Ancient India is a prime example of a culture whose accounting practices merit more attention due to their complexity and innovation. Looking back at Indian history, one finds that the art and practice of accounting were present in India even in Vedic times.
Ancient economic thoughts of Near East facilitated in knowing accuracy of products and methods were formalized in 2000B.C. Bible and Islamic Quran also mentions about Simple trade accounting. Luca Pacioli (1445-1517) is to be credited for "birth of accountancy" it was because of his mathematical knowledge that "double accounting system" was introduced.
The First book on accounting in English language was published in London, England by John Gouge (or Gough) in 1543 described as "A Profitable Treatise" called the instrument. It helped us to learn good order of keeping of the famous reckoning, called in Latin Dare and Habere, in English as Debtors and Creditors.
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In India accounting practices merit more due to their complexity and innovations. Fine art of accounting was present in India even in Vedic times. Rig-Vedas having references to words Kraya (sale), Vanij (Merchant), Sulka (Price).
There is very clear evidence of the highly developed Hindu accounting tradition in â€• Arthashastra written by Kautilya (also known as Chanakya and Vishnugupta) around 300 B.C. When literally translated, it means 'Scripture of Wealth'. Though it focuses on creation and management of wealth, it is a masterpiece covering a wide range of topics like statecraft, politics, welfare, law, accounting systems, taxation, fiscal policies, civil rules, internal and foreign trade etc. 1
1.2 Accounting Standards in India
Accounting depicts the clear financial image of the business; hence it should be clearly defined. The word accounting is basically defined as a system that provides numeric or quantitative information about the financial status of an entity. It depicts a clear view of the financial position. Accounting as a language of a business, communicates the financial results of an enterprise, which gives valuable information to decision makers, planners and investors for taking various important decisions. Accounting has its own set of rules which have been developed by accounting bodies. These rules can't be absolutely rigid like those of the physical sciences. These rules accordingly, provide a reasonable degree of flexibility in line with the economic environment, social needs, legal requirements and technological developments. Rules basically specify the parameter within which, anything could be accepted in the society. Accounting rules provides the framework or boundary within which they can be adopted. Accounting rules are the backbone of accounting, without which there will be no authenticity or reliability of accounting. Accounting principles have to operate within the bounds of rationality. Theses accounting rules are Accounting standards.
"Accounting Standards" means the standard of accounting recommended by ICAI and prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards (NACAS) constituted under Sec. 210(1) of companies Act, 1956.
Accounting standards provide consistency to accounting. It is only on the basis of these accounting standards that the information provided by the business organization is relied upon. It is not possible to compare the business performance in the absence of accounting standards. These Accounting standards can be: Financial Reporting Standards or Standard Accounting Practices. Accounting Standards are issued by various regulatory authorities. 2
Accounting deals with the issues of:
Recognition of events and transaction in the financial statements,
Measurement of these transaction and events,
Presentation of these transactions and events in the financial statements in a manner which is meaningful and understandable to the reader, and the disclosure of requirements.
The disclosure requirement would enable the public at large and the stakeholders and the potential investors in particular, to get an insight into what these financial statements are trying to reflect and, in turn, enable them to take informed business decisions.
Accounting standards standardize diverse accounting policies with a view to:
Reconcile the non-comparability of financial statements and
Provide a set of standard accounting policies, valuation norms and disclosure requirements.
The paradigm shift in the economic environment in India during last few years has led to increasing attention being devoted to accounting standards as a means towards ensuring potent and transparent financial reporting by corporate. Further, cross-border rising of huge amount of capital has also generated considerable interest in the generally accepted accounting principles in advanced countries such as USA.
Always on Time
Marked to Standard
The Institute of Chartered Accountants of India (ICAI) is a statutory body established under the Chartered Accountants Act, 1949 for the regulation of the profession of Chartered Accountancy in India. During its more than sixty years of existence, the Institute has achieved recognition as a premier accounting body in India for its contribution in the fields of maintenance of high accounting, auditing and ethical standards. It took upon itself the leadership role by establishing Accounting Standards Board, to fall in line with the international and national expectations. The ICAI now is the second largest accounting body in the whole world.
Today, accounting standards in India have come a long way. Presented hereinafter are some salient features of the accounting standard-setting endeavors in India.
Financial statements are prepared to summarize the end-result of all the business activities by an enterprise during an accounting period in monetary terms. These business activities vary from one enterprise to other. To compare the financial statements of various reporting enterprises poses some difficulties because of the divergence in the methods and principles adopted by these enterprises in preparing their financial statements. In order to make these methods and principles uniform and comparable to the extent possible - standards are evolved.
Accounting Standards Board (ASB)
It came into picture after economic boom of 1920, Stock Market crash in 1929 and great depression in mid -1930. Financial Community and federal government both has responded to needs of uniform accounting standards. (Particularly for corporations traded publicly). NYSE along with Americans Institute of Certified Public Accountants ventured preliminary guidelines for Audit of Corporate Accounts in 1934.
U.S. Securities and Exchange Commission was formed by congressional securities act, 1933 and the securities exchange Act, 1934. However it was voted out to forgo its prerogative and private sector to regulate its accounting practices. The AICPA shifted its responsibility to its Accounting Principal Board (APB) in 1959 APB main contribution was basic concepts and accounting principals of business enterprise. But was criticized for achieving too little and too late.
In 1971 special committee of AICPA suggested that standard setting should role should be given to autonomous body. Therefore finally in 1973 Accounting Standard Board Soon after SEC ratified the FASB's role in promulgating financial accounting and reporting.
The Institute of Chartered Accountants of India (ICAI) being a member body of the IASC, constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a view to harmonize the diverse accounting policies and practices in use in India. After the vowed adoption of liberalization and globalization as the corner stone's of Indian economic policies in early 90s, and the growing concern about the need of effective corporate governance of late, the Accounting Standards have increasingly assumed importance. While formulating accounting standards, the ASB takes into consideration the applicable laws, customs, usages and business environment prevailing in the country.
The composition of the ASB is broad-based with a view to ensuring participation of all interest groups in the standard-setting process. These interest-groups include industry, representatives of various departments of government and regulatory authorities, financial institutions and academic and professional bodies. Industry is represented on the ASB by their apex level associations, viz., Associated Chambers of Commerce and Industry (ASSOCHAM), Confederation of Indian Industries (CII) and Federation of Indian Chambers of Commerce and Industry (FICCI). As regards government departments and regulatory authorities, Reserve Bank of India, Ministry of Company Affairs, Comptroller and Auditor General of India, Controller General of Accounts and Central Board of Excise and Customs are represented on the ASB. Besides these interest-groups, representatives of academic and professional institutions such as Universities, Indian Institutes of Management, Institute of Cost and Works Accountants of India and Institute of Company Secretaries of India are also represented on the ASB. Apart from these interest groups, certain elected members of the Central Council of ICAI are also on the ASB.
Ensuring compliance with the Accounting Standards while preparing the financial statements is the responsibility of the management of the enterprise. Statutes governing certain enterprises require of the enterprises that the financial statements should be prepared in compliance with the Accounting Standards.
Financial Statements cannot be described as complying with the Accounting Standards unless they comply with all the requirements of each applicable standard.
Objectives Of Accounting Standards
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The basic objective of Accounting Standards is to remove variations in the treatment of several accounting aspects and to bring about standardization in presentation
Add the reliability to the Financial Statement
Eradicate baffling (unsolved) variation in treatment of accounting aspects
Facilitate inter-firm and intra-firm comparison.
The Accounting Standards-setting Process:
The accounting standard setting, by its very nature, involves reaching an optimal balance of the requirements of financial information for various interest-groups having a stake in financial reporting. With a view to reach consensus, to the extent possible, as to the requirements of the relevant interest-groups and thereby bringing about general acceptance of the Accounting Standards among such groups, considerable research, consultations and discussions with the representatives of the relevant interest-groups at different stages of standard formulation becomes necessary. The standard-setting procedure of the ASB, as briefly outlined below, is designed in such a way so as to ensure such consultation and discussions:
Identification of the broad areas by the ASB for formulating the Accounting Standards.
Constitution of the study groups by the ASB for preparing the preliminary drafts of the proposed Accounting Standards.
Consideration of the preliminary draft prepared by the study group by the ASB and revision, if any, of the draft on the basis of deliberations at the ASB.
Circulation of the draft, so revised, among the Council members of the ICAI and 12 specified outside bodies such as Standing Conference of Public Enterprises (SCOPE), Indian Banks' Association, Confederation of Indian Industry (CII), Securities and Exchange Board of India (SEBI), Comptroller and Auditor General of India (Cand AG), and Department of Company Affairs, for comments.
Meeting with the representatives of specified outside bodies to ascertain their views on the draft of the proposed Accounting Standard.
Finalization of the Exposure Draft of the proposed Accounting Standard on the basis of comments received and discussion with the representatives of specified outside bodies.
Issuance of the Exposure Draft inviting public comments.
Consideration of the comments received on the Exposure Draft and finalization of the draft
Accounting Standard by the ASB for submission to the Council of the ICAI for its consideration and approval for issuance.
Consideration of the draft Accounting Standard by the Council of the Institute, and if found necessary, modification of the draft in consultation with the ASB.
ï€ The Accounting Standard, so finalized, is issued under the authority of the Council.
Compliance With Accounting Standards:
Accounting Standards issued by the ICAI have legal recognition through the Companies Act,1956, whereby every company is required to comply with the Accounting Standards and the statutory auditors of every company are required to report whether the Accounting Standards have been complied with or not. Also, the Insurance Regulatory and Development Authority (IRDA) (Preparation of Financial Statements and Auditor's Report of Insurance Companies) Regulations, 2000 requires insurance companies to follow the Accounting Standards issued by the ICAI. The Securities and Exchange Board of India (SEBI) and the Reserve Bank of India also require compliance with the Accounting Standards issued by the ICAI from time to time.
Section 211 of the Companies Act, 1956, deals with the form and contents of balance sheet and profit and loss account. The Companies (Amendment) Act, 1999 has inserted new sub-sections 3A, 3B and 3C to Section 211, with a view to ensure that the financial statements are prepared in accordance with the Accounting Standards. The new sub-sections as inserted are reproduced below:
Section 211 (3A): ' Every profit and loss account and balance sheet of the company shall comply with the accounting standards' Section 211 (3B): ' Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following, namely:-
a) The deviation from the accounting standards;
b) The reasons for such deviation; and
c) The financial effect, if any, arising due to such deviation'
Section 211 (3C): 'For the purposes of this section, the expression "accounting standards" means the standards of accounting recommended by the Institute of Chartered Accountants of India, constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards established under sub- section (1) of section 210A:
Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the Accounting Standards until the accounting standards are prescribed by the Central Government under this sub-section.'
It may also be mentioned that the National Advisory Committee on Accounting Standards (NACAS) has been constituted under section 210A as referred to under section 211 (3C) to advise the Central Government on formulation and lying down of the accounting standards for adoption by companies or class of companies. It is of significance to note that on the recommendation of NACAS, the Ministry of Company Affairs, has issued a Notification dated 7th December, 2006, whereby it has prescribed Accounting Standards 1 to 7 and 9 to 29, as recommended by the Institute of Chartered Accountants of India, which are included in the said Notification. As per the Notification, the Accounting Standards shall come into effect in respect of accounting periods commencing on or after the publication of these Accounting Standards, i.e., 7th December, 2006. Specific relaxations are given to particular kinds of companies, termed as Small and Medium Sized Companies, depending upon their size and nature.
The above legal provisions have cast a duty upon the management to prepare the financial statements in accordance with the accounting standards. The corresponding provision to report on the compliance of accounting standards has been inserted under section 227 of the Companies Act, 1956, thereby casting a duty upon the auditor of the company to report on such compliance. A new clause (d) under sub-section 3 of Section 227 of the Companies Act, 1956 is read as under:
As far as the reporting of compliance with the Accounting Standards by the management is concerned, clause (i) under the new sub-section 2AA of Section 217 of the Companies Act, 1956, (inserted by the Companies Amendment Act, 2000) prescribes that the Board's report should include a Directors' Responsibility Statement indicating therein that in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures. 4
Procedure For Issuing Accounting Standards:
Accounting Standard Board (ASB) determines the broad areas in which Accounting Standards need to be formulated.
In the preparation of AS, ASB is assisted by Study Groups.
ASB also holds discussions with representative of Government, Public Sector Undertakings, Industry and other organizations (ICSI/ICWAI) for ascertaining their views.
An exposure draft of the proposed standard is prepared and issued for comments by members of ICAI and the public at large.
After taking into consideration the comments received, the draft of the proposed standard will be finalized by ASB and submitted to the council of the Institute.
The council of the Institute will consider the final draft of the proposed Standard and If found necessary, modify the same in consultation with ASB. The AS on the relevant subject will then be issued under the authority of the council.
Present Status of Indian Accounting Standards:
The IASB have taken great strides towards achieving global accounting convergence in the recent years. The changes have now been proposed in an effort to achieve convergence. In recent amendments, many of the changes made in the IASB to previous standards have accomplished the goal. With regard to the need for convergence with IFRS in India, the council of the ICAI, at its meeting held on 18th to 20th July 2007, has decided to fully converge with the IFRS issued by the IASB from the commencing accounting periods, for the listed entities and other public interest entities such as banks, insurance companies and large sized entities, subject to its ratification by the government and other legal and regulatory authorities. This means that within the next two years there would be a transition from the Indian GAAP into the IFRS. The ICAI has made an implementation schedule which identified the changes require to be made in the existing standards in order to achieve convergence. The ICAI has made a comprehensive plan for educating and training accountants so that country gets well prepared by 2011. It has released a Concept Paper on 'Convergence with IFRS in India'. It includes the roadmap and strategy for convergence of the accounting norms of all the listed companies to the IFRS.
In India many changes are being made for convergence of international accounting standards. It is also recognized that it is a pre-requisite for attracting foreign investment and for globalization of the economy.
The Reserve Bank of India (RBI), being the regulator of banks in India, requires all the banks, through its circulars/guidelines, to follow the Accounting Standards issued by the Institute of Chartered Accountants of India. Further, the Securities and Exchange Board of India (SEBI), through the Listing Agreement with stock exchanges, requires all listed entities to comply with the Accounting Standards issued by the Institute. Also, the Insurance Regulatory and Development Authority (IRDA), which regulates the financial reporting practices of insurance companies under the Insurance Regulatory and Development Authority Act, 1999, through IRDA (Preparation of Financial Statements and Auditor's Report of the Insurance Companies) Regulations, 2002, requires compliance with the Accounting Standards issued by the Institute of Chartered Accountants of India for preparing and presenting their financial statements by insurance companies.
Apart from the ICAI ensuring compliance with the IFRSs to the extent possible, the National Committee on Accounting Standards (NACAS) constituted by the Central Government for recommending accounting standards to the Government, while reviewing the Accounting Standards issued by the ICAI, considers the deviations in the Indian Accounting Standards, if any, from the IFRSs and recommends to the ICAI to revise the Accounting Standards wherever it considers that the deviations are not appropriate. 5
3. Accounting Standards at International Level:
History And Development:
The foundation for international accounting standards was laid in 1966, when it was proposed that an International Study Group be started comprising the Institute of Chartered Accountants of England and Wales (ICAEW), American Institute of Certified Public Accountants (AICPA) and Canadian Institute of Chartered Accountants (CICA). As a result, the Accountants International Study Group (AISG) was set up in 1967, which published papers on important topics.
IASC was founded in June 1973 after an agreement by accountancy bodies in Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland and the United States, and these countries constituted the Board of IASC at that time. The intention was that it would set up new international standards, which must 'be capable of rapid acceptance and implementation world-wide'.
In 1981, IASC and IFAC agreed that IASC would have full and complete autonomy in setting international accounting standards and in publishing discussion documents on international accounting issues. At the same time, all members of IFAC became members of IASC.
This membership link was discontinued in May 2000 when IASC's Constitution was changed as part of the reorganization of IASC. The International Accounting Standards Board (IASB) replaced the International Accounting Standards Committee (IASC), in 2001.
4. International Financial Reporting Standards (IFRS):
Since the turn of the new century there has been a wind of change blowing cross the Accounting profession. Convergence of National accounting standards to International Financial Reporting Standards is already underway in many countries. The introduction of IFRS represents a fundamental change in financial reporting. It is not something that can be handled in a few weeks prior to adoption. Planning for it, generating the necessary awareness, educating stakeholders and managing the required changes will take considerable commitment and time to achieve a successful transition. IFRS brings groups and collective working to achieve profits, bring about fair value in the business. Outsourcing becoming important IFRS will give leverage to Indian companies to understand international accounting. The most important change to take place in accounting and financial reporting in years is the convergence (adoption) around IFRS by over 100 countries worldwide. These countries have abandoned what was referred to colloquially as "National GAAP" (Generally Accepted Accounting Principles) for IFRS.
On its formation in April 2001 the IASB announced that the IASC Foundation Trustees agreed that accounting standards issued by IASB would be designated "International Financial Reporting Standards". On May 23rd 2002 the IASB issued published a press release announcing the publication of the Preface to International Financial Reporting Standards which provided 'a brief description of the purpose and function of the main structures of the new arrangements for setting global standards'. The first IFRS was published in June 2003 (IFRS 1, First-time Adoption of International Financial Reporting Standards).
The idea of International financial reporting standards (IFRS) is to make the financial information uniform, transparent and comparable, to increase the quality of information and to make it as close to the true and fair presentation of company status as possible; hence to make the capital movement across the countries easier and less costly.
The growing acceptance of International Financial Reporting Standards (IFRS) as a basis for financial reporting represents a fundamental change for the accounting profession. The Securities and Exchange Commission (SEC) has been taking steps to set a date to allow public companies to use IFRS. In fact, on November 14, 2008, the SEC released for public comment a proposed roadmap with a timeline and key milestones for adopting IFRS. A decade ago, national versions of Generally Accepted Accounting Principles (GAAP) were commonplace. Nowadays, IFRS has gained broad acceptance and is used in over 100 countries.
IFRS are considered a "principles based" set of standards in that they establish broad rules as well as dictating specific treatments. 7
Core standards completed
SEC review of core standards; concept release published Feb 2000 IASC approves new constitution IOSCO review finalized EU proposes that all EU listed companies (some 6,700) should apply IAS by 2005
IASB assumes accounting standard setting responsibilities from IASC
EU's decision to adopt IFRS from 1 Jan 2005
Nearly 7,000 listed business in 25 countries switch to IFRS
SEC accepts fillings from Foreign Private Issues (FPI) without reconciliation to US GAAP
US allows certain large filers to file IFRS accounts
US converged for listed companies - decision to be taken in 2011
Definition Of IFRS
Guidelines and rules set by the International Accounting Standards Board (IASB) that companies and organizations can follow when compiling financial statements. The creation of international standards allows investors, organizations and governments to compare the IFRS-supported financial statements with greater ease. The International Financial Reporting Standards were previously called the International Accounting Standards (IAS).
Structure Of IFRS Comprises:
International Financial Reporting Standards (IFRS) - standards issued after 2001
International Accounting Standards (IAS) - standards issued before 2001
Interpretations originated from the International Financial Reporting Interpretations Committee IFRIC) - issued after 2001
Standing Interpretations Committee (SIC) - issued before 2001
ICAI is of the view that IFRS to be adopted for public interest entities such listed Co, Banking Companies, Insurance entities and large size entities from the Accounting period beginning on or after April 2011. The view is further strengthened by convergence process being initiated by Ministry of Corporate Affairs.
For this purpose, public interest entities are the entities falling under the Category level 1 as defined by ICAI except that turnover should exceed Rs 100Crs (Instead of Rs 50 Crore) and borrowing should exceed Rs 25 Crore (instead of Rs 10Crs) and holding and subsidiary of above.
Even if listed company does not fulfill the above criteria for level 1 enterprise, the application of IFRS is mandatory.
Early adoption of IFRS is encouraged but it should be the adoption of all IFRS and should not be on selective basis.
For other entities, IFRS are not mandatory but recommendatory.
Securities and Exchange Commission which is responsible for the supervision and regulation of the securities industry
Financial Accounting Standards Board, an independent body that establishes and interprets U.S. GAAP
IASB, which is working with the FASB on the convergence of GAAP and IFRS.
The Underlying Assumptions Used In IFRS Are:
Accrual basis - the effect of transactions and other events are recognized when they occur, not as cash is gained or paid.
Going concern -an entity will continue for the foreseeable future.
Basic Difference between AS and IFRS
Accounting driven by value
Accounting driven by principles
Meaning Of 'Convergence' With IFRS
Before discussing the contours (outline/shape) of the convergence strategy with a view to meet the above mentioned objectives, the word 'convergence' needs to be clearly understood.
In general terms, 'convergence' means to achieve harmony with IFRSs; in precise terms convergence can be considered "to design and maintain national accounting standards in a way that financial statements prepared in accordance with national accounting standards draw unreserved statement of compliance with IFRSs". Presentation of Financial Statements, which states that financial statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs. It does not imply that financial statements prepared in accordance with national accounting standards draw unreserved statement of compliance with IFRSs only when IFRSs are adopted word by word. The IASB accepts in its 'Statement of Best Practice: Working Relationships between the IASB and other Accounting Standards-Setters' that "adding disclosure requirements or removing optional treatments do not create noncompliance with IFRSs. Indeed, the IASB aims to remove optional treatments from IFRSs." This makes it clear that if a country wants to add a disclosure that is considered necessary in the local environment, or removes an optional treatment, this will not amount to non compliance with IFRSs. Thus, for the purpose of this Concept Paper, 'convergence with IFRSs' means adoption of IFRSs with the aforesaid exceptions, where necessary.
For a country to be IFRS-compliant, it is not necessary that IFRSs are applied to all entities of different sizes and of different public interests. Even the IASB recognizes that IFRSs are suitable for publicly accountable entities. The IASB has, therefore, recently issued an Exposure Draft of an IFRS for Small and Medium-sized Entities (SMEs).
The Approach taken on Convergence
Opening balance sheet as at 1st April 2011
i. Companies which are part of NSE Index - Nifty 50
ii. Companies which are part of BSE Sensex - BSE 30
iii. Companies whose shares or other securities are listed on a stock exchange outside India
iv. Companies , whether listed or not, having net worth of more than INR 1,0000 crore
Opening balance sheet as at 1st April 2013
Companies not covered in phase 1 and having net worth exceeding INR 500 crore
Opening balance sheet as at 1st April 2014
Listed companies not covered in the earlier phases
If the financial year of a company commences at a date other than 1st April, then it shall prepare its opening balance sheet at the commencement of immediately following year.8
Diagrammatic Representation Of The Bodies Associated With IFRS
(Source: http: www.googleimages.com)
International Accounting Standard Committee (IASC):
The concept of convergence of accounting standards relates back to 19th century when the idea of "International Accounting Standards" was germinated in the first International Congress of Accountants held at St. Louis in 1904. Again in 1957, when 7th International Congress of Accountants held in Amsterdam, Mr. Jacob kraayenhof, spoke on the need of international accounting cooperation and standardization. Latter in 1966, discussions were made among the various professional bodies like the Institute of Chartered Accountants of England and Wales, Canadian Institute of Chartered Accountants and Association of the Institute of Certified Public Accountants of America. The discussions were led by Sir Henry Benson, the then President of the Institute of Chartered Accountants of England and Wales and ultimately a study group was formed to conduct comparative studies on the accounting thoughts and practices among participating countries. It conducted about twenty studies on accounting and auditing topics during its eleven years lifetime. Ultimately, the senior officers of the study group decided to establish international standards.
The meeting was held in 1972, and in the 10th International Congress of Accountants at Sydney, the International Coordination Committee for Accounting Profession (ICCAP) was formed to lay the groundwork for the establishment of a formal organization for the International Accounting Standards. The International Accounting Standards Committee (IASC), now International Accounting Standards Board (IASB) came into existence as a result of an agreement by 16 accounting bodies representing 9 nations, i.e., Canada, Australia, France, Japan, Germany, Mexico, Netherlands, United Kingdom and the United States of America on 29th June 1973, with its secretariat and head quarters at London.
At present IASC has 153 accounting bodies representing 112 countries. It has so far issued 41 standards. Barring Canada, Japan and the US, all countries have accepted these standards.
Goal Of IASB
The IASB is a committee with 14 members, from nine different countries, which work to develop global accounting standards. The goal of this committee is to create global standards that are transparent, enforceable, understandable, and of high-quality. These members create the International Financial Reporting Standards (IFRS) that are used by so many countries around the world. Each committee member has one vote for each of the standards that is voted upon and this privately funded group of accounting standards setters are based in London.
Importance Of IASB And IFRS
The International Accounting Standards Board (IASB) and the International Financial Reporting Standards (IFRS) that they issue are very important for the future of accounting. With businesses turning global, it is important that investors are able to compare companies under similar standards. Likewise, it is important for businesses operating in multiple countries to be able to create financial statements that are understandable in all of the countries they operate in. allow for the best of circumstances for investors and other interested parties to be able to examine and compare companies in a transparent and equal way.
Expectations From The IASB
To ensure smooth convergence with IFRSs, up to 2011 and thereafter also, IASB is also expected to play an important role as follows:
Provide guidance on issues emerging on adoption of IFRSs on timely basis at least up to 2011.
Address concerns about the complexity and structure of the international standards.
Write standards in simple English that is understandable, clear and capable of translation and consistent application.
In developing the IFRS and setting effective dates, be cognizant of the fact that the final standards are required to be translated in India for the purpose of Government Notification.
In considering changes to the IFRS, be cognizant of the cost vs. the benefits of the proposed changes.
Establish a process, or enhance the existing process to respond in a timely manner to requests for interpretations.
Consider the development of implementation guidance.
IFRS Adoption Procedure in India
In 1949, Indian government to streamline accounting practices in the country established Institute of Chartered Accountants of India by passing ICAI Act, 1949. Accounting Standard Board was constituted by ICAI in 1977 with a view to harmonize the diverse accounting policies and practices in India. The other objectives of the Board are:
(i) conceive of and suggest new areas in which Accounting Standards are needed,
(ii) Formulation of Accounting Standards,
(iii) Examine how far IAS and IFRS can be adapted while formulating the accounting standards and to adapt the samovar, and
(iv)Review the existing Accounting Standards and revise them regularly as and when necessary, among others. In 2006, a task force was set up by ICAI. The objective of the task force was to lay down a road map for convergence of IFRS in India.
Based on the recommendation made by the Task Force and on the basis of outcome of discussions and public opinions on IFRS adoption procedure, a 3 step process was laid down by the Accounting Professionals in India. This three steps IFRS adoption procedure can be summarized as follows:
Step 1 - IFRS Impact Assessment
In this step, the firm will begin with the assessment of the impact of IFRS adoption on Accounting and Reporting Issues, on systems and processes, and on Business of the firm. The firm will then identify the key conversion dates and accordingly a IFRS training plan will be laid down. Once the training plan is in place, the firm will have to identify the key Financial Reporting Standards that will apply to the firm and also the differences among current financial reporting standards being followed by the firm and IFRS. The firm will also identify the loopholes in the existing systems and processes.
Step 2 - Preparations for IFRS Implementation
This step will carry out the activities required for IFRS implementation process. It will begin with documentation of IFRS Accounting Manual. The firm will than revamp the internal reporting systems and processes. IFRS 1 which deals with the first time adoption of IFRS will be followed to guide through the first time IFRS adoption procedure. To make the convergence process smooth, some exemptions are available under IFRS 1.These exemptions are identified and applied. To ensure that the IFRS are applied correctly and consistently, control systems are designed and put in place.
Step 3 - Implementation
This step involves actual implementation of IFRS. The first activity carried out in this phase is to prepare an opening Balance Sheet at the date of transition to IFRS.A proper understanding of the impact of the transition from Indian Accounting Standards to IFRS is to be developed. This will follow the complete application of IFRS as and when required. First time implementation of IFRS requires lot of training and some difficulties may also be experienced. To ensure a smooth transition from Indian Accounting Standards to IFRS, Continuous training to staff and addressing all the difficulties that would be experienced while carrying out the implementation is also required.
Proposed SEC Roadmap
As mentioned previously, the proposed roadmap is not final, and the SEC (Securities and Exchange Commission) will review the feedback that it has received and whether milestones have been met in 2011. Depending on the feedback that the SEC receives, it may phase in the requirement for IFRS in 2014 depending on market capitalization. For example, the largest companies will be required to report IFRS in 2014, with others following in subsequent years.
The seven milestones that the SEC will review the progress of in 2011 are as follows:
The improvement of current specific accounting standards
The current funding of the FASB
The ability to use XBRL for IFRS
The current education and training of U.S. accountants
Evaluating the success of U.S. early adopters of IFRS
Timing of future rule making by the SEC
Determining when to make IFRS required for U.S. companies, such as in 2014 or a possible phased approach
In the roadmap, the SEC proposed that early adopters meeting certain criteria be allowed to elect to file financial statements by IFRS for fiscal years ending on or after December 15, 2009.9
SEC Proposed Roadmap 2008-2014.
November 14, 2008: SEC proposes a roadmap for the transition to IFRS for US companies
Under current proposal, early adopters meeting certain criteria can elect to report financial statements by IFRS.
SEC will review the feedback that it has received and whether milestones have been met. The SEC will then decide whether to require IFRS for 2014.
Under current proposal, listed US companies to start preparing comparative financial statements by IFRS.
Under current proposal, all listed US companies will be required to report financial statements by IFRS.
Current Slowdown And Fair Value Principle
The fair value principle has exacerbated the current credit crisis which has result in declining housing prices, reduced value of all Mortgaged Based Securities (MBS) since the housing collateral protecting them much less. Because of mark-to-market losses companies have to raise capital for meeting capital adequacy requirements. When MBS or other assets are sold to raise capital the market value is driven down further. Worse still, the distress prices become the new price for valuation of all similar instruments held by all companies. The domino effect results in a downward death spiral. The credit rating agencies downgrade the company's credit ratings, making borrowings to meet capital requirements more difficult. In normal time, fair value principle would not have been a subject of great debate. However, any accounting which fails to highlight the liquidity risk - in the way that the fair value accounting does - would not the serve the interest of investors and other stake holders. These perceived benefits are based on the experience of IFRS compliant countries under normal conditions. Thus the current decline in market confidence in India and overseas coupled with tougher economic conditions may pose significant challenges to Indian companies. IFRS requires application of fair value principles in certain situations and this would result in significant differences from financial information currently presented especially relating to financial instruments, mergers and acquisitions and other forms of business combinations. Considering the present economic scenario this would result in significant volatility in reported earnings and key performance measures like EPS and P/E ratios. Indian companies will have to create awareness among investors and other users of financial statements to explain the reasons for this volatility in order to improve understanding and transparency reliability and verifiability of their financial statements. However, there is lack of availability of actuaries (professionals with adequate valuation skill) to assist Indian companies in arriving at reliable "fair value". Infact, it is one of the significant resource constraints that would affect comparability of financial statements and thus render some of benefits from IFRS ineffective.
IFRS are "principle based standards" and offer certain accounting policy choices to prepare financial statements. For example in accounting for Investment Properties the use of cost-based model or revaluation model may be adopted. This would reduce the consistency and comparability of financial statements to some extent and hence this would affect the credibility and reliability of the financial position of the enterprise.10
Standards in issue at 30 September 2010
First-time Adoption of International Financial Reporting Standards
1 July 2009
1 January 2005
1 July 2009
1 January 2005
Non-current Assets Held for Sale and Discontinued Operations
1 January 2005
Exploration for and Evaluation of Mineral Resources
1 January 2006
Financial Instruments: Disclosures
1 January 2007
1 January 2009
1 January 2013
Presentation of Financial Statements
1 January 2009
1 January 2005
Statement of Cash Flows
1 January 1994
Accounting Policies, Changes in Accounting Estimates and Errors
1 January 2005
Events After the Reporting Period
1 January 2005
1 January 1995
1 January 1998
Property, Plant and Equipment
1 January 2005
1 January 2005
1 January 1995
1 January 1999
Accounting for Government Grants and Disclosure of Government Assistance
1 January 1984
The Effects of Changes in Foreign Exchange Rates
1 January 2005
1 January 2009
Related Party Disclosures
1 January 2005
Related Party Disclosures
1 January 2011
Accounting and Reporting by Retirement Benefit Plans
1 January 1988
Consolidated and Separate Financial Statements
1 July 2009
Investments in Associates
1 January 2005
Financial Reporting in Hyperinflationary Economies
1 January 1990
Interests in Joint Ventures
1 January 2005
Financial Instruments: Presentation
1 January 2005
Earnings per Share
1 January 2005
Interim Financial Reporting
1 January 1999
Impairment of Assets
31 March 2004
Provisions, Contingent Liabilities and Contingent Assets
1 July 1999
31 March 2004
Financial Instruments: Recognition and Measurement
1 January 2005
1 January 2005
1 January 2003
Emerging Markets And IFRS
Several emerging markets - such as Russia, India and China have experienced remarkable economic and foreign direct investment (FDI) growth in recent years and strong growth is expected to continue for many years to come the Current slowdown in a temporary phase and in the outcome of liquidity crunch which can be termed as purely a temporary technical insolvency situation. According to data compiled by Goldman Sachs and IMF the share of RIC (Russia, India and China) in global GDP will be doubled in next ten years (2006-2016) period, i.e. from 9.5 per cent in 2006 to 18.1 per cent in 2016 (2008). This kind of dramatic growth serves to highlight what is at stake for emerging markets like India and Underscores why these markets should continue to Endeavour to fully integrate with the new financial reporting and accounting standards and adopt IFRS in its entirely without any notification or country specific interpretations. It is, all about sustainability, moving to a global set of standards should have the free flow and efficient use and allocation of capital. It is in the long term self interest of emerging markets and other to enhance sustainable growth by making sure they are beneficiaries of free flow of capital. Achieving a single set of accounting standards is the first building block toward a truly global capital market. The ultimate goal is the creation of a truly global barrier free capital market, one that improves the over-all quality, effectiveness and efficiency of capital flow around the world. That is the real key to sustainable growth and prosperity in the world.
Therefore, current market values are more relevant for decision making purposes. However corporate hate "mark to market" accounting because it makes their results volatile, uncontrollable and unpredictable. Under historical cost accounting, managers can control the reported results by a practice called "Cherry picking" selling appreciated investments selectively to achieve the desired results. Mark to Market accounting currently reflects the underlying market volatility which is the reality and shows the actual financial position on that date. Any other practice to conceal the real market value of the assets may be temporarily comforting but it will lead to misrepresentation and will misguide the users of financial statements.
Hence, there is an urgent need to address all those challenges and work towards full adoption of IFRS in India. The most significant need is to build adequate IFRS skill and expansive knowledge base amongst Indian accounting professionals to manage the convergence for India Incorporation. This can be done by leveraging the knowledge and experience gained from IFRS convergence in other countries and incorporating the IFRS into the curriculum for professional accounting (CA) courses so that we have quite good number of professionals to manage the pressure of convergence.11
Benefits and Challenges of IFRS
Benefits of IFRS :
Adopting IFRS by Indian corporate is going to be very challenging but at the same time could also be rewarding. Indian corporate is likely to reap significant benefits from adopting IFRS.
IFRSs will improve the comparability of financial information and financial performance with global peers and industry standards. This will result in more transparent financial reporting of a company's activities which will benefit investors, customers and other key stakeholders in India and overseas.
World Class Peer Standards for Financial Reporting:-
The adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements. This, in turn, will lead to increased trust and reliance placed by investors, analysts and other stakeholders. Superior financial reporting could be useful in convincing a firm's present and potential employees of its financial soundness, so that as key users of firm's accounting information they can trust the firm as a dependable employer. The rising use of pay for performance plans and the need for international tradability of employees stocks and stock options further underscore the need for respectable accounting rules.
Harmonization with Global Financial Market:-
Increasingly, Indian accountants and businessmen feel the need for convergence with IFRS. Capital markets provide an important explanation for this change. Some Indian companies are already listed on overseas stock exchanges and many more will list in the future. Internationally acceptable accounting standards will then become the language of communication for Indian companies. Better access to and reduction in the cost of capital raised from global capital markets since IFRS are now accepted as a financial reporting framework for companies seeking to raise funds from most capital markets across the globe. A recent decision by the US Securities and Exchange Commission (SEC) permits foreign companies listed in the US to present financial statements in accordance with IFRS. This means that such companies will not be required to prepare separate financial statements under Generally Accepted Accounting Principles in the US (US GAAP). Therefore, Indian companies listed in the US would benefit from having to prepare only a single set of IFRS compliant financial statements, and the consequent saving in financial and compliance costs.
However, the perceived benefits from IFRS adoption are based on the experience of IFRS compliant countries in a period of mild economic conditions. The current decline in market confidence in India and overseas coupled with tougher economic conditions may present significant challenges to Indian companies.
Challenges of IFRS :
The transition will be a tough challenge for the country as it requires a shift in the academic approach, along with regulatory challenges. The Institute of Chartered Accountants of India (ICAI) and the government will have to play a larger role in countering industry problems.
There are several impediments and practical challenges to adoption of and full compliance with IFRS in India. These are:
IFRS requires application of fair value principles in certain situations and this would result in significant differences from financial information currently presented, especially relating to financial instruments and business combinations. Given the current economic scenario, this could result in significant volatility in reported earnings and key performance measures like EPS and P/E ratios. Indian companies will have to build awareness amongst investors and analysts to explain the reasons for this volatility in order to improve understanding, and increase transparency and reliability of their financial statements.
This situation is worsened by the lack of availability of professionals with adequate valuation skills, to assist Indian corporate in arriving at reliable fair value estimates. This is a significant resource constraint that could impact comparability of financial statements and render some of the benefits of IFRS adoption ineffective.
Although IFRS are principles-based standards, they offer certain accounting policy choices to preparers of financial statements. For example, the use of a cost-based model or a revaluation model in accounting for investment properties. This could reduce consistency and comparability of financial information to a certain extent and therefore reduce some of the benefits from IFRS adoption. IFRS are formulated by the International Accounting Standards Board (IASB) which is an international standard setting body.
However, the responsibility for enforcement and providing guidance on implementation vests with local government and accounting and regulatory bodies, such as the ICAI in India. Consequently, there may be differences in interpretation or practical application of IFRS provisions, which could further reduce consistency in financial reporting and comparability with global peers. The ICAI will have to make adequate investments and build infrastructure to ensure compliance with IFRS.
Amendments in Laws and Regulations:
Without regulatory approvals the whole thing will fall flat. Certain regulatory amendments have to be taken up quickly. IFRS is not only going to help Indian companies benchmark their performance with global counterparts but also escape from filing multiple reports for Indian companies who have gone global.
There is a great need for changes in several laws and regulations governing financial accounting and reporting in India. In addition to accounting standards, there are legal and regulatory requirements that determine the manner in which financial information is reported or presented in financial statements.
Company law and Accounting Standards:
A study of the requirement of company law regarding the financial statements reveal several lacunae like earning per share, information about future cash flows, consolidation, mergers, acquisitions etc. Apart from this, Companies Act, 1956 determines the classification and accounting treatment for redeemable preference shares as equity instruments of a company, whereas these may be considered to be a financial liability under IFRS. The Companies Act (Schedule VI) also prescribes the format for presentation of financial statements for Indian companies, whereas the presentation requirements are significantly different under IFRS. Similarly, the Reserve Bank of India regulates the financial reporting for banks and other financial institutions, including the presentation format and accounting treatment for certain types of transactions. Income Tax Act and Accounting Standards: The Income Tax Act does not recognize the accounting standards for most of the items while computing income under the head "Profits & Gains of Business or Profession". Section 145(2) of the I.T. Act has empowered the Central Government to prescribe accounting standards. The standards prescribed so far constitute a rehash of the related accounting standards prescribed by ICAI for corporate accounting. On a close scrutiny of these standards one is left wondering about the purpose and value of this effort. Examples are application of prudence substance over form, adherence to principles of going concern etc.
Other regulations and accounting standards:-
In respect of banks, financial institutions, and finance companies the Reserve Bank of India (RBI) pronounces policies among others, revenue recognition, provisioning and assets classifications. Similarly the Foreign Exchange Dealers Association (FEDAI) provides guidelines regarding accounting for foreign exchange transactions. Since the Securities & Exchange Board of India (SEBI) is an important regulatory body it would also like to have its own accounting standards and in fact, it has started the process by notifying cash flow reporting format. It is also in the process of issuing a standard on the accounting policies for mutual funds. It appears as if several authorities in our country are keen to have a say in the matter of framing accounting rules of measurement and reporting. The tentative and half hearted legal and regulatory intervention in accounting in our country has come in the way of development of robust, continuously evolving and dynamic accounting theory and standards.
The recent announcement by the MCA is encouraging as it indicates government support for the timetable for convergence with IFRS in India. However, the announcement stops short of endorsing the roadmap for convergence and the full adoption of IFRS that is discussed in ICAI's concept paper. In the absence of adequate clarity and assurance that Indian laws and regulations will be amended to conform to IFRS, the conversion process may not gain momentum.
Apart from the above differences, there are a few conceptual differences between the Indian Accounting Standards and the IFRSs. 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 be required 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 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. Further, the judgment whether the management has raised valid expectations in those affected may be a matter of considerable argument. In view of this, the corresponding Indian accounting standard, viz., AS 29, does not specifically deal with 'constructive obligation'. AS 29, however, requires 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 are required to be applied.
There is a lack of adequate professionals with practical IFRS conversion experience and therefore many companies will have to rely on external advisers and their auditors. This is magnified by a lack of preparedness amongst Indian corporate as this project may be viewed simply as a project management or an accounting issue which can be left to the finance function and auditors. However, it should be noted that IFRS conversion will involve a fundamental change to an entity's financial reporting systems and processes. It will require a detailed knowledge of the standards and the ability to consider their impact on business transactions and performance measures. Further, the conversion process will need to disseminate and embed IFRS knowledge throughout the organization to ensure its application on an ongoing basis.
Replacement and Up gradation in systems:
Many Indian organizations are having legacy financial systems that will need to be evaluated to determine whether they are capable of handling the transition process. Some systems will require extensive upgrades or total replacement to handle the conversion to IFRS. For organizations with older systems, this is potentially a very expensive proposition. That's why it is important to evaluate redesign and replacement options early, so major system replacements can be planned for and implemented cost effectively. Ideally, and with sufficient planning, upgrades and replacements can occur as part of the overall strategic technology planning and procurement process.
Determine the impact
The transition to IFRS will affect more than just the general ledger and subsidiary ledger systems; it will impact all business systems that feed data to accounting systems. This includes departmental systems and even spreadsheets used to capture and upload financial information. To make sure a successful conversion to IFRS, it is very important to identify all touch points within the organization that require modification.
Covert historical data:-
Historical data from recent prior periods will have to be recast for comparative purposes. This is necessary to permit accurate and comparative trend and ratio analysis. Record retention requirements should be reviewed to ensure that data currently being retained is detailed enough to permit proper restatement of prior-period financials.
Shortage of resources:
With the convergence to IFRS, implementation of SOX, strengthening of corporate governance norms, increasing financial regulations and global economic growth, accountants are most sought after globally. Accounting resources is a major challenge. India; with a population of more than 1 billion has only approximately 145000 Chartered Accountants, which is far below its requirement.
If IFRS has to be uniformly understood and consistently applied, training needs of all Stakeholders, including CFOs, auditors, audit committees, teachers, students, analysts, regulators and tax authorities need to be addressed. It is imperative that IFRS is introduced as a full subject in universities and in the Chartered Accountancy syllabus.
Financial accounting and reporting systems must be able to produce robust and 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. As financial accounting an