Ifrs an Overview

International Journal of Applied Financial Management Perspectives

Volume 1, Number 1, July -September 2012

© Pezzottaite Journals, Jammu & Kashmir, India.

IN TERNAT I O NA L F I N ANC IAL RE P O RT ING S TANDARD S ( I F R S) - A N O VERV IEW

Pawan Kumar1 Shalini Srivastav2

ABSTRACT

International Financial Reporting Standards (IFRS) are principles-based standards; interpretations and the framework adopted by the International Accounting Standards Board Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). This article tries to explain an overview of IFRS to the readers. The adoption of standards that require high-quality, transparent, and comparable information is welcomed by investors, creditors, financial analysts, and other users of financial statements.

Without common standards, it is difficult to compare financial information prepared by entities located in different parts of the world. In an increasingly global economy, the use of a single set of high-quality accounting standards facilitates investment and other economic decisions across borders, increases market efficiency, and reduces the cost of raising capital. IFRS are increasingly becoming the set of globally accepted accounting standards that meet the needs of the world’s increasingly integrated global capital markets.

KEYWORDS

IFRS, Transition to IFRS, Roadmap to IFRS Convergence, IAS, and Challenges to IFRS etc.

INTRODUCTION

IFRS means International Financial Reporting Standards. As the name suggests, it means some standards which can be used worldwide universally which would enable to standardize training among various nations. It is a single set of accounting standards which would assure better quality and also permit international capital to flow more freely. The convergence with IFRS is set to change the landscape for financial reporting in India. IFRS represents the most commonly accepted global accounting framework and it has been adopted by more than 100 countries.

In April 2001, the International Accounting Standards Board (IASB) was founded to undertake the responsibilities of the International Accounting Standards Committee (IASC) established in 1973. The IASB is made up of fourteen members representing nine countries, including China, Japan, Australia, and the U.S., and is sponsored by a variety of financial institutions, companies, banks, and accounting firms. In 2002, a year after their establishment, the IASB united with the Financial Accounting Standards Board (FASB) to combine their knowledge and develop a set of high-quality accounting standards that would be compatible with all countries in order to successfully carry out international business affairs and their accounting. This set of global accounting standards is referred to as the International Financial Reporting Standards (IFRS).

IAS was issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1,2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards IFRS.

International Financial Reporting Standards refer to the standards and interpretations adopted by the IASB comprising of:

International Financial Reporting Standards. International Accounting Standards. Interpretation of IFRIC (International Financial Reporting Interpretations Committee). Interpretation of SIC.

Need for IFRS

Different Countries employ different Accounting Standards while computing the Profits of a Company. It is expected that IFRS adoption worldwide will be beneficial to investors and other users of financial statements, by reducing the Costs of Comparing alternative Investments and Increasing the Quality of Information. The Companies are also expected to benefit, as investors will be more willing to provide financing.

In recent Past, there have been cases where companies reporting under IFRS in Europe record a loss but when these same companies re-state their accounts according to US GAAP they record a profit. International Financial Reporting Standards remove some of the subjectivity from financial reporting and provide a consistent basis for recognition, measurement, presentation and disclosure of transactions and events in financial statements. In other words we can say that this has lead to improved transparency of financial reporting.

1Registrar & Assistant Professor, ACCMAN Institute of Management, Uttar Pradesh, India, p awan inbo x@gmail .co m

mailto:[email protected]




2Assistant Professor, ACCMAN Institute of Management, Uttar Pradesh, India, s h a l in i _ 7 7 @ s if y . c o m

mailto:[email protected]




Qualitative Characteristics

UnderstandabilityFinancial information that is classified, characterized and presented in a clear and concise way is understandable.

RelevanceRelevant financial information is capable of making a difference to the decision made by users. In order to make adifference, financial information has predictive value, confirmatory value or both.

ReliabilityFinancial information that faithfully represents economic phenomena has three characteristics: It is complete, it isneutral, and it is free from error.

ComparabilityComparability enables users to identify similarities and differences among items, both between different periodswithin a set of financial statements and across different reporting entities.

ConsistencyConsistent application of methods to prepare financial statements helps to achieve comparability.

Figure-1

INTERNATIONAL FINANCIAL REPORTING STANDARDS-EFFECTIVE AS ON DATE

IFRS-1: First time adoption of IFRS

The objective of this IFRS is to ensure that an entity’s first IFRS financial statements, and its interim financial reports for part ofthe period covered by those financial statements, contain high quality information.

It is transparent for users and comparable over all the periods presented. Provides a suitable starting point for accounting under International Financial Reporting Standards (IFRS). Can be generated at a cost that does not exceed the benefits to users.

IFRS-2: Share Based Payment

The objective of this IFRS is to specify the financial reporting by an entity when it undertakes a share-based payment transaction. In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees.

IFRS-3: Business Combinations

The objective of the IFRS is to enhance the relevance, reliability and comparability of the information that an entity provid es in its financial statements about a business combination. It does that by establishing principles and requirements for how an acquirer:




Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquire,

Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and Determines what information to disclose to enable users of the financial statements to evaluate the nature and

financial effects of the business combination.

IFRS-4: Insurance Contracts

The objective of this IFRS is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance contracts. In particular, this IFRS requires:

Limited improvements to accounting by insurers for insurance contracts. Disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts

and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows frominsurance contracts.

IFRS-5: Non-Current Assets Held For Sale and Discontinued Operations

The objective of this IFRS is to specify the accounting for assets held for sale, and the presentation and disclosure of discontinued operations. In particular, the IFRS requires:

Assets that meet the criteria to be classified as held for sale to be measured at the lower carrying amount and fair value less costs to sell, and depreciation on such assets to cease.

Assets that meet the criteria to be classified as held for sale to be presented separately in the statement of financial position and the results of discontinued operations to be presented separately in the statement of comprehensiveincome.

IFRS-6: Exploration & Evaluation of Mineral Resources

The objective of this IFRS is to specify the financial reporting for the exploration for and evaluation of mineral resources:

Exploration and evaluation expenditures are expenditures incurred by an entity in connection with the exploration for and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable.

Exploration for and evaluation of mineral resources is the search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore in a specific area, as wellas the determination of the technical feasibility and commercial viability of extracting the mineral resource.

IFRS-7: Financial Instruments – Disclosures

The objective of this IFRS is to require entities to provide disclosures in their financial statements that enable users to evaluate:

The significance of financial instruments for the entity’s financial position and performance. The nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at

the reporting date, and how the entity manages those risks. The qualitative disclosures describe management’s objectives, policies and processes for managing those risks. The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity's key management personnel. Together, these disclosures provide an overview of the entity's use of financial instruments and the exposures to risks they create.

IFRS-8: Operating Segments

An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.

IFRS-9: Financial Statements

An entity shall disclose to all its users the uses of different financial statements and their application as required.

IFRS-10: Consolidated Financial Statements



Volume 1, Number 1, July -September 2012It builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess.




IFRS-11: Joint Arrangements

It provides for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form (as is currently the case). The standard addresses inconsistencies in the reporting of joint arrangements by requiring a single method to account for interests in jointly controlled entities.

IFRS-12: Disclosure of Interests in Other Entities

It is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles.

IFRS - 13 Fair Value Measurements

Fair Value measurement completes a major project of the boards’ joint work to improve IFRSs and US GAAP and to bring about their convergence.

Roll IFRS out from April 2012

Despite issuing the IFRS-converged standards in February 2011, Indian regulators did not implement the new standard from April1, 2011. Thus, it is possible that all regulatory steps required implementing Indian AS can be completed over the next several months whereby Indian AS can become mandatory from April 1, 2012.

OBJECTIVES OF STUDY

According to the Preface to IFRS issued by the IASB; the main objectives of IFRS are:

1. To develop in public interest, a single set of high quality, understandable & enforceable global accounting standards that require high quality, transparent & comparable information in financial statements & other financial reporting to help participants in the various capital markets of the world & other users of the information to make economic decisions.

2. To promote the use & rigorous application of those standards.3. In fulfilling the objectives associated above to take account of, as appropriate, the special needs of small & medium-

sized entities & emerging economies.4. To bring about convergence of national accounting standards & IFRSs to high quality solutions.5. To encourage international investing & thereby increase in foreign capital inflow.6. To benefit the economy by increased international business.7. To provide more relevant, reliable, timely & comparable information to investors.8. Better understanding of financial statements would benefit investors who wish to invest outside the country.9. Capital at lesser cost from foreign market.10. To reduced accounting requirements prevailing in various countries & hence reduced cost of compliance.11. Professional opportunity to serve international clients.12. Increased mobility to work in different parts of the world in industry or practice.

THE DEATH OF LIFO

Few differences between IFRS and U.S. GAAP loom larger than accounting for inventories, particularly the disallowance of the last-in, first-out (LIFO) method in IFRS. The proposed shift of U.S. public companies to IFRS could affect many companies currently using LIFO for both financial reporting and taxation. This is because the conformity rule of IRC 472(c) requires taxpayers who apply LIFO for tax purposes to also apply it for income measurement in financial reporting, and IFRS does not permit LIFO for book accounting.

Therefore, CPA may be called upon to help manage inventory method changes. Companies using LIFO would have to switch to FIFO or average cost. The change would place companies in violation of the conformity requirement. Absent relief from the Treasury Department, it would require them to change their tax method of inventory reporting. Thusa typical change in inventory method, such as from average cost to FIFO, is treated retrospectively. The entity reflects a change from LIFO to FIFO in the same manner. The result is:

An increase in inventory. An increase in current income taxes resulting from the effective increase in income. An adjustment to retained earnings for the effect of the increase in net income.




The entity may need to show a deferred tax liability for the temporary difference between the accounting and tax bases for the inventory change if it were to remain, for example, on average cost for tax purposes yet switch from average cost to FIFO for book purposes. A change from LIFO will normally have a significant positive income effect because the accumulation of prior years’ costs in beginning inventory will replace cost of goods sold valued at current costs. Assuming that the inventory turns over, income for the year of change would increase by the entire amount of the LIFO reserve.

CHALLENGES TO IFRS

Convergence to IFRS has created understandable nervousness both in industry and in profession. Without underestimating; the problems involved, it is perhaps true to say that much of this nervousness arises out of a fear of unknown. Thus, it is necessary to have a clear understanding of the issues involved and the steps necessary in this connection.

What is required is the awareness of the manner in which Indian Accounting Standards are formulated?

The differences between International standards and Indian standards fall in three broad groups namely:

Different requirements of the companies act and Schedule V1. Differences in language and additional guidance provided in Indian Standards. Differences in substance.

Action has already been taken to identify the conflicting requirements in the Companies Act and Schedule V1and steps to make necessary amendments have already been taken. What therefore, needs to be addressed are the differences in substance. This is somewhat complicated by 2 factors:

1. The international standards on which the Indian Standards are based have themselves been the subject matter of extensive revision.

2. In the revisions made by IASB and the new standards which have been issued, recognition has been given to new concepts which have fundamentally altered the basis of recognition and measurement.

Principally; there are three new concepts which need to be addressed:

A) Concept of Face Value: The face value defines as the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It emphasizes:

An exit price. Existence of an active market. Transaction in the active market.

b) Concept of Time Value of Money: This requires that where the expected date of recovery of an asset or payment of a liability is deferred, it is recorded not at its face value but at its discounted value using an effective rate of interest.

c) Concept of Comprehensive Income: A further change is needed in the said concept contained in IAS 1- Presentation of Financial Statements. Until this standard was issued, items of income and expense were recognized in the profit and loss account and items not co recognized were presented in a statement of changes in equity.

However, other comprehensive income has to be separately disclosed. Besides these, some other areas to be taken care of which are as follows:

Increase in cost due to dual reporting requirement till full convergence is achieved. Changes are required in various regulatory requirements such as Companies Act, Income Tax Act, SEBI, RBI, etc. Training may be required to all stakeholders such as employees, auditors, to understand IFRS thoroughly. Additional cost towards modification in IT systems & Procedures. Difference between Indian GAAP & IFRS may impact business decision & financial performance. Limited pool of trained resource & persons having expert knowledge on IFRS’s.

Transition to IFRS

Although 2014 may seem a long way off, it is not too early to prepare for IFRS conversion. Here are some key activities that will contribute to a successful conversion:

Establish a structured methodology. Identify the areas other than financial reporting that will be affected. Develop an IT strategy that goes beyond conversion. Implement effective training. Benefit from European conversion experiences.



Volume 1, Number 1, July -September 2012 Establish a robust communications plan.




Impact of IFRS on Production and Exploration Companies

It is the Oil and Gas industry which is one of the major drivers for any economy to grow. It goes without saying that for India which is still dependent on 70% of its crude oil requirements through imports, the application of OFRS on production and exploration companies would not be an easy task. It’s strange but true that under IFRS standards there is no specific guidance provided under the IFRS 6 which deals with only exploration activities. Other industry specific transactions like depletion, exploration costs to be written off, types of reserves, etc for which no specific guidance is provided under IFRS.

Road Map for IFRS

In July 2007, the Institute of Chartered Accountants of India accounted the move towards convergence with IFRS with effect from 1st April, 2011 and issued a detailed concept paper on Convergence with IFRS in India. In early 2010, the Ministry of corporate Affairs issued various press releases on IFRS roadmap and convergence plan for India, reaffirming the convergence date to be 1st April, 2011 through 2014 for select Indian companies:

Select companies from 1st April, 2011 onwards, Insurance companies from 1st April 2012 onwards, Banks and NBFC from 1st April 2013.

Conversion is much more than a technical accounting issue. IFRS may significantly affect any-number of a company’s day-to-day operations and may even impact the reported profitability of the business itself. Conversion brings a one-time opportunity to comprehensively reassess financial reporting and take “a clean sheet of paper” approach to financial policies and processes.

IFRS Proposed Roadmap for India

Figure-2: Opening Balance sheet as at April 1, 2012 using IFRS-Converged Accounting Standards.

2011• NSE - Nifty 50 companies,• BSE - Sensex 30

companies,• Companies whose shares

or other securities listed outside India;

• Companies listed or not, having a net worthin excess of Rs. 1,000 crores [Note 1]

2012• All

Insurance Companies

2013• Companies listed or not, having

a net worth between Rs. 500 crores and Rs. 1000 crores [Note1]

• All shedule commercial banks• Urban co-operative banks having

a net worht in excess of Rs. 300 crores

• NBFC-Nifty 50 or Sensex 30• NBFC listed or not, having a net

worth> Rs. 1,000 crores

2014• Listed companies having a

net worth of less than Rs.500 crores [Note 1]

• Urban co-operative banks aving net worth between Rs. 200 to Rs. 300 crores

• NBFC (all other Listed)• NBFC (other Unlisted)

having net worth between Rs. 500 to Rs. 1,000 crores

Companies not covered in the above chart will apply ‘Existing Indian Accounting Standards’ OR voluntarily opt to apply the‘IFRS-converged accounting standards’.

Note 1: These exclude insurance companies, banks and non-banking finance companies (NBFCs).

*If the financial year of the companies commence on a date other than April 1, then opening balance sheet need to be prepared from the beginning of the new financial year of the companies.

Who gets affected by the change?

A country’s intention to adopt IFRS or converge with IFRS is highly admirable and to be applauded. However, the accounting profession, governments, regulators, national accounting standard setters, and other constituents must continue to work together to eliminate differences between national and international standards. The principal actions needed to support convergence are outlined below:

The Accounting Profession needs to assist governments and standard setters in formulating and enacting convergence plans, provide IFRS training and education and support the preparation of national language translations of IFRS.

Governments must establish formal convergence plans that include target dates for implementation and address



Volume 1, Number 1, July -September 2012impediments to convergence, for example the link between financial accounting and lax legislation.

Regulators should set up efficient and effective enforcement mechanisms to increase the consistency and quality of application of IFRS as well as support the International Financial Reporting Interpretations Committee (IFRIC) and the IASB as the sole clearing house for interpretation of IFRS.

National Standard Setters must decide on a strategy and timetable for achieving convergence and develop an activestandard setting agenda aimed at eliminating existing differences with IFRS.

The IASB is required to address concerns about the complexity and operational practicality of IFRS, prioritize the SMEproject as an agenda item and oversee and authorize translations of IFRS in various languages.

The Preparers of financial statements must actively participate in the standard setting process, in particular to identify practical application concerns, as well as providing IFRS training for staff and managers, including those in non-financial roles.

Universities need to include IFRS in the core accounting curriculum. Analysts and Investors are required to promote convergence of national accounting standards with IFRS. They should

also actively participate in the IASB’s standard setting process, in particular to identify users’ needs, and educate theirstaff regarding the IFRS reporting model.

CONCLUSIONS

The adoption of new accounting standards in line with International Financial Reporting Standards, or IFRS, may increase the cost of raising debt through instruments such as debentures, preference shares and foreign currency convertible bonds (FCCBs) as the rules get tighter. IFRS are balance sheet driven standards which are more than likely to create volatility in the year-to-year income statements and that is a hard reality which the Indian companies will be confronting with convergence. In the case of debentures, under Ind-AS, the redemption premium plus coupon interest are amortized to the profit and loss account over the term of these instruments based on the Effective Interest Rate (EIR) method.

Transitioning to IFRS would allow companies to compete for capital in other countries, while reducing cost and complexity for companies operating internationally; we also think that embracing a single set of global accounting standards would contribute to a higher degree of investor understanding and confidence. Also IFRS is very important for US Investors as they own 2/3 rd of securities issued by foreign companies. Because of IFRS there will be greater comparability and greater confidence in the transparency of financial reporting for the US investors.

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Ifrs an Overview