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IFRS AND ITS IMPACT ON INDIAN CORPORATES

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IFRS AND ITS IMPACT ON INDIAN

CORPORATES
Authored by: CMA Suraj Kumar Pradhan*, Mr.Manas Kumar Sethi**, Mr. Pravata Kumar Jena***& Mr. Utpal Pal****

*ICoAS, Joint Director (PF-States) Ministry of Finance, Dept of Expenditure, New Delhi.

**Lecturer at Sanda Degree College, Dhenkanal &Research Scholar, Utkal University, Bhubaneswar.

***Lecturer in DKN College Cuttack & Research Scholar at Utkal University, Bhubaneswar, Odisha.

****Research Scholar at Department of Business Administration, Tezpur Central University, Assam.

ABSTRACT

Financial reporting is as old as existence of Joint Stock Companies. The need of financial reporting arises due to
separation of ownership and management of the companies. In India financial reporting is regulated by the
enactment of the Chartered Accountants Act, 1949 and The Companies Act, 1956 and earlier Companies Act.
For long time Indian Corporates were working in the separate isolated compartment, somewhat immune from
global environment and reporting was concentrated within the needs of domestic arena only. ICAI with issuance
of Accounting Standards was successfully able to standardise the Indian Reporting System. With the popular
LPG reforms a new era of competitive environment was thrown open to Indian corporates, which not only led to
consolidation of Indian corporates with foreign multinational and transnational organisations, but also required
Indian reporting system to sync with global standard to facilitate comparison among all global business entities.
International Financial Reporting Standards (IFRS) provides a standardised reporting system to facilitate easy
comparison of different business entities to serve unique needs of its various stakeholders. This paper discusses
the needs for IFRS, its adoption procedure in India and the utility for India in adopting IFRS, the problems and
challenges faced by the stakeholders and its impact on India. Further, this paper also tries to bring about the ways
through which these problems can be addressed.

Keywords: IASB, Financial Reporting, IFRS, the Companies Act, 2013, IND-AS

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1. INTRODUCTION: -

Globalization has converted many closed economies into open economies. Now a day's every national economy
is integrating in international market with other countries by spreading their trade and business outside their own
country. Foreign Direct Investments, Foreign Institutional Investors, Merger and Acquisition, Franchising and
Business Outsourcing are some example of international transaction in global business. Apart from these, there
are multinational and transnational organisations which also influence the global trade. Since accounting is the
regarded as language of a business, it is necessary for the business organisations spread across the world to adopt
a common set of accounting standards. Therefore,the International Accounting Standards Committee (IASC) was
founded in June 1973 in London to standardise the reporting system and as a result International Accounting
Standard (IAS) came into existence. IASCwas responsible for development and promoting the use of these
standards. On April 1 2001,a new International Accounting Standards Board (IASB) took over the responsibility
of setting International Accounting Standards from the IASC. It has since then continued to develop standards
which arecalledas new International Financial Reporting Standards (IFRS). The vision for development of IFRS
is to prepare a set of international accounting and reporting standards that will help to harmonize company
financial information, improve the transparency of accounting, and ensure that investors receive more accurate
and consistent reports.

The use of common set of accounting standards throughout the world provides an easy way of comparability and
transparency of financial information. It also reduces the cost of preparing financial statements across the
globeby reducing the cost of consolidation of accounts.A constant use of accounting standards provides higher
quality information which enables the various accounting usersto make prudent decision which leads to overall
allocation of funds in more efficient manner in the market and helps the company to reduce its overall cost of
capital.

2. OBJECTIVES OF THE STUDY: -

a) To understand the concept of International Financial Reporting Standards (IFRS) and Indian
Accounting Standard (Ind-AS).
b) To learn about the Roadmap for implementation of IFRS in India.
c) To bring out the advantages of convergence of IFRS.
d) To study the challenges and problems faced in the adopting of IFRS and measures taken to address the
challenges.

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3. RESEARCH METHODOLOGY: -

The data and material used for study is collected from secondary sources only. Apart from various published and
unpublished articles,many numbers of websites arereferred in the process of collection of relevant material. Due
credit is given to all the source material is given in bibliography section.

4.ABOUT INTERNATIONAL FINANCIAL REPORTING STANDARDS(IFRS):

4.1 Meaning and Definition:

IFRS can be regarded as

“A single set of high quality, understandable and enforceable global accounting standards that require high
quality, transparent and comparable information in financial statements and other financial reporting to help
participants in the world's capital markets and other users make economic decisions”

The aim of IFRS is to bring harmony in Standard and efficient reporting practices in order to bring more
transparency in reporting and generate trust in all the user of accounting information.

4.2 Need for IFRS

The challenge of international capital market is to reduce or eliminate the differences in the reporting standards,
to produce a level playing field for financial reporting and to help create more efficient international capital
markets.

The below are the main factors influencing the variations in national practices and regulation of financial
reporting.

a) Variation in the policies of capital markets of each country

b) Variations in the legal systems of each country
c) Variation in government policies & systems
d) Variation in the type and scale of economic activity, from agricultural to financialservices and from
developing economies to industrialised economies;
e) Variation in the degree of international influence and openness of an economy;

There hasalways been pressure from international community to standardise the financial reporting practice and
regulations globally to minimise the inconsistencies. It is less acceptable and not preferableto report the same
transactions differently in different countries. The need of having a standard financial report has become a
necessity for investors and financial experts and forced companies to adopt the International Financial Reporting
Standards.

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4.3 Primary factors that drives IFRS globally

The below are the primary drivers encouraging the use of IFRS globally.

a) Globalisation of trade & capital markets

b) Rapid development of Information Technology and its impact on operations
c) Fast & simplified process of moving funds between countries
d) Increased investors interest in foreign investments

A significant milestone towards achieving the goal of having one set of global standards was reached in October
2002 when the Financial Accounting Standards Board (FASB), the US standard setter, and the IASB entered into
a Memorandum of Understanding called the ‘Norwalk Agreement’. The Agreement set out a number of
initiatives, including a move to eliminate minor differences between US and international standards, a decision to
align the two Boards’ future work programmes and a commitment to work together on joint projects.

Since the publication of the Norwalk Agreement, the IASB and FASB (The Financial Accounting Standard
Board) have been working together with the common goal of producing a single set of global accounting
standards and this resulted in a further formal Memorandum of Understanding being published in February 2006.

In November 2007 the US Securities and Exchange Commission (SEC) agreed to remove with immediate effect
the requirement for non-US entities reporting under IFRS (as issued by the IASB) to reconcile their financial
statements to US GAAP. Prior to this announcement there was a need for US Registrants to prepare
reconciliation between their financial statements and certain key figures such as earnings and net assets under
IFRS with their equivalents under US GAAP.

IFRS is now accepted/ adopted in most of the countries and there is a huge increase in the number of companies
across the globe moving to IFRS reporting, to make sure that their financials are comparable for investors and
capital markets. Instead of adopting IFRS, India has chosen to converge with IFRS with issuance of Indian
Accounting Standards called Ind-AS, which corresponds to the IFRS and IAS.

5. ROADMAP FOR IMPLEMENTATION OF IFRS IN INDIA

The Ministry of Corporate Affairs (MCA) announced on February 16, 2015 a roadmap for theimplementation of
Indian Accounting Standards (“Ind AS”) - India’s accounting standards thatare based on and substantially
converged with IFRS standards as issued by IASB. India has chosenthe path of IFRS convergence and not
adoption.

The application of Ind AS is based on the listing status and net worth of a company.

The Ind AS shall be applicable to the companies as follows:

(i) On voluntary basis for financial statements for accounting periods beginning on or afterApril 1, 2015, with
the comparatives for the periods ending 31stMarch, 2015 orthereafter;

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(ii) On mandatory basis for the accounting periods beginning on or after April 1, 2016, withcomparatives for the
periods ending 31st March, 2016, or thereafter, for the companiesspecified below:

(a) Companies whose equity and/or debt securities are listed or are in the process oflisting on any stock
exchange in India or outside India and having net worth of Rs.500 Crore or more.

(b) Companies other than those covered in (ii) (a) above, having net worth of Rs. 500Crore or more.

(c) Holding, subsidiary, joint venture or associate companies of companies coveredunder (ii) (a) and (ii) (b)
above.

(iii) On mandatory basis for the accounting periods beginning on or after April 1, 2017, with comparatives for
the periods ending 31st March, 2017, or thereafter, for the companies specified below:

(a) Companies whose equity and/or debt securities are listed or are in the process of being listed on any
stock exchange in India or outside India and having net worth of less than rupees five hundred Crore.

(b) Companies other than those covered in paragraph (ii) and paragraph (iii)(a) above that is unlisted
companies having net worth of two hundred and fifty crore or more but less than rupees five hundred
Crore.

(c) Holding, subsidiary, joint venture or associate companies of companies covered under paragraph (iii)
(a) and (iii) (b) above.

However, Companies whose securities are listed or in the process of listing on SME exchanges shall not be
required to apply Ind-AS. Such companies shall continue to comply with the existing Accounting Standards
unless they choose otherwise.

(iv) Once a company opts to follow the Indian Accounting Standards (Ind-AS), it shall be required to follow the
Ind-AS for all the subsequent financial statements.

6. ADVANTAGES OF CONVERGING TO IFRS

Since, IFRS provides a common unified system of principle basedreporting for accounting internationally,it
provides a platform for synchronization of accounting standards globally which ensures effective comparison,
and more reliable and transparent financial statements. The implementation of IFRS will also help in the efficient
allocation of capital globally by attracting investment through creating trust among investors by ensuring
transparency which will result in reduced cost of capital and increase in overall world-wide investment. There are
many advantages to various beneficiaries for convergingtowards IFRS such as the economy, investors and
industries.

The Economy:The convergence to IFRS benefits the economy by increase in growth of international business. It
facilitates maintenance of orderly and efficient capital markets and also helps to increase the capital formation
and thereby inducing economic growth. It further encourages international investment and enhances capital
inflows into the country because of easy understanding and comparison of financial statements across the globe.

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The Investors:The investor will be benefited in as the way accounting information made available to them will be
more reliable, relevant, timely and most importantly the information will be comparable across different legal
framework. IFRS would enhance the comparability between financial statements of various organizations
managing business across the globe. It will develop better understanding and confidence among the investors to
take better investment decisions by comparing different financial statements.

Role of Professionals in IFRS:The professional, both in practice and in employment will get benefits as they will
be able to provide their services in various parts of the world. The practicing chartered accountants would get
opportunities to serve international clients also and thereby increase the horizons of their service. It would
furtherincrease their mobility to work in different parts of the world either in industry or practice.

Other Stakeholders:Other stakeholders of business organisations like lenders, governments, suppliers, customers
and employees will be benefitted due to increase in overall transparency of the reporting of companies.

7. COMPARISON OF IND-AS WITH IFRS STANDARDS

India chooses to converge to IFRS rather than adoption of IFRS as it is. The equivalent of IFRS as issued by the
Ministry of Corporate Affairs in consultation with the Institute of Chartered Accountants of India are known as
Indian Accounting Standards (Ind-AS). A total of 39 Ind-AS has already been issued. The Ind-AS corresponding
to the IFRS begins with serial number 101 and Ind-AS corresponding to IAS begins with serial number 1. A list
of Ind-AS with corresponding IFRS/IAS is presented below: -

Notified Ind AS Title Corresponding

IAS/IFRS
(Ind AS) 101 First time adoption of Indian Accounting Standards IFRS 1
(Ind AS) 102 Share –based payment IFRS 2
(Ind AS) 103 Business Combinations IFRS 3
(Ind AS) 104 Insurance contrancts IFRS 4
(Ind AS) 105 Non-current Assets held for sale and Discontinued Operations IFRS 5
(Ind AS) 106 Exploration for and Evaluation of Mineral Resources IFRS 6
(Ind AS) 107 Financial Instruments: Disclosures IFRS 7
(Ind AS) 108 Operating Segments IFRS 8
(Ind AS) 109 Financial Instruments IFRS 9
(Ind AS) 110 Consolidated Financial Statement IFRS 10
(Ind AS) 111 Joint Arrangements IFRS 11
(Ind AS) 112 Disclosure of Interests in Other Entities IFRS 12
(Ind AS) 113 Fair Value Measurement IFRS 13
(Ind AS) 114 Regulatory Deferral Accounts IFRS 14

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Notified Ind AS Title Corresponding
IAS/IFRS
(Ind AS) 115 Revenue from Contracts with Customers IFRS 15
(Ind AS) 1 Presentation of Financial Statements IAS 1
(Ind AS) 2 Inventories IAS 2
(Ind AS) 7 Statement of Cash Flows IAS 7
(Ind AS) 8 Accounting Policies, Changes in Estimates and Errors IAS 8
(Ind AS) 10 Events after the Reporting Period IAS 10
(Ind AS) 12 Income Taxes IAS 12
(Ind AS) 16 Property, Plant and Equipment IAS 16
(Ind AS) 17 Leases IAS 17
(Ind AS) 19 Employee Benefits IAS 19
(Ind AS) 20 Accounting for Government Grants and Disclosure of IAS 20
Government Assistance
(Ind AS) 21 The Effects of changes in Foreign Exchange Rates IAS 21
(Ind AS) 23 Borrowing Costs IAS 22
(Ind AS) 24 Related Party Disclosures IAS 24
(Ind AS) 27 Separate Financial Statements IAS 27
(Ind AS) 28 Investments in Associates and Joint Ventures IAS 28
(Ind AS) 29 Financial reporting in Hyperinflationary Economies IAS 29
(Ind AS) 32 Financial Instruments: Presentation IAS 32
(Ind AS) 33 Earnings Per Share IAS 33
(Ind AS) 34 Interim Financial Reporting IAS 34
(Ind AS) 36 Impairment of Assets IAS 36
(Ind AS) 37 Provisions, Contingent Liabilities and Contingent Assets IAS 37
(Ind AS) 38 Intangible Assets IAS 38
(Ind AS) 40 Investment Property IAS 40
(Ind AS) 41 Agriculture IAS 41

8. PROBLEMS AND CHALLENGES OF IFRS

International Accounting Standard Board has prepared and issued IFRS. But, the responsibility to adopt or
converge with IFRS lies with the local government and accounting and regulatory bodies. In India the
implementation of IFRS is executed by the Ministry of Corporate Affairs (MCA) and Institute of Chartered
Accountants of India (ICAI). Accordingly, MCA under the powers conferred by the Companies Act, 2013,
issued the Companies (Indian AccountingStandards) Rules, 2015 dated 16.02.2015 and Companies (Indian
AccountingStandards) (Amendment) Rules, 2016 dated 30.03.2016 to implement the IFRS in India.

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Indiahowever, has several constraints and practical challenges for adoption and compliance with IFRS. Some
laws and regulations governing financial accounting and reporting in India needs to be changed or modified.
Further, there are also some legal requirements which also required to be looked into during the implementation
of IFRS. For e.g., the format for preparation and presentation of financial statement is guided by the provisions
of the Companies Act, 2013, but this may be different from what is prescribed under IFRS.

Another issue is related to Businesstakeovers, merger, acquisitions etc. Under present Indian General Accepted
Accounting Principles (GAAP), the consideration over and above the book value of assets is treated as goodwill.
However, under IFRS, accounting is done for all assets including hidden intangibles at fair value. When all the
assets are recognized at fair value including intangible assets like goodwill, amortization of these assets will
reduce future year profits under IFRS.

Therefore, there are several likely challenges that will be faced on the way of IFRS convergence in India. These
are: -

8.1- GAAP and IFRSDifference: Adoption of IFRS requires drastic change in entire set of financial statements.
GAAP has been followed since long time and very deep routed in the financial reporting culture of the
country there to bring about awareness of IFRS implementation and impact among the users of financial
statements is a challenging task.

8.2- GAAP Reconciliation: The Securities Exchange Commission(SEC) laid out two options in its proposal-one
calling for the traditional IFRS first-time adoption reconciliation, the other requiring that step plus an on-
going unaudited reconciliation of the financial statements from IFRS to U.S. GAAP which is clearly more
costly approach for companies and for investors.

8.3- Lack of Training and Education in IFRS: India very well lack the training facilities and academic courses on
IFRS. Further, the professional who can impart training in IFRS are very few, therefore, spreading the IFRS
education is difficult.

8.4- Legal and Regulatory considerations: Currently, the reporting requirements are governed by various
regulators in India and many a time their provisions override other laws. IFRS does not recognize such
overriding laws. The regulatory and legal requirements in India will pose a challenge unless the same is been
addressed by respective regulatory.

8.5- 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 of country needs to address the treatment
of tax liabilities arising on convergence from Indian GAAP to IFRS.

8.6- Fair value Measurement: IFRS uses fair value as a measurement base for valuing most of the items of
financial statements. The use of fair value accounting can bring a lot of instability and prejudice to the
financial statements. It also involves a lot of hard work in arriving at the fair value and valuation experts

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have to be used. Moreover, computation of fair value is not free from ambiguity and there are more than one
method is available for arrival of fair value.

8.7- ContractRe-negotiation: Many a contracts where profitability is a criterion has to be re-negotiated after
implementation of IFRS as the profitability may change under new reporting standard. Re-negotiated is a
little bit trick and challenging due to existing laws under which contract is made, as they have not undergone
any change.

8.8- Change in existing Management Information System (MIS): Existing MIS of companies needs to be
modified to suit the reporting requirements of IFRS. Further, the new reporting system needs to capture all
the data asrequired by IFRS, which has to be integrated with the IFRS reporting. This not only is a tedious
and time consuming but also expensiveprocess.

9. MEASURES TAKEN TO ADDRESS THE CHALLENGES

9.1- For changes required in rules and regulations of various regulatory bodies, draft recommendations have been
placed before Accounting Standard Board.

9.2- The ICAI issued various interpretations of accounting standards, with a view to resolve various intricate
interpretational issues arising in the implementation of new accounting standards.

9.3 Guidance notes have been issued by ICAI for providing immediate guidance on accounting issues.

9.4- To facilitate discussions at seminar, workshops, etc., ICAI has issued background material on newly issued
accounting standards.

9.5- For the purpose of assisting its members, the ICAI council has formed an expert advisory committee to
answer queries from its members.

Moreover, to face the challenges of IFRS implementation and future reporting, more effective steps like building
adequate IFRS skills professionals by investing more in training processes for Indian accounting professionals is
required. This will help India to manage the smooth transition to the regime of IFRS. This can be done by
research on effect of IFRS conversion in different countries and brief knowledge of IFRS should be added into
the studies for professional courses with worldwide latest examples.

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10. CONCLUSION: -

Ind AS - Indian Accounting Standards converged with International Financial Reporting Standards (IFRS) has
now become a reality.The transition from Indian GAAP to Ind AS is a historic and a landmark change. By
making Indian Accounting Standards par with IFRS, the Indian corporate and the accounting professional will
reap the benefits of global accounting standard. Irrespective of various challenges, adoption of converged IFRS
in India will significantly change the contents of corporate financial statements as a result of more refined
measurements of performance and state of affairs, and enhanced disclosures leading to greater transparency and
comparability. Successful Ind AS implementation will require a thorough strategic assessment, a robust step-by
step plan, alignment of resources and training, effective project management as well as smooth integration of the
various changes into normal business operations. Finally, the Ind AS implementation exercise needs to establish
sustainable processes so as to continue to produce meaningful information long after the conversion exercise is
completed.

Reference and Notes:

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3. https://taxenquiryindore.wordpress.com/2014/12/19/practical-problems-in-implementing-ifrs-in-india/
4. AN ANALYSIS AND COMPARISON BETWEEN IFRS AND IND AS OF THE FIRM, National Seminar
on “IND-AS: A Road Map for IFRS in India” March 18 & 19, 2016, ISBN : 978-93-5254-333-5
5. THE STATUS OF IFRS ADOPTION IN INDIA, National Seminar on “IND-AS : A Road Map for IFRS in
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Scholar, Department of Commerce, School of Business Studies, Central University of Karnataka,
Kalaburagi – 585 367
6. OPPORTUNITIES AND CHALLENGES IN ADOPTING IFRS IN INDIA, National Seminar on “IND-AS
: A Road Map for IFRS in India” March 18 & 19, 2016 V V PG College (VVPGC) Muzaffarnagar,
D.Venkatesh, Ph.D. Research Scholar & Prof. M.Venkateswarlu, Department of Commerce,
7. International Financial Reporting Standards (IFRS) in India: Problems and Challenges, National Seminar
on “IND-AS : A Road Map for IFRS in India” March 18 & 19, 2016 V V PG College (VVPGC)
Muzaffarnagar, Dr. R.Babu Post-Doctoral Fellows, (UGC) & J. Muni Narendra, Research Scholar
8. Opportunities and challenges in adopting IFRS in India, Dr. A. Vinayagamoorthy. Ph.DProfessor of
Commerce, Department of Commerce, Periyar University, Salem 636011, Tamilnadu, ISSN -2348-0653
9. MoU for Norwalk agreement
10. A Study on Challenges and Prospects of IFRS in Indian Accounting System, International Journal Of Core
Engineering & Management (IJCEM), Volume 2, Issue 4, July 2015, ISSN: 2348 9510
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