IFRS

IFRS – AN OVERVIEWINTERNATIONAL FINANCIAL REPORTING STANDARDS

Introduction :

With the growth of Indian economy & increasing integration with the global economies, Indian corporates are raising capital globally. Under the circumstances it would be imperative for Indian corporates to adopt IFRS for their financial reporting. The convergence with IFRS is set to change the landscape for financial reporting in India. IFRS represents the most commonly accepted global accounting framework as it has been adopted by more than 100 countries.

One of the basic feature of the IFRS is that it is principle based standard rather than rule based.

A separate set of IFRS for Small & Medium–Sized Enterprises has been issued by the IASB in July 2009

What is IFRS?

IFRS stands for International Financial Reporting Standards & includes International Accounting Standards (IASs) until they are replaced by any IFRS & interpretation originated by the IFRIC (International Financial Reporting Interpretation Committee) or its predecessor, the former Standing Interpretation Committee.

IFRS are developed and approved by IASB (International Accounting Standard Board)

Objectives :

According to the Preface to IFRS issued by the IASB the main objectives of IFRS are

To develop in public interest, a single set of high quality, understandable & enforceable global accounting standards that require high quality, transparent & comparable information in financial statements & other financial reporting to help participants in the various capital markets of the world & other users of the information to make economic decisions

To promote the use & rigorous application of those standards

In fulfilling the objectives associated above to take account of, as appropriate, the special needs of small & medium-sized entities & emerging economies

To bring about convergence of national accounting standards & IFRSs to high quality solutions.

IFRS in India

At its 269th meeting the council of ICAI has decided that public interest entities such as listed companies, banks insurance companies & large sized organisations to converge with IFRS for accounting period commencing on or after 1st April, 2011.

For small & medium sized entities ICAI had proposed that a separate standard may be formulated based on the IFRS for SMEs issued by the IASB after modifications, if necessary.

TIME LINE FOR CONVERGENCE

Phase I1st April 2011*

a)Companies which are part of NSE – Nifty50b)Companies which are part of BSE – Sensex30c)Companies whose shares or other securities are listed on stock exchanges outside India.d)Companies, whether listed or not which have a networth in excess of Rs. 1000 crores.

Phase II1st April 2013*

The companies whether listed or

not, having a networth exceeding Rs. 500 crores but not exceeding Rs.

1000 crores

Phase III1st April 2014*Listed companies

which have a networth of Rs. 500

crores or less.

*Companies to prepare opening B/S as on the respective date. When the accounting year ends on a date other than 31st March, conversion opening B/S will be made in relation to the first B/S which is made on a date after 31st March.

IFRS in not mandatory for the following Companies.

Non-Listed Companies which have a networth of Rs. 500 crores or less and whose shares or other securities are not listed on stock exchanges outside India.

Small & Medium Companies (SMCs)

Benefits :

Encourage international investing & thereby increase in foreign capital inflow.

Benefit the economy by increased international business.

More relevant, reliable, timely & comparable information to investors.

Better understanding of financial statements would benefit investors who wish to invest outside the country.

Benefits :

Capital at lesser cost from foreign market. Reduced accounting requirements

prevailing in various countries & hence reduced cost of compliance.

Professional opportunity to serve international clients.

Increased mobility to work in different parts of the world either in industry or practice.

Challenges :

Increase in cost due to dual reporting requirement till full convergence is achieved.

Changes may be required to various regulatory requirements such as Companies Act, Income Tax Act, SEBI, RBI, etc..

If IFRS is to be uniformly understood training may be reuired to all stakeholders such as employees, auditors, etc.

Challenges :

Additional cost towards modification in IT systems & Proceedures.

Difference between Indian GAAP & IFRS may impact business decision & financial performance.

Limited pool of trained resource & persons having expert knowledge on IFRSs.

Qualitative Characteristics

Understandability

Relevance

Reliability

Comparability

Contents :

1. A statement of financial position as at the end of the period (Balance Sheet)

2. A statement of comprehensive income for the period (Income Statement)

3. A statement of changes in equity for the period4. A statement of cash flows for the period5. Notes comprising of significant accounting policies &

other explanatory information6. A statement of financial position as at the beginning

of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it classifies items in its financial statements.

Differences between Indian GAAP & IFRS in general

Basis of Difference

Indian GAAP IFRS/IAS

GAAP There is a presumption that financial statements should be prepared in compliance with AS to give true & fair view

Entities should make an explicit & unreserved statement in the note that the financial statement comply with IFRS

Departure from GAAP

Non compliance with any of the applicable AS needs to be disclosed in the financial statements

An entity cannot describe financial statements as complying with IFRSs unless they comply with all the requirements of each applicable standard & interpretation

True & Fair View

True & fair override is generally not permitted

In extremely rare circumstances in which management concludes that compliance with a requirement in an IFRS would be so misleading that it would conflict with the objective of financial statements, the entity shall depart from that requirement if the relevant regulatory framework requires or otherwise doesn’t prohibit, such a departure & disclosure is required.

Conflict between GAAP & Local Law

The Accounting Standards by their very nature cannot & do not override the local regulations which govern the preparation & presentation of financial statements in the country

The override doesn’t apply where there is conflict between local company law & IFRS. In such a situation IFRS must be applied.

Differences between Indian GAAP & IFRS in general

Basis of Difference

Indian GAAP IFRS/IAS

Preparation & Presentation

An entity has to present financial statements on a stand alone basis. Consolidations is mandatory as per listing agreement only for public listed companies.

An entity has to present financial statements on a consolidated basis unless it meets exemption criteria prescribed under IAS 27. Stand alone statements may be prepared voluntarily.

First time adoption

Does not give specific guidance on first time adoption of the standards by an entity

IFRS 1 specifically deals with first time adoption

Components

B/S, P&L A/c, Cash flow statement(Not mandatory for SMCs), Accounting Policies & Notes to accounts.

Balance sheet, Income Statement, Statement of changes in equity, Cash flow statement, notes comprising of significant accounting policies & other explanatory information.

Balance sheet format

AS doesn’t prescribe specific format.Companies Act & other industry regulations prescribe industry specific format of Balance sheet

No specific format prescribed

Classification of Asset & Liabilities

No strict classification in Current & Non-current assets & Liabilities required under Schedule VI of Companies Act

An entity shall present separate classification of Current & non current assets & liabilities in its statement of financial position except when a presentation based on liquidity provided more reliable information

Steps in conversion

Recognise all the assets & liabilities whose recognition is required by IFRSs.

De-recognise items of assets & liabilities if IFRS does not permit such recognition.

Reclassify assets, liabilities & items of equity as per the requirements of IFRS.

Apply IFRS measurement principles for all recognised assets & liabilities retrospectively. (Unless exemption available under IFRS).