A GUIDEBOOK
|
||
ON IFRS
|
||
INTERNATIONAL
|
||
FINANCIAL
|
||
REPORTING
|
||
STANDARDS
|
||
RAMA
|
||
MARCH 28th,
2010
|
||
IFRS – A
GUIDE BOOK ON TRANSITITION TO
GLOBAL
ACCOUNTING STANDARDS
The article
analyses the fundamentals of IFRS, the differences between USGAAP and IFRS and
other related issues in a comprehensive manner.
IFRS ADOPTION AND USE
AROUND THE WORLD
More
than 120 countries now require or permit the use of IFRSs or are converging
with the International Accounting Standards Board's (IASB) standards.
The
picture below shows the level of IFRS adoption at present. Blue areas
indicate countries that require or permit IFRSs. Grey areas are countries
seeking convergence with the International Accounting Standards Board (IASB) or
pursuing adoption of IFRSs.
Picture courtesy: IASB 2009
CONTENTS Page
|
1
|
Abbreviations
used
|
3
|
2
|
Executive
Summary
|
4
|
3
|
What is
IFRS and its importance?
|
6
|
4
|
What are
standard-setting bodies?
|
7
|
5
|
What are
IASB and IASC Foundation?
|
7
|
6
|
What is
the role of IOSCO?
|
8
|
7
|
Why do we
need financial statements?
|
9
|
8
|
What are
the objectives of Financial Reporting Standards?
|
10
|
9
|
What is
the status of international adoption of IFRS?
|
11
|
10
|
What are
the latest developments in IFRS?
|
11
|
11
|
What is
global financial standards convergence?
|
12
|
12
|
What are
the obstacles to global covergence?
|
13
|
13
|
Why is
vital for investors to know about IFRS?
|
13
|
14
|
How does
USGAAP compare with IFRS?
|
13
|
15
|
Does
|
15
|
16
|
What is
|
16
|
17
|
What are
the issues involved in IFRS convergence in
|
17
|
18
|
How are
Indian Banks preparing for IFRS?
|
19
|
19
|
What is
the importance of new IFRS 9 on profits?
|
20
|
20
|
Some
Important IFRS standards
|
21
|
1. ABBREVIATIONS USED
|
ADS : American Depository Share
CBDT : Central Board of Direct Taxes
(of India
FASB : Financial Accounting Standards
Board (of the USA
FCCB : Foreign Currency Convertible
Bond
FIFO : First in, first out (a method
used in inventory valuation)
FSA : Financial Services Authority
(of the UK
GDR : Global Depository Receipt
IASB : International Accounting
Standards Board
IASC : International Accounting
Standards Committee
IASCF : International Accounting
Standards Committee Foundation
ICAI : Institute
of Chartered Accountants of India
IFRS : International Financial
Reporting Standards
IOSCO :
International Organization of Securities Commissions
IRDA : Insurance Regulatory and
Development Authority (of India
LIFO : Last in, first out (a method
used in inventory valuation)
MCA : Ministry of Corporate Affairs
(India
NACAS :
National Advisory Committee on Accounting Standards (India
RBI : Reserve Bank of India
SEBI : Securities and Exchange Board
of India
SEC : Securities and Exchange
Commission (of the US
SOX : Sarbanes-Oxley Act
USGAAP : Generally Accepted Accounting
Principles of the US
2. EXECUTIVE SUMMARY
|
||
The
financial year 2011-12 is going to be one of the most significant years since
the introduction of economic reforms in 1991 in india
- Goods and Services
Tax – GST (a long-pending reform of indirect taxes)
- Direct Taxes Code –
DTC (proposed to replace Income Tax Act)
- Adoption of IFRS by
companies in the Nifty 50 Sensex 30 indices and other companies with net
worth exceeding Rs 1,000 crore
These
new acts are going to be very complex for ordinary investors. The implications
for companies are quite humungous. As
such, investors need to be well prepared for the changes that are going to
happen in the next one year. All these legislations and standards are going to
be game changers in India
The
valuations of companies and businesses are going to change in a substantial
manner with effect from April 1, 2011. Stock markets are supposed to act ahead
of time. As such, one can expect significant action on the bourses based on the
news flows relating to the introduction and passing of these new legislations
in India
Ramesh
Damani, a veteran broker from Bombay, has gone on record saying that if the DTC
implemented as per the draft released in August 2009, there is going to be huge
sell-off in the stock markets before the deadline of April 1, 2011 (DTC
proposes to eliminate the difference between long-term capital gains and
short-term capital gains on shares and mutual funds. Both LTCG and STCG will be
taxed at the rate of the individuals or others. At present, tax on LTCG is NIL
and tax on STCG is 15 per cent exclusive of surcharge and education cess.)
As
such, investors have to familiarize themselves with the provisions and
implications of these new developments. To know about GST & DTC, just
click:
Goods and Services Tax-GST-First Discussion Paper
|
|
|
Direct Taxes Code-DTC-Its impact on individuals, etc
|
Direct Taxes Code-DTC-Its impact on Long-term capital
|
gains and short-term
capital gains of shares/MFs
|
This
article discusses the significance of IFRS (International Financial Reporting
Standards) and its likely impact on the balance sheets of Indian companies.
The
financial statements are extensively used by several groups of people –
including analysts, creditors and other stakeholders. Financial statements include
balance sheet, income statement, cash flow statement and others. They provide
useful information to users about the financial position and financial
performance of the company. IFRSs are developed by
International Accounting Standards Board (IASB), a global body headquartered in
London US
On 22 January 2010, the Ministry of Corporate
Affairs (MCA) in India
issued a press release setting out the roadmap for International
Financial Reporting Standards (IFRS) convergence in India
Leading Indian companies and banks have already
begun to plan the conversion to IFRS. The convergence to IFRS will have
far-reaching implications for Indian companies – in terms of initial public
offers, disclosures, mergers and acquisitions, fair value of financial assets,
publication of quarterly results, investors’ relations, debt offerings and
raising foreign funds. These big companies have got a year’s time to migrate to
IFRS from Indian GAAP.
As of now, more than 120 countries use IFRS standards, including Australia , New
Zealand , the UK Japan ,
Brazil , Canada and India
There are several benefits to Indian companies for implementing
IFRS: 1. They can raise money abroad with favourable credit terms; 2. Indian
companies will get international recognition and can avoid publication of
financial statements based on multiple standards; 3. They can list on foreign
bourses much more easily; 4. IFRS enhances the brand value of Indian companies
abroad; and 5. India will be in line with the world in terms of its commitment
as part of G-20 Group of nations to implement these uniform global accounting
standards.
The biggest economy US
Leading companies and banks in India India
3. WHAT IS IFRS AND
ITS IMPORTANCE?
|
||
IFRS
stands for International Financial Reporting Standards. IFRS standards are set
by an international body known as IASB. The objectives of IFRS are to establish
a single set of high quality global accounting standards that can be adopted by
several companies across countries and continents. More than 120 countries have
already adopted or are at an advanced stage of implementing the IFRS at their
national level. Countries, like, Australia ,
the UK , countries in the
European Union and several countries in Africa
have already moved toward IFRS. Countries, like, Brazil ,
Canada and India US
The
IFRS standards are more transparent and easily acceptable to several users of
financial statements. Disclosure standards are very high under IFRS.
Comparability of companies’ balances sheets and income statements is much more
easier under IFRS.
The
term IFRS refers to the new numbered series of pronouncements that the IASB is
issuing, as distinct from the International Accounting Standards (IASs) series
issued by its predecessor. More broadly, IFRS standards refer to the entire
body of IASB pronouncements, including standards and interpretations approved
by the IASB and IASs and SIC interpretations approved by the predecessor
International Accounting Standards Committee. IASs start from IAS 1 up to IAS
41; while IFRSs start from IFRS 1 up to IFRS 9. Some of the IASs are superseded
by other standards. All these IASs and IFRSs have been effectively implemented
except IFRS 9 which is slated to be implemented with effect from 1st
of January 2013. In addition, IASB has developed another IFRS for SMEs (Small
and Medium-sized Entities) which was implemented in 2009.
4. WHAT ARE
STANDARD-SETTING BODIES?
|
||
In
general, standard-setting bodies are professional organizations in the private
sector. They are responsible for the formulation, development and setting
accounting standards for corporate bodies and other entities in a particular
country. In the US
In
addition, there are regulatory authorities that take care of regulation and
overall supervision from the Government level. In the US , the regulatory authority under the
government is SEC, the Securities and Exchange Commission and in the UK
Internationally,
IASB, the International Accounting Standards Board is responsible for the
creation and development of global standards that are used by several countries
and multi-national corporations (MNCs).
In
India , the standard-setting
body is ICAI, The Institute of Chartered Accountants of India, which is a
professional body set up under an act of Indian Parliament for the maintenance
of high accounting, auditing and ethical standards in India
5. WHAT ARE IASB AND
IASC FOUNDATION?
|
||
Prior
to 2001, IASB is known as IASC, the International Accounting Standards
Committee. IASC was established in 1973 and IASB was formed in 2001. The
International Accounting Standards Board, headquartered in London
- Developing global accounting standards which are
transparent, understandable, enforceable, consistent and high quality
- Promoting these standards
- To work for the convergence of national and
accounting standards
- Taking care of special needs of small and medium
entities (SMEs) and emerging market economies
The objective of the IASC Foundation and the IASB is to develop, in the public interest, a single set of high-quality global accounting standards. In pursuit of this goal, the IASB works in close cooperation with stakeholders around the world, including investors, national standard-setters, regulators, auditors, academics, and others who have an interest in the development of high-quality global standards.
The IASB is the independent
standard-setting body of the IASCF. IASB is supervised by the
International Accounting Standards Committee Foundation. IASCF has got 20
trustees who promote the work of IASB and rigorous application of IFRSs. India is proud to have one of its leading
businessmen, T V Mohandas Pai, Director and Member of
the Board, Infosys Technologies Limited, Bangalore
6. WHAT IS THE ROLE OF
IOSCO?
|
||
The International Organization of
Securities Commissions is an international forum of capital market regulators
of the world. It was set up in 1983. At present, it has got 110 ordinary
members from all the major countries of the world. It represents about 90 per
cent of the securities market regulators in the world. It is headquartered in Madrid , the capital of Spain
According
to IOSCO, the three objectives of
securities regulation are:
1. The protection of investors;
2. Ensuring that markets are fair, efficient and transparent; and,
3. The reduction of systemic risk
The
body is responsible for the cooperation among capital market regulators to
promote high standards of regulation in order to maintain just, efficient and
sound markets. The regulators exchange information and unite their efforts to
establish standards; effective surveillance of international securities
transactions and promote the integrity of financial markets around the world.
It is also working for the promotion of uniform regulation.
IOSCO
works closely with IASB, IASC Foundation, other standard-setting bodies and regulators
for the global convergence of accounting standards.
SEBI, the capital markets regulator in India India UK
and the SEC in the US
7. WHY DO WE NEED
FINANCIAL STATEMENTS?
|
||
A
variety of users use the financial statements, like, balance sheet, profit and
loss account, cash flow statement and others of companies and other entities.
The body of users includes investors, creditors, credit rating agencies, bankers,
financial analysts, management, regulators, standard-setting bodies, auditors
and shareholders.
The
financial statements are most important in security analysis and valuation. In
fact, these are the springboards to know about a company’s financial health and
the soundness of its operations.
With
the help of financial statements, the users are expected to assess the
financial position of a company in terms of assets, liabilities and equity. In
addition, they can measure the financial performance in terms of income and
expenses.
Suppose
a financial company or a bank is considering a credit proposal for a company.
The bank has to study the financial statements of the company to evaluate its
borrowing needs.
Likewise,
an analyst may want to find out the valuation of a listed company for
investment purposes; then she has to necessarily dissect the numbers given in
the financial statements of the company. These are only a few examples.
According
to IASB, the following are the necessary financial statements and fundamental
principles underlying their preparation:
Financial Statements
|
Fundamental Principles
|
|
1.
Balance Sheet
|
1. Fair
presentation
|
|
2. Income
Statement or Profit & Loss a/c
|
2. Going
concern
|
|
3.
Statement of Cash Flows
|
3.
Accrual basis
|
|
4.
Statement of changes in Equity
|
4.
Consistency
|
|
5. Notes
to Accounting policies and others
|
5.
Materiality
|
|
In
order to understand the financial statements properly, there are four
essential features that financial statements should satisfy. They are:
|
||
1. Easy
understandability by users
|
||
2.
Relevant and timely information
|
||
3.
Reliable information free from errors
|
||
4.
Comparability of information across
|
||
companies
|
8. WHAT ARE THE
OBJECTIVES OF FINANCIAL REPORTING STANDARDS?
|
||
As
the financial statements are used by a large number of stakeholders, they are
to be prepared by accountants in such a uniform and consistent way so that all
the users of the statements understand them in a like manner. There should not be
any confusion among the users with regard to figures, statistics or
interpretation of the financial statements. There is a need to maintain
consistency in financial statements and to make them understandable to all in a
simple and similar way.
The
International Accounting Standards Board (IASB) has expressed the objective of
Financial Reporting in a lucid way:
“The objective of financial statements is to
provide information about the financial position, performance and changes in
financial position of an entity; this information should be useful to a wide
range of users for the purpose of making economic decisions.”
9. WHAT IS THE STATUS
OF INTERNATIONAL ADOPTON OF IFRS?
|
||
The following table shows
the status of IFRS adoption across continents:
(The list
is only for information purpose. For accuracy of information, please refer to
the respective countries’ standard setting bodies:
Country
|
Status of IFRS
adoption
|
It is adopting IFRS from 2011
|
|
The European Union (EU) has already made it
mandatory for EU countries to adopt IFRS since 2005
|
|
It has introduced IFRS for banks and other
companies in a phased manner. But
|
|
Countries, like,
|
|
UNITED
STATES
|
The
|
10. WHAT ARE THE
LATEST DEVELOPMENTS
IN FINACIAL STANDARDS?
|
||
Progress toward the
goal of global convergence of accounting standards has been steady. Since 2001,
more than 120 countries have required or permitted the use of International
Financial Reporting Standards (IFRSs), while the remaining major economies have
established timelines for convergence with, or adoption of, IFRSs. The notable
exception to convergence of IFRSs is the USA
The IASB and FASB
have made progress towards substantial convergence between IFRSs and USGAAP.
Several memoranda of understanding were signed since 2006 and in November 2009
the two boards issued a further statement outlining steps for completing their
convergence work by 2011.
Most recently, at
their September 2009 meeting in Pittsburgh ,
US Japan Brazil
11. WHAT IS GLOBAL
FINANCIAL STANDARDS CONVERGENCE?
|
||
The
degree of globalization has increased by several folds in the past two decades.
This calls for a need to have uniform and consistent set of regulations that
can be used by investors and analysts across the world. From the principles of
consistency, uniformity and correct interpretation of financial statements,
there is a vital need for adoption of single set of standards that are useful
to all types of global users of financial statements. As of now, more than 120
countries have adopted IFRS standards at their national level – some partially
and some fully. The USA
Towards
this direction, both IASB and FASB came to an agreement in 2002 known as
“Norwalk Agreement” setting out their commitment to the development of
compatible accounting standards that are useful to all. The FASB has been
working with IASB for convergence of USGAPP to IFRS and narrow the differences.
However, full alignment between IFRS and USGAAP, for a creating a unique set of
globally accepted accounting principles, may take much longer time according to
the present indications. A
common set of high quality global standards remains a priority for both the
IASB and the FASB.
Accounting
Scandals involving corporations, like, the Enron Corporation, Worldcom and Arthur
Andersen of the US US India
12. WHAT ARE THE
OBSTACLES TO GLOBAL CONVERGENCE?
|
||
However,
the global convergence of accounting standards is not a smooth matter for a
variety of reasons. One important factor that is creating hurdles for convergence
is the powerful lobby of some corporations who have got vested interests in
keeping the existing standards which may be lax in certain cases. And then
there are dissimilarities between various standard-setting bodies and
regulators in order to protect their own national standards that may be more
useful in a domestic context. This has led to some political pressures also.
13. WHY IS IT VITAL
FOR INVESTORS TO KNOW ABOUT IFRS?
|
||
Accounting standards are
important for companies. For example, on March 31, 2009, Government of India
diluted accounting standard AS-11, pertaining to mark-to-market provisioning
for foreign exchange-related gains and losses; allowing foreign exchange losses
to be deducted from the cost of fixed cost for the financial year 2008-09 by
postponing the implementation of AS-11 from March 31, 2009 to March 31, 2011. This dilution has helped quite a few large companies (like,
Reliance Communications, Tata Motors, JSW Steel, Sterlite Industries, M&M,
Bharat Forge and Ashok Leyland) report a better profit picture as on 31st
of March 2009.
Likewise, the
IFRS migration is going to impact the Indian companies in different ways in
terms of their profits, quarterly results, treatment of extraordinary items,
consolidated financial statements, etc. Only experts can fathom the impact on
profits and the size of the balance sheet. One can expect research reports from
brokerages, research houses and firms in the next one year, detailing the
impact of the newly developed accounting standards. Assessing the impact of
IFRS standards on holding companies with several subsidiaries – foreign as well
as local – is much more complex due to the enormity of IFRS standards and its
Framework. It will be a Himalayan task for analysts to decipher the
ramifications from a balance sheet and income statement perspective.
14. HOW DOES IFRS
COMPARE WITH USGAAP?
|
||
There
are significant differences between IFRS and USGAAP. While calculating
financial ratios, analysts need to be aware of them. For example, USGAAP allows
LIFO method of inventory valuation which allows US companies to report lower
profits and consequently pay lower taxes in an inflationary environment.
By
using LIFO method, US companies will be able to show higher raw material cost
in the income statement which depresses the net income* and resulting in lower
taxes for them.
This
will ultimately gets reflected in profitability ratios, like, Return on Equity
(RoE), etc. With lesser profits to declare, the companies will show lower RoE.
Historical data suggests that the difference in RoE for IFRS and USGAAP
calculations can be as large as 3 to 4 per cent in several cases.
(* The word ‘net
income’ is used in the context of international terminology and followed in the
US India
There
are a large number of differences between the provisions of these two
standards. Presenting all of them is outside the scope of this article.
Following are some of the main differences:
IFRS
|
USGAAP
|
|
1.
Principles based approach
|
1. A
combination of principles and rules
|
|
based approach
|
||
2. Upward
revaluation of assets (property,
|
2. Upward
revaluation of assets is not
|
|
plant & equipment) and intangible
assets
|
allowed
|
|
is allowed
|
||
3.
Weighted average cost and FIFO are
permitted for inventory valuation; LIFO is
|
3.
Weighted average cost, LIFO & FIFO
are allowed for inventory valuation
|
|
not permitted
|
||
4. IFRS
does not allow any items to be
|
4.
Extraordinary items shall be reported
|
|
classified as "extraordinary
items"
|
in the income statement, net of tax,
|
|
below income from continuing
operations
|
||
5. While
consolidating accounts for long-term
|
5. USGAAP
uses a dual model based on
|
|
investments, IFRS uses a voting control
|
voting control and economic control
|
|
method for consolidation
|
for consolidation
|
|
6.
Deferred tax assets and liabilities are
|
6.
Deferred tax assets and liabilities are
|
|
classified net as NON-CURRENT on the
|
classified as current or non-current,
|
|
balance sheet with additional disclosures
|
based on the classification of related
|
|
tax asset or liability for financial
reporting
|
||
Note:
USGAAP allows LIFO method of inventory valuation, which allows US companies to report lower profits and pay lower
taxes during an inflationary period
DIFFERENCES IN CASH FLOW STATEMENTS: There are significant differences in Cash Flow statements (Operating,
Investing or Financing activity):
IFRS
|
USGAAP
|
|
1.
Interest received can be Operating or
|
1. Interest
received is Operating activity
|
|
investing activity
|
||
2.
Dividend received can be Operating or
|
2.
Dividend received is Operating activity
|
|
investing activity
|
||
3.
Interest paid can be Operating or
|
3.
Interest paid is Operating activity
|
|
financing activity
|
||
4.
Dividends paid can be Operating or
|
4.
Dividends paid is Financing activity
|
|
financing activity
|
||
As can be seen from above, IFRS permits more flexibility in
classifying cash flows
|
||
15. DOES
|
||
With
increased globalization, several Indian companies have acquired large assets
and expanded their businesses abroad through stake buys, outright acquisition
and others. Uniform accounting rules, like, IFRS are extremely useful to such
companies. With the adoption of IFRS, raising funds abroad through ADS, GDR or
FCCB will be quite easy for Indian companies. Migration to IFRS will lower the
cost of raising money as it will obviate the need for preparing a multiple set
of financial statements (like, Indian GAAP, USGAAP or other). Moreover, the
entire world is moving towards IFRS or accounting standards that bear close
resemblance to IFRS. IFRS is expected to increase the transparency in financial
statements which will help investors, creditors and other stakeholders in a
better manner.
Even
during the summit meeting of the Group of 20 leaders (G-20) held in September
2009, India
Several Indian companies and banks have
created separate bodies for eventual implementation of IFRS as per the roadmap
for transition. IFRS-compliant financial statements have a high brand value
globally and the transition to IFRS will allow Indian companies to list their
shares on foreign bourses much more easily. Companies may be able to get better
credit rating from agencies.
16. WHAT IS
|
||
The Indian Government had on 22nd of January 2010
released the roadmap for convergence of Indian Accounting Standards with the
globally acknowledged International Financial Reporting Standards (IFRS). The Core Group, constituted by the Ministry
of Corporate Affairs for convergence of Indian Accounting Standards with IFRS from 1st of April 2011, that held
its meeting on 11th of January 2010 had agreed for a clear roadmap. There
will be two sets of accounting standards:
FIRST SET OF ACCOUNTING STANDARDS
|
|
PHASE 1
|
|
Date
|
Coverage
|
Opening
balance sheet as at 1 April 2011*
|
a.
Companies which are part of NSE Index – Nifty 50
|
b.
Companies which are part of BSE Sensex – 30
|
|
c.
Companies whose shares or other securities are listed on a stock exchange
outside
|
|
d.
Companies, whether listed or not, having net worth of more than Rs 1,000
crore
|
|
PHASE 2
|
|
Date
|
Coverage
|
Opening
balance sheet as at 1 April 2013*
|
Companies
(whether listed or not) not covered in phase 1 and having net worth exceeding
Rs 500 crore, but not exceeding Rs 1,000 crore
|
PHASE 3
|
|
Date
|
Coverage
|
Opening
balance sheet as at 1 April 2014*
|
Listed
companies (not covered in phase 1 and 2) having net worth of Rs 500 crore or
less
|
* When the accounting year ends on a date other than 31st
March, the conversion of the opening Balance Sheet will be made in relation
to the first Balance Sheet which is made on a date after 31st
March.
|
|
If an Indian company's financial year is April to March,
that company will have to shift to IFRS with effect from FY 2011-12, if it
falls under phase 1. Accordingly, the company will have to reset its balance
sheet for FY 2010-11 as per IFRS.
|
|
According to an Economic Times’ estimate, IFRS will be adopted by
about 400 Indian companies from 1st of April 2011 in the First Phase
of implementation. This is highly significant from a stock market point of
view.
SECOND SET OF ACCOUNTING STANDARDS
|
Companies which fall in the following categories will not be
required to follow the notified accounting standards which are converged with
the IFRS (though they may voluntarily opt to do so) but need to follow only
the notified accounting standards which are not converged with the IFRS.
These companies are: -
|
a. Non-listed companies which have a net worth of Rs. 500 crores
or less and whose shares or other securities are not listed on Stock
Exchanges outside
|
b. Small and
Medium Companies (SMCs).
|
The
salient features of the roadmap are:
- There will be two
separate sets of Accounting Standards under Section 211(3C) of the
Companies Act, 1956 – as given above
- First set would
comprise of the Indian Accounting Standards which are converged with the
IFRSs which shall be applicable to the specified class of companies – the
details are given above
- The second set would
comprise of the existing Indian Accounting Standards and would be
applicable to other companies, including Small and Medium Companies (SMCs).
But IFRS convergence will only be voluntary for SMCs.
- For Banking and
Insurance companies there will be a separate roadmap
- The ICAI
has submitted to the MCA revised Schedule VI to the Companies Act, 1956.
The NACAS shall review the draft and submit a revised Schedule VI to the
MCA. Amendments to Schedule XIV will also be carried out in a time bound
manner.
17. WHAT ARE THE
ISSUES INVOLVED IN
IFRS CONVERGENCE IN
|
||
The
transition to convergence between Indian GAAP and IFRS is not going to be
smooth. As mentioned above, the transition is going to be done in a phased
manner in the next four years. The following are some of the issues that need
to be sorted out before the elimination of differences:
INCOME TAX ISSUES:
1. CBDT is working with ICAI to examine the direct tax issues arising out of the convergence between IFRS and Indian GAAP
2. It remains to be
seen whether CBDT will full adopt IFRS for taxation purposes
3. The problem of
income tax will get more complicated for Indian companies which have acquired
several subsidiaries abroad, while preparing the consolidated financial
statements
4. Consolidated
financial statements concern companies having joint ventures, subsidiaries and
associates. According to IFRS norms, companies will have to present their
interim financial statements (like quarterly results) also on a consolidated
basis.
5. Some experts
contend the draft Direct Taxes Code (DTC) is very averse to IFRS and does not
recognize fair value measurement
6. Fair value
accounting concept is the bedrock of IFRS
IMPLEMENTATION and COMPLIANCE COSTS:
1. The cost of
implementation of IFRS convergence is going to be huge
2. Training cost of
making employees being aware of IFRS provisions and implications is also very
big
AMENDMENTS TO VARIOUS LAWS:
1. Before
implementation of IFRS, various laws need to be amended and approved in Indian
Parliament
2. Some of the laws
that need to amended are Companies Act (specifically Schedule VI of the Act),
Income Tax Act (or the proposed Direct Taxes Code), SEBI norms, banking laws
like the Banking Regulation Act, insurance laws, etc
INSURANCE COMPANIES:
1. Under IFRS a
large part of the premium of insurance companies is treated as investment
liability (as against Indian GAAP treating it as revenue) as they have to
return it to the investors. This will create a big dent in their financial
statements. IRDA regulates financial reporting by insurance companies in India
IT AND ERP SYSTEMS:
1. Convergence to
IFRS requires companies to upgrade their IT and ERP systems in a robust manner
2. There is a need
to improve their Management Information Systems (MIS)
3. The convergence
to IFRS is a big opportunity for IT companies training institutions and tax
consultants
DIFFERENCES BETWEEN IFRS and Indian
GAAP (Cash Flows):
IFRS
|
Indian GAAP
|
|
1.
Interest received can be Operating or
|
1.
Interest received is Investing activity.
|
|
investing activity
|
In case of a financial enterprise, it is
|
|
operating activity.
|
||
2.
Dividend received can be Operating or
|
2.
Dividend received is Investing activity.
|
|
investing activity
|
In case of a financial enterprise, it is
|
|
operating activity.
|
||
3.
Interest paid can be Operating or
|
3.
Interest paid is Financing activity.
|
|
financing activity
|
In case of a financial enterprise, it is
|
|
operating activity.
|
||
4.
Dividends paid can be Operating or
|
4.
Dividends paid is Financing activity
|
|
financing activity
|
||
18. HOW ARE BANKS
PREPARING FOR IFRS?
|
||
With
the Government deciding to implement IFRS with effect from 1st of
April 2011 in a phased manner, RBI is expected to come with clarifications on how IFRS
will be implemented in Indian Banks. The regulator is a member of a committee
convened by the ministry of corporate affairs to finalize IFRS rules that will
be applicable in India
Indian Banks Association (IBA), an industry body of
Indian Banks, has set up a committee to guide banks in shifting towards IFRS
framework. A lot of issues have to be addressed and banks have to adopt IFRS
suitably to fit India
The following issues will have a big impact on
banks while adopting IFRS:
- Provisioning for NPAs will change radically. Indian Banks
currently follow RBI norms and Indian Accounting Standards according to
which losses due to non-performing assets is based on what is actually
incurred. But under IFRS, banks will have to make an estimation of all
future NPAs based on an expectation of losses leading to upfront recognition
of losses.
- Presentation of financial statements
- Financial Instruments-Disclosures: The two main categories of disclosures required by the new IFRS
standard No. 7 are: (i). information
about the significance of financial instruments and (ii). information
about the nature and extent of risks (liquidity risk, market risk and
credit risk) arising from financial instruments. The IFRS 7 provides for
extensive disclosures under the above two categories and it will be a
daunting task for the banks to disclose all such information in their
financial statements.
- Financial instruments and derivatives accounting: At present,
valuation of investments by banks are classified as Helf for Trading
(HTM), Available for Sale (AFS) and Held to Maturity (HTM). Under IFRS,
all these investments are all mostly required to be treated as Held for Trading and they should be valued at fair
value in the books. Fair value is defined as the amount at which an
asset could be exchanged, or a liability settled, between willing and knowledgeable
parties or market participants. When the asset or liability trades
regularly, its fair value is usually readily available from its market
price. All derivative instruments are to be recognized at fair value on
the balance sheet under IFRS.
State Bank of India
19. WHAT IS THE IMPACT
NEW IFRS 9 ON PROFITS?
|
||
HDFC
Limited is an Indian-based financial institution renowned the world over. It
has got huge investments which are quoted at book value. The balance sheet
value of these several unquoted investments is very low. And their market value
could be much higher by several folds. When HDFC moves towards IFRS from 1st
of April 2010, how does the new standards affect the valuation of its unquoted
investments, whose market value could be in hundred of crores of rupees? It
remains to be seen whether HDFC will have to pay income tax on the difference
between book value and the fair value of these investments. How the Indian tax
authorities will interpret and implement the provisions of IFRS is in the realm
of speculation.
Now,
HDFC Limited has decided to unlock the value of its unquoted investments by
transferring them to a Special Purpose Vehicle (SPV) and selling a portion of
their investments in small portions to private equity or other investors. This
is an interesting move by the company. Is it creating an SPV in order to move
smoothly towards IFRS convergence or is it a simple case of unlocking value?
The
IASB has introduced a new standard, namely IFRS 9, relating to Financial
Instruments: classification and measurement of financial assets. This is going
to be effective from 1st of January 2013. The details are given
below:
Overview of IFRS 9:
The
new standard IFRS 9 is expected to be implemented with effect from 1st
of January 2013. It will replace the existing IAS 39. According to IFRS 9, all
financial assets are initially measured at fair value plus, in the case of a
financial asset not at fair value through profit or loss, transaction costs.
IFRS
9 divides all financial assets that are currently in the scope of IAS 39 into
two classifications – those measured at amortised cost and those measured at
fair value. The new IFRS 9 does away with the classification of Available for
Sale (AFS) and Held to Maturity (HTM) categories for financial assets (under
the existing IAS 39), which are extensively used by companies and banks now.
Debt
instruments: A debt instrument that
meets the following two conditions can be measured at amortised cost (net of
any writedown for impairment): 1. An entity is holding the financial asset to
collect the future cash flows and 2. The contractual cash-flows are solely
payments of principal and interest.
All
other debt instruments must be measured at fair value through profit or loss
(FVTPL).
Equity
instruments: All equity investments
in scope of IFRS 9 are to be measured at fair value in the balance sheet, with
value changes recognised in profit or loss, except for those equity investments
for which the entity has elected to report value changes in 'other
comprehensive income'. There is no 'cost exception' for unquoted equities.
'Other
comprehensive income' option: If an equity investment is not held for trading,
an entity can make an irrevocable election at initial recognition to measure it
at fair value through other comprehensive income (FVTOCI) with only dividend
income recognized in profit or loss.
Derivatives: All derivatives, including those linked to unquoted
equity investments, are measured at fair value. Value changes are recognised in
profit or loss unless the entity has elected to treat the derivative as a
hedging instrument in accordance with IAS 39, in which case the requirements of
IAS 39 apply.
20. SOME IMPORTANT
IFRS STANDARDS
|
||
The following are the
standards in the series of IFRSs:
IFRS
|
DETAILS
|
1
|
First
Time Adoption of IFRSs
|
2
|
Share-based
Payment
|
3
|
Business
Combinations
|
4
|
Insurance
Contracts
|
5
|
Non-current
assets held for sale and discontinued operations
|
6
|
Exploration
for and Evaluation of Mineral Assets
|
7
|
Financial
Instruments: Disclosures
|
8
|
Operating
Segments
|
9
|
Financial
Instruments: Classification and measurement of financial assets
|
Sources:
1. www.iasb.org
4. Press release of Ministry of
Company Affairs
5. Newspapers and websites
Disclaimer: The views of the author are personal.
This research paper is prepared for information purpose to the general reader
only. For correct interpretation of the provisions and tax-related matters,
readers are advised to consult their recognized tax consultants or qualified
chartered accountants.
No comments:
Post a Comment