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.

Adopting IFRS by Indian corporates is going to be very challenging but at the same time could also be rewarding.

Benefits

• Comparability : Improvement in comparability of financial information and financial performance with global peers and industry standards.
• Better quality of financial reporting  :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 will lead to increased trust and reliance placed by investors, analysts and other stakeholders in a company’s financial statements.
• Access to and reduction in the cost of capital : 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.
• Saving in financial and compliance costs: 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.
• Single Reporting :Convergence with IFRS eliminates multiple reporting such as Indian GAAP, IFRS, US GAAP.
  

Disadvantages:-

• Change to regulatory environment: Indian accounting structure is influenced by laws and regulations. The success of the convergence effort in India will depend on support received from government, regulators (RBI, SEBI and IRDA), tax authorities, courts and tribunals. For example, amendment will be required in Companies act 1956 for depreciation. Currently Companies are required to provide depreciation based on useful life of an asset or statutory rates, whichever is higher. Under IFRS depreciation is based on only on the useful life of an asset.
• Training : Corporate India and accounting professionals need to be trained for effective migration to IFRS. Additionally auditors would need to train their staff to audit under IFRS environment.
• Educating Stakeholders Educating Stakeholders comprising of investors, lenders, employees, auditors, audit committee and etc would be a big challenge as this would require a considerable time and effort
• Complexity in the financial reporting process Under IFRS, companies would need to increasingly use fair value measures in the preparation of financial statements. Companies, auditors

• Tougher economic conditions :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.
•  Fair value principles: 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.
• Awareness: 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 will render some of the benefits of IFRS adoption ineffective.