Transitional Measures in IFRS

The transitional measures initially deal with four situations:

- An amount treated as a trading receipt under IFRS and which was also treated as a trading receipt in computing profits or gains under Indian GAAP, e.g. income originally taxed in 2007 which has been deferred until 2008, is regarded as a ‘deductible amount’. An example might include the deferral of income caused by the recognition of upfront fees or commissions by a financial institution over the life of a loan rather than in year one.

IAS -1 (Technical Summary)

IAS 1 Presentation of Financial Statements

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards.

Objective:-

This Standard prescribes the basis for presentation of general purpose financial statements to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities. It sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content.

A complete set of financial statements comprises:

Introduction of uniform accounting standards, need of the hour

A BUSINESSMAN on presenting his company's financial records to different accountants are likely to get varied estimates on projected profits for the forthcoming year. The need of the hour was the introduction of uniform accounting standards. This was the consensus opinion of a set of accountants who met here to weigh the pros and cons of International Financial Reporting Standards (IFRS).

IFRS-7 (Technical Summary)

IFRS 7 Financial Instruments: Disclosures

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB.

For the requirements reference must be made to International Financial Reporting Standards.

IFRS 7 Financial Instruments: Disclosures

Objective

IFRS-6(Technical Summary )

IFRS 6 Exploration for and Evaluation of Mineral Resources

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards. IFRS 6 Exploration for and Evaluation of Mineral Resources

Objective:-

IFRS-5 (Technical Summary)

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

Objective :-

IFRS-4 (Technical Summary)

IFRS 4 Insurance Contracts

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards. IFRS 4 Insurance Contracts

Objective:-

The objective of this IFRS is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance contracts. In particular, this IFRS requires:

(a) limited improvements to accounting by insurers for insurance contracts.

(b) disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts.

Definition of insurance contract:

An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.

Applicability of Insurance Contracts:-

The IFRS applies to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds, except for specified contracts covered by other IFRSs. It does not apply to other assets and liabilities of an insurer, such as financial assets and financial liabilities within the scope of IAS 39 Financial Instruments: Recognition and Measurement. Furthermore, it does not address accounting by policyholders.

The IFRS exempts an insurer temporarily (ie during phase I of this project) from some requirements of other IFRSs, including the requirement to consider the Framework in selecting accounting policies for insurance contracts. However, the IFRS:

(a) prohibits provisions for possible claims under contracts that are not in existence at the end of the reporting period (such as catastrophe and equalisation provisions).

(b) requires a test for the adequacy of recognised insurance liabilities and an impairment test for reinsurance assets.

(c) requires an insurer to keep insurance liabilities in its statement of financial position until they are discharged or cancelled, or expire, and to present insurance liabilities without offsetting them against related reinsurance assets.

Accounting policies for insurance  contracts:-

The IFRS permits an insurer to change its accounting policies for insurance contracts only if, as a result, its financial statements present information that is more relevant and no less reliable, or more reliable and no less relevant. In particular, an insurer cannot introduce any of the following practices, although it may continue using accounting policies that involve them:

(a) measuring insurance liabilities on an undiscounted basis.

(b) measuring contractual rights to future investment management fees at an amount that exceeds their fair value as implied by a comparison with current fees charged by other market participants for similar services.

(c) using non-uniform accounting policies for the insurance liabilities of subsidiaries.

The IFRS permits the introduction of an accounting policy that involves remeasuring designated insurance liabilities consistently in each period to reflect current market interest rates (and, if the insurer so elects, other current estimates and assumptions). Without this permission, an insurer would have been required to apply the change in accounting policies consistently to all similar liabilities.

Disclosure:-

The IFRS requires disclosure to help users understand:

(a) the amounts in the insurer’s financial statements that arise from insurance contracts.

(b) the amount, timing and uncertainty of future cash flows from insurance contracts

IFRS-3 (Technical Summary)

 IFRS 3 Business Combinations

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards.

Objective:-

IFRS-2 (Technical Summary )

IFRS 2 Share-based Payment

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards. IFRS 2 Share-based Payment

Financial reporting  of Share Based Payment:-

The objective of this IFRS is to specify the financial reporting by an entity when it undertakes a share-based payment transaction. In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees.

The IFRS requires an entity to recognize share-based payment transactions in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity. There are no exceptions to the IFRS, other than for transactions to which other Standards apply.

This also applies to transfers of equity instruments of the entity’s parent, or equity instruments of another entity in the same group as the entity, to parties that have supplied goods or services to the entity.


Types of share-based payment transactions:

The IFRS sets out measurement principles and specific requirements for three types of share-based payment transactions:
(a) equity-settled share-based payment transactions, in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options);
(b) cash-settled share-based payment transactions, in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s shares or other equity instruments of the entity; and
(c) transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments.

Valuation of share-based payment transactions:-

 A) Equity-settled share-based payment

For equity-settled share-based payment transactions, the IFRS requires an entity to measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the entity is required to measure their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. Furthermore:

(a) For transactions with employees and others providing similar services, the entity is required to measure the fair value of the equity instruments granted, because it is typically not possible to estimate reliably the fair value of employee services received. The fair value of the equity instruments granted is measured at grant date.

(b) For transactions with parties other than employees (and those providing similar services), there is a rebuttable presumption that the fair value of the goods or services received can be estimated reliably. That fair value is measured at the date the entity obtains the goods or the counterparty renders service. In rare cases, if the presumption is rebutted, the transaction is measured by reference to the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders service.

(c) For goods or services measured by reference to the fair value of the equity instruments granted, the IFRS specifies that vesting conditions, other than market conditions, are not taken into account when estimating the fair value of the shares or options at the relevant measurement date (as specified above). Instead, vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for goods or services received as consideration for the equity instruments granted is based on the number of equity instruments that eventually vest. Hence, on a cumulative basis, no amount is recognised for goods or services received if the equity instruments granted do not vest because of failure to satisfy a vesting condition (other than a market condition).

(d) The IFRS requires the fair value of equity instruments granted to be based on market prices, if available, and to take into account the terms and conditions upon which those equity instruments were granted. In the absence of market prices, fair value is estimated, using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an arm’s length transaction between knowledgeable, willing parties.

(e) the IFRS also sets out requirements if the terms and conditions of an option or share grant are modified (eg an option is repriced) or if a grant is cancelled, repurchased or replaced with another grant of equity instruments. For example, irrespective of any modification, cancellation or settlement of a grant of equity instruments to employees, the IFRS generally requires the entity to recognise, as a minimum, the services received measured at the grant date fair value of the equity instruments granted.

B) cash-settled share-based payment

For cash-settled share-based payment transactions, the IFRS requires an entity to measure the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity is required to remeasure the fair value of the liability at each reporting date and at the date of settlement, with any changes in value recognised in profit or loss for the period.

C) Where the Contract Provides  Equity-settled share-based payment or  cash-settled share-based payment

For share-based payment transactions in which the terms of the arrangement provide either the entity or the supplier of goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments, the entity is required to account for that transaction, or the components of that transaction, as a cash-settled share-based payment transaction if, and to the extent that, the entity has incurred a liability to settle in cash (or other assets), or as an equity-settled share-based payment transaction if, and to the extent that, no such liability has been incurred.

Disclosure Requirements:-

The IFRS prescribes various disclosure requirements to enable users of financial statements to understand:

(a) The nature and extent of share-based payment arrangements that existed during the period;

(b) How the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined; and

(c) The effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position.

IFRS-1 (Technical Summary)

IFRS 1 First-time Adoption of International Financial Reporting Standards

Technical Summary

This extract has been prepared by IASC Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards.

High Quality Information:-

The objective of this IFRS is to ensure that an entity’s first IFRS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high quality information that:

(a) is transparent for users and comparable over all periods presented;

(b) provides a suitable starting point for accounting under International Financial Reporting Standards (IFRSs); and

(c) can be generated at a cost that does not exceed the benefits to users.

Transition Period Financials:-

An entity shall prepare and present an opening IFRS statement of financial position at the date of transition to IFRSs. This is the starting point for its accounting under IFRSs.An entity shall prepare an opening IFRS balance sheet at the date of transition to IFRSs. This is the starting point for its accounting under IFRSs. An entity need not present its opening IFRS balance sheet in its first IFRS financial statements.

In general, the IFRS requires an entity to comply with each IFRS effective at the end of its first IFRS reporting period. In particular, the IFRS requires an entity to do the following in the opening IFRS statement of financial position that it prepares as a starting point for its accounting under IFRSs:
(a) recognise all assets and liabilities whose recognition is required by IFRSs;
(b) not recognise items as assets or liabilities if IFRSs do not permit such recognition;
(c) reclassify items that it recognised under previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity under IFRSs; and
(d) apply IFRSs in measuring all recognised assets and liabilities.

Exemption from Reporting:-

The IFRS grants limited exemptions from these requirements in specified areas where the cost of complying with them would be likely to exceed the benefits to users of financial statements. 

Retrospective Application:-

The IFRS also prohibits retrospective application of IFRSs in some areas, particularly where retrospective application would require judgement by management about past conditions after the outcome of a particular transaction is already known.

Disclosure:-

The IFRS requires disclosures that explain how the transition from previous GAAP to IFRSs affected the entity’s reported financial position, financial performance and cash flows.

RBI working on IFRS guidelines for banks

Auditing and consulting firms are working with the Reserve Bank of India (RBI) and the Indian Banks' Association (IBA) on adopting international financial reporting standards (IRFS) for banks in India.

Currently, the RBI is working on the procedures for the adoption of IFRS accounting standards. It should come out with guidelines soon

All listed companies and enterprises dealing with public funds will be required to prepare and present financial statements using accounting principles and methods stipulated in IFRS, once it is adopted. The International Accounting Standards Board (IASB) issues IFRS.

"Most countries throughout the world, including European countries and the US, are adopting total convergence with IFRS," said Doshi, adding that once the standards are adopted in India, the financial impact of convergence for Indian banks will be significant.

Difference will be especially felt in areas related to loan loss provisioning, financial instruments and derivative accounting, she added.

"There is likely to be a significant impact on the financial position and performance of banks, directly affecting key parameters like capital adequacy ratios and outcomes of valuation metrics," she noted.

Doshi also said that with IFRS in place, the historic cost will be substituted by fair values for several balance sheet items. This will enable corporates to know their true worth. "By providing transparent and comparable financial information, IFRS reporting will provide a thrust to cross-border acquisitions," she commented.

It will also enable partnerships and alliances with foreign entities and lower the cost of integration in post-acquisition periods, pointed out experts.

However, for successful implementation of IFRS, there needs to be a dedicated team for project implementation with proper knowledge of IFRS

Do We Need Fair Value Accounting?

Sudden Decline in Economy:-

Some argue that fair value accounting has exacerbated the current credit crisis. In the current crisis, declining housing prices reduced the value of all mortgage based securities (MBS), since the housing collateral protecting them is much less. Because of the mark-to-market losses, companies have to raise capital for meeting capital adequacy requirements. When MBS or other assets are sold to raise capital, the market value is driven down further. Worse still, the distress prices becomes the new price for valuation of all similar instruments held by all companies. This domino effect results in a downward death spiral. The credit rating agencies downgrade the company’s credit ratings, making borrowings to meet capital requirements more difficult. This eventually results in the collapse of the company. 

Notional Gains and Losses:-

In normal times, fair value accounting would not have been a subject of great debate. However, in boom or bust times, some may argue if fair value accounting results in notional gains and losses, since the eventual settlement price of the financial assets/liabilities could be substantially different. However, those criticising fair value accounting do not seem to provide any credible alternatives.

Historical Cost or Fair Value:-

 Do we go back to historical cost accounting, wherein the financial assets are stated at outdated values and hence are not relevant or reliable? Do we become fortune-tellers and use the crystal ball to determine the futuristic value at which the financial assets would be settled? Is it therefore not appropriate to state financial assets at their fair values prevailing at the balance sheet date? In the current crisis, a question that is raised is, should assets be marked down to their current throw away prices, as companies may not want to sell them at those values. Still others may view the artificially low values as the market values and the best representative value of the asset at the balance sheet date. It is quite evident that irrespective of an entity’s intention to not sell the assets at distressed values liquidity pressures have forced companies to make the so called fire sales. In the current market scenario, any accounting which fails to highlight the liquidity risk, in the way that fair value accounting does, would not serve the interest of investors and other stakeholders. 

Basis of Valuation:-

One of the issues has been finding a reliable basis for the valuation of financial instruments as markets liquidity disappeared. And when comparable transactions are available, some have questioned whether these are representative of normal, active markets, or of distressed sales and therefore, whether these could be ignored for valuation purposes under IFRS or US GAAP. As many assets and liabilities do not have an active market, the inputs and methods for estimating their fair value are subjective making fair valuation less reliable. US Federal Reserve research shows that fair value estimates for bank loans can vary greatly depending on the valuation inputs and methodology used.

Difference in IFRS and Indian AS

- The increased use of fair value measurement and amortised cost (rather than cost), particularly in the financial services sector and for financial instruments such as interest rate hedges;

- Greater use of discounting;

- More capitalization or deferral of costs that may have been expensed previously, e.g. development costs;

- More recognition of specific types of intangibles;

- The treatment of actuarial differences on defined benefit pension schemes;

- The recognition of share options granted to, and other share based payments made to, employees as an expense of the employer;

- A prohibition of the use of the closing rate to translate foreign operations and the introduction of a new option to present results in any currency;

- New rules for accounting for foreign exchange forward contracts;

- Splitting certain bonds into debt and equity components;

- Acceleration or deferral of income due to new income recognition rules;

- New accounting disclosures.

IFRS-2 and Indian Norms

How are the Indian norms different from those specified by the IFRS (International Financial Reporting Standards) in IFRS-2 `Share-based Payments'?

Though the ICAI's guidance note is largely similar to IFRS-2, there are certain critical aspects of share-based payments which are not touched by the Indian accounting guidance.

kinds of share-based payments : A critical difference between the Indian standard and its international counterpart is that the IFRS deals with all kinds of share-based payments, whereas the Indian guidance note applies only to employee share-based payments such as ESOPs and Employee Stock Purchase Plan (ESPP).

Share-based considerations for purchase of goods and services. : At present, there is no guidance available in India for arrangements where share-based considerations are given for purchase of goods and services. The IFRS goes one step further to discuss situations even where the goods or services received in exchange are not identifiable, like in cases where shares are granted to charitable institutions. The Indian framework would again be at a loss to deal with such a situation.

Group Shares Transactions : Further, the IFRS also contains guidance on treatment of stock options given to employees of a subsidiary or any other group company, commonly known as `Group Shares Transactions'. There is no guidance available in India for accounting of such transactions and the SEBI guidelines only require disclosures for these in the financials of both the parent and the subsidiary company.

Tax Once the IFRS is mandatorily adopted in India, a key matter relating to ESOP plans will emerge as a common issue across entities: the treatment of Fringe Benefit Tax (FBT) on ESOPs in case where a company claims reimbursement of such tax from the concerned employee. While one would tend to think that such an arrangement being in the nature of a reimbursement is best treated as a reimbursement of tax for the entity, there is an ongoing debate on the accounting treatment under the IFRS: Whether the IFRS will treat this arrangement more as a modification to the terms of the options, whereby the exercise price is increased to include the FBT element and then accounted for as a modification to the terms and conditions?

The ICAI's guidance note prescribes accounting depending on whether the liability would be `equity settled' or `cash settled', whereas SEBI's guideline does not differentiate between these two.

IFRS -8 (Technical Summary))

Technical Summary

This extraction has been prepared by IASC Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standards. IFRS 8 Operating Segments

Core principle—An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.

This IFRS shall apply to:

(a) the separate or individual financial statements of an entity:

(i) whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or

(ii) that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market; and

(b) the consolidated financial statements of a group with a parent:

(i) whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or

(ii) that files, or is in the process of filing, the consolidated financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market.

The IFRS specifies how an entity should report information about its operating segments in annual financial statements and, as a consequential amendment to IAS 34 Interim Financial Reporting, requires an entity to report selected information about its operating segments in interim financial reports. It also sets out requirements for related disclosures about products and services, geographical areas and major customers.

The IFRS requires an entity to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments

The IFRS requires an entity to report a measure of operating segment profit or loss and of segment assets. It also requires an entity to report a measure of segment liabilities and particular income and expense items if such measures are regularly provided to the chief operating decision maker. It requires reconciliations of total reportable segment revenues, total profit or loss, total assets, liabilities and other amounts disclosed for reportable segments to corresponding amounts in the entity’s financial statements.

The IFRS requires an entity to report information about the revenues derived from its products or services (or groups of similar products and services), about the countries in which it earns revenues and holds assets, and about major customers, regardless of whether that information is used by management in making operating decisions. However, the IFRS does not require an entity to report information that is not prepared for internal use if the necessary information is not available and the cost to develop it would be excessive.

The IFRS also requires an entity to give descriptive information about the way the operating segments were determined, the products and services provided by the segments, differences between the measurements used in reporting segment information and those used in the entity’s financial statements, and changes in the measurement of segment amounts from period to period.

Great Opportunity in IFRS

Please read the following article on IFRS published in Economic Times on 07/07/2008 and see the BIG opportunity before professionals

IFRS : The impact on Indian corporates
Adopting international financial reporting standards (IFRS) by Indian corporates is going to be very challenging but at the same time could also be rewarding

THE use of international financial reporting standards (IFRS) as a universal financial reporting language is gaining momentum across the globe. Over a 100 countries in the European Union, Africa, West Asia and Asia-Pacific regions either require or permit the use of IFRS. The Institute of Chartered Accountants of India (ICAI) has recently released a concept paper on Convergence with IFRS in India, detailing the strategy for adoption of IFRS in India with effect from April 1, 2011. This has been strengthened by a recent announcement from the ministry of corporate affairs (MCA) confirming the agenda for convergence with IFRS in India by 2011. Even in the US there is an ongoing debate regarding the adoption of IFRS replacing US GAAP. Adopting IFRS by Indian corporates is going to be very challenging but at the same time could also be rewarding. Indian corporates are likely to reap significant benefits from adopting IFRS. The European Union’s experience highlights many perceived benefits as a result of adopting IFRS. Overall, most investors, financial statement preparers and auditors were in agreement that IFRS improved the quality of financial statements and that IFRS implementation was a positive development for EU financial reporting (2007 ICAEW Report on ‘EU Implementation of IFRS and the Fair Value Directive’). There are likely to be several benefits to corporates in the Indian context as well. These are: • Improvement in comparability of financial information and financial performance with global peers and industry standards. This will result in more transparent financial reporting of a company’s activities which will benefit investors, customers and other key stakeholders in India and overseas; • The adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements. This, in turn, will lead to increased trust and reliance placed by investors, analysts and other stakeholders in a company’s financial statements; and • Better access to and reduction in the cost of capital raised from global capital markets since IFRS are now accepted as a financial reporting framework for companies seeking to raise funds from most capital markets across the globe. A recent decision by the US Securities and Exchange Commission (SEC) permits foreign companies listed in the US to present financial statements in accordance with IFRS. This means that such companies will not be required to prepare separate financial statements under Generally Accepted Accounting Principles in the US (US GAAP). Therefore, Indian companies listed in the US would benefit from having to prepare only a single set of IFRS compliant financial statements, and the consequent saving in financial and compliance costs. However, the perceived benefits from IFRS adoption are based on the experience of IFRS compliant countries in a period of mild economic conditions. The current decline in market confidence in India and overseas coupled with tougher economic conditions may present significant challenges to Indian companies. IFRS requires application of fair value principles in certain situations and this would result in significant differences from financial information currently presented, especially relating to financial instruments and business combinations. Given the current economic scenario, this could result in significant volatility in reported earnings and key performance measures like EPS and P/E ratios. Indian companies will have to build awareness amongst investors and analysts to explain the reasons for this volatility in order to improve understanding, and increase transparency and reliability of their financial statements. This situation is worsened by the lack of availability of professionals with adequate valuation skills, to assist Indian corporates in arriving at reliable fair value estimates. This is a significant resource constraint that could impact comparability of financial statements and render some of the benefits of IFRS adoption ineffective. Although IFRS are principles-based standards, they offer certain accounting policy choices to preparers of financial statements. For example, the use of a cost-based model or a revaluation model in accounting for investment properties. This could reduce consistency and comparability of financial information to a certain extent and therefore reduce some of the benefits from IFRS adoption. IFRS are formulated by the International Accounting Standards Board (IASB) which is an international standardsetting body. However, the responsibility for enforcement and providing guidance on implementation vests with local government and accounting and regulatory bodies, such as the ICAI in India. Consequently, there may be differences in interpretation or practical application of IFRS provisions, which could further reduce consistency in financial reporting and comparability with global peers. The ICAI will have to make adequate investments and build infrastructure to ensure compliance with IFRS. In addition to the above, there are several impediments and practical challenges to adoption of and full compliance with IFRS in India. These are: • The need for a change in several laws and regulations governing financial accounting and reporting in India. In addition to accounting standards, there are legal and regulatory requirements that determine the manner in which financial information is reported or presented in financial statements. For example, the Companies Act, 1956 determines the classification and accounting treatment for redeemable preference shares as equity instruments of a company, whereas these may be considered to be a financial liability under IFRS. The Companies Act (Schedule VI) also prescribes the format for presentation of financial statements for Indian companies, whereas the presentation requirements are significantly different under IFRS. Similarly, the Reserve Bank of India regulates the financial reporting for banks and other financial institutions, including the presentation format and accounting treatment for certain types of transactions. The recent announcement by the MCA is encouraging as it indicates government support for the timetable for convergence with IFRS in India. However, the announcement stops short of endorsing the roadmap for convergence and the full adoption of IFRS that is discussed in ICAI’s concept paper. In the absence of adequate clarity and assurance that Indian laws and regulations will be amended to conform to IFRS, the conversion process may not gain momentum. • There is a lack of adequate professionals with practical IFRS conversion experience and therefore many companies will have to rely on external advisers and their auditors. This is magnified by a lack of preparedness amongst Indian corporates as this project may be viewed simply as a project management or an accounting issue which can be left to the finance function and auditors. However, it should be noted that IFRS conversion will involve a fundamental change to an entity’s financial reporting systems and processes. It will require a detailed knowledge of the standards and the ability to consider their impact on business transactions and performance measures. Further, the conversion process will need to disseminate and embed IFRS knowledge throughout the organisation to ensure its application on an ongoing basis. • Another potential pitfall is viewing IFRS accounting rules as “similar” to Generally Accepted Accounting Principles in India (Indian GAAP), since Indian accounting standards have been formulated on the basis of principles in IFRS. However, this view disregards significant differences between Indian GAAP and IFRS as well as differences in practical implementation and interpretation of similar standards. Further, certain Indian standards offer accounting policy choices which are not available under IFRS, for example, use of pooling of interests method in accounting for business combinations. There is an urgent need to address these challenges and work towards full adoption of IFRS in India. The most significant need is to build adequate IFRS skills and an expansive knowledge base amongst Indian accounting professionals to manage the conversion projects for Indian corporates. This can be done by leveraging the knowledge and experience gained from IFRS conversion in other countries and incorporating IFRS into the curriculum for professional accounting courses. Ultimately, it is imperative for Indian corporates to improve their preparedness for IFRS adoption and get the conversion process right. Given the current market conditions, any restatement of results due to errors in the conversion process would be detrimental to the company involved and would severely damage investor confidence in the financial system. (The author is COO, KPMG India)

Importance of IFRS

ICAI has announced convergence to IFRS by 2011 and that is not very far away since firms would need to start with an opening IFRS balance sheet as of 1 April 2009. As compared to Canada where 79% of senior management including Audit Committees has formulated a strategic plan to manage IFRS conversions by 2011, India is definitely lagging behind.
The Independent Directors and Audit Committee members should push for clarity on adoption of IFRS of these listed companies. There is the option of getting on to the bus now and figuring the best route. IFRS is principle based vis a vis rule based and hence you can choose principles to your advantage—you need to know what your choices are. India has the benefit of leveraging on global experiences if one wants to be based on which industry you are in. IFRS conversion is not unfortunately just a “switch” or another “MS excel driven” process where overnight you can convert—there are impacts on financials, people and processes and IT systems that need to be considered. It is not another finance project where the CFO and the controllers department can burn midnight oil and produce magic period on period. There are various inputs that would need to be given by operations. The quantum of information processed outside a system has inherent data integrity risks. If you are a CEO or an analyst or investor relations or HR head you need to be able to explain to public and employees, more importantly how numbers stack. You need to address a range of issues from tax structuring to wording your contracts to revisiting your incentives calculation to training people across the company—so this is as much a CEO agenda as a CFO’s.
Here are ten questions/points to attain “IFRS Nirvana”. Determine the scope of companies in your group that would need to converge and assess what you want to achieve by when and agree with the Audit Committee Chair? Do you want to merge your internal reporting and IFRS to avoid multiple financial closures? Considering that this would be a change in primary GAAP, do you want to go down the path of systems based conversion? Identify a team and treat this as a project—evaluate how you would bridge any gap in technical skill sets by training or seeking assistance. Evaluate the relevant principles and arrive at the choices...
after involving the Audit Committee, CEO and CFO. Identify issues that may require large amount of data gathering and evaluate the best method to get it—set separate teams at work on this. Prepare a sample financials for your company and educate the relevant stakeholders on differences. Do an impact assessment not just on financials but also people, processes and IT.
I can hear some of you saying, “This is India and government would take a long time to move any of the IFRS related decisions. We have all the time in the world and I would master this by then—why start now? Many people are laid back expecting convergence to get stuck with regulators or tax authorities or political agencies. If you are taking chances on this it is at your own risk. Canada was in the same complacency boat until it was rocked by the stock exchange announcing a mandatory disclosure on how companies are planning to handle the convergence
Look at this from a cost perspective. If you start late you may find scarcity of technical skill sets and IT implementation partners which would automatically raise your costs on simple law of demand and supply.
The author is COO, KPMG India. These are his personal views...

Difficulties in Adopting IFRS in INDIA

There are several impediments and practical challenges to adoption of and full compliance with IFRS in India.

• The need for a change in several laws and regulations governing financial accounting and reporting in India. In addition to accounting standards, there are legal and regulatory requirements that determine the manner in which financial information is reported or presented in financial statements. For example, the Companies Act, 1956 determines the classification and accounting treatment for redeemable preference shares as equity instruments of a company, whereas these may be considered to be a financial liability under IFRS.
• The Companies Act (Schedule VI) also prescribes the format for presentation of financial statements for Indian companies, whereas the presentation requirements are significantly different under IFRS.
• The Reserve Bank of India regulates the financial reporting for banks and other financial institutions, including the presentation format and accounting treatment for certain types of transactions.
• The announcement by the MCA is encouraging as it indicates government support for the timetable for convergence with IFRS in India. However, the announcement stops short of endorsing the roadmap for convergence and the full adoption of IFRS that is discussed in ICAI’s concept paper.
• In the absence of adequate clarity and assurance that Indian laws and regulations will be amended to conform to IFRS, the conversion process may not gain momentum.
• There is a lack of adequate professionals with practical IFRS conversion experience and therefore many companies will have to rely on external advisers and their auditors.
• This is magnified by a lack of preparedness amongst Indian corporates as this project may be viewed simply as a project management or an accounting issue which can be left to the finance function and auditors.
• However, it should be noted that IFRS conversion will involve a fundamental change to an entity’s financial reporting systems and processes. It will require a detailed knowledge of the standards and the ability to consider their impact on business transactions and performance measures. Further, the conversion process will need to disseminate and embed IFRS knowledge throughout the organisation to ensure its application on an ongoing basis.
• Another potential pitfall is viewing IFRS accounting rules as “similar” to Generally accepted Accounting Principles in India (Indian GAAP), since Indian accounting standards have been formulated on the basis of principles in IFRS. However, this view disregards significant differences between Indian GAAP and IFRS as well as differences in practical implementation and interpretation of similar standards.
• Further, certain Indian standards offer accounting policy choices which are not available under IFRS, for example, use of pooling of interests method in accounting for business combinations.
• There is an urgent need to address these challenges and work towards full adoption of IFRS in India. The most significant need is to build adequate IFRS skills and an expansive knowledge base amongst Indian accounting professionals to manage the conversion projects for Indian corporates.
• This can be done by leveraging the knowledge and experience gained from IFRS conversion in other countries and incorporating IFRS into the curriculum for professional accounting courses.
• Ultimately, it is imperative for Indian corporates to improve their preparedness for IFRS adoption and get the conversion process right. Given the current market conditions, any restatement of results due to errors in the conversion process would be detrimental to the company involved and would severely damage investor confidence in the financial system.

Eyes on global standards

ICAI sets eyes on global standards

New Delhi: The recent planning and initiative of the Institute of Chartered Accountants of India (ICAI) are now directed to make India as a destination for accounting as well as auditing services.
Apart from converging with the international financial reporting standards (IFRS) by April 1, 2011, it is now planning to convergence with the international auditing standards.
ICAI president Ved Jain told Fe that if a person wants to take audit service from India then he needs to be sure that India makes use of auditing standards that are used world over. Keeping this in mind, ICAI is now focusing towards convergence with global auditing standards which will ensure that accounting and auditing services in India will be of international level and it will create professional opportunities and avenues not only in accounting services but also in auditing services.
The implication of this will be that it will increase the outsourcing opportunities since the Indian CAs will be capable of providing the global level accounting as well as auditing services. Moreover, the foreign players will also be comfortable in doing business in India as they would be aware that the Indian accounting and auditing standards are in sync with the international ones.
According to ICAI sources, keeping this in mind, the chartered accountant (CA) course content, education and training is being focused more to ensure that the Indian CA is able to meet the global expectations and high international standards.
Ved Jain said that keeping in view the global financial crisis where the Indian regulators and systems have performed well as compared to the developed nations in US and Europe, on the same lines, it is imperative that India emerges as a leader in providing both accounting as well as auditing services.
He added that the ICAI is now planning to make the chartered accountancy profession truly global and for that purpose it is in talks with various accounting bodies world over.
Jain further said, “With the adoption of the global standards, the Indian CAs will be much in demand to provide not only the accounting services but also the auditing services world over. With the advancement of technology and communication, accounting and auditing standards have become borderless and I see no reason why India should not be a destination for whole of the world’s accounting and auditing services on the same level as India is a destination for IT services”.

Changeover to IFRS

Changeover to IFRS is a complicated process. The number of companies reporting under the International Financial Reporting Standards (IFRS) in India will be far more than anywhere else in the world, according to Mr Sai Venkateshwaran, a partner with consultancy firm, Grant Thornton’s Assurance Group.

‘Converge, not to adopt’ IFRS

The Ministry of Company Affairs (MCA) has stated that India would converge with IFRS but not adopt it. While this could sound confusing initially, it appears that all that the MCA is saying is that there could be small differences with Indian regulatory requirements, which compels one not to embrace IFRS (International Financial Reporting Standards) with open arms.

Pros and Cons of Adopting IFRS

Pros and Cons of Adopting IFRS as Indian Standards

The use of international financial reporting standards (IFRS) as a universal financial reporting language is gaining momentum across the globe. ICAI has released a concept paper on Convergence with IFRS in India, detailing the 
strategy for adoption of IFRS in India. This has been strengthened by a recent announcement from the ministry of corporate affairs (MCA) confirming the 
agenda for convergence with IFRS in India.Even in the US there is an ongoing debate regarding the adoption of IFRS replacing US-GAAP.

What is IFRS ?

The International Accounting Standard Board IASB is a standalone, privately funded accounting standard setting body established to develop global standards for financial reporting. It is the successor to the International Accounting Standards Committee (IASC), which was created in 1973 to develop International Accounting Standards (IAS). Based in London, the IASB assumed accounting standard-setting responsibilities from the IASC in 2001. Since that time, the standards that the IASB develops and approves have been known as International Financial Reporting Standards (IFRS). The term IFRS comprises IFRS issued by IASB; IAS issued by IASC; and Interpretations issued by the Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB.