project on ifrs...
Personal Details Name: Purvesh Jobanputra MFM : Sem 5, Div: B Roll No : 220 Project :On IFRS Submitted to : Professor Hemant Junarkar
WHAT IS IFRS? International Financial Reporting Standards (IFRS), together with International Accounting Standards (IAS), are a "principles-based" set of standards that establish broad rules rather than dictating specific accounting treatments. From 1973 to 2001, IAS were issued by the International Accounting Standards Committee (IASC). In April 2001 the International Accounting Standards Board (IASB) adopted all IAS and began developing new standards called IFRS.
Structure of IFRS IFRS are considered a "principles based" set of standards in that they establish broad rules as well as dictating specific treatments. International Financial Reporting Standards comprise: • • • •
International Financial Reporting Standards (IFRS) - standards issued after 2001 International Accounting Standards (IAS) - standards issued before 2001 Interpretations originated from the International Financial Reporting Interpretations Committee (IFRIC) - issued after 2001 Standing Interpretations Committee (SIC) - issued before 2001
There is also a Framework for the Preparation and Presentation of Financial Statements which describes of the principles underlying IFRS.
Framework The Framework for the Preparation and Presentation of Financial Statements states basic principles for IFRS.
Objective of financial statements The framework states that the objective of financial statements is to provide information about the financial position, performance and changes in the financial position of an entity that is useful to a wide range of users in making economic decisions,and to provide the current financial status of the entity to its shareholders and public in general.
Underlying assumptions The underlying assumptions used in IFRS are:
Accrual basis - the effect of transactions and other events are recognised when they occur, not as cash is received or paid
Going concern - the financial statements are prepared on the basis that an entity will continue in operation for the foreseeable future
Qualitative characteristics of financial statements The Framework describes the qualitative characteristics of financial statements as being
Elements of Financial Statements The Framework sets out the statement of financial position (balance sheet) as comprising:-
Assets - resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
Liabilities - a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
Equity - the residual interest in the assets of the entity after deducting all its liabilities
and the statement of comprehensive income (income statement) as comprising: •
Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or reductions in liabilities.
Expenses are decreases in such economic benefits.
Content of financial statements:IFRS financial statements consist of (IAS1.8) •
a balance sheet
either a statement of changes in equity(SOCE) or a statement of recognised income or expense ("SORIE")
a cash flow statement
notes, including a summary of the significant accounting policies
Comparative information is provided for the previous reporting period (IAS 1.36). An entity preparing IFRS accounts for the first time must apply IFRS in full for the current and comparative period although there are transitional exemptions (IFRS1.7). On 6 September 2007, the IASB issued a revised IAS 1 Presentation of Financial Statements. The main changes from the previous version are to require that an entity must: •
present all non-owner changes in equity (that is, 'comprehensive income' ) either in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the statement of changes in equity.
present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies an accounting policy retrospectively or makes a retrospective restatement.
disclose income tax relating to each component of other comprehensive income.
disclose reclassification adjustments relating to components of other comprehensive income.
IAS 1 changes the titles of financial statements as they will be used in IFRSs: •
'balance sheet' will become 'statement of financial position'
'income statement' will become 'statement of comprehensive income'
'cash flow statement' will become 'statement of cash flows'.
The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009. Early adoption is permitted.
Necessity of IFRS:By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors,making comparisons easier.Furthermore,companies with subsidiaries in countries that require or permit IFRS may be able to use one accounting langauge company – wide.Companies also may need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS,or if they have a foreign investor that must use IFRS.Companies may also benefit by using IFRS if they wish to raise capital abroad.
How widespread is the adoption of IFRS around the world? More than 12000 companies in approximately 113 nations have adopted IFRS,including listed companies in the European Union. Other countries, including Canada and India, are expected to transition to IFRS by 2011. Mexico plans to adopt IFRS for all listed companies starting in 2012. Some estimate that the number of countries requiring or accepting IFRS could grow to 150 in the next few years. Japan has introduced a roadmap for adoption that it will decide on in 2012 (with adoption planned for 2016). Still other countries have plans to converge (eliminate significant differences) their national standards with IFRS
IFRS & INDIA:-
The issue of convergence with IFRS has gained significant momentum in India. At present, the ASB of the ICAI formulates Accounting Standards based on IFRS, however, these standards remain sensitive to local conditions, including the legal & economic environment. Accordingly, the Accounting Standards issued by the ICAI depart from the corresponding IFRS in order to ensure consistency with the legal, regulatory and economic environments of India.
At a meeting held in May 2006, the council of ICAI expressed the view that IFRS may be adopted in full at a future date, at least for listed and large entries.The ASB, at a meeting held in August 2006,considered the matter and supported the council’s view that there would be several advantages of converging with IFRS.Keeping in mind the extent of differences between IFRS and Indian Accounting Standards, as well as the fact, that convergence with IFRS would be important policy decision, the ASB decided to form an IFRS Task Force .The objectives of the Task Force were to explore: • •
The approach for achieving convergence with IFRS , and Laying down a road map for achieving convergence with IFRS with a view to make India IFRS – compliant.
Based on the recommendation of the IFRS Task Force, the council of ICAI, at its 269th meeting decided to converge with IFRS, for accounting periods commencing on or after 1 April 2011.IFRS will be adopted for listed and other public interest entities such as banks , insurance, companies and large – sized organizations. With an objective to ensure smooth transition to IFRS from 1 April 2011,ICAI is taking up the matter of convergence with IFRS with NACAS and other regulators including RBI, IRDA and SEBI.The NACAS has been established by the Ministry of Corporate Affairs, Government of India.ICAI is taking various other steps as well as to ensure that IFRS is effectively adopted from 1 April 2011. These include: • • •
Formulations of work – plan, and Conducting training programmes for members of ICAI and others concerned to prepare them to implement IFRS. ICAI will also discuss, with the IASB those areas, where changes in certain IFRS may be required, to reflect conditions specific to India and areas of conceptual differences.
In May 2008, the MCA issued a press release in which it committed to IFRS convergence by 1 April 2011. Recognizing the convergence efforts of ICAI & MCA, the European Union has recently allowed entries to use Indian GAAP for listing on a European securities market without reconciliation through to 2011, and if the convergence plan is achieved, to continue to do so after 2011.
BENEFITS OF ADOPTING IFRS FOR INDIAN COMPANIES:The decision to converage with IFRS is a milestone decision and is likely to provide significant benefits to Indian corporates.Some of them are listed below:
Improved access to international capital markets : Many Indian entries are expanding or making significant acquisitions in the global arena, for which large amounts of capital is required.The majority of stock exchanges require financial information prepared under IFRS.Migration to IFRS will enable Indian entities to have international capital markets, removing the risk premium that is added to those reporting under Indian GAAP. Lower Cost of Capital : Migration to IFRS will lower the cost of raising funds, as it will eliminate the need for preparing a dual set of financial statements.It will also reduce accountants’ fees, abolish risk premiums and will enable access to all major capital markets as IFRS is globally acceptable. Enable benchmarking with global peers and improve brand value: Adoption of IFRS will enable companies to gain a broader and deeper understanding of the entity’s relative standing by looking beyond country and regional milestones. Further, adoption of IFRS will facilitate companies to set targets and milestones based on global business environment, rather than merely local ones. Escape multiple reporting : Convergence to IFRS, by all groups entities, will enable company managements to view all components of the groups on one financial reporting platform. This will eliminate the need for multiple reports and significant adjustment for preparing consolidated financial statements in different stock exchanges. Reflects true value of acquisitions : In Indian GAAP, business combinations, with few exceptions, are recorded at carrying values rather than fair values of net assets acquired. Purchase consideration paid for intangible assets not recorded in the acquirer’s books is usually not recorded in the financial statements, instead the amount gets added to goodwill.Hence,the true value of the business combination is not reflected in the financial statements.IFRS will overcome this flaw, as it mandates accounting for net assets taken over in a business combination at fair value.It also requires recognition of
intangible assets, even if they have not been recorded in the acquiree’s financial statements.
New opportunities : Benefits from the adoption of IFRS will not be restricted to Indian corporates.In fact; it will open up a host of opportunities in the service sector.With a wide pool of accounting professionals, India can emerge as an accounting services hub for the global community.As IFRS is fair value focused it will provide significant opportunities to professionals including, accountants, valuers and actuaries, which in – turn, will boost the growth prospects for the BPO/KPO segment in India.
IFRS CHALLENGES:Some of the challenges are listed below: Shortage of resources : With the convergence to IFRS, implementation of SOX, strengthening of corporate governance norms, increasing financial regulations and global economic growth, accountants are most sought after globally. Accounting resources is a major challenge.India; with a population of more than 1 billion has only approximately 145000 Chartered Accountants, which is far below its requirement. Training : If IFRS has to be uniformly understood and consistently applied, training needs of all stakeholders, including CFOs, auditors, audit committees, teachers, students, analysts, regulators and tax authorities need to be addressed. It is imperative that IFRS is introduced as a full subject in universities and in the Chartered Accountancy syllabus. Information systems: Financial accounting and reporting systems must be able to produce robust and consistent data for reporting financial information.The systems must also be capable of capturing new information for required disclosures, such as segment information, fair values of financial instruments and related party transactions.As financial accounting and reporting systems are modified and strengthened to deliver information in accordance with IFRS, entries need to enhance their IT security in order to minimize the risk of business interruption ,in particular to address the risk of fraud, cyber terrorism and data corruption. Taxes:
IFRS convergence will have significant impact on financial statements and consequently tax liabilities.Tax authorities should ensure that there is clarity on the tax treatment of items arising from convergence to IFRS.For example, will government authorities tax unrealized gains arising out of the accounting required by the standards on financial instruments? From an entity point of view, a thorough review of existing tax planning strategies is essential to test their alignment with changes created by IFRS.Tax,other regulatory issues and the risks involved will have to be considered by the entities. Communication: IFRS may significantly change reported earnings and various performance indicators. Managing market expectations and educating analysts will therefore be critical.A company’s management must understand the differences in the way the entity’s performance will be reviewed, both internally and in the market place and agree on key messages to be delivered to investors and other stake holders.Reported profits may be different from perceived commercial performance due to the increased use of fair values, and the restriction on existing practices such as hedge accounting. Consequently, the indicators for assessing both business and executive performance will need to be revisited. Management compensation and debt covenants: The amount of compensation calculated and paid under performance – based executive, and employee compensation plans may be materially different under IFRS, as the entity’s financial results may be considered different. Significant changes to the plan may be required to reward an activity that contributes to an entity’s success, within the new regime.Re – negotiating contracts that referenced reported accounting amounts,such as ,bank covenants or FCCB conversation trigger, may be required on convergence to IFRS.
Difference between IFRS and Indian GAAP Some of them are listed below :-
Generally uses historical cost, but intangible assets, property plant and equipment (PPE) and investment property may be revalued to fair value. Derivatives, biological assets and certain securities are revalued to fair value.
Uses historical cost, but property, plant and equipment may be revalued to fair value. Certain derivatives are carried at fair value. No comprehensive guidance on derivatives and biological assets.
Does not prescribe a particular
Accounting standards do not
format. Certain minimum items are presented on the face of the balance sheet. A liquidity presentation of assets and liabilities is used instead of a current/non-current presentation, only when a liquidity presentation provides more relevant and reliable information.
prescribe a particular format but certain items must be presented on the face of the balance sheet. Formats are prescribed by the Companies Act and other industry regulations like banking, insurance, etc.
Does not prescribe a standard format, although expenditure is presented in one of two formats (function or nature). Certain minimum items are presented on the face of the income statement.
Does not prescribe a standard format; but certain income and expenditure items are disclosed in accordance with accounting standards and the Companies Act. Industry-specific formats are prescribed by industry regulations.
Defined as events or transactions clearly distinct from the ordinary activities of the entity and are not expected to recur frequently and regularly. Disclosed separately.
Changes in accounting policy
Comparatives are restated, unless specifically exempted; where the effect of period(s) not presented is adjusted against opening retained earnings.
The effect and impact of change is included in current-year income statement. The impact of change is disclosed separately.
Correction of errors
Comparatives are restated and, if the error occurred before the earliest prior period presented, the opening balances of assets, liabilities and equity for the earliest prior period presented are restated.
Restatement is not required. The effect of correction is included in current-year income statement with separate disclosure.
Special purposes entity (SPE)
Consolidated where the substance No specific guidance. of the relationship indicates control.
Definition of joint venture
Contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control. Exclusion if investment is held-for-sale.
Similar to IFRS. Exclusion if it meets the definition of a subsidiary or exemptions similar to non-consolidation of subsidiaries.
Uniting of interests method
Required for certain amalgamations when all the specified conditions are met.
Not specifically addressed. Entities No specific guidance. Normal
combinations involving entities under common control
elect and consistently apply either business combination accounting purchase or pooling-of-interest would apply. accounting for all such transactions.
Allocated on a systematic basis to Similar to IFRS, except where the each accounting period over the useful life is shorter as envisaged useful life of the asset. under the Companies Act or the relevant statute, the depreciation is computed by applying a higher rate.
Recognised on an accrual basis using the effective interest method.
Recognised on an accrual basis; practice varies with respect to recognition of discounts and premiums.
Termination benefits Termination benefits arising from redundancies are accounted for similarly to restructuring provisions. Termination indemnity schemes are accounted for based on actuarial present value of benefits.
With the adoption of AS 15 (revised), similar to IFRS, however, timing of recognising liability could differ. Prior to AS 15 (revised), no specific guidance. Generally, voluntary retirement expenses are recognised on acceptable of the plan by employees and amortised over 3 to 5 years.
Acquired intangible assets
Capitalised if recognition criteria are met; amortised over useful life. Intangibles assigned an indefinite useful life are not amortised but reviewed at least annually for impairment. Revaluations are permitted in rare circumstances.
Capitalised if recognition criteria are met; all intangibles are amortised over useful life with a rebuttable presumption of not exceeding 10 years. Revaluations are not permitted.
Property, plant and equipment
Historical cost or revalued amounts are used. Regular valuations of entire classes of assets are required when revaluation option is chosen.
Historical cost is used. Revaluations are permitted, however, no requirement on frequency of revaluation. On revaluation, an entire class of assets is revalued, or selection of assets is made on a systematic basis.
Investment property Measured at depreciated cost or fair value, with changes in fair value recognised in the income statement.
Treated the same as a long-term investment and is carried at cost less impairment.
Similar to IFRS, except that contingent gains are neither
Disclose unrecognised possible losses and probable gains.
recognised nor disclosed. Government grants
Recognised as deferred income and amortised when there is reasonable assurance that the entity will comply with the conditions attached to them and the grants will be received. Entities may offset capital grants against asset values.
Similar to IFRS conceptually, although several differences in detail. For e.g., in certain cases, grants received are directly credited to capital reserve (in equity).
Convertible debt (fixed number of Convertible debt is recognised as a shares for a fixed amount of cash) liability based on its legal form is accounted for on split basis, without any split. with proceeds allocated between equity and debt.
Derecognition of financial liabilities
Liabilities are derecognised when extinguished. Difference between carrying amount and amount paid is recognised in income statement.
No specific guidance; in practice, treatment would be similar to IFRS based on substance of the transaction.
Financial statements are adjusted for subsequent events, providing evidence of conditions that existed at the balance sheet date and materially affecting amounts in financial statements (adjusting events). Non-adjusting events are disclosed.
Similar to IFRS, except nonadjusting events are not required to be disclosed in financial statements but are disclosed in report of approving authority e.g. Directors Report.
Interim financial reporting
Contents are prescribed and basis should be consistent with full-year statements. Frequency of reporting (eg, quarterly, halfyear) is imposed by local regulator or is at discretion of entity.
Similar to IFRS. However, pursuant to the listing agreement, all listed entities in India are required to furnish their quarterly results in the prescribed format. Quarterly results include financial results relating to the working of the Company and certain notes thereon.