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CONTENT

Sr. No. PARTICULARS Page No.

INTRODUCTION

1 Structure of IFRS 3

2 Benefits of IFRS 4

3 Standards of IFRS 5

IFRS AND INDIA

1 Introduction 6

2 Benefits of adopting for Indian Companies 7

3 IFRS Conversion Program 9

4 Transition From Indian GAAP to IFRS 11

5 Key Difference in Presentation of Financial Statement 13

6 Convergence of IFRS with Indian Accounting Standards 15

7 Challenges to India 16

8 Comparison of Indian GAAP, IFRS and IND AS 18

9 Future Agendas of IFRS 19

IMPORTANCE OF IFRS IN GLOBAL SCENARIO

1 IFRS in China 23

2 IFRS in Australia 25

3 IFRS in Canada 26

4 IFRS in Brazil 26

CASE STUDY OF INDIA

1 Introduction 28

2 Challenges and Issues Involved 31

3 Capacity Building 36

4 Lessons Learned 39

CONCLUSION

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INTRODUCTION:

International Financial Reporting Standards (IFRS) are standards adopted by the International

Accounting Standards Board (IASB). The main hindrance in the free flow of capital across the

borders has been the different reporting standards. So, IFRS has been introduced with the aim of

increasing the flow of capital.

International Financial Reporting Standards are the global accounting standards which are being

increasingly accepted by more and more countries across the world. Accounting Standards are

the principles governing accounting practices and determine the appropriate treatment of

financial transactions. Till now different countries across the world used different accounting

standards which were called as local GAAP (Generally Accepted Accounting Principles) e.g.

India uses Indian GAAP (IGAAP), America uses US GAAP, Australia uses AGAAP etc. But

now the world is moving towards common accounting standards called IFRS. IFRS are rapidly

increasing their footprints and are gaining worldwide acceptance. IFRS are now being used for

public reporting purposes in some 100 countries like Australia, United Kingdom etc. and FASB

(Financial Accounting Standards Board of United States) has taken steps to align FAS (Financial

Accounting standards) with IFRS.

International Financial Reporting Standards (IFRS) is a set of accounting standards, developed

by the International Accounting Standards Board (IASB) and is becoming a universal standard

for the preparation of public company financial statements. Over 100 countries worldwide have

moved or in a process of synchronizing their national accounting standards with IFRS. The

rationale behind migrating to IFRS is to provide a single set of high quality, understandable and

uniform accounting standards, to improve comparability, transparency in reporting to build up

investors’ confidence and to seek better access to international capital market at lower cost of

capital. In line with the global trend, the Institute of Chartered Accountants of India (ICAI) has

declared convergence with IFRS in India with effect from April 1, 2011. Globalization of Indian

GAAP will offer blend of rewards as well as challenges. Thus, the analysis of its feasibility in

order to reap maximum benefits with a minimum cost and to devise strategies to face the future

challenges effectively.

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

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

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

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

are progressively replacing the many different national accounting standards.

The 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.

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STRUCTURE OF IFRS:

The International Accounting Standard Committee (IASC) Foundation is an independent body

that oversees the International Accounting Standard Board (IASB) The IASC appoints Standard

Advisory Council, The IASB and International Financial Reporting Interpretations Committee

(IFRIC).

1. IASB consists of 14 members for the initial term of three to five years. IASB is responsible

for technical matters including:

-- Preparation & issue of IFRS

-- Preparation & Issue of exposure draft

--Setting up procedures for reviewing comments received on documents published for comments

-- Issuing bases for conclusions.

2. Standard Advisory Council (SAC) consists of 40 members appointed by IASC Foundation

trustees. They are appointed for a renewable term of three years with a diverse geographic and

functional background. SAC meets in public at least 3 times a year with IASB. Their main

objectives are to advice the IASB on agenda decisions, to pass views of the council members on

the major standard setting project and other works.

3. IFRIC consists of accounting experts from 12 countries appointed by trustees.

The main objects of IFRIC are to develop conceptually sound & practicable interpretations of

IFRSs to be applied on a global basis:

For newly identified financial reporting issues not specifically addressed in IFRSs

Where unsatisfactory, conflicting, divergent or other unacceptable interpretations have

developed or seem likely to develop in the absence of authoritative guidance.

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BENEFITS OF IFRS:

IFRS are the accounting standards, a set of accounting principles which state the rules, the

format to be followed while posting transactions into the financial statements. IFRS are the new

standards which have incorporated the International Accounting Standards (IAS), which were

issued from 1973-2000. With this standardization, the comparisons of the various financial

statements would be made easy across borders.

The meaning of IFRS can be classified in terms of narrow and broad:

Narrow IFRS - The term narrow related to IFRS means, that the new standards which IASB is

notifying that are different from those issued by IAS.

Broad IFRS - Broadly tells us about the entire body of IASB declarations, including standards &

Interpretations approved by the IASB, IASC, SIC & IFRIC.

IFRS is making a big impact on the minds of the investors because it provides a better

standardization and comparison across various markets and international boundaries and helps

for an easy entry into the stock exchanges worldwide. Due to the financial results and statements

being more clear and transparent the cost of capital would reduce and also the risk premium

would come down.

For these changes to happen across the organizations, it would require a large effort in terms of

technology and systems change, changes in the accounting policies, financial processes, investor

relations, as well as in human resources and their training and development.

The companies already implementing IFRS are seeing benefits in terms of costs as they have to

prepare similar financial statements under multiple jurisdictions for reporting requirements and

preparation of these statements with the guidelines of globally accepted standards would further

help to reduce the cost because similar type of statements will be required for local or statutory

purposes. Implementation of IFRS also helps to improve the quality and comparability of

financial information which give a benefit to the shareholders, stakeholders and the analyst

which always are in hunt of consistent, high-quality information to assess companies across

borders.

Other benefits of IFRS adoption include the following:

Efficient availability and use of resources: As the similar standards would be followed

globally. The development of standardized training programs would be facilitated.

Divergent accounting systems would be eliminated.

Better controls: It results in a better control over statutory reporting, which reduces risks

related to penalties and compliance problems at the local level.

Improved cash management: Cash flow planning would be improved as payments of

the dividends from subsidiaries would not be effected by the local standards.

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STANDARDS OF IFRS:

IFRS

Standard Standard Name

Effective

Date

IFRS 1

First-time Adoption of International Financial Reporting

Standards 1 July 2009

IFRS 2 Share-based Payment

1 January

2005

IFRS 3 Business Combinations 1 July 2009

IFRS 4 Insurance Contracts

1 January

2005

IFRS 5

Non-current Assets Held for Sale and Discontinued

Operations

1 January

2005

IFRS 6 Exploration for and Evaluation of Mineral Resources

1 January

2006

IFRS 7 Financial Instruments - Disclosures

1 January

2007

IFRS 8 Operating Segments

1 January

2009

IFRS 9 Financial Instruments

1 January

2015

IFRS 10 Consolidated Financial Statements

1 January

2013

IFRS 11 Joint Arrangements

1 January

2013

IFRS 12 Disclosure of Interests in Other Entities

1 January

2013

IFRS 13 Fair Value Measurement

1 January

2013

IFRS 14 Regulatory Deferral Accounts

1 January

2016

IFRS 15 Revenue from Contracts with Customers

1 January

2017

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IFRS AND INDIA:

For India, adoption and implementation of IFRS has been finalized by Institute of Chartered

Accountants of India (ICAI). It has been decided that India would be moving to IFRS from the

accounting period commencing on or after April 1, 2011 for listed and other public interest

entities such as banks, insurance and large–sized entities.

To have a timely implementation of IFRS by 2011, affirmation has also come from the Ministry

of Corporate Affairs for the harmonization of the Indian Accounting Standards and to have a

continued effort for achieving the convergence with IFRS for large public interest entities. The

convergence of Indian GAAP with IFRS is desirable and would be facilitated by the fact that

historically Indian standards have been principle-based and because of the nature of the Indian

Accounting Standards, the implementation is going to have its own complexities.

With over 100 countries mandating International Financial Reporting Standards (IFRS), it is

rapidly emerging as a globally accepted accounting framework. With its inherent benefits in the

global economy, countries like Australia, Hong Kong, China and the Middle East have mandated

IFRS compliance for publicly listed companies. With more and more companies following these

standards U.S Securities & Exchange Commission (SEC) has also allowed foreign private filers

in the U.S. to file IFRS-compliant financial statements which would finally result in cross-border

investments, capital flow, enhanced comparability, reporting transparency and reduction in the

cost of capital and compliance for enterprises.

With the adoption of IFRS, it is not only the change from one set of accounting principles to

another. The changes would reflect in financial reporting issues and extend to significant

business and regulatory matters including implications on performance indicators, compliance

with debt covenants, structuring of ESOP schemes, training of employees, modification of IT

systems, and implication of mergers and acquisitions and tax planning. Also the basic definitions

would change, as Preference equity will become loans; dividends will become interest while

hedge accounting and fair value will become very difficult concepts.

Indian Accounting Standards have not kept pace with changes in IFRS. There are significant

differences between IFRS and I-GAAP, because Indian standards remain sensitive to local

conditions.

In order to have consistency with the legal, regulatory and economic environment of India, the

Accounting Standards released by ICAI get departed from the corresponding IFRS. In 2006, it

was decided by ICAI that India should adopt IFRS in complete form at least for listed and large

companies. In 2006 ASB and ICAI got to the conclusion that there would be many advantages if

convergence happens between Indian standards and IFRS and to remove these differences to a

minimum level, an IFRS task force has been formed with the aim:

Of formulating an approach for achieving convergence with IFRS, and

Of laying down a road map for achieving convergence with IFRS

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After the analysis, the IFRS Task Force has decided to implement the change with a ‘big bang’

approach, i.e. to full convergence of Indian Accounting Standards with IFRS (issued by IASB),

with effect from April 1st 2011.

Benefits of adopting IFRS for Indian companies:

In India, IFRS converged Indian Accounting Standards (Ind AS), have been published by The

Institute of Chartered Accountants of India & Notified by the Ministry of Corporate Affairs in

February 2011. The date for adoption of Ind AS' by Indian Companies is yet to be finalized.

The perceived benefits of IFRS are:

Enhanced comparability of financial statements

Improved corporate transparency

Improved quality of Financial Statements

Potentially lower cost of capital

Reduced cost of preparing Statements

More discretion to convey superior information

With the present analysis there are many factors, which show that the implementation of IFRS is

likely to provide significant benefits to Indian corporate sector.

Improved access to International capital markets

Lower cost of capital

Enable benchmarking with global peers and improve brand value

New opportunities

Changing from Indian GAAP to IFRS would change not only the accounting methods, but would

have consequences on business activities also. So, due consideration should be given to the

conversion process because it can bring negative publicity and also lead to regulatory action.

The various areas which would be affected and might face large number of challenges are:

Business Combinations

Financial Instruments (It should be noted that ICAI has approved AS 30, AS 31 and AS

32 which are based on IFRS

Group Accounts

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Fixed Assets and Investment Property

Presentation of Financial Statements

Share-based Payments

In this impact assessment an analysis can be done to have a comparison of the current financial

statements and statements that are based on IFRS because the perception of the business can

change with IFRS implementation.

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IFRS CONVERSION PROGRAM:

The transition to IFRS is a not an easy process. A preliminary study need to be done before

proceeding for IFRS conversion, which will give an opportunity to challenge the way it is

viewed and evaluated by the outside world.

Various steps that can be followed are listed as follows:

STEP 1: DIAGNOSTIC AND DESIGN PROCESS

The tasks to be carried out in this step would vary according to the nature of business.

Companies which have a number of subsidiaries will take more time to implement IFRS.

At this step:

Identification of the existing processes, issues related to the industry and study of

benchmarks is done.

Observing the differences under the two standards and assessment of the impact on the

business will be done.

Identification and analysis of the current IFRS practices and preparing a detailed road

map.

STEP 2: SOLUTION DEVELOPMENT PROCESS

The way the data is handled by the software systems would also change. Determining the

changes required in IT systems will be a critical process.

STEP 3: IMPLEMENTATION AND MAINTENANCE PROCESS

Expert’s inputs will be required for the implementation of IFRS i.e. for stating the opening

balance sheet, restating the financial statements for comparative period. Preparation of first IFRS

financial statements will also have to be done. For maintenance, it is required to follow the IFRS

updates.

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Diagnostic and Design

• Perform the accounting diagnostic

• Identify industry issues and benchmarks

• Assess business impact

• Perform an IT diagnostic surrounding major accounting differences

• Tailor the team with appropriate expertise

• Prepare detailed timetable

Solution Development

• Develop and document scenarios

• Prepare accounting manual

• Deternine IT critical changes required and launch development when appropriate

Implementation and Maintenance

• Restate opening balance sheet

• Restate balance sheet and profit and loss account for comparative information

• Prepare full year IFRS Financial Statement

• Follow IFRS updates

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TRANSITION FROM INDIAN GAAP TO IFRS:

Assets and liabilities in the opening balance sheet not meeting IFRS definitions:

Under IFRS, assets and liabilities are not recognized but under Indian GAAP, they are

recognized and so they are required to be eliminated from the opening balance sheet. E.g. under

IAS 38, deferred revenue expenditure of share issue expenses do not meet the definition of

intangible asset. There is also lots of information that is not disclosed under Indian GAAP but is

required to be disclosed as per IFRS.

E.g. Indian GAAP prohibits disclosure of contingent assets but IFRS do not. Similarly proposed

dividends cannot be disclosed as liability under IFRS.

Assets and liabilities not recognized in Indian GAAP:

All derivative financial assets and liabilities and embedded derivatives need to be recognized in

IFRS opening balance sheet. If these are not recorded under Indian GAAP, entities need to bring

them on the IFRS balance sheet.

IFRS require restructuring provisions to be recognized based on constructive obligation. Indian

GAAP permits recognizing such provision only when legal obligation arises. Therefore, if an

entity had constructive obligation on the opening balance sheet date, it needs to record the

provision in the IFRS balance sheet. If there was no legal obligation by that date, Indian GAAP

balance sheet would not have recorded such provision.

IAS 12 is based on the balance sheet liability approach. AS 22 requires deferred taxes to be

recognized based on the income statement liability approach. Therefore, temporary differences

for which deferred tax is not recognized under Indian GAAP need to be identified on the opening

balance sheet date and deferred tax should be recognized accordingly under IFRS.

IFRS classification of assets and liabilities:

Asset and liability classifications under Indian GAAP balance sheet does not conform to IFRS.

Therefore, the assets and liabilities need to be classified to draw up the opening IFRS balance

sheet in accordance with IFRS requirements.

Indian GAAP balance sheet does not have a separate class as equity. Therefore, items which

meet the definition of equity under IFRS need to be identified first and then to be classified into

this class in the opening IFRS balance sheet.

There may be acquired intangible assets in the past business combinations, which do not meet

the definition of intangible assets under IFRS. These need to be classified as goodwill and vice

versa in the opening balance sheet.

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IFRS 1 provides exemption from split accounting of compound financial instruments when

certain conditions are satisfied. When this exemption cannot be availed by the entity, compound

financial instruments need to be split into equity and liability portions for their appropriate

classification. Those items which are liabilities but are classified as equity under Indian GAAP,

such as mandatory redeemable preference shares, need to be re-classified as liability in the

opening balance sheet.

IAS 27 does not provide any exemption from consolidating subsidiaries. Therefore, if the entity

has not prepared CFS under Indian GAAP or has not consolidated any subsidiary in its Indian

GAAP CFS, opening IFRS balance sheet needs to be redrawn to ensure all subsidiaries are

recorded in the consolidated opening balance sheet.

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KEY DIFFERENCE IN PRESENTATION OF FINANCIAL STATEMENT:

IAS 1 Presentation of Financial Statements is significantly different from the corresponding AS

1 Disclosure of Accounting Policies. While IAS 1 sets out overall requirements for the

presentation of financial statements, guidelines for their structure, and minimum requirements

for their content, Indian GAAP offers no standard outlining overall requirements for presentation

of financial statements. In India, for various entities, the statutes governing the respective entities

lay down formats of financial statements. For example, in the case of companies, format and

disclosure requirements are set out under Schedule VI to the Companies Act, 1956. For entities

such as partnership firms, the statute governing those entities does not lay down any specific

format of financial statements.

IAS 1 recognizes true and fair override. True and fair override is generally not permitted under

Indian GAAP. Though Clause 49 of the Listing Agreement contains provisions relating to the

true and fair override, no practical guidance is available.

IAS 1 essentially sets out overall requirements for presentation of financial statements. In case of

balance sheets, it requires a clean segregation of current and non-current items for assets and

liabilities. In the profit and loss account, both, the functional format and the format based on

nature of expenses are allowed. Therefore, IAS 1 significantly impacts the presentation of

financial statements. These impacts are covered under the following broad parameters:

1. Enhanced transparency and accountability

2. Better presentation of financial position

3. Legal implications

IFRS 3 Business Combinations applies to most business combinations, both amalgamation

(where acquiree loses its existence) and acquisition (where acquiree continues its existence).

Under Indian GAAP, there is no comprehensive standard dealing with all business combinations.

AS 14 applies only to amalgamation, i.e., when acquiree loses its existence and AS 10 applies

when a business is acquired on a lump-sum basis by another entity. AS-21, AS-23, and AS-27

apply to subsidiaries, associates and joint ventures respectively.

IFRS 3 requires all business combinations (excludes common control transactions) within its

scope to be accounted as per Purchase method and prohibits merger accounting. Indian GAAP

permits both Purchase method and Pooling of Interest method. Pooling of Interest method is

allowed only if the amalgamation satisfies certain specified conditions.

IFRS 3 requires net assets taken over, including contingent liabilities, to be recorded at fair value

unlike Indian GAAP, which requires recording of net assets, with a few exceptions, at carrying

value. Contingent liabilities are not recorded as liabilities under Indian GAAP. IFRS 3 prohibits

amortization of goodwill arising on business combinations and requires it to be tested for

impairment. Indian GAAP requires amortization of goodwill in the case of amalgamations. With

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reference to goodwill arising on acquisition through equity, no guidance is provided in Indian

GAAP.

IFRS 3 requires negative goodwill to be credited to profit and loss account, whereas the same is

credited to capital reserve under Indian GAAP. In IFRS 3 acquisition accounting is based on

substance. Reverse acquisition is accounted assuming the legal acquirer is the acquiree. In Indian

GAAP, acquisition accounting is based on form. Indian GAAP does `not deal with reverse

acquisition.

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CONVERGENCE OF IFRS WITH INDIAN ACCOUNTING STANDARDS:

The Ministry of Corporate Affairs (MCA) reported on 13th May 2008 that the initiative for

harmonization of the Indian Accounting Standards with International Financial Reporting

Standards (IFRS), which was taken up in 2001 and implemented through notification of

accounting standards in 2006, would be continued by the Government with the intention of

achieving convergence with IFRS by 2011. The initial road map notified by MCA for conversion

of Indian Accounting Standards with IFRS is yet to be implemented and a revised road map was

under consideration of MCA.

A core group was constituted in July 2009 under the Chairmanship of Secretary, MCA to prepare

a road map for convergence with representatives from regulatory bodies (RBI, CAG, SEBI,

IRDA, and PFRDA), Ministry of Finance, The Institute of Chartered Accountants of India

(ICAI), Chambers and Industry bodies and experts. The core group was supported by two sub

groups. The core group had communicated the changes required to be carried out by various

regulators as well as the road map for implementation of the Converged Accounting Standards

(Ind-AS) in phases. As per the road map announced by MCA in March 2010, the Ind-AS were to

be applied to specified class of companies in phases beginning with the financial year 1st April

2011. The Ind-AS would be applicable for both stand-alone and consolidated financial

statements.

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CHALLENGES TO INDIA:

Shortage of Resources:

India has about 145,000 Chartered Accountants, which is far below the number what is required.

There is a huge demand of Chartered Accountants because of IFRS implementation. In the recent

years with lots of corporate frauds, there has been implementation of SOX, strengthening of

corporate governance norms, increasing financial regulations. So, at present we see a shortage of

accounting professionals, at least in a short run.

Training:

If India wants to implement IFRS effectively from 2011, there is a need to train all the

stakeholders, comprising CFOs, auditors, audit committees, teachers, students, analysts,

regulators, and tax authorities. The best way to have a talent pool in this field can be done by

introducing IFRS as a full subject in universities and Accountancy syllabus.

Information systems:

The computer systems and the software, which are going to handle financial accounting and

reporting must be designed and made available in such a way that they produce robust and

consistent data for reporting financial information. These systems have to be reliable. The new

systems should have the capability of capturing new information for required disclosures, such as

segment information, fair values of financial instruments, and related party transactions. The

companies need to enhance their IT security so that their business is at minimum risk from

potential fraud, cyber terrorism, and data corruption.

The differences between GAAP and IFRS 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

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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.

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COMPARISON OF INDIAN GAAP, IFRS AND IND AS:

Topic Indian GAAP IFRS Ind AS

Presentation of

Financial

Statements

AS-1 Disclosure of

Accounting

Policies

IAS 1-

Presentation of

Financial

Statement

Ind AS 1-

Presentation of

Financial

Statements

Format Schedule VI

prescribes

mandatory formats

for presentation of

balance sheet and

statement of profit

and loss.

Only illustrative

formats for

presentation of

financial

statements have

been given.

Ind AS does not

include any

illustrative format

for the presentation

of financial

statements though

Ind AS 27 does set

out the form in

which consolidated

financial

statements are to

be presented.

Inventories AS-2 Valuation of

Inventories

IAS 2- Inventories Ind AS 2-

Inventories

Classification As per the

requirements of

Schedule VI,

inventories need to

be classified as:

Raw materials

Work in progress

Finished goods

Stock in trade

Stores and spares

Loose tools

Others

No specific

classification

requirements-

classification

should be

appropriate to the

entity

Similar to IFRS

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FUTURE AGENDAS OF IFRS:

The historic 2002 Norwalk Agreement between the US standard setter, FASB, and the IASB

called for "convergence" of the two sets of standards, and indeed a number of revisions of either

US GAAP or IFRS have already taken place to implement this commitment, with more changes

expected in the near future.

More recently (late 2007), the US Securities and Exchange Commission waived the longstanding

requirement that foreign private issuers (i.e. registrants) filing financial statements prepared in

accordance with full IFRS (i.e., not European or other national versions of IFRS) reconcile those

financial statements to US GAAP. Additionally, the SEC is weighing a rule change that would

permit US domestic registrants to choose between compliance with US GAAP and IFRS. These

current and prospective changes, coupled with ongoing convergence efforts, seemingly portend a

greatly expanded usage of IFRS in world commerce.

Typical IFRS timeline can be explained as:

The aim was to disclose the plan for IFRS convergence by the end of 2009 and in 2010 the main

task to be completed has been outlined as to

Collect IFRS comparative data.

Disclosure of the detailed plan.

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Financial services, health services, consumer and industrial products are the industries which are

highly interested in going for IFRS. These industries are interested because most of their

competitors are non-U.S. Companies. In addition, cross-border merger and acquisition

transactions make IFRS attractive to companies in these industries.

US have recognized that IFRS is going to have a significant impact of the US companies. As the

principles of IFRS are similar to U.S. GAAP, the professionals there are not going to face much

difficulty in implementing IFRS. Major differences have been minimized and the concepts in

both have been aligned. Several areas in which substantial convergence between U.S. GAAP and

IFRS has occurred are:

Share-based payment.

Business combinations.

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IMPORTANCE OF IFRS IN GLOBAL SCENARIO:

The changes and the challenges have not been restricted to a few selected nations. With the fast

growth of technology and internet, there has been redefinition of the way business is being

carried on and challenges are being faced by new methods of commerce.

Different countries following different accounting standards can be looked as “Inefficiency at its

Best”

Presentation of Standards can be done in different ways. In terms of accounting, standards are a

mark of quality. International standards are international marks of quality, and specifically the

IFRS. In the recent times, IFRS has been widely recognized as the leading standard to be adhered

to in the coming future. The quicker local organizations move to working within this framework,

the quicker the investment will flow.

India is moving towards IFRS because its major trading partners like Russia and China are

planning for a move. There is no legislation as such in UAE which directs the companies to

follow IFRS, but the standards are being followed by the banks and the companies which are

listed on the stock market. Those countries who want large investments in this competitive world

would have to follow IFRS in near future. The IFRS standards would help to link the small and

big countries of the world in a better way. Now there is no choice with the companies to follow

the local accounting standards. As the business is being carried on globally and companies are

getting listed on stock exchanges in different countries, there is a need to have a consistent

reporting system across the world. The solution is IFRS. The aim of implementing is to create

more reliable, comparable and more detailed financial statements that would expedite trade

taking place between countries.

There are certain reasons in general which speak about the need to implement and follow IFRS

Subsidiaries and joint ventures of the holding and parent companies, operating under the

law where IFRS have been implemented, are required to follow the same accounting

regulations as their corporate origin/parent/holding company.

MNCs which want to start their operations in a foreign country will be required to follow

IFRS to obtain a license to operate and expand.

Converting the IAS standards to IFRS is a complex process. It is not only the changes in the

accounting exercise but various other aspects of the company would also change that can be

listed as

Financial reporting process

Issues related to an organization i.e. matters related to law, tax related issues,

compensation procedures etc.

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An important moment came on June 6th, 2002 when European Council of Ministers made it

mandatory for the EU Companies listed on a regulated market to prepare accounts in accordance

with the International Accounting Standards for accounting periods beginning on or after January

1st, 2005. With these steps taken, the importance of IFRS has been increased by European

Capital market which is the second largest economic power in the world after US. European

commission published the necessary components to achieve a single capital market in 'Financial

Service Action Plan (FSAP)' in 1999 which comprises of a five year legislative process.

The major objectives are:

To have one EU Wholesale securities market.

To have Open and secure retail markets.

To have State of art prudential rules and supervision.

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WORLD WIDE IMPLEMENTATION OF IFRS:

The countries till few years back were developing their own Generally Accepted Accounting

Principles (GAAP). Based on these laws the financial statements were prepared for the different

countries differently. The advent of IFRS has brought with it the choice of adopting a globally

accepted set of standards instead of using local GAAP. Financial statements are prepared based

on a number of accounting principles and assumptions. Accountants use their judgment to apply

these principles and produce financial statements for use by management, shareholders, analysts,

finance providers, governmental agencies, the general public and other stakeholders. Based on

these financial statements the users are able to make the correct decisions.

The accountants can interpret the financial statements differently if no common standard is

followed globally. Cases have come up that the companies, which reported under IFRS, have

recorded a loss; but when the same company filed its accounts as per different standard, it

recorded a profit. With IFRS subjectivity is removed and the information that we get is

consistent basis for recognition, measurement, presentation and disclosure of transactions and

events in financial statements.

Convergence of accounting standards will have the effect of attracting investments through

greater transparency and a lower cost of capital for potential investors. Stock exchanges that do

not recognize accounts filed in accordance with IFRS are finding it increasingly difficult to

attract new listings. Differences in accounting practice make it difficult for investors, whether

individual or institutional, to compare the financial results of different companies and make

investment decisions

IFRS IN CHINA:

China has made sincere efforts for harmonizing Chinese accounting standards with IFRS.

Deloitte Touche Tohmatsu has played a significant role for the development of Chinese

Accounting Standards in accordance with the global standards.

China has long realized the importance of a sound financial system with its economic

transformation happening from a centrally planned economy to a market oriented economy.

Earlier as China had a planned economy, the design of the accounting system was different from

what is needed now. Earlier the main focus was on whether the state-owned enterprises were

able to execute the financial plans or not. So, the performance parameters and objectives were

also significantly different from the financial objectives in a modern market oriented economy.

In 1979, China opened its door for foreign investments, which lead to rapid growth of its

economy, international trade and securities market. This all lead to the need of having new

objectives for financial reporting. With the changes happening in the economy, State-owned

enterprises now look a lot like profit oriented businesses and reliable information is required for

making decisions for efficient allocation of capital.

In 1993, there were efforts being made to develop Chinese Accounting Standards (CAS) which

were in line with the accounting and reporting standards. MOF engaged Deloitte Touche

Tohmatsu as consultants to develop CAS. Since then exposure drafts on about 30 standards have

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been developed and since 2001 remarkable achievement can be seen in this field. In 2001 a new

comprehensive Accounting System for Business Enterprises (the “System”) was released .The

new System replaced the Accounting System for JSLE from January 1, 2001 and Accounting

Regulations for FIE from January 1, 2002. In 2001-2002 all Joint Stock Limited Enterprises

(JSLE, including all listed enterprises) and Foreign Investment Enterprises (FIE) were required

to follow one unified new System. The MOF plans to ultimately require all medium-size and

large enterprises (other than financial enterprises) to adopt the new System, and it also

announced its expectation that state-owned enterprises will adopt the new System over time.

When all the enterprises will follow these new standards, comparison of the financial statements

will be better. With these steps and with the adoption of updated definitions of accounting

elements similar to those of IFRS Chinese financial system is moving closer to the International

Accounting standards.

The financial statements prepared for FIE were earlier based on Accounting Regulation for FIE

and so the companies actual results were not reflected and lot of adjustments were required when

financial statements were prepared for filing in some other country. This process had cost a lot in

terms of money and time. With the adoption of IFRS the results will become more clear and

transparent thereby enabling the foreign investors to assess the performance of their investments

more efficiently.

Over the past few years importance of IFRS has increased significantly. Many countries are

accepting this standard for more efficient trade to happen. Convergence with this standard is

being seen as a high priority because the differences which are existing between the GAAP of

individual countries and IFRS are significant. This international accounting harmonization is also

being supported by ministry of finance of China and it is paying due consideration while drafting

each CAS so that it is in accordance with IFRS. MOF is trying to come up with Accounting

Standards in accordance with IFRS and it is also keeping the point that the standards should also

follow the national laws.

The Chinese ministry of finance has accelerated the development of standards that are in

accordance with IFRS. The finance ministry has to work, also on the standards that are industry

specific- e.g. banking, agriculture, oil and gas. The ministry is also working on the accounting

system of small enterprises for better comparability. In recent times significant progress has been

made by the Chinese Accounting Standards. With its recent plan we expect China will see

further convergence with IFRS in near future and keeping in mind there are standards responsive

to Chinese economy during the transitional period.

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IFRS IN AUSTRALIA:

There are 41 Accounting Standards issued by Australian Accounting Standards

Board (the AASB) called as A-IFRS. These were applicable for annual reporting periods

beginning on or after 1 January 2005.

A-IFRS is not consistent with IFRS because of:

The updates to accommodate the Australian legislative environment.

Due to the application of AASB 1 ‘First-Time Adoption of Australian Equivalents to

International Financial Reporting Standards’ on transition to A-IFRS leads to deletion of

transitional provisions in individual Standards.

Additional/amended requirements for not-for-profit entities

There are also cases in which from a number of options, AASB permits only one option from the

corresponding.

Additional disclosures.

Overseas reporting of foreign-owned Australian companies where the foreign parent

entity is applying IFRS.

July 2002 Australian Financial Reporting Council announced that Australia would adopt

international financial reporting standards 1 January 2005. Australian equivalents to IFRS i.e.

AIFRS take effect for reporting periods beginning on or after this date.

AIFRS apply to all

listed and non-listed entities,

profit,

not-for-profit

public sectors

AIFRS transition involves two elements;

1. Companies integrating the new reporting requirements into the internal business processes,

2. Share market coming to terms with changed accounting treatments and their impact on a

companies ‘on paper’ financial position.

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IFRS IN CANADA:

In January 2006, the Canadian Accounting Standards Board (AcSB) announced its decision to

replace Canadian Generally Accepted Accounting Principles (GAAP) with International

Financial Reporting Standards (IFRS) for all Canadian Publicly Accountable Enterprises (PAEs).

PAEs include listed companies and any other organizations that are responsible to large or

diverse groups of stakeholders, including non-listed financial institutions, securities dealers and

many co-operative enterprises. Effective January 1, 2011, enterprises issuing financial statements

under standards other than IFRS must demonstrate that they are not publicly accountable. To

allow affected companies sufficient time to prepare for the transition, the AcSB announced a

five-year transition period, with an expected changeover date of January 1, 2011, for annual

periods beginning on or after that date. This transition will be significant and far reaching for

affected organizations and all their stakeholders, including their employees, lenders, and

investors.

Canada’s small, open economy comprises less than 4% of world capital markets. The AcSB is

adopting IFRS for publicly accountable enterprises to help them remain competitive within

global capital markets. Not only will the adoption of IFRS improve the clarity and comparability

of financial information globally; ultimately, it will also prove more efficient and cost effective

by eliminating the need for reconciliations of information reported under separate national

standards. While Canada’s standards setters have played a leading role in developing

international standards from the onset, Canada’s transition to IFRS has been slower than in some

other parts of the world. This is because the AcSB has been careful to consult widely with

affected entities before determining the best transition approach for Canada. The AcSB also

wanted to be confident that the transition to IFRS occurred with as little disruption as possible,

allowing enough time for those affected to learn and understand IFRSs to be able to properly

plan for their transition.

Over the last few years, over 100 countries, including the European Union, Australia and New

Zealand, have adopted IFRS. Pressure on Canadian businesses to harmonize with U.S. GAAP

and its higher compliance costs have declined. The U.S. standard setter, Financial Accounting

Standards Board (FASB), is now working with the International Accounting Standards

Board (IASB) to develop converged standards; the SEC has proposed to accept foreign issuer

filings in accordance with IFRS without reconciliation to U.S. GAAP by 2009. The world-wide

trend to IFRS adoption is clear. The transition to IFRS repositions Canadian financial reporting

for the future.

IFRS IN BRAZIL:

In Brazil, the deadline has been set as 2010 for adoption of IFRS by the Brazilian Central Bank

and the Brazilian Securities and Exchange Commission (CVM). So from 2010 IFRS would be

followed for the consolidated financial statements of financial institutions and publicly-held

companies. As per the recent publication of Law 11.638/07, it has become priority for the

Brazilian companies to make the transition to IFRS. By revising the accounting aspects of

Company Law 6.404/76, Law 11.638/07, effective from January 1, 2008, is the most significant

change in Brazilian corporate legislation in the last 31 years. The new law talks about various

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steps to be followed for the convergence with IFRS. There is no point mentioned in the law that

tells to adopt IFRS immediately or going for a total convergence between Brazilian and

international accounting practices.

Brazil seems to be in a privileged position as of now as compared to the 7,000 European

companies that have undergone transition to IFRS because Brazil has the opportunity to learn

from the mistakes of the companies which have already adopted IFRS and benefit from the

advances subsequently made by the regulating body of the International Accounting Standards

Board (IASB). As already discussed the adoption of IFRS helps to make the financial statements

with more transparency and also helps to include better Corporate Governance practices in

companies. So the financial statements that are more transparent will definitely help in better

comparability of financial statements and would help the investors in their decision-making

process. It will also improve the investor confidence. More than a simple accounting change,

IFRS adoption will require the analysis of impacts on businesses, processes and information

systems and the need to train professionals involved directly or indirectly with IFRS.

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CASE STUDY OF INDIA:

In recent years, India has experienced strong economic growth, rising foreign exchange reserves,

falling inflation, global recognition of its technological competence and interest shown by many

developed countries to invest in the engineers and scientists produced in the country, including

by setting up of new research and development centres. Above all, as the largest democracy in

the world, India has a reputation for providing leadership for one billion people in a country with

different cultures, languages and religions. The technological competence and value systems of

India are highly respected. Foreign institutional investors find investing in India attractive.

Indians are also investing in companies abroad and are opening new business ventures.

The Government of India is also committed to economic development, ensuring a growth rate of

7–8 per cent annually, enhancing the welfare of farmers and workers and unlocking the creativity

of the entrepreneurs, business persons, scientists, engineers and other productive forces of the

society. Today, India is one of the fastest growing economies in the world, with a compounded

average growth rate of 5.7 per cent over the past two decades. The Government of India has

plans to transform India into a developed nation by 2020.

In India, accounting standards are issued by the Institute of Chartered Accountants of India based

on international financial reporting standards (IFRS). Departures from IFRS are made with a

view to the prevailing legal position and customs and usages in the country. Accordingly, this

case study of India is prepared to highlight the practical challenges involved in adapting IFRS in

India. This case study also throws light on the existing regulatory framework in the country and

the enforcement of the standards in the country.

Accounting standards-setting in India: A historical perspective:

The accounting profession in India was among the earliest to develop, as the Indian

Companies Act was introduced in the mid-1800s, giving the accounting profession its start.

Since then, considerable efforts have been made to align Indian accounting and auditing

standards and practices with internationally accepted standards. Indian accounting and auditing

standards are developed on the basis of international standards and the country has many

accountants and auditors who are highly skilled and capable of providing international-standard

services.

The Institute of Chartered Accountants of India (ICAI) set up the Accounting Standards Board in

1977 to prepare accounting standards. In 1982, ICAI set up the Auditing and Assurance

Standards Board (initially known as the Auditing Practice Committee) to prepare auditing

standards. ICAI became one of the associate members of the International Accounting Standards

Committee (IASC) in June 1973. ICAI also became a member of the International Federation of

Accountants (IFAC) at its inception in October 1977. While formulating accounting standards in

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

the prevailing laws, customs, practices and business environment in India.

The Accounting Standards Board has worked hard to introduce an overall qualitative

improvement in the financial reporting in the country by formulating accounting standards to be

followed in the preparation and presentation of financial statements. So far, the board has issued

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29 accounting standards. In addition, it has also issued various accounting standards

interpretations and announcements, so as to ensure uniform application of accounting standards

and to provide guidance on the issues concerning the implementation of accounting standards

which may be of general relevance. Appendix A contains a comparative statement of

international accounting standards/international financial reporting standards and Indian

accounting standards.

As accounting standards in India are formulated on the basis of IFRS issued by the IASB,

ICAI interacts with the IASB at various levels, namely:

Sending comments on the various draft IFRS issued by the IASB;

Active participation in the meetings of the global standard-setters with the IASB;

Active participation in the meetings of the regional standard-setters with the IASB;

Contribution in the discussions on various ongoing projects of the IASB, e.g. on the

IASB management commentary project;

ICAI is approaching the IASB to take up projects to be carried on by India, e.g. IFRS for

regulated enterprises.

Challenges involved in adoption of IFRS and implementation issues:

(A) Convergence with IFRS in India

A financial reporting system supported by strong governance, high-quality standards and a sound

regulatory framework is key to economic development. Indeed, high-quality standards of

financial reporting, auditing and ethics form the foundations of the trust that investors place in

financial information and therefore play an integral role in contributing to a country’s economic

growth and financial stability. As the forces of globalization prompt more and more countries to

open their doors to foreign investment and as businesses expand across borders, both the public

and private sectors are increasingly recognizing the benefits of having a commonly understood

financial reporting framework, supported by strong globally accepted standards. The benefits of

a global financial reporting framework are numerous and include:

Greater comparability of financial information for investors;

Greater willingness on the part of investors to invest across borders;

Lower cost of capital;

More efficient allocation of resources; and

Greater economic growth.

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However, before these benefits can be fully realized, there must be greater convergence with a

single set of globally accepted high-quality standards. International convergence is a goal that is

embraced in the mission of the International Federation of Accountants (IFAC) and shared by

IFAC members, international standard-setters and many national standard-setters.

As a member body of IFAC, India has recognized in its preface to the statements of accounting

standards that “ICAI, being a full-fledged member of the International Federation of

Accountants (IFAC), is expected, inter alia, to actively promote the International Accounting

Standards Board’s (IASB) pronouncements in the country with a view to facilitating global

harmonization of accounting standards. Accordingly, while formulating the accounting

standards, the Accounting Standards Board will give due consideration to International

Accounting Standards (IAS) issued by the International Accounting Standards Committee

(predecessor body to the IASB) or international financial reporting standards (IFRS) issued by

the IASB, as the case may be, and try to integrate them, to the extent possible, in the light of the

conditions and practices prevailing in India”.

Accordingly, the accounting standards issued by ICAI are generally in conformity with IFRS.

Indeed, with respect to certain recently issued/revised Indian accounting standards, there are no

differences between the Indian accounting standards and IFRS. For example, accounting

standard No. 7 on construction contracts and accounting standard 28 on impairment of assets are

identical to the corresponding IFRS. However, in exceptional cases, when a departure from IFRS

is warranted by conditions in India, the major areas of difference between the two are pointed out

in the appendix to the accounting standard.

ICAI endeavors to bridge the gap between Indian accounting standards and IFRS by issuing new

accounting standards and ensuring that existing Indian accounting standards reflect any changes

in international thinking on various accounting issues. In this regard, it should be noted that ICAI

is making a conscious effort to bring the Indian accounting standards into line with IFRS by

revising existing accounting standards. ICAI has so far issued 29 Indian accounting standards

corresponding to IFRS.

In view of the above, Indian accounting standards are largely in step with IFRS. This is also

recognized in the following extracts of article from an Indian financial daily, Hindu Business

Line, on 5 November 2005:

“Indian Companies can now get listed on the London Stock Exchange (LSE) by reporting

their financial results based on Indian accounting standards. Until now, these companies

had to report their financial data in accordance with the international financial reporting

standards (IFRS).”

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CHALLENGES AND ISSUES INVOLVED IN CONVERGENCE WITH

IFRS IN INDIA:

i. Legal and regulatory considerations:

In some cases, the legal and regulatory accounting requirements in India differ from the

IFRS; in such cases, strict adherence to IFRS in India would result in various legal problems.

The examples below illustrate this point.

IAS 1 – Presentation of Financial Statements:

In India, laws governing companies (e.g. the Companies Act of 1956), banking enterprises (e.g.

the Banking Regulation Act of 1949) and insurance enterprises (formats of financial statements

for insurance companies as prescribed by the Insurance Regulatory and Development

Authority regulations in the document “Preparation of Financial Statements and Auditor’s

Report of the Insurance Companies” (2002), prescribes detailed formats for financial statements

to be followed by respective enterprises. At this stage lawmakers/regulators may not be willing

to accept IAS 1 in its present form and change the existing law. Therefore, full adoption of IAS 1

may not be possible at this stage. However, it is proposed that the corresponding accounting

standard being developed by ICAI, would have an appendix containing suggested detailed

formats of financial statements which, while complying with IAS 1, would also contain other

disclosures prescribed in the formats laid down by various legislations to address the concerns of

the legislature.

IAS 21 – The Effects of Changes in Foreign Exchange Rates:

If IAS 21 is adopted in India it would result in violation of schedule VI to the Companies Act of

1956. Schedule VI requires foreign currency fluctuations in respect of foreign currency loans

raised to acquiring foreign assets to be reflected in the cost of the fixed assets, whereas IAS 21

requires the same to be charged to the profit and loss account. The corresponding Indian

accounting standard prescribes the accounting treatment contained in IAS 21; however, through

a separate announcement issued by ICAI, it is recognized that law will prevail.

IAS 34 – Interim Financial Reporting:

The disclosures requirements of IAS 34 are not in accordance with the formats of unaudited

quarterly/half-yearly results prescribed in the listing agreement issued by the Securities and

Exchange Board of India. The corresponding Indian standard prescribes disclosure as per IAS

34, but also recognizes that the law will prevail insofar as presentation and disclosure

requirements are concerned.

ii. Alternative treatment:

IFRS allow alternative treatments a number of cases. The implications of adopting IFRS as they

are would be that it would lead to presentation of incomparable financial information by various

enterprises. The following examples illustrate this aspect.

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IAS 23 – Borrowing Costs:

IAS 23 on borrowing costs prescribes expensing of borrowing costs as the benchmark treatment;

however, it also allows capitalization of borrowing costs as an allowed alternative. If this

standard is followed (and it is), some enterprises then charge borrowing costs to the profit and

loss account, while others capitalize these costs as part of the cost of the assets

acquired/constructed using the borrowings. In India, however, the corresponding accounting

standard No. 16 does not allow any alternative and borrowing costs directly attributable to the

acquisition, construction or production of a qualifying asset to be capitalized. However, the

IASB has issued an exposure draft of proposed amendments to IAS 23 in May 2006, in which it

has decided to eliminate the option of immediate recognition of the borrowings costs as an

expense and allow only capitalization of borrowing costs that are directly attributable to the

acquisition, construction or production of a qualifying asset as part of the cost of the assets.

Thus, once this exposure draft is finalized, no difference would remain between accounting

standard No. 16 and IAS 23.

IAS 19 – Employee Benefits:

IAS 19 allows the following options with regard to the treatment of actuarial gains and losses:

Immediate recognition in the profit and loss account in the year in which such gains and

losses occur;

Adjustment against the retained earnings, whereby the current year’s profit and loss

account is not affected at all; or

Recognition of a part of the actuarial gains and losses in the profit and loss account which

exceeds the specified percentage (known as the “corridor approach”).

The corresponding Indian accounting standard No. 15 on employee benefits requires only the

first alternative, however: i.e. immediate recognition in the profit and loss account.

The above are only some of the examples that could be presented. To facilitate comparability, it

is imperative that there should be no options in the accounting standards, otherwise the investors

and other users of financial statements cannot take decisions based on comparable information.

Indian accounting standards do not ordinarily permit any option, but prescribe one of the most

appropriate options permitted by the corresponding IAS/IFRS.

The IASB recently issued the “Statement of Best Practice: Working Relationships between the

IASB and other Accounting Standard-Setters”, which states that removing optional treatments

does not mean any non-compliance with IFRS.

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iii. Economic environment:

The economic environment and trade customs and practices prevailing in India may not, in a few

cases, be conducive for adoption of an approach prescribed in an IFRS. For example, in a

country whose markets do not have adequate depth and breadth for reliable determination of fair

values, it may not be advisable to follow a fair value-based approach prescribed in certain IFRS.

Certain IAS/IFRS assume an economic environment with mature markets. For example,

IAS 41 on agriculture is based on the fair value approach presuming that fair values are available

for various biological assets such as plants, crops and living animals. The standard is relevant

only if the fair values are reliable; this may not be true in India as, in some instances, market data

may not be reliable in view of markets not being mature enough.

Conceptually, ICAI is in agreement with the fair value approach followed in various IFRS.

However, there is always the risk of misuse of this approach as was reportedly the case in Enron.

ICAI has so far been cautious in adopting the fair value approach in its accounting standards,

although certain accounting standards recognize this approach, (for example, accounting

standard No. 28 on impairment of assets), and ICAI has decided to follow this approach in its

proposed accounting standard on financial instruments (recognition and measurement)

corresponding to IAS 39.

iv. Level of preparedness:

In a few cases, the adoption of IFRS may cause hardship to the industry. To avoid the hardship,

some companies have gone to the court to challenge the standard, for example:

When ICAI issued accounting standard No. 19 on leases, which is based on the

corresponding IAS, leasing companies are of the view that it may cause hardship to them.

To avoid this, the Association of Leasing Companies approached the courts to receive

context to the standard.

When ICAI issued accounting standard No. 22 on accounting for taxes on income to

introduce the international concept of deferred taxes in India for the first time, a number

of companies challenged the standard in court, as they were concerned about the effect it

may have on their bottom lines.

In view of the above, to avoid hardship in some genuine cases, ICAI has deviated from

corresponding IFRS for a limited period until such time as preparedness is achieved.

In addition to the above-mentioned technical differences, there are a few conceptual differences

between Indian accounting standards and IFRS. For example, IAS 37 deals with constructive

obligation in the context of creation of a provision. The effect of recognizing provision on the

basis of constructive obligation is that, in some cases, provision will need to be recognized at an

early stage. For instance, in case of a restructuring, a constructive obligation arises when an

enterprise has a detailed formal plan for the restructuring and the enterprise has raised a valid

expectation in those affected that it will carry out the restructuring by starting to implement that

plan or announcing its main features to those affected by it. It is felt that merely on the basis of a

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detailed formal plan and announcement thereof, it would not be appropriate to recognize a

provision, since a liability cannot be considered to be crystallized at this stage. Furthermore, the

judgment whether the management has raised valid expectations in those affected may be a

matter for considerable argument. Accordingly, the corresponding Indian accounting standard,

accounting standard No. 29, does not specifically deal with constructive obligation. Accounting

standard No. 29 does, however, require a provision to be created in respect of obligations arising

from normal business practice, custom and a desire to maintain good business relations or act in

an equitable manner. In such cases, general criteria for recognition of provision must be applied.

The treatment prescribed in accounting standard No. 29 is also in consonance with the legal

requirements in India.

v. Frequency, volume and complexity of changes to the international financial reporting

Standards:

It has clearly been a very challenging time for preparers, auditors and users of financial

statements, following the publication of new and revised IFRS. The following changes evidence

the frequency, volume and complexity of the changes to the international standards:

The IASB Improvements Project resulted in 13 standards being amended, as well as

consequential amendments to many others. In India, a project to examine of IAS

revisions, pursuant to the IASB improvement project, has been launched to determine

whether corresponding Indian accounting standards need revision.

Repeated changes of the same standards, including changes reversing the previous

stances of the IASB, and changes for the purpose of international convergence.

Complex changes on accounting standards, such as those on financial instruments,

impairment of assets and employee benefits, require upgrading of skills of those

professionals who implement them, in order to keep up with the changes.

Challenges for small and medium-sized enterprises and accounting firms:

In emerging economies like India, a significant part of the economic activities is carried on by

small- and medium-sized enterprises (SMEs). SMEs face problems in implementing the

accounting standards because:

Resources and expertise within the SMEs are scarce; and

Cost of compliance is not commensurate with the expected benefits.

To address the issue of applicability of accounting standards to SMEs, ICAI has provided certain

exemptions/relaxations for such companies. For the purpose of applicability of accounting

standards, enterprises are classified into three categories: level I, level II and level III. Level I

enterprises are large and publicly accountable entities. Level II enterprises are medium-sized

enterprises and level III are small enterprises. Level II and level III enterprises are considered as

SMEs. Level I enterprises are required to comply fully with all the accounting standards issued

35

by ICAI. The relaxations/exemptions are provided for level II and level III enterprises from

accounting standards. Level II and level III enterprises are fully exempted from certain

accounting standards which primarily lay down disclosure requirements, such as accounting

standard No. 3 on cash flow statements, accounting standard No. 17 on segment reporting,

accounting standard No. 18 on related party disclosures and accounting standard No. 24 on

discontinuing operations. In respect of certain other accounting standards, which also lay down

disclosure requirements, level II and level III enterprises are exempted from some of its

disclosure requirements, such as accounting standard No. 19 on leases, accounting standard No.

20 on earnings per share and accounting standard No. 29 on provisions, contingent liabilities and

contingent assets. Generally, ICAI does not favour exemptions to be given in respect of

recognition and measurement requirements. However, considering rigorous measurement

requirements in accounting standard No. 15 (revised 2005) on employee benefits and accounting

standard No. 28 on impairment of assets, simplified measurement approaches have been allowed

to the SMEs.

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CAPACITY BUILDING:

The pace at which accounting standards have recently been issued and mandated in India is

posing various accounting problems and has serious business consequences. Building the

capacity of the preparers and the auditors is therefore a stiff challenge to the accounting

profession. To enhance capacity-building and to ensure effective implementation of accounting

standards, the Institute of Chartered Accountants has acted proactively by taking the following

steps:

(a) Issuing accounting standards interpretations on matters related to accounting standards:

With a view to resolving various intricate interpretational issues arising in the implementation of

new accounting standards that have already been issued, ICAI has issued 30 interpretations of

accounting standards.

(b) Issuance of background materials on accounting standards:

To facilitate discussion at seminars, workshops, etc., ICAI has issued background material on

newly issued accounting standards. The background material deals, inter alia, with the key

requirements of the accounting standards with examples and frequently asked questions that

accountants and auditors may encounter in the application of accounting standards.

(c) Issuance of guidance notes on accounting matters:

ICAI has issued various guidance notes in order to provide immediate guidance on accounting

issues arising as a result of the issuance of new accounting standards, and to provide immediate

guidance on new accounting issues arising because of changes in legal or economic environment

and/or other developments. These guidance notes form an important part of the generally

accepted accounting principles in India and need to be referred to on a regular basis by people

involved in the preparation and presentation of financial statements, as well as by people

involved in auditing these statements.

(d) Organizing seminars and workshops:

ICAI has always been striving for excellence in terms of standards of professional services

rendered by its members. To enable members to maintain high standards of professional

services, ICAI is providing inputs to members by way of seminars, workshops and lectures.

(e) Responding to various queries raised by members:

While performing their attesting function members of the ICAI are often presented with certain

delicate situations, particularly as they apply accounting standards to the specific situations of an

enterprise, where an authentic view is required. For the purpose of assisting its members, the

ICAI council formed an expert advisory committee to answer queries from its members. The

committee deals with queries on accounting and/or auditing principles and related matters.

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Auditing issues involved in implementation of accounting standards:

Independent auditors play a vital role in enhancing the reliability of financial information

produced by companies, not-for-profit organizations, government agencies and other entities by

providing assurance on the reliability of the financial statements. As mentioned above, ICAI

members are required to ensure compliance with ICAI accounting standards when performing

their attesting function under certain legislation (such as the Companies Act (1956)), as well as

by ICAI itself.

ICAI has established an auditing and assurance standards board that formulates standards that are

broadly in line with ISAs issued by the IAASB. In general, the text of the national board is based

on the text of the equivalent ISA, although certain modifications are introduced into the

accounting and assurance standards in order to adapt them to local circumstances when

considered necessary.

Examples of audit issues arising as a consequence of adaptation of IAS/IFRS:

Some of the major issues that may have an impact on the work of auditors in India in

implementation of Indian accounting standards that have been formulated on the basis of the

corresponding IAS/IFRS are given below.

IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors:

IAS 8 provides that financial statements do not comply with IFRS if they contain immaterial

errors that were deliberately included to achieve a particular presentation of an entity’s financial

position, financial performance or cash flows. The Accounting Standards Board of ICAI has also

prepared the preliminary draft of the revised accounting standard No. 5, corresponding to IAS 8.

In the draft, the board has decided that since the above accounting treatment is conceptually

correct, it should be adopted in accounting standard No. 5 too. However, the board also feels that

this requirement would be too onerous on the auditors, since it would be difficult for the auditor

to determine whether the errors had been intentionally made or not and he or she may ignore

such errors on the grounds of materiality. The board has, therefore, decided that once the

standard is finalized, it may ask the Accounting and Assurance Standards Board of ICAI to look

into the matter and provide necessary guidance.

IAS 19 - Employee Benefits:

IAS 19 also deals with measurement of defined benefit plans, which is complex when compared

to measurement of defined contribution plans, since actuarial assumptions are required to

measure the obligation and the expense, and there is a possibility of actuarial gains and losses.

ICAI has recently issued the revised accounting standard No. 15 on employee benefits based on

IAS 19, which recognizes the role of a professional actuary. An auditing issue may arise about

the extent of reliance that an auditor may place on the actuary’s report, particularly in view of

extensive disclosure requirements prescribed in the standard.

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To effectively address the problem, ICAI has asked the Actuarial Society of India to revise its

guidance note on the subject, so that the actuary’s report contains the relevant information as

envisaged in the accounting standard, in order to guide actuaries (as has been done in certain

other countries, including the United Kingdom). In any case, the responsibility of the auditor will

continue to be determined under Auditing and Assurance Standard 9 on using the work of an

expert, which provides guidance on auditor’s responsibility in relation to and the procedures the

auditor should consider in using the work of an expert, such as an actuary, as audit evidence.

IAS 27 – Consolidated and Separate Financial Statements:

In accordance with IAS 27, a parent enterprise shall present financial statements in which it

consolidates its investments in subsidiaries. Along the lines of IAS 27, IAS 21 on consolidated

financial statements provides that a parent which presents consolidated financial statements

should consolidate all domestic and foreign subsidiaries.

It is possible that the auditor of the parent enterprise is not the auditor of its subsidiary

enterprises. Furthermore, the auditor of the consolidated financial statements may not necessarily

be the auditor of the separate financial statements of the parent company, or one or more of the

components included in the consolidated financial statements. However, a law or regulation

governing the enterprise may require the consolidated financial statements to be audited by the

statutory auditor of the enterprise. In such cases, the auditor will face issues of reliability of the

work performed by the other auditors. In India, the listing agreement requires financial

statements to be audited apart from the audit of separate financial statements under the

Companies Act (1956). ICAI recently issued a guidance note on audit of consolidated financial

statements, which provides detailed guidance on the specific issues and audit procedures to be

applied in an audit of consolidated financial statements.

Fair value issues:

Fair value is the amount for which an asset could be exchanged, or a liability settled, between

knowledgeable, willing parties in an arm’s length transaction. As mentioned in the above section

entitled “Challenges involved in adoption of IFRS and implementation issues”, the economic

environment in India may not be conducive for adoption of the fair value approach prescribed in

various IFRS. ICAI agrees on a conceptual level with this approach – it has used it in accounting

standard No. 28 on impairment of assets, and has also decided to follow it in its proposed

accounting standard No. on financial instruments (recognition and measurement), which

corresponds to IAS 39 – but an auditor might face difficulties in satisfying him or herself that the

fair values computed are reliable.

Although the IFAC)has recently issued a ISA) on auditing fair value measurements and

disclosures to address the increasing number of complex accounting pronouncements containing

measurement and disclosure provisions based on fair value, it still remains to be seen whether

this ISA, in the Indian context, will adequately address the auditing issues that need to be

examined.

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LESSONS LEARNED:

Convergence of accounting standards in all countries, including India, is duly recognized as the

future of global accounting standards. In the past, different views of the role of financial

reporting made it difficult to encourage convergence of accounting standards, but there now

appears to be a growing international consensus that financial reporting should provide high

quality financial information that is comparable, consistent and transparent, in order to serve the

needs of investors. Convergence is possible in two ways, either by adopting or adapting a

standard. As discussed in earlier sections, IAS and IFRS in India are being adapted while the

legal and other conditions prevailing in India are borne in mind. The major lessons learned

during such adaptation are:

a. Implementation of certain requirements of IFRS should be a gradual process:

India has learned that adapting IFRS is not just an accounting exercise. It is a transition that

requires everyone concerned to learn a new language and new way of working. While

formulating accounting standards on the basis of IFRS, one should consider that, in certain cases,

it may cause undue hardship to the industry, at least at the beginning. In other words, Indian

industry may not be prepared to apply the provisions of the standards immediately and some

transitional measures are needed to be introduced for them.

b. Lessons learned in addressing differences in the accounting treatment prescribed in

IFRS and law:

As a standard-setter, ICAI has learned a lesson that where the conceptually superior accounting

treatments prescribed in various IFRS are in conflict with the corresponding legal requirements.

c. Guidance needs to be provided in various cases for effective implementation of accounting

standards:

Adequate guidance needs to be provided for effective implementation of accounting standards.

In some cases, where accounting standards require management of the enterprises concerned to

use judgement in making accounting estimates etc., various issues arise in the actual

implementation. To address those issues, ICAI has issued accounting standards interpretations,

guidance notes and other explanatory material. For example, accounting standard No. 16 on

borrowing costs corresponding to IAS 23, defines the term “qualifying asset” as “an asset that

necessarily takes a substantial period of time to get ready for its intended use or sale”. The issue

as to what constitutes “substantial period of time” has been addressed by issuance of accounting

standard interpretation 1 on substantial period of time.

Furthermore, ICAI has also undertaken various projects for providing guidance on accounting

matters arising from issuance of a new accounting standard, for example, it has recently

undertaken to prepare a guide on estimating future cash flows and discount rates in the context of

accounting standard No. 28 on impairment of assets.

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d. Capacity-building required before issuance of some of the newer accounting standards or

revision of accounting standards corresponding to IFRS:

Nowadays, with the issuance of newer accounting standards or revision of existing ones on the

basis of IFRS, various new concepts are being introduced in India for which preparers and

auditors need to be adequately trained; by organizing workshops, conducting seminars, etc. It is

increasingly recognized that the preparers and auditors should be given training even before final

issuance of a new standard, at the exposure draft stage itself, so that when the standard is finally

issued, they are ready to effectively implement the standard.

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CONCLUSION:

Irrespective of various challenges, adoption of IFRS in India has significantly changed the

contents of corporate financial statements as a result of:

More refined measurements of performance and state of affairs, and

Enhanced disclosures leading to greater transparency.

With the rapid liberalization process experienced in India over the past decade, there is now a

huge presence of multinational enterprises in the country. Furthermore, Indian companies are

also investing in foreign markets. This has generated an interest in Indian GAAP by all

concerned. In this context, the role of Indian accounting standards, which are becoming closer to

IFRS, has assumed a great significance from the point of view of global financial reporting.

Indian companies using the Indian accounting standards are experiencing fewer difficulties

accessing international financial markets, as Indian accounting standards are becoming closer to

IFRS. Indian standards are expected to converge even further in the future, especially after the

challenges mentioned in study are addressed over the next few years.