Posted in Finance Articles, Total Reads: 2723
, Published on 02 June 2013
With the world shrinking at a rapid pace and globalization being the ruling theme, it is the need of the hour to follow homogeneity in the reporting standards in the financial sector so as to ensure ease of comparison, universality, removal of redundancy, comprehensiveness etc. Adoption of IFRS (International Financial Reporting Standards) is a step in this direction to bridge the gap existing due to intra country reporting standards in the various countries.
Through our article, we have tried to highlight what IFRS is all about, its basic features, comparison with the already existing accounting standard -GAAP, Current global scenario from the perspective of adoption, status of implementation in India, its benefits , challenges in the implementation and the future roadmap in this direction.
Our basic motto through this paper has been to provide a lucid and comprehensive picture of IFRS and the benefits India can derive through its adoption.
Since the advent of internet, the world has shrunk, distances have lost their importance and information has no more remained the differentiating factor in this global arena.
“Globalization”-the BUZZWORD has swept nations within its leap and business at this hour, across the international boundaries has become as easy as it was in the domestic setup. Unfettered, unbridled, the corporate world is expanding and spreading its reach beyond nations conquering them at the rate of knots and boundaries have lost their relevance without a doubt.
At this point, it is the need of the hour to have globally set standards in all domains to avoid discrepancies and conflicts across boundaries and have a well defined, structured policy framework throughout. In this regard, a need for an internationally accepted accounting standard becomes all the more unavoidable so as to ensure greater accountability and homogeneity in the financial sector and bridge the lacuna that exists in the accounting standards. So, the transition from GAAP i.e. Generally Accepted Accounting Principles to IFRS- International Financial Reporting standards becomes indispensable.
What is IFRS?
International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries
These are standards for reporting financial statements applicable to all the companies under its ambit.
IFRSs are developed and approved by IASB (International Accounting Standard Board)
One of the basic features of IFRS is that it is the principle based standard rather than rule based
Need of IFRS in India
With the transition of a large number of countries towards acceptance of IFRS as their financial reporting standard, it has become the need of the hour for India to quickly adopt the IFRS standards so as to stay competitive and investor friendly. Also to ensure greater flexibility, ease and friendly environment for the growth of our companies we need a globally accepted reporting framework so as to ensure greater credibility of the Indian companies on the global podium.
The Ministry of Corporate affairs (MCA), a part of Government of India, laid out a roadmap for transition to IFRS Converged Indian Accounting Standards (IAS) in January 2010 in three different phases for companies.
All EU listed companies were required to prepare their financial statements following IFRS from 2005 as a result of a regulation passed in 2002.The the Securities and Exchange Commission (SEC), in 2007, also announced that it would allow foreign companies to have access to US Capital Markets while reporting under IFRS, which in turn affected around 1100 U.S. companies with US listings, along with any companies planning U.S. IPO’s. A roadmap for mandatory adoption of IFRS, in US, by 2016 has also been proposed by the SEC.
Following EU and America, China has taken the path of IFRS adoption but in its new domestic version called the Accounting Standards for Business practices, which was issued by its Ministry of Finance in Feb, 2006.
Starting 1st April, 2011, The Ministry of Corporate Affairs (MCA) has designed a roadmap for companies to start following IFRS converged IAS (Indian Accounting Standards) in a phased manner.
For companies who do not fall in the above categories, if voluntarily wants then they can disclose their financial statements under IFRS.
Effective Comparison of performance with other business
With the acceptance of IFRS by all the nations, the burden on the multinationals in reporting their accounts and profitability will be much less and their accounts will be more comprehensible.
There will be greater transparency for the companies in comparing the performance of the company outside its country. It will also help the companies in judiciously evaluating the companies in foreign lands and taking the decision about their prospective alliances or partners in different countries.
Adoption of a universal reporting standard will help the users in easily understanding the financial statements and hence make the business decisions.
Flexibility and Reusability
A huge amount of rework is avoided as changes done by the companies need be done again and again if all the countries in which the company is listed, originally belong to or operates in all adopts the IFRS, hence ensuring greater flexibility.
Increase the credibility of Indian companies globally
It will help companies in increasing their creditability as the financial statements will be more comprehensible and transparent and subsequently will help them in attracting foreign investors and also
Ease in partnering with global partners
Foreign investors targeting India or Indian companies seeking foreign alliance all will find it much easy and comprehensible to understand their financial statements before partnering or forming the alliance.
Drawbacks of non adoptability of IFRS:
The increased burden on foreign investors who have their financial statements reported under IFRS to convert it to GAAP in order to list themselves on Indian stock exchanges. This extra cost will mitigate the investment sentiments and will in turn reduce the foreign capital inflow to India.
The non adoptability of IFRS has attracted a very poor rating in terms of ease of doing business in India.
Inadequate trained people on IFRS
A large pool of people trained on IFRS will be required which is a big challenge for India.
Transition from GAAP to IFRS is complex as it not only requires changes in the accounting procedures but also in our IT systems. Along with these changes huge costs will be incurred in order to ensure the transition in training people, modifying systems, procedures etc.
IFRS requires assets to be reported as per the market value instead of historic value as required under GAAP. This may adversely impact the financial statements of a huge number of firms initially and is attracting resistance from a large number of corporate houses.
Unlike other countries, the accounting framework in India is subject to a wide number of laws and regulations. With the complete adoption of IFRS, changes need to be incorporated in various regulatory requirements under The Companies Act 1956, Income Tax Act 1961, SEBI, RBI etc
Along with the people preparing the financial statements; stakeholders, regulators, auditors, employees, tax authorities, management and people in other decision making bodies need to be trained.
Indian Efforts towards Adoption of IFRS
Realizing the utter need of IFRS, The MCA finally took a step forward and announced a three phase roadmap for the companies specifying the date for them for reporting their financial statements in accordance with the IFRS. In order to ensure the smooth attainment and helping companies in the transition process, government of India has taken the following steps:
A high level task force was set up in India to expedite the convergence process
Extensive Research and surveys were carried out to understand the state of readiness of the companies on adoption of IFRS and it was concluded that a large number of them had successfully attained the pilot phase.
Small and Medium Enterprises (SMEs) were exempted in adopting the IFRS in the roadmap proposed as the whole transition is very cost intensive and will pose great burden on SMEs. Also ICAI has suggested that for SMEs, a separate standard may be formulated based on the IFRS issued by the IASB after modifications, if necessary.
As per a senior official of ICAI, they are planning to upgrade the CA curriculum with the adoption of IFRS in India by including some of the certification courses, conducting programs and also training people on this.
Since the inception of the idea of a universal financial reporting standard, more than 100 countries have already adopted it to enjoy the long term benefits derived due to its homogeneity and standardization.
Seeing and analyzing the benefits of IFRS, it becomes all the more pertinent for a country like India to adopt it as soon as possible so as to maintain investors’ positive sentiments and also strengthen their faith and credibility in the Indian Market. The adoption might lead to short term investments and initial challenges but the long term benefits are strong enough to justify the initial hassles of implementation and adoptability.
A holistic roadmap, with the support of the government, must be chalked out to train all the people from the top management to all the stakeholders involved so as to gain maximum benefits from IFRS.