realities that exist in different nations and

regions. Over the past decade, this global discussion has intensified. In 2001, the International

Accounting Standards Board (IASB) adopted the first International Financial Reporting

Standards (IFRS) to serve as a possible pathway for establishing uniform global accounting

standards. Since then, IFRS has been adopted or become accepted in over 100 countries. Over

this same period, the Financial Accounting Standards Board (FASB) and the IASB have begun

an effort to converge IFRS and the Generally Accepted Accounting Principles in the United

States (US GAAP), essentially working to make the two sets of accounting standards

increasingly similar to each other. More recently, some market participants have raised the

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possibility of transitioning entirely from US GAAP to IFRS for public company financial

reporting in the United States. In the coming years, critical decisions will need to be made

regarding the use of global accounting standards in the United States. Market participants will be

called upon to determine whether achieving a uniform set of high-quality global accounting

standards is feasible, what sort of investments would be required to achieve that outcome, and

whether it is a desirable goal in the first place. This dialogue will be critical to the future of

financial reporting and of fundamental importance to the long-term strength and stability of the

global capital markets.

Convergence with IFRS has gained momentum in recent years all over the

World. 110+ countries including European Union, Australia, China, New Zealand, and Russia

currently require or permit the use of IFRS. Apart from India, countries like Japan, Sri Lanka,

Canada and Korea have also committed to adopt IFRS from 2011. United States of America has

announced its intention to adopt IFRS from 2014 and it also permits foreign private filers in the

U.S. Stock Exchanges to file IFRS complied Financial Statement, without requiring the

presentation of reconciliation statement.

In this scenario of globalization, India cannot insulate itself from the developments taking

place worldwide. In India, so far as the ICAI is concerned, its aim has always been to comply

with the IFRS to the extent possible with the objective to formulate sound financial reporting

standards. The ICAI, being a member of the International Federation of Accountants (IFAC),

considers the IFRS and tries to integrate them, to the extent possible, in the light of the laws,

customs, practices and business environment prevailing in India. The Preface to the Statements

of Accounting Standards, issued by the ICAI, categorically recognizes the same. Now, as the

world globalizes, it has become imperative for India also to make a formal strategy for

convergence with IFRS with the objective to harmonize with globally accepted accounting

standards.

In the present era of globalization and liberalization, the World has become an economic

village. The globalization of the business world and the attendant structures and the regulations,

which support it, as well as the development of e-commerce make it imperative to have a single

globally accepted financial reporting system. A number of multinational companies are

establishing their businesses in various countries with emerging economies and vice versa.

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The use of different accounting frameworks in different countries, which

require inconsistent treatment and presentation of the same underlying economic transactions,

creates confusion for users of financial statements. This confusion leads to inefficiency in capital

markets across the world. Therefore, increasing complexity of business transactions and

globalization of capital markets call for a single set of high quality accounting standards. High

standards of financial reporting underpin the trust investors place in financial and non-financial

information. Thus, the case for a single set of globally accepted accounting standards has

prompted many countries to pursue convergence of national accounting standards with IFRS.

The ICAI as the accounting standard - setting body in the country has always made efforts to

formulate high quality Accounting Standards and has been successful in doing so. Indian

Accounting Standards have withstood the test of time. As the world continues to globalize,

discussion on convergence of national accounting standards with International Financial

Reporting Standards (IFRS) has increased significantly.

1.2-LITERATURE REVIEW:

IFRS have been recently developed due to expansion of boundaries of business and few

researcher conducted study on this issue. There is so many studies have been conducted in

outside India because of non-adoption of IFRS by the Indian organizations and also due to

continuous extension of convergence in India. However, ICAI recently announced to compliance

with IFRS by Indian organization since 2013. The following is a summary of research studies at

international context under different part of section viz.

Katarina Struharova, Karle steker, Milana Otrusinova (2011). In this paper they discuss what

the shift to IFRS mean for Czech companies and what is the impact of possible adoption or

convergence plans on Czech companies.

Dr. Naseem Ahmad and Professor Nawab Ali Khan (2010), define that all major economies

have established time lines to converge with or adopt IFRSs in the near future.

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Amanda Paul and Eddy Burks (2009), provide a history of IFRS and discuss the timeline

of convergence, along with advantages and disadvantages. This paper will also address

the future impact on accounting education

George Iatridis(2010), This study investigates the impact of the implementation of the

International Financial Reporting Standards (IFRSs) on key financial measures of UK firms

and the volatility effects of IFRS adoption. The findings show that IFRS implementation has

favorably affected the financial performance (e.g. profitability and growth potential) of firms.

The study also demonstrates that following the fair value orientation of IFRSs the transition

to IFRSs appears to introduce volatility in income statement figures.

Ramona Dzinkowski(2007), “ this study provide the information that On March 6, the US

Securities and Exchange Commission (SEC) held a round table on the roadmap to IFRS

convergence. According to the panel of about 20 experts, not only was the general consensus a

resounding "yes", but reconciliation to US GAAP is looked upon as a mostly futile and

expensive exercise. Most investors both in and out of the US are not relying on the reconciliation

to US GAAP to make investment decisions; they use the IFRS or local country GAAP. If the

SEC takes the recommendations resulting from this forum, in the very near future people can

expect the reconciliation requirement to be dropped, potentially before 2009. In the interim it

will be thinking very carefully about whether it should give US firms the opportunity to file

under the IFRS should they wish to, or mandate that as of a certain date, US firms must be filing

under the IFRS.

1.3-IMPORTANCE OF THE STUDY:

There are many accounting standards in the world, with each country using a version of their

own generally accepted accounting principles, also known as GAAP. These allow firms to report

their financial statements in accordance to the GAAP that applies to them. The complication lies

within whether the firm does business in multiple countries. How can investors then deal with

multiple standards, which ones are accurate, and how can corporations be compared based upon

their financials? The answer to these questions lies within the adoption of the International

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Financial Reporting Standards, or IFRS, which is being developed and supported by the

International Accounting Standards Board (IASB).

With more and more countries adopting the IFRS as their accounting standard, over 120 as of

April 2011, investors and analysts should be well advised on how this transition affects

company's reporting, and what it means moving forward. To do this, this study will look at the

background of IFRS, the benefits, its goals, the fundamental differences between IFRS and U.S.

GAAP &IAS, convergence of IFRS & its impact, challenges etc.

The past few decades have seen the advent of globalization whereby many entities have and

are expanding or making significant acquisitions in the global arena, for which huge capital is

required. One of the key challenges that faced by all such entities is the compliance requirements

imposed by various stock exchanges across the world for financial information. Today majority

of stock exchanges across the world will accept or require financial statements to be prepared

under IFRS. India being one of the key global players, migration to IFRS will enable Indian

entities to have access to international capital markets.

1.4-OBJECTIVE OF THE STUDY:

To Make a brief analysis of International Financial Reporting Standard ( IFRS )

To Examine the Convergence of International Financial Reporting Standard ( IFRS)

To establish the difference between the Indian accounting standards & International

accounting standard.

To make a case study of Wipro Ltd under Indian GAAP and IFRS to determine their

implications and impacts on financial statement

1.5-RESEARCH METHODOLOGY:

1.5.1-Scope of the study- scope is limited to an analysis of the convergence of IFRS

in Indian scenario taking the case study of Wipro.

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1.5.2-Sources of data- Data are collected from the secondary sources such as

Published sources & unpublished sources. Published sources are Newspaper & Magazines,

research scholars, Government publications etc. Un-published sources are un-published material

found with research scholars and Referring various website.

1.5.3-Time frame: the study covers a period of 4 years.

1.5.4-Statistical tools: Table and bar graph have been used for the purpose of the study.

1.6-LIMITATION OF THE STUDY:

The project is subjected to limitation of inherent nature of secondary source of data that is

authenticity and accuracy.

1.7-CHAPTER PLAN:

CHAPTER-1: Chapter 1 is the introduction part. It includes literature review, importance of

the study, objective of the study, scope of the study, sources of data collection, time frame, and

limitation of the project and chapter plan.

CHAPTER-2: Chapter 2 deals with conceptual framework of IFRS. It includes background

of IFRS, objective of IFRS, importance of IFRS, scope of IFRS, requirement of IFRS.

CHAPTER-3: Chapter 3 is all about convergence of IFRS and its impact. It covers need for

global convergence with IFRS, challenges in the way of global convergence, benefits of

convergence with IFRS, major areas impacted by convergence with IFRS.

CHAPTER-4: Chapter 4 deals with comparative analysis of IFRS and IND AS.

CHAPTER-5: Chapter 5 is all about adoption of IFRS in Indian companies. The financial

data of WIPRO ltd was taken into consideration and how the company reports its financial

figures by using both IFRS and Indian GAAP which is clearly mention.

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CHAPTER-6: It is the conclusion part. This chapter include summary of the project, findings

and suggestion.

CHAPTER-2

IFRS-

CONCEPTUAL

FRAMEWORK

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2.1-INTRODUCTION OF IFRS:

International Financial Reporting Standards (IFRS) are designed as a common global

language for business affairs so that company accounts are understandable and comparable

across international boundaries. They are a consequence of growing international shareholding

and trade and are particularly important for companies that have dealings in several countries.

They are progressively replacing the many different national accounting standards. The rules to

be followed by accountants to maintain books of accounts which are comparable,

understandable, reliable and relevant as per the users internal or external.

2.2- BACKGROUND OF IFRS:

IFRS are the principle based standards issued by international accounting standard board

(IASB) and establish board rules as well as dictating specific treatments. A set of international

accounting standards stating how particular types of transactions and other events should be

reported in financial statements. Many of the standards forming part of IFRS are known by the

Board of the International accounting Standards Committee (IASC).On 1 April 2001; the new

Board adopted existing IAS and SICs. The IASB has continued to develop standards calling the

new standards IFRS.

Accounting standards issued by the IASB (International accounting standard board) are

known as International Accounting standards. Companies that are locally listed, as well as those

that are not under obligation to use their financial statements in the countries that have accepted

those standards.

2.3-OBJECTIVE OF IFRS:

The objective behind the IFRS is to create a common platform for better

understanding of accounting internationally.

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By adopting IFRS, a business can present its financial statements on the same

basis as its foreign competitors, so that it is very easier for comparisons.

To bring about convergence of national accounting standards and international

accounting standards and IFRS to high quality solution.

To take account of, as appropriate, the special needs of small and medium sized entities

and emerging economies.

2.4-IMPORTANCE OF IFRS:

A single set of accounting standards would enable internationally to standardize training and

assure better quality on a global screen, it would be also permit international capital to flow more

freely, enabling companies to develop consistent global practices on accounting problems. It

would be beneficial to regulators too. As a complexity associated with needing to understand

various reporting regions would be reduced.

2.5-SCOPE OF IFRS:

IASB standards are known as International financial Reporting standards (IFRS).

All International Accounting Standards (IAS’S) and Interpretations issued by the former

IASC & SIC continue to be applicable unless and until they are amended or withdrawn.

IFRS’S apply for the purpose of preparing financial statements and other financial

Reporting by profit oriented entities, those engaged in commercial, industrial and

financial activities.

IFRS is appropriate for all entities. Other than profit oriented business entities.

Here the financial statements are intended to meet the common needs of shareholders,

creditors, employees. As well as provide information regarding financial position,

performance and cash flows of business entity.

Other financial reporting includes information provided outside financial statements that

assist in the interpretation of a complete set of financial statements or improves user’s

ability to make efficient economic decision.

IFRS apply to individual company and consolidated financial statements.

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A complete set of financial statements include a balance sheet, an income statements, a cash

flow statement, a statement showing either all changes in equity or changes in equity other than

those arising from investments and distributions to owners, a summer of accounting policies and

explanatory notes.

2.6- REQUIREMENTS OF IFRS:

IFRS financial statement consist of (IASI 8)

A statement of financial position.

A statement of Comprehensive income or two separate statements comprising an income

statement and separately a statement of Comprehensive income, which reconcile profit

and loss on the income statement to total comprehensive income reconcile profit or loss

on the income statement to total comprehensive income

A statement of changes in equity(SOCE)

A cash flow statement or statement of cash flow

Notes, including a summary of the significant accounting policies

Comparative information is required for the prior period (IAS1.36). 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 (IFRS-7).

On 6 September 2007, issued a revised IAS 1 Preparation of financial Statements, the main

changes from the previous version are to require that an equity entity must:

Present all non-owner changes inequity that is comprehensive income either in one

statement or in two statements a separate income statement and a statement of

comprehensive income).components of comprehensive income may not be presented in

the statement of changes inequity.

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 the

new standard.

Present statement of cash flow.

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Make necessary disclosure by the way of a note.

The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009.

Early adoption is permitted.

2.7-STRUCTURE OF IFRS:

IFRS are considered a “principle based” set of standards in that establish broad rules as well

As dictating specific treatments.

International Financial Reporting Standards comprises:

International Financial reporting Standards (IFRS)—standards issued after 2001

International accounting standards (IAS) –standards issued before 2001

Interpretation originated from the international financial reporting Interpretations

committee (IFRIC)—issued after 2001

Standard Interpretation Committee (SIC)—issued before 2001.

Conceptual Framework for the preparations and presentation of financial statements

(2010)

2.8: BENEFITS OF IFRS:

By adopting IFRS, you would be adopting a "global financial reporting" basis that will

enable your company to be understood in a global marketplace. This helps in accessing

world capital markets and promoting new business. It allows your company to be

perceived as an international player.

A consistent financial reporting basis would allow a multinational company to apply

common accounting standards with its subsidiaries worldwide, which would improve

internal communications, quality of reporting and group decision-making.

In increasingly competitive markets, IFRS allows a company to benchmark itself against

its peers throughout the world, and allows investors and others to compare the company's

performance with competitors globally.

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2.9- DRAWBACK OF IFRS:

IFRS are international accounting standards developed by the International Accounting

Standards Board (IASB). The IASB is an independent international organization working to

improve and standardize the preparation and release of important international financial

information. With the increase of companies conducting business in a global environment, the

international financial reporting standards framework was developed to ensure standardized

accounting principle for companies with domestic and international business operations. United

States (U.S.) companies are still required to use generally accepted accounting principles

(GAAP), although they can report their global financial information under the international

framework as well.

The IASB is the international equivalent of the U.S. financial accounting Standards Board

(FASB). The IASB is a private, nonprofit organization responsible for assessing the financial

needs of the global business environment and developing accounting standards that meet the

needs of bankers, investors and other stakeholders. The IASB has 15 board members that help

guide and direct the organization on which international accounting situations should be

addressed through international financial reporting standards. The IASB creates the standards

using two basic assumptions: accrual basis and going concern. The accrual basis requires

companies to record transactions as they occur; a going concern means the entity will continue

into the foreseeable future. International financial reporting standards are created using a due

process that was developed and is monitored by the IASB. When developing new standards, the

IASB considers the relevance of information released to users, determines whether a current

guideline exists for the specific accounting information, assesses the possibility of creating a

quality accounting standard and identifies constraints that might exist. This process may be time

consuming since the IASB must consider all the countries that use international financial

reporting standards for reporting accounting information. The IASB usually allows individuals in

the international accounting community to provide input and comments during the due process

phase. This review and comment process allows the IASB to modify potential accounting rules

prior to releasing them as official reporting standards.

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The IASB and FASB have been working on a convergence process to create a universal,

global set of accounting principles. This convergence process is attempting to merge the

international financial reporting standards and GAAP to create one set of accounting principles

companies can use when reporting financial information. While most U.S. companies must use

GAAP for reporting financial accounting information domestically, foreign countries are

commonly adopting international financial reporting standards for their standard accounting

principles overall. These dual accounting principle guidelines mean U.S. companies must spend

more time developing international financial statements and translating financial information to

meet the specific needs of domestic and international users of financial information.

2.10-IFRS ADOPTED AS GLOBAL STANDARDS:

The use of IFRS as a universal financial reporting language is gaining momentum across the

world. Every major nation is moving towards adopting IFRS to some extents. Large number of

authorities requires public companies to use IFRS for stock-exchange listing purposes, and in

addition, banks, insurance companies and stock-exchange may be using them for their statutorily

required reports. Therefore over the next few years, thousands of companies will adopt the

international standards. The increased use of IFRS is not limited to public company listing

requirements or statutory reporting. Many regulatory and government bodies are looking to IFRS

to fulfill local financial reporting obligations related to financing or licensing.

IFRS are used in many parts of the world, including the European Union, Australia, South

Africa and Russia. More than 100 countries have required or permitted the use of IFRS since

2001 and the number is expected to increases to 150 by 2015. The group of 20 leader countries

(G20) reaffirmed their commitment to global convergence in accounting standards in September

2009 in a meeting held a Pittsburgh (United States), calling on ‘international accounting bodies

to redouble their efforts to achieve a single set of high-quality, global accounting standards

within the context of their independent standard setting process and complete their convergence

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project by June 2011’. Some of the major countries that are seeking to converge with IFRS by

2011 include Canada, Korea, India, and Brazil.

The task of facilitating the movements towards increasing comparability and harmonizing

world-wide was taken by International Accounting Standards Committee (IASC) [presently

known as International Accounting Standards Boards (IASB)], an independent body that was

formed in 1973 by professional accounting bodies in the United States and eight other

industrialized countries. The goal of IASC Foundation and the IASB is to develop, in the public

interest, a single set of high-quality global accounting standards. In pursuit of this goal, the IASB

works in the close corporation with stakeholders around the world, Including investors, national

standard-setters, regulators, auditors, intellectuals and others who have an interest in the

development of global standards. Between 1973 and 2001, the International Accounting

Standards Committee (IASC) released International Accounting Standards. The IASC

restructured its organization in years 1997 to 1999, which resulted in the formation of IASB.

Subsequently, IASB published its standards in a new series of pronouncements called

International Financial Reporting Standards (IFRS).

2.11-IFRS ROADMAP FOR INDIAN COMPANIES:

A meeting of core group constituted by the Ministry of corporate affairs for convergence of

Indian accounting standards with International Financial Reporting Standards (IFRS) was held

on 11th January, 2010. The meeting was attended by various officials from the Institute of

Chartered Accountants of India, Ministry of Finance, Securities and Exchange Board of India

(SEBI), Insurance Regulatory and Development Authority (IRDA), Reserve Bank of India

(RBI), Comptroller and Auditor General (C&AG), Pension Fund Regulatory and Development

Authority (PERDA), Industry representatives and other experts. The core group discussed the

report submitted by the Sub-Group headed by Mr. Malegam to finalize the roadmap for

achieving convergence of Indian Accounting standards with IFRS by April, 2011. The

amendment required in the companies Act, 1956, the related Schedules-VI and XIV and

Accounting Standards Rules for the purpose of Convergence were also discussed. There were

detailed deliberations on the implementation challenges especially those related to legal and

accounting framework and transitional issues.

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2.11.1-TWO SEPARATE SET OF ACCOUNTING STANDARDS:

The core Group decided that there will be two separate sets of Accounting Standards under

Section 211(3C) of the companies Act, 1956, which are as follows:

Indian Accounting Standards converged with the IFRS

These are the standards which are being converged by eliminating the differences of the

Indian Accounting Standards vis-à-vis IFRS. These standards shall apply by all the companies

falling under the phase I to phase III.

Indian Accounting Standard notified in the companies (Accounting Standards) Rules,

2006

These are the standards used, at present, by Indian Companies under the Companies Act,

1956. Companies not falling within the threshold limits prescribed for IFRS compliance in the

respective phases shall continue to use these standards in the preparation and presentation of

financial statements.

CONCLUSION:

In this chapter it is tried to explain, detail background of International Financial

Reporting Standard & its scope & objective and its benefits to an organization. The Ministry

of Corporate Affairs had issued a press release setting different phase for adoption of IFRS.

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CHAPTER-3

CONVERGENCE

OF IFRS & ITS

IMPACT

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Accounting is the language of business, but every country has its own language which is

called generally accepted Accounting Principles (GAAP). Accounting standards would yield

financial statements that could be effortlessly interpreted by any user around the world.

However, different countries have local accounting standards or principles which spell out the

accounting treatment and disclosure requirements for preparing the financial statement. These

standards may have different accounting treatment for the same type of transaction in two

different countries. This makes difficult for the end user to understand the financial statements

for taking any economic decisions unless these are prepared based on uniform accounting

standard. Converging of domestic Accounting standard with IFRS will bring almost the entire

world on one single uniform accounting platform with good number of attendant benefits to large

number of entities for doing global business. Moving from Indian Accounting standard to IFRS

is not merely changing from one set of accounting policies to another but involves a number of

business implications. Basically there will be major change in the profitability and the way in

which business management is looked at by various stakeholders and calculation of various

leveraging ratios due to the convergence to IFRS. This chapter throws lights on need for global

convergence with IFRS, present status of its implementation, its impact on discloser

requirements and advantages in the Indian scenario.

3.1-NEED FOR GLOBAL CONVERGENCE WITH IFRS:

In general term, ‘convergence ‘means to achieve harmony in relation to IFRS; in precise

terms, convergence can be considered “to design and maintain national accounting standards in a

way that financial statements prepared in accordance with national accounting standards draw

unreserved statement of compliance with IFRS”.

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International analysts and investors would like to compare the financial statements based on

similarity accounting standards, and this has led to growing support for an International accepted

set of accounting standards for cross-border filling. A strong need was felt by legislation to bring

about uniformity, comparability, transparency and adaptability in financial statements. Having

multiplicity of accounting standards around the world is against the public interest. It creates

confusion, encourages error and facilitates fraud. The cure for these ills is to have a single set of

high quality global standards. The goal of the IFRS is to create single set of accounting standard

so that can be applied anywhere in the world, allowing investors to compare the performance of

business entities across geographic boundaries.

The harmonization of financial reporting around the world will help to raise confidence of

investors in the information they are used to make their financial decision. If accounting for same

events and information produces divergent reported financial statements due to adoption of

different set of accounting standards, then it is self evident that accounting will be increasing

discredited in the eyes of users of the financial statements. Also for the companies with multiple

listing in both domestic and foreign country, the convergence is very much essential.

3.2-CHALLENGES IN THE WAY OF GLOBAL CONVERGENCE:

IFRS poses a great challenge to the drafters of financial statements and auditors. There is an

urgent need to understand the complexities in IFRS implementation. Cultural, legal and political

obstacles may exist in the convergence path. With the assistance of the appropriate authorities,

these intricacies can be minimized. Legislators, regulators and standard-setting bodies need to

aware of the technical faults in the current convergence process and, where appropriate, they

should taken action to ensure reasonable progress. Reconciliation and restatement of financial

statements is costly, not only in the monetary terms but also in terms of resources. There are

disagreements in some countries with the requirements of certain specific IFRS. The complicated

nature of some IFRS is perceived as a barrier to convergence in many countries. All entities will

have to consider their own road map and gear up for complying with IFRS differences.

Convergence to IFRS will be quite challenging and entities should ensure that their convergence

plans are designed in a phased manner.

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The emergence of transnational corporations in search of money, not only for stimulating the

growth, but to maintain on-going activities has demanded flow of capital from all parts of the

globe. This has bought a million of new investors into the capital markets whose interests are not

constrained by national boundaries.

Each country has its own set of rule, regulations and reporting standards. When an entity

decides to raise the capital from the markets other than the country in which it is located, the

rules and regulation of other country will apply. This will require that the enterprise is in a

position to understand the differences between the rules governing financial reporting in the

foreign country as compared to own country. Translation and reinstatements of financial

statements are of extreme importance in a rapidly globalizing world.

3.3-BENEFITS OF CONVERGENCE WITH IFRS:

Improved access to international capital markets

Access to low-cost foreign funds

Elimination of multiple reporting costs

Opportunities for professionals

Easier comparability with global peers

3.4-MAJOR AREAS IMPACTED BY CONVERGENCE WITH IFRS:

Converging with IFRS will bring almost the entire world on one single uniform

accounting platform with good number of attendant benefits to large number of entities for

doing global business. Moving from Indian GAAP to IFRS is not merely changing from one

set of accounting policies to another. It is much more, since it not only has significant

accounting consequences but also has reaching business implications. Some of the major

areas impacted due to convergence with IFRS will be:

Business Combination

Group Accounts

Fixed Assets and Investment Property

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Presentation of Financial Statements

Experts are of the opinion that there will be major impact on the profitability and the way in

which business management is looked at by various stakeholders due to the convergence to

IFRS. Also it is expected that there will be deviation in the way major leveraged ratios are

calculated after the convergence with IFRS. The following areas, where significant accounting

changes are anticipated are discussed below:

3.4.1 BUSINESS COMBINATION:

In case of amalgamation of business in the nature of merger or in the nature of purchase,

subsidiaries, associates and joint venture, assets are valued at their carrying cost or by following

interest pooling method if certain number of conditions are fulfilled. Contingent liabilities of the

acquire companies are not counted as liabilities under Indian GAAP. However as per IFRS-

3(Revised), all assets taken over are to be incorporated in the books at fair value including

contingent liabilities and intangible assets. Similarly, there is difference in treatment of

amortization of goodwill reserve acquisition which is not considered under Indian GAAP and

also in many areas of business combination.

3.4.2-GROUP ACCOUNTS:

There are many key differences with regard to the accounting for Group Accounts under

IFRS. Under IAS- 27(Revised), consolidated and separate Financial Statements, the preparation

of group accounts is mandatory, subject to a few exemptions, whereas, preparation of

consolidated financial statements (CFS) is required only for listed entities under Indian GAAP.

Also, the application of equity method or proportionate consolidation to associates /Joint-

ventures is mandatory under IAS-27(Revised) whereas preparation of financial statements (CFS)

is required only for listed entities under Indian GAAP. The application of equity method or

proportionate consolidation to associates/ joint-ventures is mandatory, subject to a few

exceptions even if an entity does not have any subsidiaries as per IAS-27(Revised). Under Indian

GAAP, application of the equity method or proportionate consolidation is required only when the

entity has subsidiaries and prepares CFS. Under IAS-27(Revised), consolidation is required for

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all subsidiaries, whereas, there are two exemptions from consolidation provided under Indian

GAAP. Potential voting rights, which are currently exercisable, are considered for determination

of control under IFRS; Indian GAAP is silent on whether potential voting rights are to be

considered for control. However, under AS-23, potential voting rights are not considered for

determining significant influence in the case of and associate. Thus, an analogy can be drawn in

the case of a subsidiary as well. Both, IFRS and Indian GAAP require use of uniform accounting

policies for preparation of CFS. However, Indian GAAP provides an exemption on the grounds

of impractically.

IFRS allows a 3 months’ time gap between financial statements of a parent or investor and its

subsidiary, associates or jointly controlled entity. Indian GAAP allows a 6 months’ time gap for

subsidiaries and jointly controlled entities. For associates, there is no time gap prescribed. Under

IFRS, changes in ownership interest of a subsidiary (that do not result in the loss of control) are

accounted for as an equity transaction and have no impact on goodwill or the income statement.

No Guidance is given in Indian GAAP for changes in ownership interest of subsidiary that do not

result in loss of control. IFRS requires losses incurred by the subsidiary to be allocated between

the controlling (parent) and non- controlling equity investment in the subsidiary. Under Indian

GAAP, excess losses attributable to minority shareholders over the minority interest are adjusted

against the majority interest unless, the minority has a binding obligation to, and is able to, make

good the losses.

3.4.3-FIXED ASSETS AND INVESTMENT PROPERTY:

As per the provision contained in IAS-16, property, plant and Equipment mandates

component accounting, whereas, AS-10 recommends, but does not require, component

accounting. IFRS requires depreciation to be based on the useful economic life of an asset. In

Indian GAAP, depreciation is based on higher of useful life or schedule-XIV rates. Major repairs

and overhaul expenditure are capitalized under IFRS as replacement costs, if they satisfy the

recognition criteria, whereas, in most cases, Indian GAAP requires these is to be charged off to

the profit and loss account as incurred. IFRS requires estimates of useful lives and residual

values to be reviewed at least at each financial year-end. In Indian GAAP, there is no need for an

annual review of estimates of useful lives and residual values.

22

Both IFRS and Indian GAAP permit the revaluation model for subsequent measurements. If

an asset is revalued, IFRS mandates revaluation to be done for the entire class of property, plant

and equipment to which that asset belongs, and the revaluation to be updated periodically. In

Indian GAAP, revaluation is not required for all the assets of the given class. It is sufficient that

the selection of the assets to be revalued is made on systematic basis, e.g. an entity may revalue a

class of assets at other location. Also there is no need to update revaluation regularly under

Indian GAAP.

Under IFRS, depreciation on the revaluation portion cannot be recouped out of revaluation

reserve and will have to be charged to the income statements over the useful life of the asset,

whereas Indian GAAP permits depreciation on revaluation portion to be recouped out of

revaluation reserve to the income statement.

IFRS provides details rules for classification of an asset as an investment property and allows

subsequent measurement of investment property at cost or at fair value. Indian GAAP requires

investment property to be recognized at cost less diminutions other than temporary diminutions

in value.

Under IFRS, intangible assets can have indefinite useful life. Such assets are required to be

tested for impairment and are not amortized. Under Indian GAAP, there is no concept of

indefinite useful life.

3.4.4-PRESENTATION OF FINANCIAL STATEMENTS:

IAS-1 (Revised 2007) Presentation of financial statements (effective from annual accounting

periods beginning on or after 1st January 2009) is significantly different from the corresponding

AS-1. While IAS-1 (Revised) sets out overall requirements for the presentation of financial

statements, guidelines for their structure and minimum requirements for their content, Indian

GAAP offers no standard outlining overall requirements for presentation of financial statements.

In Indian, for various entities, the statutes governing the respective entities lay down formats of

financial statements. For example, in the case of companies, format and disclosure requirements

are set out under schedule-VI to the companies Act, 1956. For entities such as partnership firms,

the statute governing those entities does not lay down any specific format of financial statements.

23

IAS-1 (Revised) recognizes the true and fair override provisions. The true and fair override

concept is generally not permitted under GAAP. While Clause 49 of the listing agreement

contains provision relating to the true and fair override, no practical guidance is available.

Further IAS-1(Revised) requires the presentation of a statement of comprehensive income as part

of the financial statements. This statement presents all the item of income and expense

recognized in profit and less, together with all other items of recognized income and expense.

Entities may present all item together in a single statement or present tow linked statements

displaying the items of income and expense recognized in profit and loss (the income statement),

and statement beginning with profit or loss and displaying all item included in ‘other

comprehensive income’ (the statement of comprehensive income). The concept of other

comprehensive income does not prevail under Indian GAAP, however, information relating to

movement in reserves, etc. is generally presented the caption reserves and surplus in the balance

sheet.

3.4.5-ADDRESSING SENSITIVITY TO LOCAL CONDITIONS:

The issue of convergence with IFRS has gained considerable momentum in India. At present,

the accounting standards board (ASB) of the institute of Chartered accountants of India (ICAI)

formulates the accounting standards based on IFRS. However, these standards remain sensitive

to local conditions, including the legal and 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.

3.4.6-APPLICATION OF FAIR VALUE CONCEPT:

Further, the IFRS are principle-based standards and the application required the increased use

of fair value accounting (FVA) for valuation and measurement of assets and liabilities. Fair value

is defined as “an estimate of the price an entity would have realized if it had sold an asset or paid

if it had been relieved of a liability on the reporting date in an arm’s length exchange motivated

by normal business considerations”. Evidence shows that FVA would result in added volatility in

the earning and equity, especially for the banking and financial institutions. Possible reason for

many countries to delay adopting to the IFRS is attributed to the economic downslides being

faced by them of late, mainly in the us and other European countries, where there is formidable

24

opposition to the adoption of fair value concept, apprehension being that, applying fair value to

their assets and liabilities may results in triggering the contagion effect.

3.4.7-LEGISLATIVE CHANGE:

Important issue for detailed discussion is the one relating to the bringing in suitable

legislative changes required to various laws- compliance to which is mandatory for all the

entities whether in the public, government or private domain. For example, the format of

reporting of financial statements is as per the guidelines provided by IASB. IAS-1 requires

presentation of financial position in a flowing format. This is significantly different from the

provisions contained in the schedule –VI of the companies Act, 1956 for public and private

limited companies and as per the banking Regulations Act for banking and insurance entities.

Suitable amendments needs to be brought in to these legal enactments enabling the entities

converging to IFRS to present the financial statements as prescribed. In addition to regulatory

challenges, IFRS convergence in India will face other challenges such as training, shortage of

resources, information systems, etc.

3.4.8-FINANCIAL STATEMENTS:

Under the new standards the complete set of financial statements comprises of the following:

Balance sheet as at the end of the period (along with the statement of changes in equity

annexed thereto)

Statement of profit and loss (including other comprehensive income)

Statement of Cash flows for the period

Notes comprising the summary of significant accounting policies and other explanatory

information

Balance sheet as at the beginning of the earliest comparative period when an entity

applies an accounting policy retrospectively or makes a retrospective restatement of items

in the financial statements or when it reclassifies items in its financial statements.

3.4.9-BALANCE SHEET:

25

The balance sheet or the statement of financial position as it is called in the international

accounting standards is to be drawn as per Schedule VI of the companies Act. The present

Schedule VI is proposed to be amended to make it in line with IAS-1. Each entity is required to

present current and non-current assets, and current and non-current liabilities, as separate

classifications in its balance sheet. As an exception to this general rule, an entity may provide the

classification based on the liquidity if such information is reliable and more relevant.

The current and non-current classification is aimed at providing useful information by

distinguishing the net asset that are continuously circulating as working capital from those used

in the entities long term operations. This classification highlights the assets that are expected to

be recovered within the current operating cycle and liabilities that are due for settlement within

the same period.

Thus the classification of liabilities will no longer be on the line of secured and unsecured.

Similarly the assets will be classified as non-current and current instead of the present

classification as fixed assets and current assets. Presently long term loans and advances are also

classified as current assets. In the proposed schedule VI they will be classified as Non-current

Assets.

3.4.10-STATEMENTS OF CHANGES IN EQUITY:

The statement of changes in equity is similar to the existing schedule of Reserves and

Surplus. Under the new statement, the entity shall present a statement of changes in equity

showing the following information:

Total comprehensive income for the period showing separately the total amounts

attributable to the owners of the parent and to the non-controlling interests

For each component of the equity, the effects of retrospective applications or

retrospective re-statement recognized in accordance with the Indian AS-8

For each component of the equity, a reconciliation between the carrying amount at the

beginning and at the end of the period separately disclosing the changes resulting from:-

a) Profit or loss

b) Each item of other comprehensive income and

26

c) Transactions with the owners in their capacity the owners, showing separately the

contribution by and the distributions to the owners and the changes in the ownership

interest in the subsidiaries that do not result in loss of control.

3.4.11-STATEMENT OF CASH FLOWS:

The Cash Flow statement provides information to assess the ability of entity to generate cash

and cash equivalents and also the needs of the entity.

3.4.12-STATEMENTS OF PROFIT OR LOSS:

The statement requires an entity to present all items of income and expenses in a period in

profit or loss unless other standards require/ permit otherwise. All material items of income and

expenses are required to be disclosed along with the nature and amount separately.

The IAS-1 permits presentation of expenses by using either their nature or their functions

within the entity. The general method adopted in India is to present expenses on the basis of their

nature. Accordingly Indian AS-1 requires the presentation only by the nature of expenses.

NOTES

The Notes to account present information about the basis of preparation of the financial

statement and the specific accounting policies, they disclose the information required by the

standards that is not presented elsewhere in the financial statements. Such information is relevant

to understand the financial statements. The notes should be present in a systematic manner.

There should be proper cross-referencing of the items in the financial statements with that in the

notes. Generally the orders in which the notes are to be presented are as under:-

Statement of compliance with the IND AS

Summary of significant accounting policies applied.

Supporting information for items presented in the balance sheet and in the statement of

profit and loss, statement of changes in equity and the cash flow.

Disclosure of contingent liabilities and unrecognized contractual commitments and

Non-financial disclosure e.g. financial risk management objectives and policies

27

It may be useful to note that the information required to be disclosed currently under

schedule-VI such as quantitative details, CIF value of imports, FOB values, of exports etc. will

not be required to be disclosed in the notes to the accounts.

3.5-IMPACT:

This study seeks to establish if the adoption of International Financial Reporting Standards

(IFRS) in Kenya has been associated with higher accounting quality for listed companies. The

International Accounting Standards Board (IASB), in its objectives and preamble, supposes that

the beneficial effects from IFRS adoption include transparency, accounting quality and reduced

cost of capital. Based on these assumptions, this study applied accounting quality measures;

earnings management, timely loss recognition and value relevance to find out whether the

adoption of IFRS has led to improvements in accounting quality in companies listed in Kenya.

The methodology is based on prior literature definition of metrics of accounting quality mainly

earnings management, timely loss recognition and value relevance. The study differs from the

previous ones by overcoming difficulties in controlling for confounding factors faced in previous

studies which could have led to less reliable results. Three out of the eight metrics indicated that

quality had marginally improved while five indicated that it had marginally declined. These

mixed outcomes are very much in line with findings in other studies and the study contributes to

the debate by explaining why accounting quality outcomes are still not consistent with IFRS

promises in spite of improved test conditions.

CONCLUSION:

IFRS are help in to maintain a harmony, while preparing the financial statement. There are

certain challenges face by auditor & other while convergence the IFRS in global level. If the

company are adopted the IFRS, there are certain benefit can get in the form of presentation of

Financial Statement & treatment of Fixed Asset & other investment etc. The Impact in adoption

of IFRS help in Transparency, accounting quality & reduction cost of capital, reliability,

accuracy in presenting the Financial Statement.

28

CHAPTER-

4

29

COMPARATIVE

ANALYSIS OF

IFRS AND IND AS

Accounting standards are written documents, policy document issued by experts accounting

body or by government or other regulatory body covering the aspects of recognition,

measurement treatment, presentation and disclosure of accounting transaction in the financial

statement. Till now, 32 Accounting standards have been issued by the ICAI as against the 41

International Accounting standards out of which seven accounting standards are superseded

effectively now there are 34 International accounting standards. There are also eight international

financial reporting standards (IFRS).

Generally Accepted Accounting Principles (GAAPs) includes accounting conventions, rules,

procedures and accounting standards, accepted accounting practices both promulgated and non

promulgated. GAAPs consist of four components: the requirements of law, judgments of various

courts of law; pronouncements of the governing body from time to time; and requirements of

regulatory Authority SEBI.

30

In 2001, the international fraternity of accountants took stock of the situation and constituted

the International Accounting Standards Board (IASB) to evolve and prescribe norms for

treatment of several items in the preparation and presentation of financial statements. IASB

adopted all the 41 standards issued by the IASC till 2001. These standards were thoroughly

revised and updated in view of the changes in industry and the need for rationalization. Now

only 34 standards are functional. The US Finance Accounting Standards Boards (FASB) and the

IASB are in the process of eliminating the differences in some of the standards. The International

Finance Reporting Interpretations committee (IFRIC) was constituted to replace the SIC.

This committee meets periodically to discuss and spell out their interpretations. Some of the

other major international bodies in the realm of international accounting are the European

Commission (EC), the UN, the International Federation of Accounts (IFAC) and the organization

for Economic Cooperation and Development (OECD).

OBJECTIVES OF THIS CHAPTER:

To study the accounting standards applicable at various level enterprises.

To establish the difference between the Indian accounting standards and international

accounting standards.

To analysis the applicability of accounting standards in respect of their size.

ANALYSIS AND INTERPRETATION:

The need for a speedy integration of the Indian accounting standards with the international

accounting standards cannot be over-emphasized. Assurance that financial statements are

prepared in accordance with internationally accepted accounting standards and audited on a basis

comparable with international accounting practice is a key plan in the system of regulation. In all

32 Accounting Standards have been prescribed. However, their applicability is dependent on its

size-Level I/II/III company. The following table I enumerate applicability level, prescriptions &

important content of accounting standards:

TABLE 1: LEVEL OF ENTERPRISES

31

LEVEL-1 ENTERPRISES LEVEL-2

ENTERPRISES

LEVEL-3

ENTERPRISES

Listed companies

To be listed companies

Banks

Financial institutions

Insurance companies

Enterprise having

Turnover more than INR

500 million

Enterprises whose

borrowing exceeds INR

100 million

Holding or subsidiary

Companies of above

Listed companies

Enterprise not covered

under level-1, but

Enterprise having

turnover exceeding INR

4 million but less than

500 million

Enterprise whose

borrowing exceeds INR

10 million but less than

100 million

Enterprise not

Covered under level-1

and level-2

Level II and Level III enterprises are considered as SMES. Level I enterprises are required to

comply fully with all the accounting standards. No relaxation is given to Level II and Level III

enterprises in respect of recognition and measurement principles. Relaxations are provided with

regard to disclosures requirements. Accordingly, Level II and Level III enterprises are fully

exempted from certain accounting standards, which mainly lay down disclosure requirements.

INDIAN ACCOUNTING STANDARDS

TABLE 2: INDIAN ACCOUNTING STANDARDS AND ITS APPICABILITY LEVEL

AS

no

Particulars Applicability

level

Prescription and content

AS-1 Disclosure of

accounting

1,2,3 Disclosure of accounting policies means

disclosure of fundamental accounting assumptions,

32

policies guide lines for selecting accounting policies, change

in accounting policies how to disclose them

AS-2 Valuation of

inventories

1,2,3 Valuation of inventories means applicability,

measurement, determine cost, exclusion, net

realizable value and reporting

AS-3 Cash flow

statement

1 Defining cash, cash equivalent, classifying cash

flow into operating financing and investing cash,

direct and indirect method of cash flow.

AS-4 Contingencies

and events

occurring after

the balance sheet

date

1,2,3. Contingencies are like, estimation of liability,

events after B/S date, events affecting going concern,

proposed dividend, how to report them are the feature

of this standard.

AS-5 Net profit or loss

for the period,

prior period items

and accounting

policies

1,2,3. Applicable to all enterprise the components of profit :

ordinary and extraordinary activities, prior period

items, change in accounting estimates & accounting

policies disclosure.

AS-6 Depreciation

accounting

1,2,3. Depreciable assets, calculation and method of

depreciation disclosures.

AS-7 Construction 1,2,3. Revenue recognition in long term construction

33

contracts contracts, effect of change in estimate in contract,

percentage of completion or completion of contract

method, disclosure.

AS-8 Accounting for

research and

development(this

standard has been

withdrawn with

effect on

01.04.2004 for all

levels of

enterprises and

AAS 26 is

applicable)

Withdrawn As withdrawn now these standard has not been

applicable.

AS-9 Revenue

recognition

1,2,3. What is revenue, revenue from of sale, rendering

services, and from interest, dividend, royalty,

disclosure

AS-

10

Accounting

for fixed assets.

1,2,3. It is related with defining fixed assets, recognition

and measurement, historical costs, revalued price,

upward and downward revaluation, disclosure.

AS-

11

The effect of

changes in

foreign exchange

rates

1,2,3 This standard defines foreign currency, exchange

rate, monetary and non monetary items, closing rate

and transaction in foreign currencies, disclosure.

AS-

12

Accounting

for government

1,2,3. Accounting for government grants recognize

monetary & non-monetary grants, grants related to

revenue, promoter’s contribution, refunds,

34

grants contingency, and disclosure.

AS-

13

Investments 1,2,3. Investment in property, cost, carrying amount,

reclassification, disposal and disclosure.

AS-

14

Accounting

for amalgamation

1,2,3. It includes amalgamation, merger, purchase

consideration, accounts methods: pooling of interest

& purchase. Statutory reserve, goodwill, disclosure.

AS-

15

Accounting

for retirement

benefits in the

financial

statements of

employers

1,2,3. This standard explains(retirement) benefits & its

types short/long term during/post employment

benefits, defined contribution & defined benefit

scheme, accrual valuation, PF, gratuity,

superannuating, pension benefit, funding and

accounting, disclosure.

AS-

16

Borrowing costs 1,2,3. Borrowing cost, interest, amortization of discounts,

provisions, ancillary costs, finance charges, exchange

difference, qualifying assets, conditions of

capitalizing borrowing costs, commencement,

suspension, cessation of capitalization disclosure are

the treatment of this standard.

AS-

17

Segment

reporting

1

2-with

modification

3-with

modification

Segment reporting related to business &

geographical, enterprise & segment revenue, segment

expenses; segment results segment assets segment

liabilities, identification of reportable segment,

disclosure.

35

AS-

18

Related party

disclosures

1

2-with

modification

3-with

modification

What should be disclosed to related party, control /

significant influence management or operating

policies, related party transactions, exceptions,

disclosure.

AS-

19

Leases 1

2-with

modification

3-with

modification

Define lease: finance & operating define: guaranteed

residual value for lessee & lessor, unwarranted

residual value, accounting by lessee & lessor,

recognition of revenue, sale & lease back, disclosure

AS-

20

Earnings per

share

1

2-with

modification

3-with

modification

The concept of basic & diluted EPS, calculation of

net profit or net loss for the period attributable to

share holders weight age average no of outstanding

shares, right issue, diluted earnings share formula,

right factor, restatement. Disclosure.

AS-

21

Consolidated

financial

statements

1 Format of consolidated financial statements, it is an

additional information scope, consolidation

procedure, minority interest, arrears of cumulative

preference share, disclosure.

AS-

22

Accounting for

taxes on income

1,2,3. Accounting & income tax on profit, current &

deferred

AS-

23

Accounting for

investments in

consolidated

financial

statements

1 Accounting for investments covers associate

accounting, carrying amount of investment,

contingencies, disclosure.

AS- Discontinuing 1 Discontinuing operation define initial & updating

36

24 operations disclosure, recognition & measurement interim

financial report.

AS-

25

Interim financial

reporting

1 Financial statement for interim reporting shows

integral & discrete view, minimum content, form and

content materiality, seasonal / occasional revenue,

change in accounting policies, depreciation.

Disclosures.

AS-

26

Intangible assets 1,2,3. In this standard difference between tangible &

intangible assets, unidentified & acquired intangible

assets cost, R & D, carrying amount, amortization

method, impairment losses, retirement & disposal,

disclosure.

AS-

27

Reporting of

interests in joint

ventures

1

2-with

modification

3-with

modification

Financial reporting of jointly control operation /

assets, transaction between venture & joint venture,

disclosure.

AS-

28

Impairment of

assets

1

2-with

modification

3-with

modification

Impairment of asset include carrying amount,

impairment loss, effect of depreciation, and

impairment of cash generating asset, recoverable

amount, impairment loss & deferred tax, reversal,

disclosure.

AS-

29

Contingent

liabilities and

contingent asset

1 Concept of contingent liability and contingent asset

and their recognition & measurement of provision,

disclosure.

37

AS-

30

Financial

instrument

recognition and

measurement

From 1/4/2009

recommendatory

from 1/4/2011

mandatory

except SMEs

Financial instruments recognition & de recognition

include accounting recognition & measurement

initial & liabilities, fair value, reclassification, gains

& losses, impairment, hedging & hedging

accounting, embedded derivatives.

AS-

31

Financial

instrument:

presentation

Recommendatory

form 01/04/2009

The significance of financial instruments for the

entity’s financial position presentation procedure.

AS-

32

Financial

instrument:

disclosures

Recommendatory

form 01/04/2009

The significance of financial instruments for the

entity’s financial position presentation procedure.

INTERNATIONAL ACCOUNTING STANDARDS:

As a result of global operations, financial statement produced in one country are used in other

more frequently, this has raised the issue of harmonization of accounting policies, presentation

and disclosure. In this situation, there is a strong need for legislation to bring about uniformity,

rationalization, comparability, transparency and adaptability in financial statements and this

underlines the need to have stringent norms for preparation and presentation of financial

statements.

TABLE-3: INTERNATIONAL ACCOUNTING STANDARDS AND ITS

APPLICABILITY LEVEL

IAS

sNO

.

PARTICULAR APPLICABILIT

Y LEVEL

PRESCRIPTION AND CONTENT

IAS- Presentation of 1,2,3. The purpose of financial statements is to

38

1 financial

statements

disclose the information required by the

IFRSs that is not presently elsewhere in the

financial statements.

IAS-

2

Inventories 1,2,3. The treatment for inventories, include the

recognition of the inventory cost, explanation

of net realizable value.

IAS-

7

Cash Flow

Statements

1. It explains the definition of cash, cash

equivalent, classifying cash flow into

operating, financing & investing cash, direct

& indirect method of cash flow.

IAS-

8

Accounting

policies, changes

in accounting

estimates and

errors

1,2,3. It explains the criteria for selecting &

changing in accounting policies.

IAS-

10

Events after the

balance sheet date

1,2,3. Entity should adjust its financial statements

for events after the reporting period.

IAS-

11

Construction

contract

1,2,3. Explain construction contract, prescribed the

accounting treatment of revenue and costs

associated with construction contract.

IAS-

12

Income Taxes 1,2,3. Prescribe the accounting treatment for

income taxes. How to account for current and

future tax.

39

IAS-

14

Segment

Reporting

1

2-with

modification

3-with

modification

Related to all segment reporting.

IAS-

16

Property, plant,

and Equipment

1,2,3. Accounting and measurement and

recognition of property, plant and equipment,

interests are charged.

IAS-

17

Leases 1

2-with

modification

3-with

modification

This standard shall be applied in accounting

for revenue arising from the sales of goods;

tendering of services and use of others of

entity assets yielding interest, royalties and

dividends.

IAS-

18

Revenue 1,2,3. Revenue determination and its measurement.

IAS-

19

Employee benefits 1,2,3. It includes all forms of consideration given

by an entity in exchange for service rendered

by employees.

IAS-

20

Accounting for

government grants

and disclosure of

government

assistance.

1,2,3. Explain the government grants and disclosure

of government assistance.

IAS-

21

The effects of

changes in foreign

1,2,3. Explain reporting about foreign currency,

exchange rate, monetary & non-monetary

items, closing rate, and transaction in foreign

40

exchange rates currencies, translating GS of foreign

operation integral & non-integral, accounting

treatments, disclosure.

IAS-

23

Borrowing costs 1,2,3. Define borrowing cost only.

IAS-

24

Related party

disclosures

1,2,3. This standard explains transfer of resources,

services or obligations between related

parties.

IAS-

26

Accounting and

reporting by

retirement benefit

plan

Explain retirement benefits plans how is it

valuated and disclosed.

IAS-

27

Consolidated and

separate financial

statements

1. Explain consolidated statements presentation

of consolidated financial statements,

consolidation procedures, non controlling

interest, changes in the ownership interests,

separate financial statements & disclosure.

IAS-

28

Investments in

associates

1. It includes investment in associates and does

not include venture capital organizations,

mutual funds, unit trusts and similar entities

including investment-linked insurance funds.

IAS-

29

Financial reporting

in

hyperinflationary

Applied on that entity whose functional

currency is the currency of a

hyperinflationary economy.

41

economies

IAS-

31

Interests in joint

ventures

1

2-with

modification

It explains measurement of jointly controlled

operations, jointly. Controlled assets, jointly

controlled entities etc.

IAS-

33

Earnings per share 1

2-with

modification

Determination and presentation of earning

per share and explains basic earnings per

share, diluted earnings per share and

retrospective adjustments.

IAS-

34

Interim financial

reporting

1 Main feature is to identify an asset that may

be impaired, measuring recoverable amount,

recognizing and measuring an impairment

loss, reversing an impairment loss.

IAS-

36

Impairment of

assets

1

2-with

modification

Prescribe the procedures that an entity

applies to ensure that its assets are carried at

no more than their recoverable amount.

IAS-

37

Provisions,

contingent

liabilities and

contingent assets

1,2,3. It covers only appropriate recognition criteria

and measurement applied for provisions,

contingent liabilities and contingent assets.

IAS-

38

Intangible assets 1,2,3. Recognition and measurement, internally

generated intangible assets.

IAS-

39

Financial

instruments:

recognition and

measurement

1,2,3. Recognition and measurement of financial

instruments.

42

IAS-

40

Investment

property

1,2,3. It describes the accounting treatment for

investment property and related disclosures

related to agricultural activity.

IAS-

41

Agriculture It describes the accounting treatment and

disclosures related to agricultural activity.

There are significant variations between the Indian and international accounting standards.

Prevailing laws of the land significantly contribute to the variances between accounting

standards of one country with the other.

Table 4: COMPARATIVE ANALYSIS OF ACCOUNTING STANDARDS (ISSUED BY

ICAI) IN INDIA Vs INTERNATIONAL ACCOUNTING STANDARDS

N.OF

THE

LEVEL OF

COMPANIES

TITLE OF ACCOUNTING

STANDARDS

COMPARABLE

IAS

LEVEL OF

COMPANIES

AS-1 1,2,3. Disclosure of accounting

policies.

IAS-1 1,2,3.

AS-2 1,2,3. Valuation of inventories. IAS-2 1,2,3.

AS-3 1. Cash flow statements. IAS-7 1.

AS-4 1,2,3. Contingencies and events

occurring after the balance sheet

date.

IAS-10 1,2,3.

AS-5 1,2,3. Net profit or loss for the period,

prior period and extraordinary

items and changes in accounting

IAS-8 1,2,3.

43

policies.

AS-6 1,2,3. Depreciation accounting. IAS-16

IAS-38

1,2,3.

AS-7 1,2,3. Accounting for construction

contracts.

IAS-11 1,2,3.

AS-8 With drawn Accounting for research and

development (irrelevant after

issuing AS 26)

Not applied

AS-9 1,2,3. Revenue recognition. IAS-18 1,2,3.

AS-

10

1,2,3. Accounting for Fixed assets. IAS-16 1,2,3.

AS-

11

1,2,3. Accounting for the effects of

changes in foreign exchange

rates.

IAS-21 1,2,3.

AS-

12

1,2,3. Accounting for government

grants.

IAS-20 1,2,3.

AS-

13

1,2,3. Accounting for investments. 1,2,3.

AS-

14

1,2,3 Accounting for amalgamation. (IAS-22) IFRS 3 1,2,3.

AS-

15

1,2,3. Accounting for retirement

benefits in the financial

statements of employers.

IAS-19 1,2,3.

44

AS-

16

1,2,3. Borrowing cost. IAS-23 1,2,3.

AS-

17

1.

2-with

modification

3-with

modification

Segment reporting. IAS-14 1.

2-with

modification

3-with

modification

AS-

18

1

2-with

modification

3-with

modification

Related party IAS-24 1

2-with

modification

3-with

modification

AS-

19

1

2-with

modification

3-with

modification

leases IAS-17 1

2-with

modification

3-with

modification

AS-

20

1.

2-with

modification

3-with

modification

Earnings per share IAS-33 1.

2-with

modification

3-with

45

modification

AS-

21

1 Consolidated financial

statements

IAS-27 1

AS-

22

1,2,3. Accounting for taxes on income. IAS-12 1,2,3.

AS-

23

1 Accounting for investments in

associating in consolidated

financial statements.

IAS-28 1

AS-

24

1 Discounting operations. 1

AS-

25

1 Interim financial reporting. IAS-34 1

AS-

26

1,2,3. Intangible assets. IAS-38 1,2,3.

AS-

27

1.

2-with

modification

3-with

modification

Financial reporting of interests in

joint ventures.

IAS-31 1.

2-with

modification

3-with

modification

46

AS-

28

1.

2-with

modification

3-with

modification

Impairment of assets interests in

joint ventures.

IAS-36 1

2-with

modification

3-with

modification

AS-

29

1. Contingent liabilities and

contingent asset.

IAS-37 1

AS-

30

From 1/4/2009

recommendatory.

From1/4/2011

mandatory

except SMEs

Financial instrument recognition

& measurement.

IAS-36

AS-

31

Recommendatory

form 01/04/2009

Financial instrument

presentation and disclosures.

Partly covered

IAS-13

AS-

32

Recommendatory

from 01/04/2009

Financial instrument

presentation and disclosures.

CONCLUSION:

There is a need for continued improvement in accounting standards and disclosure rules to

resolve various accounting aspects and to simplify, to a greater extent, the financial reporting

system. In our country in the light of above, it is found that effort is on to match Indian standards

with the international accounting standards, through there are significant variations between the

Indian and international accounting standards.

47

CHAPTER-5

ADOPTION OF IFRS48

A CASE STUDY ON

WIPRO

49

5.1-WIPRO: COMPANY AT A GLANCE

Wipro Limited is amongst the largest global IT services, BPO and Product Engineering

companies in India. In addition to Information Technology business Wipro also has leadership

position in niche market segments of consumer products and lighting solutions. The company

has been listed since 1945 and started its technology business in 1980. Its equity shares are listed

in India on the Bombay Stock Exchange and the National Stock Exchange; as well as on the

New York Stock Exchange in US. The 2009-2010 Annual Report of Wipro presented the

consolidated financial statement in both Indian GAAP and IFRS. Reconciliation of equity as per

IFRS and Indian GAAP was reported for the year ended 2009, which is considered in this study.

TABLE-5: BALANCE SHEET OF WIPRO 31ST MARCH 2009

COMPARISION OF IFRS & INDIAN GAAP STATEMENT

Opening balance April 2009 rupees in millionsPARTICULAR IGAAP IFRS CHANGE %

CHANGEGoodwill 56521 56143 378 0.67PPE & Intangibles 52563 53287 -724 -1.38Available for sale investment 16426 16293 133 0.81Investment in equity accounted 1670 1670 0 0Inventories 7587 7587 0 0Trade receivables 50370 50123 247 0.49Unbilled revenue 14108 14108 0 0Cash & cash equivalents 49117 49117 0 0Net tax assets 2672 5759 -3087 -115.53Other assets 20984 23203 -2219 -10.57TOTAL ASSETS 272018 277290 -5272 -1.94

Share capital & share premium 29667 29667 0 0Share application money pending allotment

15 0 15 100

Retained earnings 119957 126646 -6689 -5.58Cash flow hedging reserve -16886 -14533 -2353 13.93

50

Other reserves 3546 5601 -2055 -57.95

TOTAL EQUITY 136299 147381 -11082 -8.13

Minority interest 237 0 237 100

Loan & borrowings 56892 56892 0 0

Trade payables 40191 40191 0 0

Unearned revenues 8734 8734 0 0

Other liabilities & provisions 29665 24092 5573 18.79

TOTAL LIABILITIES 135719 129909 5810 4.28

5.2: INTERPRETATION:

Analyzing the financial statements of WIPRO for the year 31.3.2009. It is observed

there is 1.94% increase in the total assets value as per IFRS when compared with the

total assets value as per Indian Accounting Standards.

There is increase in the value of Net tax asset including deferred taxes in IFRS

reporting by 115.53% when compared with the amount reported under Indian

Accounting Standard. The reason being as per IAS 12, A deferred tax asset should be

recognized for deductible temporary differences, unused tax losses and unused tax

credits to the extent that is probable that taxable profit will be available in the future

to realize the tax benefits and Balance sheet approach is followed in recognizing

deferred taxes . Whereas in Indian Accounting standards the deferred tax asset in

respect of carry forward losses is recognized if it is virtually certain that sufficient

future taxable income would be available in the future to realize the tax benefits and

Income statement approach is followed in recognizing deferred taxes.

51

There is 10.57% increase in other assets in IFRS reporting compared to Indian

Accounting standards. The reasons are because of IAS 17 Leases, IAS 18(revenue),

IAS 39(Financial instruments: Recognition and Measurement), IAS 37(Provisions,

contingent liabilities and contingent assets) and IFRS 2 (Share based payment). Under

IAS 17 Leases, leases of land are classified as operating leases unless the title to the

leasehold land is expected to be transferred to the company at the end of lease term.

So, there is a reclassification of land from Property Plant and equipment to other

assets under IFRS reporting resulting in this no impact on equity. Under IAS 18

Revenue, in respect of multiple element arrangement comprising delivered products

and installation services, the Company defers and recognizes revenue relating to

installation services when those services are rendered. Earlier in Indian Accounting

standard the entire revenue is recognized when the products are delivered in

accordance with the contractual terms and the expected cost of installation is also

accrued. This has an impact on the income statement. Under IAS 39(Financial

instruments: Recognition and Measurement), loans and receivables are recognized at

amortized cost, which is carried at historical cost under Indian Accounting standards.

This has an impact on the equity.

The total equity has increased by nearly 8.13% in IFRS when compared to the Indian

accounting standards. IFRS 2 share based payment each tranche of vesting interest is

treated as a separate reward and the stock compensation expense relating to that

tranche is amortized over the vesting period of the underlying tranche. Earlier Indian

standard permits an entity to recognize the stock compensation expense, relating to

share option which vest in a graded manner on the straight line basis over the

52

requisite vesting period for the entire award. Under IFRS minority interest is reported

as a separate item within equity whereas under Indian standards minority interest is to

be presented separately from equity.

The total liability has decreased by 4.28% in IFRS when compared to Indian

accounting standards. Under IAS 10 Events after the balanced sheet date, the liability

for dividend is recognized only when it is approved by shareholders. Under Indian

accounting standards the liability is recognized in respect of proposed dividend on

company's equity share even though the dividend is expected to be approved by the

shareholders subsequent to the reporting date.

Under IAS 1 Presentation of financial statement, share application money received

and pending allotment is reported under other liabilities whereas in Indian

Accounting standards share application money pending allotment to be presented as a

separate item within equity.

5.3: FINDINGS:

The total assets under IFRS is more than the Indian accounting standards by 1.94%

which shows that Indian accounting is more conservative. The most probable reasons are

its fair value measurement, difference in the basis of interest capitalization, deferred tax

asset recognition and difference in accounting for foreign currency forward contracts. It

shows that the Indian accounting standards are conservative.

The equity under IFRS has increased by 8.13% when compared to Indian accounting

standard. Minority interest are treated as part of equity and under IFRS 1 First time

adoption, adjustments required to move from previous GAAP to IFRS should be

recognized directly in retained or if appropriate another category of equity at the date of

transition to IFRS.

53

The total liabilities under IFRS are decreased by 4.28% when compared to the Indian

accounting standards. The provision for proposed dividend is recognized in IFRS only

when it is approved by shareholders who resulted in reduction of provision.

CHART-1: COMPARISON OF IGAAP AND IFRS ON

FINANCIAL POSITION AS AT 31ST MARCH 2009

ASSETS Equity Liabilities0

50000

100000

150000

200000

250000

300000

IGAAPIFRS

5.4: EFFECTS OF CONVERGENCE TO IFRS ON FINANCIAL RATIOS:

It is examined five ratio that rely on financial statements for the year as at March 31, 2009

(1) Return on Equity=net income\book value of equity

(2) Return on Assets=net income\total assets

(3) Total Asset Turnover=sales revenue\total assets

(4) Leverage=total liabilities\book value of equity

(5) Net Profit ratio=net income\sales revenue

TABLE-6: FINANCIAL RATIOS FOR THE YEAR ENDED 31ST MARCH 2009 OF WIPRO

RATIOS AS PER IGAAP AS PER IFRS

54

Return on Equity 0.29 0.26Return on Assets 0.14 0.14

Total asset Turnover 0.94 0.93Leverage 1 0.88

Net Profit Ratio 0.15 0.15

ANALYSIS:

We examine that the Return on Equity and Net profit ratio as reported under IGAAP and

IFRS remains the same. There is a decrease in the leverage or debt equity ratio in IFRS

accounting when compared to IGAAP accounting. The reduction in this ratio in IFRS is due

to increase in value of Equity by 8.13% in IFRS accounting and reduction in value of Total

Liabilities by about 4.28% in IFRS accounting when compared with IGAAP accounting.

There is reduction in return on equity mainly because of increase in the equity value by about

8.13% and decrease in Net profit by about 0.61% in IFRS reporting when compared to

IGAAP reporting.

There is reduction in Total asset Turnover mainly because of increase in Total assets by

about 1.94% and decrease in turnover by about 0.04% in IFRS reporting when compared

with IGAAP reporting.

CONCLUSION: The study investigates the financial statement implications of adopting IFRS by Wipro. It is

observed that the net income position in IFRS reporting and Indian GAAP is not much varied.

But there are differences in the Total liability and Equity position which is mainly because of

reclassification between Equity and Total liability. The provision under IFRS is reduced mainly

because dividend provision is not recognized in IFRS. Fair value measurement of Available for

sale investment and the share compensation expense recognized in IFRS is higher, as in IFRS

reporting accelerated amortization of stock compensation expense in the initial years following

the grant of options, whereas in Indian GAAP reporting recognizes the stock compensation

expenses in graded manner on a straight line basis over the requisite vesting period for the entire

award which resulted in increase in share based payment reserve. Overall the return on equity,

return on asset, total asset turnover and net profit ration are not significantly affected by

converging to IFRS but the leverage ratio shows significant change on converging with IFRS.

There are also significant changes in the Total Equity and total liability position on convergence

55

to IFRS but not prominent changes in the Total Asset Position. All these observations make us

conclude that IFRS is fair value oriented and Balance Sheet oriented accounting where there are

more transparent disclosures and Indian GAAP is conservative approach.

56

CHAPTER-5

SUMMARY AND CONCLUSION

57

SUMMARY AND FINDINGS:

Keeping in view the complex nature of IFRSs and the extent of differences between the

existing ASs and the corresponding IFRSs and the reasons there for, we point out that

IFRSs should be adopted for the public interest entities such as listed entities, banks and

insurance entities and large-sized entities from the accounting periods beginning on or

after 1st April, 2011.The countries which have adopted IFRSs have done so for similar

types of entities.

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 statement and other financial reporting to help participants in the world

capital markets and others users make economic decision.

The IASB’s has produced so far a high quality global standard acceptable all over the

world and the progress remained steady and focused.

International Accounting Standards Board (IASB) and its member countries are

committed towards promoting the use and rigorous application of those standards.

IFRS apply to individual company and consolidated financial statements.

A complete set of financial statements includes a balance sheet, and income statement, a

cash flow statement, a statement showing either all change in equity or change in equity

other than those arising from investment by and distributions to owners, a summary of

accounting policies, and explanatory notes.

IFRS helps in improved access to the international Capital Markets through raising fund

internationally.

The perception of stakeholders & the markets likely to be affected by these changes

Further this would provide high quality, transparent and comparable information in

financial statement and other financial reporting to help participants in the world capital

markets and others users make economic decision.

58

Conversion to IFRS will have unique repercussion for each country, depending on how

each national GAAP differs. In the case of India, there are a number of differences &

similarities that need to be carefully looked at.

A common set of accounting principles will help companies with operations in different

countries & facilitates cross border transactions.

In our study of financial statements of Wipro Ltd, follows Indian GAAP as well as IFRS,

due to its operation in different country. It is found out that deviations are prominent in

some areas and not so prominent in others.

IFRS will potentially better reflect the underlying economics of a transaction

SUGGESTION:

Currently the IFRS is not complete as it does not contain:-

IFRS common practice or industry concept reflects disclosures & relational structures

commonly observed in the financial statements in practice.

Description or definition of concepts is not complete

There should be proper disclosure & feedback to the management, so that management

should keep their account properly.

At global level accounting principles vary from country to country due to which the

reporting practices also vary.

International Financial Reporting Standards (IFRS) are a high quality accounting

standards that are acceptable all over the world.

This would bring more accountability, transparency and comparability in preparation,

presentation and reporting of financial statements.

This would further facilitate all the stakeholders in better decision making.

This would further promote international trade and business all over the world.

India being a developing country with high economic growth, must take a strong step in

implementation of IFRS to be in pace with other countries.

In order to improving the IFRS, the above point must keep in mind.

59

CONCLUSION:

The convergence of financial reporting and accounting standards is a valuable process that

contributes to the free flow of global investment and achieves substantial benefits for all capital

market stakeholders. It improves the ability of investors to compare investments on a global

basis and, and thus, lowers their risk of errors of judgment. It has the potential to create a new

standard of accountability and greater transparency, which are of significant value for market

participants including regulators. Focused on realistic economic representation, financial

reporting should address the legitimate needs of key stakeholders and provide a comprehensive

overview of financial information. Every stakeholder should gain from active participation in

shaping the successive phases of the convergence process.

The convergence with IFRS is now at a very crucial stage in India. There is a need to develop

an enabling regulatory framework and infrastructure that would assist and facilitate IFRS

convergence. The government would need to frame and revise laws in consultation with the

NACAS and the ICAI. Similarly, regulatory such as IRDA, RBI, SEBI, and CBDT would have

to consider accepting IFRS in place of the existing set of prescribed accounting rules.

Convergence is lengthy process and it may take years to reach the important goal of a single set

of accounting standards.

BIBLIOGRAPHY

60

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61

10) Indian journal of accounting, December 2010

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62