Personal Details

Name: Purvesh Jobanputra

MFM : Sem 5, Div: B
Roll No : 220
Project :On IFRS
Submitted to : Professor Hemant Junarkar
WHAT IS IFRS?
International Financial Reporting Standards (IFRS), together with International
Accounting Standards (IAS), are a "principles-based" set of standards that establish
broad rules rather than dictating specific accounting treatments. From 1973 to 2001,
IAS were issued by the International Accounting Standards Committee (IASC). In
April 2001 the International Accounting Standards Board (IASB) adopted all IAS and
began developing new standards called IFRS.

Structure of IFRS
IFRS are considered a "principles based" set of standards in that they establish broad
rules as well as dictating specific treatments.

International Financial Reporting Standards comprise:

• 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

There is also a Framework for the Preparation and Presentation of Financial

Statements which describes of the principles underlying IFRS.

Framework
The Framework for the Preparation and Presentation of Financial Statements states
basic principles for IFRS.

Objective of financial statements

The framework states that the objective of financial statements is to provide

information about the financial position, performance and changes in the financial
position of an entity that is useful to a wide range of users in making economic
decisions,and to provide the current financial status of the entity to its shareholders
and public in general.
Underlying assumptions

The underlying assumptions used in IFRS are:

• Accrual basis - the effect of transactions and other events are recognised
when they occur, not as cash is received or paid
• Going concern - the financial statements are prepared on the basis that an
entity will continue in operation for the foreseeable future

Qualitative characteristics of financial statements

The Framework describes the qualitative characteristics of financial statements as

being

• Understandability
• Relevance
• Reliability and
• Comparability.

Elements of Financial Statements

The Framework sets out the statement of financial position (balance sheet) as
comprising:-

• Assets - resources controlled by the entity as a result of past events and

from which future economic benefits are expected to flow to the entity
• Liabilities - a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits
• Equity - the residual interest in the assets of the entity after deducting all its
liabilities

and the statement of comprehensive income (income statement) as comprising:

• Income is increases in economic benefits during the accounting period in the

form of inflows or enhancements of assets or reductions in liabilities.
 • Expenses are decreases in such economic benefits.

Content of financial statements:-

IFRS financial statements consist of (IAS1.8)

• a balance sheet
• income statement
• either a statement of changes in equity(SOCE) or a statement of recognised
income or expense ("SORIE")
• a cash flow statement
• notes, including a summary of the significant accounting policies

Comparative information is provided for the previous reporting period (IAS 1.36). An
entity preparing IFRS accounts for the first time must apply IFRS in full for the
current and comparative period although there are transitional exemptions
(IFRS1.7).

On 6 September 2007, the IASB issued a revised IAS 1 Presentation of Financial

Statements. The main changes from the previous version are to require that an
entity must:

• present all non-owner changes in equity (that is, 'comprehensive income' )

either in one statement of comprehensive income or in two statements (a
separate income statement and a statement of comprehensive income).
Components of comprehensive income may not be presented in the
statement of changes in equity.
• present a statement of financial position (balance sheet) as at the beginning
of the earliest comparative period in a complete set of financial statements
when the entity applies an accounting policy retrospectively or makes a
retrospective restatement.
• disclose income tax relating to each component of other comprehensive
income.
 • disclose reclassification adjustments relating to components of other
comprehensive income.

IAS 1 changes the titles of financial statements as they will be used in IFRSs:

• 'balance sheet' will become 'statement of financial position'

• 'income statement' will become 'statement of comprehensive income'
• 'cash flow statement' will become 'statement of cash flows'.

The revised IAS 1 is effective for annual periods beginning on or after 1 January
2009. Early adoption is permitted.

Necessity of IFRS:-
By adopting IFRS, a business can present its financial statements on the same basis
as its foreign competitors,making comparisons easier.Furthermore,companies with
subsidiaries in countries that require or permit IFRS may be able to use one
accounting langauge company – wide.Companies also may need to convert to IFRS if
they are a subsidiary of a foreign company that must use IFRS,or if they have a
foreign investor that must use IFRS.Companies may also benefit by using IFRS if
they wish to raise capital abroad.

How widespread is the adoption of IFRS around the

world?

More than 12000 companies in approximately 113 nations have adopted

IFRS,including listed companies in the European Union. Other countries,
including Canada and India, are expected to transition to IFRS by 2011.
Mexico plans to adopt IFRS for all listed companies starting in 2012. Some
estimate that the number of countries requiring or accepting IFRS could grow
to 150 in the next few years. Japan has introduced a roadmap for adoption
that it will decide on in 2012 (with adoption planned for 2016). Still other
countries have plans to converge (eliminate significant differences) their
national standards with IFRS

IFRS & INDIA:-

The issue of convergence with IFRS has gained significant momentum in India. At
present, the ASB of the ICAI formulates Accounting Standards based on IFRS,
however, these standards remain sensitive to local conditions, including the legal &
economic environment. Accordingly, the Accounting Standards issued by the ICAI
depart from the corresponding IFRS in order to ensure consistency with the legal,
regulatory and economic environments of India.

At a meeting held 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 entries.The ASB, at a
meeting held in August 2006,considered the matter and supported the council’s view
that there would be several advantages of converging with IFRS.Keeping in mind the
extent of differences between IFRS and Indian Accounting Standards, as well as the
fact, that convergence with IFRS would be important policy decision, the ASB
decided to form an IFRS Task Force .The objectives of the Task Force were to
explore:

• The approach for achieving convergence with IFRS , and

• Laying down a road map for achieving convergence with IFRS with a view to
make India IFRS – compliant.

Based on the recommendation of the IFRS Task Force, the council of ICAI, at its
269th meeting decided to converge with IFRS, for accounting periods commencing
on or after 1 April 2011.IFRS will be adopted for listed and other public interest
entities such as banks , insurance, companies and large – sized organizations.

With an objective to ensure smooth transition to IFRS from 1 April 2011,ICAI is

taking up the matter of convergence with IFRS with NACAS and other regulators
including RBI, IRDA and SEBI.The NACAS has been established by the Ministry of
Corporate Affairs, Government of India.ICAI is taking various other steps as well
as to ensure that IFRS is effectively adopted from 1 April 2011.

These include:

• Formulations of work – plan, and

• Conducting training programmes for members of ICAI and others
concerned to prepare them to implement IFRS.
• ICAI will also discuss, with the IASB those areas, where changes in certain
IFRS may be required, to reflect conditions specific to India and areas of
conceptual differences.

In May 2008, the MCA issued a press release in which it committed to IFRS
convergence by 1 April 2011.

Recognizing the convergence efforts of ICAI & MCA, the European Union has recently
allowed entries to use Indian GAAP for listing on a European securities market
without reconciliation through to 2011, and if the convergence plan is achieved, to
continue to do so after 2011.
BENEFITS OF ADOPTING IFRS FOR INDIAN
COMPANIES:-
The decision to converage with IFRS is a milestone decision and is likely to provide
significant benefits to Indian corporates.Some of them are listed below:

Improved access to international capital markets :

Many Indian entries are expanding or making significant acquisitions in the global
arena, for which large amounts of capital is required.The majority of stock exchanges
require financial information prepared under IFRS.Migration to IFRS will enable
Indian entities to have international capital markets, removing the risk premium that
is added to those reporting under Indian GAAP.

Lower Cost of Capital :

Migration to IFRS will lower the cost of raising funds, as it will eliminate the need
for preparing a dual set of financial statements.It will also reduce accountants’ fees,
abolish risk premiums and will enable access to all major capital markets as IFRS is
globally acceptable.

Enable benchmarking with global peers and improve brand value:

Adoption of IFRS will enable companies to gain a broader and deeper understanding
of the entity’s relative standing by looking beyond country and regional milestones.
Further,
adoption of IFRS will facilitate companies to set targets and milestones based on
global business environment, rather than merely local ones.

Escape multiple reporting :

Convergence to IFRS, by all groups entities, will enable company managements to

view all components of the groups on one financial reporting platform. This will
eliminate the need for multiple reports and significant adjustment for preparing
consolidated financial statements in different stock exchanges.

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 books is usually not recorded
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.

New opportunities :

Benefits from the adoption of IFRS will not be restricted to Indian corporates.In fact;
it will open up a host of opportunities in the service sector.With a wide pool of
accounting professionals, India can emerge as an accounting services hub for the
global community.As IFRS is fair value focused it will provide significant opportunities
to professionals including, accountants, valuers and actuaries, which in – turn, will
boost the growth prospects for the BPO/KPO segment in India.

IFRS CHALLENGES:-

Some of the challenges are listed below:

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.

Training :

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.

Information systems:

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 and reporting systems are modified and strengthened to deliver
information in accordance with IFRS, entries need to enhance their IT security in
order to minimize the risk of business interruption ,in particular to address the risk of
fraud, cyber terrorism and data corruption.

Taxes:
 IFRS convergence will have significant impact on financial statements and
consequently tax liabilities.Tax authorities should ensure that there is clarity on the
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? From an entity point of view, a thorough
review of existing tax planning strategies is essential to test their alignment with
changes created by IFRS.Tax,other
regulatory issues and the risks involved will have to be considered by the entities.

Communication:

IFRS may 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 reviewed, both internally and in the market place and agree on
key messages to be delivered to investors and other stake holders.Reported profits
may be different from perceived commercial performance due to the increased use of
fair values, and the restriction on existing practices such as hedge accounting.
Consequently, the indicators for assessing both business and executive performance
will need to be revisited.

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 considered different. Significant
changes to the plan may be required to reward an activity that contributes to an
entity’s success, within the new regime.Re – negotiating contracts that referenced
reported accounting amounts,such as ,bank covenants or FCCB conversation trigger,
may be required on convergence to IFRS.

Difference between IFRS and Indian GAAP

Some of them are listed below :-

Subject IFRS Indian GAAP

Historical cost Generally uses historical cost, but
intangible assets, property plant
and equipment (PPE) and
investment property may be
revalued to fair value.
Derivatives, biological assets and
certain securities are revalued to
fair value.
Uses historical cost, but property,
plant and equipment may be
revalued to fair value. Certain
derivatives are carried at fair value.
No comprehensive guidance on
derivatives and biological assets.

Balance sheet Does not prescribe a particular Accounting standards do not

 format. Certain minimum items
are presented on the face of the
balance sheet. A liquidity
presentation of assets and
liabilities is used instead of a
current/non-current presentation,
only when a liquidity presentation
provides more relevant and
reliable information.
Income statement Does not prescribe a standard
format, although expenditure is
presented in one of two formats
(function or nature). Certain
minimum items are presented on
the face of the income statement.
Extraordinary items Prohibited.
Changes in Comparatives are restated, unless
accounting policy specifically exempted; where the
effect of period(s) not presented
is adjusted against opening
retained earnings.
Correction of errors Comparatives are restated and, if
the error occurred before the
earliest prior period presented,
the opening balances of assets,
liabilities and equity for the
earliest prior period presented are
restated.
Special purposes Consolidated where the substance No specific guidance.
entity (SPE) of the relationship indicates
control.
Definition of joint Contractual arrangement whereby
venture two or more parties undertake an
economic activity, which is subject
to joint control. Exclusion if
investment is held-for-sale.
Uniting of interests Prohibited.
method
Business Not specifically addressed. Entities No specific guidance. Normal
prescribe a particular format but
certain items must be presented on
the face of the balance sheet.
Formats are prescribed by the
Companies Act and other industry
regulations like banking, insurance,
etc.
Does not prescribe a standard
format; but certain income and
expenditure items are disclosed in
accordance with accounting
standards and the Companies Act.
Industry-specific formats are
prescribed by industry regulations.
Defined as events or transactions
clearly distinct from the ordinary
activities of the entity and are not
expected to recur frequently and
regularly. Disclosed separately.
The effect and impact of change is
included in current-year income
statement. The impact of change is
disclosed separately.
Restatement is not required. The
effect of correction is included in
current-year income statement with
separate disclosure.
Similar to IFRS.
Exclusion if it meets the definition of
a subsidiary or exemptions similar to
non-consolidation of subsidiaries.
Required for certain amalgamations
when all the specified conditions are
met.
combinations elect and consistently apply either business combination accounting
involving entities purchase or pooling-of-interest
under common accounting for all such
control transactions.
Depreciation Allocated on a systematic basis to Similar to IFRS, except where the
each accounting period over the
useful life of the asset.
Interest expense Recognised on an accrual basis
using the effective interest
method.
Termination benefits Termination benefits arising from
redundancies are accounted for
similarly to restructuring
provisions. Termination indemnity
schemes are accounted for based
on actuarial present value of
benefits.
Acquired intangible Capitalised if recognition criteria
assets are met; amortised over useful
life. Intangibles assigned an
indefinite useful life are not
amortised but reviewed at least
annually for impairment.
Revaluations are permitted in rare
circumstances.
Property, plant and Historical cost or revalued
equipment amounts are used. Regular
valuations of entire classes of
assets are required when
revaluation option is chosen.
Investment property Measured at depreciated cost or
fair value, with changes in fair
value recognised in the income
statement.
Contingencies Disclose unrecognised possible
losses and probable gains.
would apply.
useful life is shorter as envisaged
under the Companies Act or the
relevant statute, the depreciation is
computed by applying a higher rate.
Recognised on an accrual basis;
practice varies with respect to
recognition of discounts and
premiums.
With the adoption of AS 15
(revised), similar to IFRS, however,
timing of recognising liability could
differ.
Prior to AS 15 (revised), no specific
guidance. Generally, voluntary
retirement expenses are recognised
on acceptable of the plan by
employees and amortised over 3 to
5 years.
Capitalised if recognition criteria are
met; all intangibles are amortised
over useful life with a rebuttable
presumption of not exceeding 10
years.
Revaluations are not permitted.
Historical cost is used. Revaluations
are permitted, however, no
requirement on frequency of
revaluation.
On revaluation, an entire class of
assets is revalued, or selection of
assets is made on a systematic
basis.
Treated the same as a long-term
investment and is carried at cost less
impairment.
Similar to IFRS, except that
contingent gains are neither

Government grants Recognised as deferred income
and amortised when there is
reasonable assurance that the
entity will comply with the
conditions attached to them and
the grants will be received.
Entities may offset capital grants
against asset values.
Convertible debt Convertible debt (fixed number of Convertible debt is recognised as a
shares for a fixed amount of cash) liability based on its legal form
is accounted for on split basis,
with proceeds allocated between
equity and debt.
Derecognition of Liabilities are derecognised when
financial liabilities extinguished. Difference between
carrying amount and amount paid
is recognised in income
statement.
Post-balance-sheet Financial statements are adjusted
events for subsequent events, providing
evidence of conditions that
existed at the balance sheet date
and materially affecting amounts
in financial statements (adjusting
events). Non-adjusting events are
disclosed.
Interim financial Contents are prescribed and basis
reporting should be consistent with full-year
statements. Frequency of
reporting (eg, quarterly, half-
year) is imposed by local
regulator or is at discretion of
entity.
recognised nor disclosed.
Similar to IFRS conceptually,
although several differences in
detail. For e.g., in certain cases,
grants received are directly credited
to capital reserve (in equity).
without any split.
No specific guidance; in practice,
treatment would be similar to IFRS
based on substance of the
transaction.
Similar to IFRS, except non-
adjusting events are not required to
be disclosed in financial statements
but are disclosed in report of
approving authority e.g. Directors
Report.
Similar to IFRS.
However, pursuant to the listing
agreement, all listed entities in India
are required to furnish their
quarterly results in the prescribed
format. Quarterly results include
financial results relating to the
working of the Company and certain
notes thereon.