Accounting Standards and IFRS

Atul Khurana

OVERVIEW:

What are Accounting Standards?

What is IFRS?

What is Convergence of Accounting Standards?

Convergence of Indian accounting standards with IFRS

Role of ICAI in convergence

Role of SEBI in convergence

Role of Industry Associations in convergence

Advantages and Challenges for convergence

Meaning of Accounting Standards: In order to ensure transparency consistency, comparability, adequacy and reliability of financial reporting, it is essential to standardize the accounting principles and policies, Accounting Standards provide framework and standard accounting polices so that the financial statements of different enterprises become comparable.

Accounting Standards are selected set of accounting policies or broad guidelines regarding the principles and methods to be chosen out of several alternatives. The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) formulas Accounting Standards to be established by the Council of the ICAI.

Objective of Accounting Standards: Objective of Accounting Standards is to standarize the diverse accounting policies and practices with a view to eliminate to the extent possible the non-comparability of financial statements and the reliability to the financial statements.

The institute of Chartered Accountants of India, recognizing the need to harmonize the diverse accounting policies and practices, constituted at Accounting Standard Board (ASB) on 21st April, 1977.

IFRS:

IFRS is a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements.

IFRS are generally principles-based standards and seek to avoid a rule-book mentality. Application of IFRS requires exercise of judgment by the preparer and the auditor in applying principles of accounting on the basis of the economic substance of transactions.

IFRS are issued by the International Accounting Standards Board (IASB).

The term IFRS comprises IFRS issued by IASB; IAS issued by IASC; and Interpretations issued by the Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB.

“FOR THE EFFECTIVE STUDY OF ACCOUNTING STANDARDS AND IFRS THERE IS A STRONG NEED TO STUDY THE LINKAGE BETWEEN THESE TWO TERMS THAT MEANS CONVERGENCE.”

MEANING of convergence:The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally, and in particular the effort to reduce the differences between the US generally accepted accounting principles (USGAAP) and the International financial reporting standards (IFRS)

Convergence of Indian accounting standards with International financial reporting standards (IFRS):

Meaning of convergence with IFRS: Convergence means to achieve harmony with IFRSs; in precise terms convergence can be considered “to design and maintain national accounting standards in a way that financial statements prepared in accordance with national accounting standards draw unreserved statement of compliance with IFRSs”, i.e., when the national accounting standards will comply with all the requirements of IFRS.

But convergence doesn’t mean that IFRS should be adopted word by word, e.g., replacing the term ‘true & fair’ for ‘present fairly’, in IAS 1, ‘Presentation of Financial Statements’. Such changes do not lead to non-convergence with IFRS.

The reason behind convergence is:

As,    Availability of essential financial information about a company to its shareholders and other stakeholders in accordance with internationally accepted financial norms is considered as an integral and important part of good corporate governance. To ensure this and to implement the G-20 commitment to achieve a single set of high quality global accounting standards, the Government has taken decision to achieve convergence of Indian accounting standards with International financial reporting standards (IFRS) in a phased manner in accordance with the roadmap suggested by the Government.

Convergence in Indian Scenario:

With regard to India, the Ministry of Corporate Affairs (MCA) has committed to converge the Indian Accounting Standards with the IFRS effective 1st April 2011. The convergence process is picking up momentum with the credit going to the Ministry of Corporate Affairs. The Ministry has extended its unstinted support and guidance to the various regulatory and legal bodies that are spearheading a smooth transition process. Laudably, the highest authorities of the Indian Government have concluded that convergence of Indian Accounting Standards with IFRS is very vital for the country to take a lead role in the global foray.

Entities covered under convergence;

Keeping in view the complex nature of IFRSs and the extent of differences between the existing ASs and the corresponding IFRSs and the reasons therefore, the ICAI is of the view that IFRSs should be adopted for the public interest entities from the accounting periods beginning on or after 1st April, 2011.

Public interest entities:

With a view to determine which entities should be considered as public interest entities for the purpose of application of IFRSs, the criteria for Level I enterprises as laid down by the Institute of Chartered Accountants of India and the definition of ‘small and mediumsized company’ as per Clause 2(f) of the Companies (Accounting Standards) Rules, 2006, as notified by the Ministry of Company Affairs (now Ministry of Corporate Affairs) in the Official Gazette dated December 7, 2006, were considered. The ICAI is of the view that in view of the complexity of recognition and measurement principles and the extent of disclosures required in various IFRSs, and the fact that about four years have elapsed since the ICAI laid down the criteria for Level I enterprises, as far as the size is concerned, it needs a revision. Accordingly, the ICAI is of the view that a public interest entity should be an entity:

(i) Whose equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India; or

(ii) Which is a bank (including a cooperative bank), financial institution, a mutual fund, or an insurance entity; or

(iii) Whose turnover (excluding other income) exceeds rupees one hundred crore in the immediately preceding accounting year; or

(iv) Which has public deposits and/or borrowings from banks and financial institutions in excess of rupees twenty five crore at any time during the immediately preceding accounting year; or

(v) which is a holding or a subsidiary of an entity which is covered in (i) to (iv) above.

Role of ICAI in convergence:

• India, though being an important emerging economy in the world, is yet to adopt the IFRS. Internationally, in so far as cross-border investments are concerned, a non-IFRS compliant country is perceived as an additional risk factor.

• After a series of discussion with various legal and regulatory authorities, the Ministry of Corporate Affairs has committed itself for convergence of Indian entities with IFRS from April 2011. ICAI was given the responsibility of formulating the convergence process and ensure smooth convergence.

• For this purpose, the Accounting Standard Board (ASB) of ICAI constituted a Task Force in the year 2006 to explore the approach for convergence with IFRS and lay down the road map for convergence with IFRS.

• Since then, ICAI has been relentlessly making extensive analysis of various phases the convergence process would go through. It has identified the legal and regulatory requirements arising out of convergence with IFRS.

• ICAI has also recommended changes in the respective Acts, guidelines and other regulatory provision related to RBI, SEBI, NACAS and IRDA and has submitted its recommendations to the respective authorities. This would eventually pave the way to a smooth transition process.

• In addition, the ICAI Accounting Board has pointed out several national issues requiring debates and conclusions that would enable the convergence process to meet the deadline.

Role Of SEBI:

SEBI has been pro-actively involved in the process of convergence of Indian Accounting Standards with IFRS.

As a step towards encouraging convergence with IFRS, listed entities having subsidiaries have been allowed an option to submit consolidated accounts as per IFRS.

SEBI has set up a group under the chairmanship of Shri Y.H. Malegam with representation from RBI, ICAI, accounting and auditing firms, and industry to discuss and submit comments on the exposure drafts issued by the IASB in an objective and streamlined manner. Since formation in February 2010, the group has had four meetings and has provided comments to IASB on the following exposure drafts:

a. Management Commentary (proposed new IFRS)

b. Financial Instruments: Amortised Cost and Impairment (IFRS9)

c. Conceptual Framework for Financial Reporting

d. Fair Value Option for Financial Liabilities (proposed new IFRS replacing IAS 39)

Role of Industry Associations:

Industry associations such as Federation of Indian Chambers of Commerce and Industry (FICCI), Associated Chambers of Commerce (Assocham) and Confederation of Indian Industries (CII) can also play an important role in preparing their constituents for the adoption of the IFRSs in the following ways:

(i) Holding round-tables on the Exposure Drafts of the IFRSs so that the views of the Association can be sent to the IASB/ICAI.

(ii) Conducting seminars/workshops on IFRSs for the industry participants to provide them appropriate training.

(iii) Provide industry-specific forums to their constituents to discuss the industryspecific issues in implementation of IFRSs.

Advantages of convergence:

• Improves investor confidence across the world with transparency and comparability
• Improves inter-unit/ inter-firm/inter-industry comparison
• Group consolidation made easy with same standard by all companies in group wherever located
• Acceptability of financial statements across all stock exchanges, which facilitates entry of any Indian company to any stock exchange across the globe.
• A business can present its financial statements on the same basis as its foreign competitors.

Challenges envisaged in convergence:

Change to regulatory environment:

For the success of convergence in India, certain regulatory amendment is required.

For example, The Companies Act (Schedule VI) prescribes the format for presentation of financial statements for Indian companies, whereas the presentation requirements are significantly different under IFRS. So, the companies act needs to be amended in line with IFRS.

Lack of Preparedness

Corporate India and accounting professionals need to be trained for effective migration to IFRS. Additionally auditors would need to train their staff to audit under IFRS environment

Significant cost

Significant one-time costs of converting to IFRS (including costs of adapting IT systems, training personnel and educating investors)

Impact on financial performance:

Due to the significant differences between Indian GAAP and IFRS, adoption of IFRS is likely to have a significant impact on the financial position and financial performance of most Indian companies

Communication of Impact of IFRS to investors:

Companies also need to communicate the impact of IFRS convergence to their investors to ensure they understand the shift from Indian GAAP to IFRS.

Implementation Phase in India:

The applicability of International Financial Reporting Standards for convergence of Indian entities would be in several phases as the issues involved in one-shot adoption are complex.

Hence, in the first phase, ICAI has submitted a suggested list of companies that come under different parameters for adoptionn of IFRS standards. These entities include companies listed with BSE / NSE Sensex, insurance companies, mutual funds, entities with a capital base of over 50 million dollars outside India, companies that are publicly accountable with an aggregate borrowing of over Rs. 1,000 crores and such others.

Accounting Standards after convergence:

A set of accounting standards notified by the Ministry of Corporate Affairs which are converged with International Financial Reporting Standards (IFRS) which are now termed as IND AS’s.

Now India will have two sets of accounting standards viz. existing accounting standards under Companies (Accounting Standard) Rules, 2006 and IFRS converged Indian Accounting Standards(Ind AS). The Ind AS are named and numbered in the same way as the corresponding IFRS.

Thirty five Indian Accounting Standards converged with International Financial Reporting Standards (henceforth called IND AS) are being notified by the Ministry and placed on the website. Students can check that out at MCA website i.e. www.mca.gov.in

Role of ICAI as an educator/trainer:

With a view to prepare its existing and prospective members for the impending adoption of the IFRSs from 1st April, 2011, the ICAI should formulate strategies with regard to the following:

(i) To revise the syllabi of the pre-qualification Chartered Accountancy Course to include IFRSs as a part of its curriculum;

(ii) The Continuing Professional Education (CPE) Committee and the Committee for Members in Industry should hold intensive workshops on IFRSs to train the members in practice as well as in industry. In order to encourage members to participate in the IFRS-specific workshops, the ICAI may consider laying down minimum CPE hours requirements in this regard.

(iii) Preparation of educational material to guide its members on various intricacies involved in the implementation of IFRS. The educational material may focus on those areas which are new compared to the existing Accounting Standards.

Conclusion:

Hereby, it is concluded that for better accounting practices and to make Indian chartered accountancy more global and better, Convergence of accounting standards is important.

(For any query related to above article author may be contacted at [email protected] – Mob:9888855340)