ANALYSING THE IMPACT THAT THE ADOPTION OF IFRS WILL HAVE ON ACCOUNTING IN INDIA

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The year 2000 was significant for International Accounting Standards (IAS), now known as International Financial Reporting Standards (IFRSs). The International organization of Securities Commission formally accepted the IAS core standards as a basis of cross border listing globally.

In June 2000, the European Commission passed a requirement for all listed companies in the European Union to prepare their Consolidated Financial Statements using IFRS from the financial years beginning 2005. Since 2005, the acceptability of IFRS has increased tremendously.

There are around 125 countries across the world where IFRS is either require or permitted.

IFRS and India

The issue of Convergence with IFRS has gained significant momentum in India. Currently, the Accounting Standard Board (ASB) of the Institute of Chartered Accountants of India (ICAI) formulates Accounting standards based on IFRS. The Accounting standards issued by ICAI diverted from IFRS in order to ensure consistency with the legal, regulatory and economic environments of India.

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In May 2006, the council of ICAI expressed the view that IFRS may be adopted in full at a future date, at least for listed and large entities. ASB decide to form an IFRS TASK force in order to achieving Convergence with IFRS and laying down a road map for achieving convergence with IFRS. With an objective to ensure smooth transition to IFRS from 1 April 2011, ICAI is taking up the matter of Convergence with IFRS with the National Advisory Committee on Accounting Standard (NACAS) and other regulators including Reserve Bank of India (RBI), Insurance Regulatory and Development Authority (IRDA) and The Securities and Exchange Board of India (SEBI). Recognizing India's commitment to convergence with IFRS, the European Union has already allowed entities to use Indian GAAP for listing on a European security market without reconciliation through to 2011 and if the convergence plan is achieved then to continue to do so after 2011.

Reasons for the convergence into IFRSs

Reason for the Convergence into IFRSs is that the capital markets become increasingly global in nature; more and more investors see the need for a common set of International Accounting Standards.

"Concept Paper" on Convergence with IFRSs in India

In general terms, "Convergence" means to achieve harmony with IFRSs. But India's "Concept Paper on convergence" is more precisely is to design and maintain National Accounting Standards in the way that financial statements prepared in accordance with National standards will also compliance with IFRSs where as IAS 1, Presentation of Financial Statements states that "Financial Statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs". Therefore, India will only be allowed to use the word "Compliance" with IFRSs when their National Accounting Standards with have same word to word with all the requirements of IFRSs.

Summary of Convergence Strategy

Will all entities be required to follow IFRSs?

The ICAI's Concept Paper has expressed the view that IFRSs should be adopted for the public interest entities such as listed entities, Banks, Insurance entities and large sized entities from the accounting periods beginning on or after 1 April 2011.

In respect of Small and Medium Sized Entities (SMEs), the ICAI has indicated that separate standard may be formulated based on the IFRS for SMEs.

Benefits of Convergence to IFRSs

Improve access to International capital markets - Many Indian entities are expanding or making significant acquisitions globally, for which large capital is required. The majority of stock exchanges require financial information prepared under IFRS. Migration to IFRS will enable Indian entities to have access to international capital markets.

Lower cost of capital - Convergence to IFRS will lower the cost of capital of raising funds as it will eliminate the need of preparing a dual set of financial statements. It will also reduce Accountant's fees, reduce risk premium and access to major capital market as IFRS is globally acceptable.

Escape multiple reporting - Adoption of IFRSs, by all group entities, will enable company managements to view all components of the group on one financial reporting platform. This will eliminate the need for multiple reports and significant adjustment for preparing consolidated financial statements or filing financial statements in different stock exchanges.

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Reflects true value of acquisitions - In Indian GAAP, business combinations, with few exceptions, are recorded at carrying values rather than fair values of net assets acquired. Purchase consideration paid for intangible assets not recorded in the acquirer's book is usually not reflected separately in the financial statements; instead the amount gets added to goodwill. Hence, the true value of the business combination is not reflected in the financial statements. IFRS will overcome this flaw, as it mandates accounting for net assets taken over in a business combination at fair value. It also requires recognition of intangible assets, even if they have not been recorded in the acquiree's financial statements.

Challenges to Convergence to IFRSs

Training - If IFRS has to be uniformly understood and consistently applied, training need of all stakeholders, include Chief Financial officer, Auditors, Audit committees, Teachers, Students, Analysts, Regulators and Tax authorities need to addressed. It is expressed that IFRS is be introduced as a full subject in Universities and in the Chartered Accountancy syllabus.

Information Systems - Financial accounting and reporting systems must be able to produce consistent data for reporting financial information. The systems must also be capable of capturing new information for required disclosures, such as segment information, fair values of financial instruments and related party transactions. Entities need to enhance their IT security in order to deliver information in accordance with IFRS and minimize the risk of business interruption, in particular to address the risk of fraud, data corruption etc.

Taxes - IFRS convergence will have a significant impact on financial statements and tax liabilities. Tax authorities should ensure that there is clarity in tax treatment of items arising from convergence to IFRS. For example, will government authorities tax unrealized gains arising out of the accounting required by the standards on financial instruments? The entities will have to consider risks involved with Tax authority and other regulatory issues.

Communication - IFRS may be significantly change reported earnings and various performance indicators. Managing market expectations and educating analysts will therefore be critical. A company's management must understand the differences in the way the entity's performance will be viewed, both internally and in the market place agree on key information to be delivered to investors and stakeholders. For example, Reported profits may be different due to increase use of fair values, and the restriction on existing practices such as hedge accounting. Therefore, the indicators for assessing both business and executive performance will need to be address.

Management compensation and debt covenants - The amount of compensation calculated and paid under performance based executive, and employee compensation plans may be materially different under IFRS, as the entity's financial results may be considerably different. Significant changes to the plan may be required rewarding an activity that contributes to an entity's success, with in the new regime. Re-negotiating contracts that referenced reported accounting amounts, such as bank covenants or foreign currency convertible bonds. Therefore entities will have to apply these changes in order to compliance with IFRS.

Impact on key industries in India

Telecom

Banking

Technology

Extractive

Retail etc (D'Souza et al., 2010, p. 35)

First time adoption of IFRS

Scope of IFRS 1

First- time adoption timeline/key dates

Optional exemptions from the requirements of certain IFRS

Presentation and disclosure etc (Pricewaterhousecoopers, 2010a, p. 3)

Impact of Practical differences

Presentation of Financial Statements

Business Combinations

Group Accounts

Financial Instruments

Income Taxes

Impairment of assets

Related party disclosure etc (D'Souza et al., 2010, p. 7)

Critical success factors for IFRS conversion projects

Strategy

Leadership communication

Knowledge

Project management etc (KPMG, 2008, p. 26)

Comparison of IFRS and Indian GAAP

Identify the similarity and difference between Indian GAAP and IFRS Accounting treatments.

Accounting treatments such as Statement of Financial Position, Inventories, Statement of Cash flows, Accounting Policies, Change in Accounting estimates and errors etc (Pricewaterhousecoopers, 2010b, p. 15)