IFRS: Challenges Ahead

Proffessor Kirit Makwana&

Dr.(Mrs.) Meenakshi Somani

Presented By

In last decade the Global market has become local. Entities are reaching new markets world over to sell their products & services, tap capital markets & banks for funds.

This has necessitated the need for a financial statement, prepared using a uniform and globally accepted accounting principles.

Introduction

What is IFRS:

IFRS is an accounting framework that establishes

recognition, measurement, presentation and

disclosure requirements relating to transactions and

events that are reflected in the financial statements.IFRS was developed in the year 2001 by the

International Accounting Standards Board (IASB) in

the public interest to provide a single set of high

quality, understandable and uniform accounting

standards. The accounting professions as well as the

government are fully geared to make the transition

in line with India’s commitment at the G-20 Summit.The Indian government had envisaged a phased

transition from April-2011.

Why IFRS?

To make a common platform for better understanding of accounting, internationally.To create comparable, reliable, and transparent financial statements.To facilitate greater cross-border capital raising and trade. To having company-wide one accounting language which have subsidiaries in different countries. Synchronization of accounting standards across the globe. The Ministry of Corporate Affairs has laid down a three-phase implementation programme for Indian companies.

Benefits of IFRS on Indian Corporates and Proffessionals

The convergence benefits the economy by increasing the growth of its international business.

Improvement in comparability of financial information and financial performance with global peers and industry standards.

Adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements.

The industry is able to raise capital from foreign markets at lower cost if it can increase confidence in the minds of the foreign investors that their financial statements comply with globally accepted accounting standards.

It encourages international investing and thereby leads to more foreign capital flows to the country.

Benefits to the investors who wish to invest outside their own country. Investors want the information that is more relevant, reliable, timely and comparable across the jurisdictions.

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The investors’ confidence would also be strong if accounting standards used are globally accepted. Convergence with IFRs contributes to investors understanding and confidence in high quality financial statements.

The burden of financial reporting is lessened with the convergence of accounting standards because it simplifies the process of preparing the individual and group financial statements and thereby reduces the costs of preparing the financial statements using different set of accounting standards

Convergence with IFRS’s also benefits the accounting professionals in a way that they are able to sell their services as experts in different parts of the world.

They are able to quote IFRS to clients to give them backing for recommending certain ways of reporting.

IFRS Convergence: Issues & Key Challenges

The preparation of financial statements in accordance with IFRS is always challenging.

Furthermore challenges have been increased by several newer standards and amendments that have a significant impact both on the presentation of the primary statements and the accompanying disclosures.

Adoption of IFRS requires a lot of preparatory work for companies in terms of comprehending, training and modification of software and IT systems.

Experts said that companies fear a fall in their bottomlines as they were not sure how the IFRS regime would pan out. IFRS requires that all transactions and assets be accounted at fair value or marked to market. This may reduce the profits of several companies depending on the sectors they operate in. For instance, they said, real estate and banking may be hit hard by the new standards.

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  Major Challenges

Shortage of ResourcesIndia with a population of more than 110 Crores has only approx 150,000 Chartered Accountants far below its requirements.Training IFRS has to be uniformly understood and consistently applied.To be introduced as a full subject in universities and Chartered Accountancy syllabus.Training to be given to all stakeholders, CFOs , Auditors, Audit Committee, Analysts, Regulators, Tax authorities etc. etc.Information SystemsFinancial accounting and reporting systems must be able to produce robust and consistent data for reporting.The system must be capable of capturing new information for required disclosures, such as fair values of financial instruments, related party transactions, segment information etc.Extra security for addressing potential risk of business interruptions particularly Fraud, Cyber terrorism and data corruption etc. continue

TaxesIFRS convergence will have significant impact on tax liability calculations.Tax authorities should ensure full clarity on the tax treatment for e.g, unrealised gains or losses on various accountings required for financial instruments etc.Tax planning strategies has to be revisited.CommunicationIFRS may significantly change reported earnings and various performance indicators.Managing market expectations and educating analysts for a particular business will be critical.Reported profits may be different from perceived commercial performance due to the increased use of fair values and the restriction on existing practices. Consequently indicators for assessing the performance need to be revisited.Distributable profitsIFRS is value driven, which results very often in unrealized gains and losses. Whether this can be considered for the purpose of computing distributable profits will have to be debated.

Management Compensation and debt covenantsIFRS may significantly change the calculation of performance based pay. Present plan will be materially different under IFRS.Significant changes to the plan may be required.Re-negotiation will be required for contracts that referenced reported accounting, such as bank covenants on convergence to IFRS.OthersUniform InterpretationsSignificant one time cost of converting to IFRS.Ensure compatibility with local tax regime, RBI, SEBI, Courts, tribunals etc.Extensive reliance on fair value measurements for standards relating to financial instruments and business combination.SME concernsScarcity of resources and expertise with the SMEs to achieve compliance Cost of compliance not commensurate with the expected

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Conclusion: Convergence of accounting standards toward a common set of

high-quality accounting principles is in the public's best interest and would provide a more uniform language for financial reporting. The rapid pace of change and proliferation of complex standards may create challenges for some stakeholders, including some in the financial statement preparer community.

Adequate time to react to changes and new standards, and an intensive effort to inform all stakeholders of these changes, will need to be provided, especially with a view toward global implementation.

We personally believe that achieving a single set of high-quality global accounting standards is a very important goal. However, we also believe that we are a fair distance away from achieving that objective. Some of the momentum around IFRS has downplayed a few real challenges associated with uniform adoption of IFRS.

The need of the hour is that the industry should not try to over ride the commitment made by the government in G-20 for converging the domestic accounting standards with the global reporting standards