Introduction
IFRS Is not a monster that is going to gobble up the existing Financial Reporting System practiced by the corporate in India. Rather, it is a much-refined system of Financial Reporting which is going to benefit all the stakeholders in the years to come, together with improved Corporate Governance and increased free flow of capital across the globe. Likewise, the implementation of convergence with IFRS is not at all a complex exercise giving tension, stress, and sleepless night to the CEOs and CFOs. On the contrary, it is an excellent opportunity of learning an advanced system of Financial Reporting for everyone engaged in the Accounting, FInancing, and Auditing functions at every level in every business organization. At the same time, IFRS is not an entirely new Financial Reporting System for us in India. Generally speaking, the current Indian GAAP covers 75-80% of IFRS already. Therefore, one only needs to learn this remaining 20-25% portion of the IFRS to facilitate IFRS compliance by his/her organization and continue Financial Reporting under IFRS thereafter.
What is IFRS?
The term IFRS has both, a narrow and a broad meaning. Narrowly, IFR refers to the new numbered series of pronouncements that the IASB is issuing, as distinct from the IAS series issued by its predecessor IASC.
- More broadly, IFRS refers to the entire body of IASB pronouncements, including standards and Interpretation approved by the IASB, IASC, and, SIC.
- IFR is a principle-based Standard, drafted lucidly and easy to understand and apply. However, the application of IFRS requires increased use of fair values for the measurement of assets and liabilities.
- The focus in IFRS is more on getting the balance sheet right and hence brings significant volatility in the income statement.
Objectives behind IFRSs
To develop a single set of high-quality, understandable, and enforceable global accounting standards that will form a stable platform for international accounting. The correct adoption of IFRSS will bring more transparency and a higher degree of comparability, both of which promise many benefits for organizations as well as economies.
Need for Convergence with IFRSs
The globalization of the business world and the regulations, which support it as well as the development of e-commerce make it imperative to have a single globally accepted financial reporting system. A number of multinational companies are establishing their businesses in various countries with emerging economies and vice versa.
The entities in emerging economies are increasingly accessing the global markets to fulfill their capital needs by getting their securities listed on the stock exchanges outside their country. Capital markets are, thus, becoming integrated consistently with this Worl-wide trend. More and more Indian companies are also being listed on overseas stock exchanges.
A sound financial reporting structure is imperative for economic well-being and the effective functioning of capital markets. The use of different accounting frameworks in different countries which require inconsistent treatment and presentation of the same underlying economic transactions creates confusion for users of financial statements. This confusion leads to inefficiency in capital markets across the world.
Therefore increasing complexity of business transactions and the globalization of capital markets call for a single set of high-quality accounting standards. High standards of financial reporting strengthen the trust investors place in financial and non-financial information. Thus, it has become the need of the day to have a single set of globally accepted accounting standards has prompted many countries to pursue convergence of national accounting standards with IFRSs.
Benefits of Achieving Convergence with IFRSs
The economy, investors, industry, and accounting professionals all stand to gain from the convergence.
(i) The Economy: The convergence benefits the economy by increasing the growth of its international business. It assists in the maintenance of orderly and efficient capital markets and also helps to increase capital formation and thereby economic growth. It encourages international investors to invest and thereby leads to more foreign capital flows to the country,
(ii) The investors who wish to invest outside their own country want information that is more relevant reliable, timely, and comparable across the jurisdictions. Financial statements prepared using a common set of accounting standards help investors better understand investment opportunities as opposed to financial statements prepared using a different set of national accounting standards. To understand the financial statements better, global investors have to incur more costs in terms of the time and effort to convert the financial statements so that they can confidently compare opportunities. Investors; confidence would be strong if the accounting standards used are globally accepted. Convergence with IFRSs adds to investors; understanding and confidence in high-quality financial statements.
(iii) The industry: The industry is able to raise capital from foreign markets at a lower cost if it can create confidence in the minds of foreign investors that their financial statements comply with globally accepted accounting standards. With the diversity in accounting standards from country to country, enterprises that operate in different countries face a multitude of accounting requirements prevailing in the countries. The burden of financial reporting reduces with the convergence of accounting standards because it simplifies the process of preparing individual, and group financials using different sets of accounting standards.
Problems And Challenges
Despite several benefits as may be looked out by the different people, there will be serval challenges that will be faced on the way of IFRS convergence.
- The difference between GAAP and IFRS: Adoption of IFRS means that the entire set of financial statements will be required to undergo a drastic change. The differences are wide and very deep-rooted. It would be a challenge to bring about awareness of IFRS and its impact on the users of financial statements.
- Training and Education: The lack of training facilities and academic courses on IFRS will also pose challenges in India. There is a need to be educated on IFRS and its application. Charles Noski, former chief financial officer and Vice Chairman of the Broad ofAT&T corporation and a former Deloitte & Touche partner noted that Educating 100,000 employees on how they must do their business is not a trivial activity,"
- Legal and Regulatory Considerations: Currently, the reporting requirements are governed by various regulators in India and their provisions override other laws. IFRS does not recognize such overriding laws. The regulatory and legal requirements in India will rise a challenge unless the same is been addressed by respective regulations.
- Taxation: IFRS convergence would affect most of the items in the financial statements and consequently the tax liabilities would also undergo a change. Thus the taxation laws should address the treatment of tax liabilities arising on convergence from Indian GAAP to IFRS.
- Fair Value Measurement: IFRS uses the fair value as a measurement vase for valuing most of the items of financial statements. The use of fair value accounting can bring a lot of arriving at the fair value and valuation experts have to be used.
- Re-negotiation of Contract: The contracts would have to be re-negotiated which is also a big challenge. This is because the financial results under IFRS are likely to be very different from those under the Indian GAAP.
- Reporting Systems: Companies would have to ensure that the existing business reporting model is amended to suit the reporting requirements of IFRS. The information systems should be designed to capture new requirements related to fixed assets, segment disclosures, related party transactions, etc. conversion is much more than a technical accounting issue. IFRS or Ind AS may significantly affect any number of a company's day-to-day operations and may even impact the reported profitability of the business itself. Since the timeline of the roadmap is no longer valid, the new implementation date of Ind AS is awaited from the MCA. It is unclear if the MCA will release a fresh roadmap or just amend the implementation date. Understanding IFRS or Ind AS and its implications is a business imperative for Indian companies.
