Convergence with IFRS

Simardeep Singh simardeep88@hotmail.com

India has been seeing a lot of changes in the legal and regulatory environment in the recent times including New Direct Tax Code, Companies Bill, 2009, Goods & Service Tax (GST) and adoption of IFRS, even though all these proposed changes are presently in draft form. Keeping in view the fact that International Financial Reporting Standards (IFRS) are fast becoming the global accounting and financial reporting language, Indian accounting practices are set to converge with IFRS from 01.04.2011 in a phased manner as announced by Ministry of Corporate Affairs and The Institute of Chartered Accountants of India (ICAI). More than 100 countries all over the world have already adopted IFRS and many more including India, Korea, Brazil and Canada have committed to make the transition by 2011.

How IFRS Can Be Adopted? IASB recognizes two ways of adopting IFRS by the member countries. These ways are: 1. Adopting IFRS in verbatim 2. Convergence with IFRS While the former refers to replacing the national Accounting Standards with International Financial Reporting Standards, the latter incorporates the IFRS provisions in the national Accounting Standards to make those IFRS compliant.

Convergence with IFRS Convergence with IFRS refers to achieving harmony of national accounting practices with IFRS. It may be important to note that as per Statement of Best Practices : Working Relationship between the IASB and other Accounting Standard-Setters issued by The International Accounting Standards Board (IASB), convergence with IFRS does not mean adoption of IFRS in toto, but adoption of IFRS provisions. Hence, when the Indian standards will be converged to IFRS, the compliance with Indian Accounting Standards would automatically ensure compliance with IFRS. The

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Accounting Standards Board is however free to eliminate any optional treatments provided in IFRS or provide for any additional disclosure requirements in the road to convergence.

Benefits of Convergence with IFRS 1) Improved Access to International Capital Markets Comparable financial reporting across firms from different countries facilitates access to international capital markets. 2) Access to Low-cost Foreign Funds Accounting and reporting on common accounting principles provide access to foreign funds through higher acceptability of the global accounting language, thereby leading to higher FII inflow and lower cost of capital. 3) Easier Comparability with Global Peers Global reporting language in the form of IFRS is bound to facilitate the comparability of an enterprise with not only its national competitors but global peers as well. 4) Elimination of Multiple Reporting Costs Multinationals having global operations in IFRS driven countries will find cost savings by having all their business units/investments on a common accounting platform. Further, the IFRS-compliant financial statements will eliminate multiple reporting in different accounting standards in different countries. 5) Opportunities for Professionals Being a comparatively new subject, professionals like CAs and CFAs with sound theoretical and practical knowledge of IFRS are certain to have more opportunities in the times to come.

IFRS & IAS Are These Terms Synonymous? IFRS stands for International Financial Reporting Standards and includes Standards & Interpretations adopted by International Accounting Standards Board (IASB) including International Accounting Standards (IAS) and Interpretations developed by International Financial Reporting Interpretation Committee (IFRIC). Hence, IFRS is a wider term and includes previously issued IAS as well. IASB started issuing the standards using the term International Financial Reporting Standards (IFRS) to emphasize upon its commitment towards better financial reporting after some Accounting Scandals such as Enron came into picture. So, it should be made clear that 29 IAS and 8 IFRS issued by IASB stand at par in terms of financial

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accounting & reporting and when one talks of an entity being IFRS compliant, it covers the compliance of an entity with IAS as well.

Roadmap to Convergence with IFRS Ministry of Corporate Affairs has constituted a Core Group for convergence of Indian Accounting Standards with International Financial Reporting Standards (IFRS). The group has a consensus on the fact that the convergence with IFRS is to be done in a phased manner based upon the public accountability of the company. Acknowledging the fact that there would be two categories of companies at any given point of time till the convergence process gets completed, the Core Group has agreed that there will be two separate sets of Accounting Standards u/s Section 211(3C) of Companies Act, 1956. 1. First set would comprise of the Indian Accounting Standards which have been converged with IFRSs which shall be applicable to the specified class of companies. 2. The second set would comprise of the existing Accounting Standards which would be applicable to the rest of the companies to which First Set of converged Accounting Standards is not applicable including Small & Medium Companies (SMCs).

Phased Applicability of Converged Accounting Standards The specified class of companies would be required to convert their opening balance sheets as on the specified dates according to the first set of Accounting Standards. The converged Accounting Standards would be applicable to specified class of companies in a staggered form as per the following schedule:

Type of Company Companies other

Date of Applicability & Specified Class of Companies than 01.04.2011 Companies which are part of NSE Nifty 50 Companies which are part of BSE Sensex 30 Companies whose shares or other securities are listed on stock exchanges outside India

Banking Companies, NBFCs and Insurance Companies

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Companies, whether listed or not, which have a net worth in excess of Rs. 1000 crores.

01.04.2013 Companies, whether listed or not, which have a net worth exceeding Rs. 500 crores but not exceeding Rs. 1000 crores 01.04.2014 Listed Companies which have a net worth of Rs. 500 crores or less

Companies which do not fall into the above categories i.e. Non - listed companies with net worth of Rs. 500 crores or less and whose shares or other securities are not listed on stock exchanges outside India, and Small & Medium Companies (SMCs)

will not be required to follow the converged Accounting Standards, though they can voluntarily opt to do so. Banking Companies 01.04.2013 All scheduled commercial banks All Urban Co-operative Banks (UCBs) with net worth exceeding Rs. 300 crores 01.04.2014 Urban Co-operative Banks which have a net worth exceeding Rs. 200 crores but not exceeding Rs. 300 crores

Banks which do not fall into the above categories i.e. Urban Co-operative Banks with net worth of Rs. 200 crores or less, and

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Regional Rural Bank (RRBs)

will not be required to follow the converged Accounting Standards, though they can voluntarily opt to do so. Insurance Companies NBFCs 01.04.2012 for all the insurance companies 01.04.2013 Companies which are part of NSE Nifty 50 Companies which are part of BSE Sensex 30 Companies, whether listed or not, which have a net worth in excess of Rs. 1000 crores. 01.04.2014 All listed NBFCs Unlisted NBFCs which have a net worth exceeding Rs. 500 crores but not exceeding Rs. 1000 crores

NBFCs which do not fall into the above categories i.e. non listed NBFCs having a net worth of Rs. 500 crores or less will not be required to follow the converged Accounting Standards, though they can voluntarily opt to do so.

Further, it has been made clear by the Core Group that once an entity starts following converged Accounting Standards, it cannot switch back to the existing Accounting Standards in any case, even if it stops fulfilling any of the conditions for applicability of converged Accounting Standards.

Basic Differences Between Existing Standards and IFRS While there are many differences between the existing set of Accounting Standards and IFRS, few of the basic differences are being listed below: S. No. Indian GAAP IFRS

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1.

Financial

Statements

are

presented Financial Statements are prepared on

upon standalone basis, unless required consolidated basis. by any other law/regulations. 2. Depreciation on Fixed Assets is charged Depreciation on Fixed Assets is charged on asset as a whole. 3. on components of Fixed Assets.

Proposed Dividend is required to be Dividend is to be recorded and shown shown as Current Liability in the in the financial statements in the financial statements of the financial financial year in which it is declared. year to which it relates as per

requirements of Schedule VI of the Companies Act. 4. Prior Period items are shown as a Adjustments for the prior period items separate item in Income Statement in are made retrospectively. the year it is detected. 5. In case of conflict between law and AS, In case of conflict between law and former prevails. IFRS, latter prevails.

These are just a few of the differences between Indian GAAP (Generally Accepted Accounting Principles) and IFRS. It can be noticed that there are several legal and regulatory issues before complete convergence with IFRS can be achieved. However, steps have already been initiated in this direction by the concerned agencies: 1) The Institute of Chartered Accountants of India ICAI has already issued Exposure Drafts for AS 17 Operating Segments (Corresponding to IFRS 8), AS 15 Employee Benefits (Corresponding to IAS 19), AS 9 Revenue (Corresponding to IAS 18), AS 39 Insurance Contracts (Corresponding to IFRS 4), AS 38 Agriculture (Corresponding to IAS 41), AS 26 Intangible Assets (Corresponding to IAS 38), AS 33 Share Based Payments (Corresponding to IFRS 2), AS 36 Accounting and Reporting by Retirement Benefit Plans (Corresponding to IAS 26), AS 22 Income Taxes (Corresponding to IAS 12), AS 28 Impairment of Assets (Corresponding to IAS 36), AS 27 Interest in Joint Ventures

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(Corresponding to IAS 31) and AS 24 Non-current Assets Held for Sale and Discontinued Operation (Corresponding to IFRS 5) for comments from interested groups and general public at large. 2) Securities Exchange Board of India SEBI has already amended listing agreement allowing for voluntary adoption of IFRS by the listed companies having subsidiaries vide circular dated April 5, 2010. This is positive step towards encouraging voluntary adoption of IFRS. 3) Ministry of Corporate Affairs Schedule VI of Companies Act, 1956 and suitable amendments in the Companies Act, 1956 are proposed to be introduced in a time bound manner.

Unanswered Issues While the Ministry of Corporate Affairs remains committed towards initiation of convergence of IFRS in India by 2011, there are several issues which remain unanswered at this point of time and suitable clarifications are awaited from the concerned regulatory authorities. Few of these issues are: 1) Deferred Tax Assets/Liabilities arising out of retrospective application of IFRS in Transition Year as per AS-22 Taxes on Income 2) Applicability of Minimum Alternative Tax (MAT) in transition year and the availability of MAT Credit thereon as the impact of transition from present Accounting Standards to the converged Accounting Standards on the financial statements and book profits especially is estimated to be huge. 3) Unrealized losses and gains on derivatives are required to be marked-to-market under IFRS. Taxation issues arising out of these notional gains & losses are still awaited to be clarified.

Convergence with IFRS is hence a lengthy & tedious process and it is hoped that India makes a smooth transition towards adoption and compliance of IFRS, though the same is likely to affect India Inc. in the early years of adoption.

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