IFRS - Challenges and Need for India Inc


By

Bhuvanesh Sharma
Company Secretary & Compliance Officer
HOV Services Limited
Pune
 


INTRODUCTION

The International Financial Reporting Standards the "IFRS" aims to make international financial reporting comparisons as easy as possible because each country has its own set of accounting rules. For example, U.S. GAAP is different from Canadian GAAP and both are far apart from India GAAP. Synchronizing accounting standards across the globe is an ongoing process in the international accounting community.

A set of international accounting and reporting standards that will help to harmonize company financial information, improve the transparency of accounting, and ensure that investors receive more accurate and consistent reports were attempted by International Accounting Standards Board (ISAB) between 1973 and 2001 and are designated as" International Accounting Standards". In 2001 IASB, adopted the first iteration of 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.

GLOBAL FOOT PRINTS OF IFRS

In last few years, because of emergence of the Global Economy and growing integration of world's capital markets, financial reporting have undergone significant changes. Many market participants are considering the question of whether it is possible or desirable to move toward a single "globally accepted financial reporting standard" so that these entities' can speak a uniform global "language" for financial reporting.

The proponents of this idea argue that a uniform set of global accounting standards, supported by strong corporate 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 across the globe.

Over the years the use of IFRS has emerged as widely used and accepted standard in the world with more than 12,000 companies and over 100 countries accepting and mandating its implementation. India aims to be joining IRFS club starting FY 2011.

The table representing the users of IFRS in different Key Markets across the globe refers ANNEXURE B.  

CONVERSION OR ADOPTION OF IFRS BY INDIAN COMPANY

India today has become an international economic force. Indian companies has surpassed in several sectors of the industry that includes, ITES, software, pharmaceutical, auto spare part to name a few. And to stay as a leader in the international market India opted the changes it need to interface Indian stakeholders', the international stakeholders' and comply with the financial reporting  in a language that is understandable to all of them. In response to the need several Indian companies have already been providing their financial statements as per US GAAP and/or IFRS on voluntary basis. But, however this is becoming more of a necessity then just being a best practice.

In the coming years, critical decisions will need to be made regarding the use of global accounting standards in India. 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.

Performance measures, based on Indian GAAP may need revisiting as it may change in IFRS adoption by fair amount on account of valuation aspect. Expectation of investor and market will also be required to be of paramount importance to manage in the adoption of process.

DEVELOPMENTS IN INDIA- IFRS

The Indian GAAP is influenced by several standard setters and influenced by Statute, namely Companies Act, Income Tax Act, Banking Regulation Act, Insurance Act etc and directions from regulatory bodies like RBI, SEBI, IRDA.

The legal or regulatory requirement will prevail over the IFRS requirement, in case of conflicts. Therefore, pre-conditions for IFRS adoption by India to be effective need amendments in required legislation and clarity on impact of IFRS adoption on Direct and Indirect taxes, especially transactions recorded at fair values.

Institute of Chartered Accountants of India is actively promoting the IASB's pronouncements in the country with a view to facilitating global harmonization of Accounting Standards and ICAI has pronounced that Indian GAAP will converge into IFRS with effect from April 1, 2011.

Under the statutory mandate provided by the Companies Act, 1956 the Central Government of India prescribes accounting standards in consultation with National Advisory Committee on Accounting Standards (NACS) established under the Companies Act, 1956. The Central Government notified 28 Accounting Standards (AS 1 to 7 and AS 9 to 29) in December 2006 in the Form of Companies (Accounting Standard Rules) 2006. While doing so the Central Government had adopted a policy of enabling disclosure of company account in a manner at par with accepted international practices, through a process of convergence with the IFRS. The NACS has taken up initiative for harmonization of accounting standards with IFRS would be continued with an intention of achieving convergence with IFRS by 2011.

Ministry of Corporate Affairs has also set up a high powered group comprising of various stakeholders under the Chairmanship of Mr. Anurag Goel, Secretary to discuss and resolve implementation challenges with regard to convergence of Indian Accounting Standards with IFRS from 2011.

In November 2009 SEBI decided to provide an option to all listed entities with subsidiaries to submit their consolidated financial statements as per IFRS to be in line with objective of convergence to IFRS by 2011. 

On January 22, 2010, the Ministry of Corporate Affairs issued a press release which laid out a phased plan by which IFRS convergence will be achieved in India for companies other than Banking and Insurance Companies. This important announcement had cleared all clouds of IFRS convergence and provided the road map in phase manner for achieving convergence in India effective April 1, 2011.

According to the above press release, there will be two separate sets of Accounting Standards under Section 211(3C) of the Companies Act, 1956. The two sets would be as described below:

First set would comprise of the Indian Accounting Standards which are converged with the IFRS (IFRS converged standards). It shall be applicable to specified class of companies;

Second set would comprise of the existing Indian Accounting Standards (Existing Accounting Standards) and would be applicable to other companies including small and medium companies (SMCs).

The table below set out the applicability of First set of standards to specified class of companies in phase manner:

Phase

Specified class of companies

Effective Date

I

Companies in Nifty 50
Companies in Sensex 30
Companies shares or other securities listed on stock exchanges outside India
Companies (whether listed or not) having net worth in excess of Rs 1,000 crores

April 1, 2011

II

Companies (whether listed or not) having net worth in excess of Rs 500 crores but less than Rs. 1, 000 crores

April 1, 2013

III

All listed companies with net worth less than Rs 500 crores

April 1, 2014


The above enlisted specified class of companies will prepare an opening balance sheet in accordance with IFRS converged standards as of effective date and will follow the IFRS converged standards from the respective effective date as mentioned in above table.

On March 31, 2010, the Ministry of Corporate Affairs issued the final road map of Convergence with IFRS for Banking and Insurance Companies also, which were excluded from the earlier notification issued on 22nd January 2010.  In brief:

All insurance companies will converge with Converged Indian accounting standards effective April 1, 2012. 

All scheduled commercial banks will converge effective April 1, 2013. A phased approach of convergence is prescribed for urban co-operative Banks. 

NBFC which are part of Nifty - 50, Sensex 30 and NBFCs (listed or unlisted) having net worth of more than 1,000 crores will converge effective April 1, 2013.   All other listed NBFC's and other NBFCs having a net worth in excess of Rs 500 crores would converge effective April 1, 2014.  Unlisted NBFCs having a net worth of less than Rs 500 crores are not mandatorily required to converge but may voluntarily decide to converge. 

There by, now the entire road map for Convergence with IFRS is conclusively defined for all categories of companies in India.

Thus, going by aforesaid directives if, corporate India needs to publish IFRS financial statements for 2011-2012, this would require comparatives for 2010-11, i.e., an opening balance sheet is required April 1, 2010. In a nutshell, this means that the real work for corporate India starts now.

APPLICABILITY OF IFRS

According to the Concept Paper on Convergence with IFRS in India, issued by ICAI in October 2007, the IFRS should be applicable to Public Interest Entities (PIE). PIE has been defined to include:

All listed companies;
All banking companies;
All financial institutions;
All scheduled commercial banks;
All insurance companies; and
All NBFC.

ADOPTION OR CONVERGENCE ?

The two terms though used interchangeably but there is a faint but important difference.

Adoption- is process of adopting IFRS as issued by IASB, with or without modifications. Modifications being, generally in the nature of additional disclosures requirement or elimination of alternative treatment. It involves an endorsement of IFRS by legislative or regulatory with minor modifications done by standard setting authority of a country.

Convergence- is harmonization of national GAAP with IFRS through design and maintenance of accounting standards in a way that financial statements prepared with national accounting standards are in compliance with IFRS.

WHAT WILL CHANGE?

Any kind of change results in some what different conditions. Similarly convergence to IFRS, which is indeed a complex process will, brings about a change inter-allia in the following:

Change in existing GAAP;
Changes in numbers reported;
Changes to the accounting policies;
Changes in procedures adopted by the company;
Changes in financial reporting systems and
Improving the IFRS skills for company personnel.

Either convergence or adoptions, both has important implication and will require synchronization of both internal and external reporting keeping in view that it can have a deep and wide impact on overall aspects of the organization as such mentioned below;

Affecting investor relations;
HR rewards;
Debts covenants;
Performance measures; and
Investors and market expectations.

WHO WILL BE BENEFITED?

The convergence with IFRS entails benefit to the following:

The Investors:- The investor will be benefited in as the way accounting information made available to them will be more reliable, relevant, timely and most importantly the information will be comparable across different legal framework. It will develop better understanding and confidence among the investors.

The Professional:- The professional, both in practice and in employment will get benefits as they will be able to provide their services in various part of the world, as few years after everybody will follow the same reporting standards.

The Corporate world:- The Indian corporate reputation and relationship with international finance community will elevate because of achievement of higher level of consistency between reporting structure and requirements; better access to international markets; improving confidence among the international investors. The international comparability will also get improve strengthening the industrial and capital markets in the country.

CHALLENGES TO BE FACED?

Despite several benefits as may be looked out by the different people, there will be several challenges that will be faced on the way of IFRS convergence.

The first and far most would be from the differences between Indian GAAP and IFRS.  The differences are wide and very deep routed, to say a few -Plant Property and Equipment (PPE) accounting, Financial Instruments accounting, Investment accounting, Business combination, Share based payment, current and non-current classification of asset and liabilities, presentation of financial statements, all are not dealt under Indian GAAP.

Convergence is not just one time technical steps but will impose practical challenges of significant business and regulatory matters like structuring of ESOP schemes, training of employees, tax planning, modification of IT system, compliance with debt covenants.  

Educating investors to understand the changed financial reporting's under IFRS.

Challenges on account of differences in various conceptual, practical, legal and implementation methods.  The Indian GAAP keeps abreast the local conditions, including the legal and economic environment. For example AS 29 does not specifically deal with constructive obligation whereas IAS 37 deals specifically with this in the context of creation of a provision. The effect of this is that in some cases provisions will be required to be recognized at an early stage.

The regulatory and legal requirements in India will pose a challenge unless the same is been addressed by respective regulatory. For example the present direct tax laws do not address any tax implications likely to arise from IFRS transitions.

Complexities of the introduction of concepts such as present value and fair value measurement, recognition and the extent of disclosure required under IFRS. For example, a few listed below though not all:

IFRS does not provide for the compromise, merger and amalgamation through court schemes, effect of all such schemes are recognized through income statement.

Treatment of expenses like premium payable on redemption of debentures, discount allowed on issue of debentures, underwriting commission paid on issue of debentures etc is different. This would bring a change in income statement leading to enormous confusion and complexities.

Equity definition changed, this would result impact on tax benefits where interest is treated as receiving a dividend.

Financial statements more complex under IFRS and thereby would pose challenge making useful decision.

The law and regulations of a country is a land specific and so of India too.  

Therefore, to overcome the challenges, a Core Group has been constituted by Indian regulatory to identify inconsistencies between IFRS and as listed below,

Companies Act;
SEBI Regulations;
Banking Laws & Regulations; and
Insurance Laws & Regulations.

A draft Schedule VI consistence with IFRS has been formulated and sent to Ministry of Corporate Affairs, most probable to get passed under Companies Amendment Bill 2009. Formats of financials statements under Schedule III of Banking Regulations Act and Formats for financials statements for insurance entities under IRDA regulations, are also consider for revision to be in consonance with IFRS.

The Annexure A attached set out the comparison of current Indian Accounting Standard with corresponding number of IFRS/IAS.

ANNEXURE A 

COMPARISON WITH CURRENT INDIAN ACCOUNTING STANDARD WITH THE CORRESPONDING NUMBER OF RELEVANT IAS/IFRS

Indian Accounting Standard

 

IAS/IFRS

AS No.

Name of Standard

 

IAS/ IFRS No.

Name of Standard

1

Disclosures of Accounting Policies

 

1

Presentation of financial statements

2

Valuation of Inventories

 

2

Inventories

3

Cash Flow Statements

 

7

Statements of Cash Flows

4

Contingencies and Events Occurring after the Balance Sheet Date

 

10

Events after the Reporting Period

5

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

 

8

Accounting Policies, Changes in Accounting Estimates and Errors

6

Depreciation

   

No equivalent standard. Included in IAS 16

7

Constructions Contracts

 

11

Constructions Contracts

9

Revenue Recognition

 

18

Revenue

10

Accounting for Fixed Assets

 

16

Property, Plant and Equipment

11

The Effects of Changes in Foreign Exchanges Rates

 

21

The Effects of Changes in Foreign Exchanges Rates

12

Accounting for Government Grants

 

20

Accounting for Government Grants and Disclosure of Government Assistance

13

Accounting for Investments

   

Mainly dealt with in IAS 39

14

Accounting for Amalgamations

 

IFRS 3

Business Combinations

15

Employee Benefits

 

19

Employee Benefits

16

Borrowing Costs

 

23

Borrowings Costs

17

Segment Reporting

 

IFRS 8

Operating Segments

18

Related Party Disclosures

 

24

Related Party Disclosures

19

Leases

 

17

Leases

20

Earnings Per Share

 

33

Earnings Per Share

21

Consolidated Financial Statements

 

27

Consolidated and Separate Financial Statements

22

Accounting for Taxes for Income

 

12

Income Taxes

23

Accounting for Investment in Associates in Consolidated Financial Statements

 

28

Investments in Associates

24

Discontinuing Operations

 

IFRS 5

Non-current Assets Held for Sale and Discontinued Operations

25

Interim Financial Reporting

 

34

Interim Financial Reporting

26

Intangible Assets

 

38

Intangible Assets

27

Financial Reporting of Interest in Joint Ventures

 

31

Interest in Joint Ventures

28

Impairment of Assets

 

36

Impairment of Assets

29

Provisions, Contingent Liabilities and Contingent Assets

 

37

Provisions, Contingent Liabilities and Contingent Assets

30

Financial Instruments: Recognition and Measurement

 

32

Financial Instruments: Recognition and Measurement

31

Financial Instruments: Presentation

 

39

Financial Instruments: Presentation

32

Financial Instruments: Disclosures

 

IFRS 7

Financial Instruments: Disclosures


However, currently there are no corresponding Standards available under Indian GAAP for the following IAS/IFRS:

IAS 26- Accounting and Reporting by retirement Benefit Plans
IAS 29- Financial Reporting in Hyperinflationary Economies
IAS 40-Investment Property
IAS 41- Agriculture
IFRS 1- First Time Adoption of International Financial Reporting Standards
IFRS 2- Share Based Payment
IFRS 4- Insurance Contracts
IFRS 6- Exploration for and Evaluation of Mineral Resources

ANNEXURE B

IFRS Adoption

Year

Australia

2005

Israel

2005

New Zealand

2005

European Union

2005

Brazil

2010

Canada

2011

India

2011

Russia

Undecided

IFRS Convergence

 

China

2007

Japan

2011

United States

2013

India

2014]


REFERENCES:

www.sebi.gov..in
www.bseindia.com
www.nseindia.com
www.mca.gov.in
http://ifrs.icai.org/
www.icai.org
 


Bhuvanesh Sharma
Company Secretary & Compliance Officer
HOV Services Limited
Pune
 

Source: E-mail July 9, 2010

 

         

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