cNTERNATIONAL INANCIAL

EPORTING YSTEM

By:
Ashok Kumar Gupta
Rameswar Dash
Ratnadeep Kumar Tiwari
 Overview
‡ IFRS History, Basics and Broad benefits
‡ Basic differences between GAAP and
IFRS
‡ Harmonization, convergence and
communication Strategy
‡ Transition to IFRS
‡ Key areas of differences and major
changes required
‡ Comparative analysis of IAS and IFRS
‡ Sectoral impact of IFRS
‡ conclusions
 History and basics

‡ IASC(1973-2001)
‡ IFRS snapshot
‡ Need of IFRS
± Efficiency of capital market
± Reducing barriers of fund flow and trade
± Reliable financial data
± Uniform accounting practices
± Reduction in cost ,time.
Broad Benefits

‡ 

± Low cost of capital
± Consistent reporting format for subsidiaries in
different countries
± Facilitating multiple listing in different markets
± Sufficient allocation of resources
‡ 
 

± Global investment opportunities

± Better information for decision making

‡ 




± Smoothing the foreign direct investment

± Higher global economic growth

 Basic differences between
GAAP and IFRS

‡ The principle basis of standard

± Rule based Vs concept based
± Qualitative aspects

‡ Scope to make choices within the

framework
± Limited option Vs Range of options
‡ Level of specificity
± Rule based standards are more specific than
concept based
± Due weightage to managerial decision making
skills for judgment

‡ Jurisdictional nature of the standard

± Regional or national Vs global
± Language with no borders and any particular
legal or regulatory jurisdiction
Harmonization and convergence

‡ More transparent and accurate financial

reporting
‡ Will remove reconciliation of statement
‡ Competitive and dynamic knowledge
based economy
‡ Better jobs and social cohesion
‡ Resistance by Japan ,Saudi Arabia and
Iceland
‡ Impact on operations, processes and
governing bodies of company
Communication strategy

‡ Managing and communicating the change Data

capturing
‡ Aligning different policies, practices and system
across the group having presence in
‡ multiple jurisdictions and having different reporting
requirements including tax and statutory reporting
‡ IFRS itself is a moving target
‡ Conforming accounting with changes in business
‡ Aligning the business practices considering IFRS
accounting requirements
‡ Training across the organization
‡ Lack of appropriately skilled resources in the market
Transition to IFRS
Key areas of differences

‡ „
 

± Primary set of financial statements

± Control (substance over form)
± Reveal true group strength
± Joint ventures or control? (IFRS 9 soon)

‡




‡ Ô 
 „


± Demonstrate true value of acquisition
± Move from legal form to substance
± Fair value approach (IFRS 3)
± Goodwill numbers may change
± Higher amortization

‡ 

 c


± IRR based revenue and expense recognition
± Disclosures of risks and how are those are
managed by the Company
Major changes required

‡

 
  
± Form and substance of financial statements
± Depreciation on revalued assets needs to be routed
through income statement under IFRS
Companies Act disallows such a treatment
± Preference shares are classified as debt instruments
and not equity
± Certain instruments may have both debt and equity
features
± No gain or loss on buy-back of shares
± The requirement to present five years of historical
financial statements for IPO ± will it be Indian GAAP or
five years of IFRS
± If yes, what would a company going public in 2011 do?
Major changes required(contd.)

‡ The rules included in Companies Act, which have

accounting impacts, for example:
± Dividends determined in accordance with Companies
Act
‡ Managerial remuneration
‡ No concept of proposed dividend
± Declaration of dividend only when approved by the
shareholders
‡ Correction of errors in audited financial
statements
± Restatement is must when correcting errors
‡ Tax laws
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ACCOUNTING FRAMEWORK
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FINANCIAL STATEMENTS-
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Subject IFRS Indian GAAP
   
  Consolidate where the No specific guidance.
  substance of the relationship
indicates control.



 
 Dissimilar activities or temporary Only if acquired and held for
   control are not a justification for resale or there are severe long-
non-consolidation. term restrictions to transfer funds
to the parent.

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All business combinations are No comprehensive accounting
acquisitions. standard on business
combinations. All business
combinations are acquisition;
however, required use of pooling
of interests method in certain
amalgamations [when all the
specified conditions are met]. To
summarize: On consolidation, for
an entity acquired and held as an
investment: treated as acquisition.
On amalgamation of an entity,
either uniting of interests or
acquisition. On business
acquisition (i.e. assets and
liabilities only) treated as
acquisition.
 







Subject IFRS Indian GAAP
]

  


Prohibited. Required for certain
 amalgamations when all the
specified conditions are met, else
accounted under the purchase
method. (AS 14 )
!

 Capitalise if recognition criteria Capitalise if recognition criteria



are met; intangible assets must are met; intangible assets must be
be amortised over useful life. amortised over useful life with a
Intangibles assigned an rebuttable presumption of not
indefinite useful life must not be exceeding 10 years.
amortised but reviewed annually
for impairment. Revaluations are Revaluations not permitted. ( AS
permitted in rare circumstances. 10)
"

 Use historical cost or revalued Use historical cost. Revaluations

 amounts. Regular valuations of are permitted, however, no
entire classes of assets are requirement on frequency of
required when revaluation option revaluation. On revaluation, an
is chosen. entire class of assets is revalued,
or selection of assets is made on
a systematic basis.
# 
Allocated on a systematic basis Similar to c
, except where the
to each accounting period over useful life is shorter than that
the useful life of the asset. envisaged under the Companies
Act or the relevant statute, the
depreciation is computed by
applying a higher rate.( AS6)
 







Subject IFRS Indian GAAP
# 
  $
Use full provision method (some Recognise tax effect of timing
exceptions) driven by balance
sheet temporary differences.
Recognise deferred tax assets if
recovery is probable.

difference as deferred tax asset or
liability. Recognise deferred tax
assets (a) for entities with tax
losses carry forward, if realisation
is virtually certain, whereas (b) for
entities with no tax losses carry
forward, if realisation is
reasonably certain. A number of
other specific differences.


 $ Included as part of related Disclosed as a separate item after
expense (fringe benefit) which profit before tax on the face of the
gives rise to incurrence of the income statement.
tax.

„
 Account for convertible debt on Convertible debt is recognised as
split basis, allocating proceeds a liability based on legal form
between equity and debt without any split.



 
 Currency of primary economic Does not define functional
environment in which entity currency.
operates.
 






Subject IFRS Indian GAAP
„
  
 Provision on actual cost to the Provision based on actuarial
company basis valuation


 $
 Charged to income statement. Deferred and written off over the
period of 5 years.


%

„  Origination cost is amortized Charged to Profit and loss
account



    Mandatory redeemable All preference shares are
  
preference shares are classified classified as shareholders¶ funds.
as liabilities.

 
 Must use the projected unit Provision in the accounts is


  
 credit method to determine normally made on the basis of

 
benefit obligation actuarial valuation ± no specific
method is prescribed
 





,
//
Subject IFRS Indian GAAP
# 
Allocated on a systematic basis Depreciation is provided based on the useful
to each accounting period over lives of assets or the minimum rates
the useful life of the asset. prescribed by the Indian Companies Act,
whichever is higher. Asset lives are not
prescribed by the Companies Act, but can be
derived from the depreciation rates.

„   
 Permitted, but not required for Compulsory when relates to the construction

   qualifying assets. of certain assets.


$
 Under IAS such gains or losses Indian GAAP requires that any profit/loss
 
are required to be expensed arising on the restatement of foreign
exchange liabilities incurred for the acquisition
of imported fixed assets as a result of change
in exchange rates is capitalized as part of the
original cost of the assets.

c 
  IAS require that assets be Indian GAAP also has adopted the provisions

   reviewed for impairment and of IFRS with effect from 1.4 2004 for listed
impairment losses recognized in companies and commercial enterprise with a
the accounts turnover > 50 crores

&  &

 Disclosed as prepaid assets and Disclosed as a part of fixed assets.
accounting treatment is similar
to operating leases.
 





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Subject IFRS Indian GAAP
„
 
Restate comparatives and prior- Include effect in the income statement


 year opening retained earnings. of the period in which the change is
 made except as specified in certain
standards where the change resulting
from adoption of the standard has to be
adjusted against opening retained
earnings.
„
 Restatement of comparatives is Include effect in the current year

 
  mandatory. income statement with appropriate
 disclosure

# ' $ Use full provision method (some Deferred tax assets and liabilities
exceptions), driven by balance should be recognised for all 

sheet   
 . differences subject to consideration of
Recognise deferred tax assets if prudence in respect of deferred tax
recovery is probable. assets.
&  !

 Has been in place for a much Applicable since 2001
longer time.
! 

 Obligations that are legally No such guidance available.
% 
!
% enforceable and unavoidable, and
are associated with the retirement
of tangible long-lived assets, be
recorded as liabilities when those
obligations are incurred and
recorded at fair value.
 





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‡ Can use benefit of hindsight and learn from other entities¶
mistakes
‡ Generally leads to Big Bang approach

-*ÔÔ
! 
‡ Focuses energies of teams around the world to convert at
one time to IFRS
‡ Is real-time and can lead to a speedy delivery of embedded
IFRS
‡ Is useful in time-limited situations
‡ It needs strong project management skills
‡ Can be very inefficient and chaotic
„
 
c
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! 
*
‡ Can be used to create efficiencies in adoption
process by phased conversion via territories or
business segments
‡ Consider phased conversion of key foreign
territories first
‡ Learn from mistakes
‡ Focus on areas of importance most likely to be
affected by conversion
‡ Pick scalable discreet projects
2009 IFRS readiness Survey
results (INDIA)
‡ Company transition to IFRS has been
discussed by MANAGEMENT.

Source: PWC
2009 IFRS readiness Survey
results

Source: PWC
2009 IFRS readiness Survey
results

Source: PWC
ROAD MAP OF IFRS (World)

‡ 2011
Canada
India
Japan
Korea (but can early adopt)
‡ 2012
Mexico (but can early adopt)
Malaysia
‡ 2014
USA?
Ô
 c

c


„ 
‡ Improvement in comparability of financial
information and financial performance with global
peers and industry standards .

‡ Adoption of IFRS is expected to result in better

quality of financial reporting

‡ Better access to and reduction in the cost of

capital raised from global capital market
c c

%,. 
c
 
Areas of Potential Change
‡ Decommissioning estimates
‡ Asset exchanges
‡ Derivatives and long term contracts
‡ Take or pay arrangements
‡ Production imbalances between joint
ventures
 c

c'c
 

‡ The main effect on the IT industry is that

the changes in the systems and in the
updation of the existing to the newer
version of IFRS enabled accounting
software
c
/c 
c

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‡ According to auditing and consultancy firm

KPMG.
In areas relating to loan loss provisioning
Financial instruments
Derivative accounting
Financial Performances
Affect to Capital Adequacy ratio
Challenges of IFRSs


 



‡ Some IFRSs require fair value approach to be
followed, examples include:
± IAS 39, Financial Instruments: Recognition
and Measurement
± IAS 41, Agriculture

‡ The markets of many economies such as India

normally do not have adequate 

  for reliable determination of fair values.

‡ With a view to provide further guidance on the

use of fair value approach, the IASB is
developing a document.
Challenges of IFRSs (contd. «)

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± Scarcity of resources and expertise
with the SMEs to achieve compliance
± Cost of compliance not
commensurate with the expected
benefits
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Challenges of IFRSs (contd. «)

' 

   
± Some IFRSs are complex.
± There is lack of adequate skills amongst the
preparers and users of Financial Statements
to apply IFRSs.
± Proper implementation of such IFRSs requires
extensive education of preparers
c
 

± A large number of application issues arise

while applying IFRSs.
± There is a need to have a forum which may
address the application issues in specific
cases.
Managing the Change
 „




‡ Transparency

°