21 International Financial Reporting standards-III

Sanjeet Sharma

LEARNING OBJECTIVES:

This  module  helps  to  understand  the  concept  of  global  convergence  of  accounting standards. After studying this module the students may able to understand need and importance of Convergence with IFRSs. They will also able to explain Convergence Process of IFRS in India. Further, Students after going through this module will be able to explain the challenges to be faced for IFRS implementation in India.

INTRODUCTION

Convergence of Accounting Standards is related with developing a globally accepted common language of accounting. The process of globalization and increased cross-border investing are the important factors that have generated the need for the development and adoption of a single set of high-quality universal accounting standards. In India, the process  of  convergence  with  IFRS  is  carried  by  MCA.  The  Institute  of  Chartered Accountants of India (ICAI), has formulated Indian Accounting Standards (Ind ASs) converged with IFRS which are in line with corresponding IAS/IFRS, adoptable under the conditions prevailing in the country.

GLOBAL CONVERGENCE OF ACCOUNTING STANDARDS

Global convergence of accounting standards is important issue. For getting best solution of this issue the standard-setters around the world discuss accounting issues and combine their experiences. Simply Convergence of Accounting Standards is a step towards developing a globally accepted common language of accounting to communicate financial information of an entity. Globally accepted financial reporting system ensures that financial transactions are recorded and presented in similar way all over word. Due to the process of globalization and increased cross-border investing are the important factors that have generated the need for the development and adoption of a single set of high-quality universal accounting standards. Many countries are now actively involved in promoting measures for achieving convergence among national accounting standards. The most important organisation in related with this is International Accounting Standards Board (IASB). The IASB has developed a comprehensive set of accounting standards. It has made attempt to cover all core issues in financial reporting. These standards are now being used extensively all over the world. Presently, a number of countries have adopted these standards. Further, in many countries, IASB standards are providing the basis for formulation of domestic national accounting standards.

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND NATIONAL ACCOUNTING STANDARDS

The Institute of Chartered Accountants of India is premier accounting body in India. With the purpose to bring uniformity in preparation and presentation of accounting results, the Institute of Chartered Accountants of India constituted in 1977 an Accounting Standards Board (ASB). The main function of the ASB is

·         To formulate accounting standards.

·         While formulating the accounting standards, the Accounting Standards Board give due consideration to the International Accounting Standards.

·         It also keeps into consideration the applicable laws, customs, usages and the business environments prevailing in India.

·        To ensure uniform adoption of International Accounting Standards in the country. The Institute of Chartered Accountants of India formulated 32 Accounting Standards a list of which is given below:

·         AS 1 Disclosure of Accounting Policies

·         AS 2 Valuation of Inventories

·         AS 3 Cash Flow Statements

·         AS 4 Contingencies & Events occurring after the Balance Sheet Date

·         AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

·         AS 6 Depreciation Accounting

·         AS 7 Construction Contracts

·         AS 8 Accounting for Research & Development

·         AS 9 Revenue Recognition

·         AS 10 Accounting for Fixed Assets

·         AS 11 The Effects of Changes in Foreign Exchange Rates

·         AS 12 Accounting for Government Grants

·         AS 13 Accounting for Investments

·         AS 14 Accounting for Amalgamation

·         AS 15 Employee Benefits (Revised 2005)

·         AS16 Borrowing Costs

·         AS 17 Segment Reporting

·         AS 18 Related Party Disclosures

·         AS 19 Leases

·         AS2O Earnings Per Share

·         AS 21 Consolidated Financial Statements*

·         AS 22 Accounting for Taxes on Income

·         AS 23 Accounting for Investments in Associates in Consolidated Financial Statements*

·         AS 24 Discounting Operations

·         AS 25 Interim Financial Reporting

• AS26 Intangible Assets
• AS27 Financial Reporting of Interests in Joint Ventures*
• AS 28 Impairment of Assets
• AS29 Provisions, Contingent Liabilities and Contingent Assets
• AS3O Financial Instruments : Recognition and Measurement
• AS 31 Financial Instruments : Presentation
• AS 32 Financial Instruments—Disclosures

IFRS IN INDIA

IFRS stands for ―International Financial Reporting Standards‖ It is a unique, high quality, easily understandable global accounting standards. It is also known as ―principles based‖ set of standards which are easy to understand and apply.

• IASB (International Accounting Standard Board) is developed and approves these standards.
• These standards provide disclosure and financial reporting guidelines to the entities who have been engaged in commercial, industrial, financial and similar activities, whether organized in corporate or in other forms
• Upon its inception the IASB adopted the body of International Accounting Standards.

CONVERGENCE WITH IFRS

According to ICAI, ‗convergence‘ means to achieve harmony with IFRSs; 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 IFRSs‖,

The need for harmonization of financial reporting is being increasingly felt all over the world. This requires each nation to design and maintain National Accounting Standards in a way that they largely comply with the requirements of International Financial Reporting Standards. In line with the global trend, the Institute of Chartered Accountants of India, has proposed a plan for convergence of the Indian Accounting Standards with the International Financial Reporting Standards.

NEED FOR CONVERGENCE WITH IFRS

India already has Indian GAAP then why IFRS are needed in India. The need for convergence with IFRSs can be clarified with the following points

1. Globalization of the business

Due the process of globalization numbers of multi-national companies are establishing their businesses in various countries. It has made imperative to have a single globally accepted financial reporting system.

2. Integration of capital markets

The entities are increasingly accessing the global markets to fulfill their capital needs by getting their securities listed on the stock exchanges outside their country. Thus, global capital markets are becoming increasingly integrated. Indian companies are also being listed on overseas stock exchanges. So there is an urgent need of sound financial reporting structure for effective functioning of capital markets.

3. Clear confusion

The use of different accounting frameworks in different countries, creates confusion for users of financial statements. This confusion leads to inefficiency in capital markets across the world. Therefore, to clear this confusion and strengthen the trust investors a single set of high quality global accounting standards is needed.

4. Global Acceptance

IFRS are globally accepted accounting frameworks. It is becoming Universal Reporting system for financial statements. Presently, about 150countries already are using IFRS in their countries.

5. Improve Transparency

IFRS improve Transparency in accounting system.

6. Limitations of Indian GAAP

Indian GAAP has some limitations if we compare with IFRS. Difference between IFRS and Indian GAPP can be cleared with the following table

Thus, it has become the need of the day to have a single set of globally accepted accounting standards has prompted many countries to pursue convergence of national accounting standards with IFRSs

NEED FOR CONVERGENCE WITH IFRS

• Globalization of the business
• Integration of capital markets
• Clear confusion
• Global Acceptance
• Limitations of Indian GAA
• Improve Transparency

CONVERGENCE PROCESS OF IFRS IN INDIA

In India, the process of convergence with IFRS is carried by MCA. For this purpose consultation and participation of all the concerned stakeholders is ensured by MCA. The Ministry of Corporate Affairs (MCA) has taken initiative for harmonization of the Indian Accounting Standards with International Financial Reporting Standards (IFRS). These would be continued by the Government with the intention of achieving convergence with IFRS. Proposed Roadmap for IFRS in India is given as below

Initial Roadmap for IFRS in India

The Initial Roadmap for Application of Converged Accounting Standards in India is given in the following Table:

Phase I (opening balance sheet as at 1 April, 2011)*:-

·         Companies which are part of BSE – Sensex 30 and NSE – Nifty 50;

·         Companies who are raising capital from outside (whose share listed outside India) India;

·         Companies having net worth of more than Rs. 1,000 crores

Phase II (opening balance sheet as at 1 April, 2013)*:-

·         Companies not covered in Phase 1 and having net worth exceeding Rs. 500 crores.

Phase III (opening balance sheet as at 1 April, 2014)*:-

·         Listed companies not covered in earlier phases.

The initial road map notified by MCA for conversion of Indian Accounting Standards.

the timeline given in the initial roadmap is no longer valid .

Revised IFRS convergence roadmap

The Ministry of Corporate Affairs (MCA) of the Government of India issued a revised roadmap for companies other than banking companies, insurance companies and non- banking finance companies for implementation of Indian Accounting Standards (Ind AS)converged  with   International   Financial   Reporting   Standards  (IFRS).    The    revisedRoadmap for Application of Converged Accounting Standards in India is given in the

following Table:

STATUS OF IMPLEMENTATION OF IND-AS

MCA has not notified the date of implementation of Ind-AS primarily on grounds of lack of consensus on its implementation. Several other regulatory issues are also required to be addressed, such as the approach to be followed by regulated entities such as banks, insurance and power distribution companies. Many of the IFRS are still undergoing revisions and some new IFRS were under process. This would require revisions/amendments in the notified Ind-AS, as well as also the notification of new Ind-AS. The Institute of Chartered Accountants of India (ICAI), has formulated Indian Accounting Standards (Ind ASs) converged with IFRS which are in line with corresponding IAS/IFRS, adoptable under the conditions prevailing in the country. These are the converged Indian Accounting Standards (Ind ASs) hosted by MCA on its website

the present Indian accounting principles already covers 75 to 80% of IFRS. Therefore, one only remaining 20-25% portion of the IFRS is new in India. Benefits of IFRS in India can be clarified with the following points:

(i)   Benefit to Economy: The convergence benefits the economy as it would result in

·         Increase growth of its international business.

·         orderly and efficient maintenance of capital markets

·         Increase the capital formation and economic growth.

·         Attracts international investors to invest and increase in foreign capital flows.

(ii)   Benefit to Investors: It would benefit the investors by

·         Providing investors the information that is more relevant, reliable, timely and comparable across the jurisdictions

·         Providing better understanding of investment opportunities

·         Reducing cost, time and efforts to understand the financial statements  Making global comparison easy

(iii)   Benefit to the industry: It would benefit the industry by

·         Making it able to raise capital from foreign markets at lower cost

·         Creating confidence in the minds of foreign investors

·         Reducing the burden of financial reporting

·         Reducing the costs of preparing financial statements and compliance.

(iv)      Benefit to the accounting professionals: It would benefit the accounting professionals by

·         Offering more opportunities in any part of the world

·         Making able to advise and comply with regulatory bodies all over world

CHALLENGES TO BE FACED FOR IFRS IMPLEMENTATION IN INDIA

There are several challenges that will be faced for IFRS implementation in India. IFRS implementation is more than a technical accounting issue in India. It will significantly affect a company‘s day-to-day operations. Some these are explained as below

1.     Problems due to difference in GAAP and IFRS: There are wide and deep differences between Indian GAAP and IFRS. These differences may impact business decision and performance. IFRS implementation in India requires change in financial statements reporting and new set of financial statements will be required to meet changes.

2.  Challenge to bring awareness of IFRS

Lack of awareness of IFRS is also a big problem IFRS implementation in India. For IFRS implementation in India requires creating awareness among the users of financial statements about of IFRS and its impact.

3.   Lack of training facilities: For IFRS implementation in India there is an urgent need of providing education and training to stakeholders, employees, auditors, regulators, tax authorities, etc about IFRS and its application. But in India there is lack of training and education facilities related with IFRS.

3.    Legal and Regulatory considerations: Currently, the reporting requirements are governed by various regulators in India and their provisions override other laws, IFRS does not recognise such overriding laws. The regulatory and legal requirements in India will pose a great challenge.

4 Impact on Taxation Laws: IFRS implementations in India affect most of the items in the financial statements. This will have important impact on the calculation tax liabilities. Thus, due to IFRS implementations in India there is a need to make changes in taxation laws of the country according to new circumstances.

5, Measurement Problems: IFRS is based on fair value measurement and it is valuing most of the items of financial statements on the basis of their fair value. The fair value measurement will bring drastic changes and subjectivity to the financial statements. Further, fair value measurement is a time consuming, laborious and costly process. It can be done with help of valuation experts.

7. Changes in Reporting and Disclosure systems: Due to IFRS implementations in India the companies have to amend existing business reporting and disclosure systems of accounting as the reporting and disclosure requirements under IFRS are different from the reporting requirements according to Indian principles.

8. Cost Concerns

Following are cost concern

• Initially cost increase very much due to dual reporting requirement
• Cost have to be incurred modifying traditional accounting for meeting the IFRS disclosures and reporting requirements.

SUMMARY

Convergence of Accounting Standards aims at developing a globally accepted common language of accounting. The process of globalization and increased cross-border investing are the important factors that have generated the need for the development and adoption of a single set of high-quality universal accounting standards. In India, the process of convergence with IFRS is carried by MCA. The Institute of Chartered Accountants of India (ICAI), has formulated Indian Accounting Standards (Ind-ASs) converged with IFRS which are in line with corresponding IAS/IFRS, adoptable under the conditions prevailing in the country. Convergence of Accounting Standards provides benefits to economy, investors industry and the accounting professionals. Difference in GAAP and IFRS, challenge to bring about awareness of IFRS, lack of training facilities, legal and regulatory considerations, impact on Taxation Laws, measurement problems, changes in reporting and disclosure systems and cost concerns are some of the problems which are posing challenges in the implementation of IFRS in India.

SUGGESTED READING

•    Garg Kamal (2013)“Practical Guide to IFRS and Ind-AS” Bharat Law House.
•   Morley, Mike “IFRS Simplified: A fast and easy-to-understand overview of the new International Financial Reporting Standards” Nixon-Carre Ltd
•  Raiyani  Jagadish  R.  “International  Financial  Reporting  Standards  (IFRS)  &Indian Accounting Practices”  New Century Publications.
•   Patel, Chintan N. and Bhupendra Mantri (2015) “Indian Accounting Standards (IND AS)” Taxmann.
• Tulsian . P.C (2014) “Financial Accounting” Pearson Education India.
•  Lal,  Jawahar  and  Seema  Srivastava  (2004)  “Financial  Accounting”  S.Chand (G/L) & Company Ltd.
•   Goyal, V.K. and Ruchi Goyal (2012) “Financial Accounting” PHI.
•   Maheshwari,  S.N.,  Suneel  K  Maheshwari  and  Sharad  K  Maheshwari(2012)“Financial Accounting” Vikas Publishing House Pvt Ltd.
•      Monga, J.R. “Avanced Financial Accounting” Mayoor Paperbacks.
•   Bhattacharyya Asish K., (2012)” Essentials of Financial Accounting” PHI.
•   A Comparative Study of Ind AS (Indian Accounting Standards) and AS (Accounting Standards) (2015), Taxmann.
• A Students Guide to IFRS (2012), Kaplan Publishing.

POINTS TO BE PONDER:

1.      Convergence of Accounting Standards is a step towards developing a globally accepted common language of accounting to communicate financial information of an entity.

2. The Institute of Chartered Accountants of India is premier accounting body in India.
3. Its purpose is to bring uniformity in preparation and presentation of accounting results
4. The Institute of Chartered Accountants of India formulated 32 Accounting Standards
5. The Institute of Chartered Accountants of India (ICAI), has formulated Indian Accounting Standards (Ind ASs) converged with IFRS which are in line with corresponding IAS/IFRS.
6. These are the converged Indian Accounting Standards (Ind ASs) hosted by MCA on its website.