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Chapter 1
Introduction
The present chapter describes the evolution and formation of Indian Accounting Standards,
International Accounting Standards (IAS), International Financial Reporting Standards
(IFRS) and their importance for the corporate sector. This chapter covers the meaning of
convergence with IFRS and need of convergence of financial accounts with IFRS. It also
depicts the major differences between Indian Accounting Standards and IFRS.
1.1 Prologue
As we need a language to communicate with others, likewise, business requires a language to
communicate with its owners, managers and other stakeholders. This is called accounting
language. Accounting is a “business language” which helps in informing the financial results
of an enterprise to owners, managers and other stakeholders by financial statements timely
prepared by enterprises. Accounting is also held as the soul of a business as it is utterly
difficult to carry on any business without proper accomplishing of its affairs (Praveen, 2009).
Accounting process requires proper attention and regulation because if it is not properly
regulated then it can mislead the owners, managers and stakeholders. It can also present the
distorted picture of business rather than true and fair view of business if it is not properly
done. In order to maintain transparency, reliability, consistency, adequacy and comparability
of financial reporting, it is necessary to know about some accounting principles and policies.
Companies have to follow certain principles or rules as their statutory duty and the same are
known as Accounting Standards (AS). These standards are written policies or rules which are
issued by expert bodies or regulatory bodies to comply the various aspects of recognition,
measurement, presentation and disclosure of accounting transactions in the financial
statements. Auditors check the conformity of these rules and examine the financial results in
a way that financial statements provide "true and fair view" of actual transactions (Indapurkar
et al., 2009).
It is the primary responsibility of the management to maintain strong internal control to
safeguard the recording of all financial operations of the business. The ostensible objective of
these accounting standards is to promote the dissemination of timely and useful financial
information to investors and certain other parties having an interest in the company’s
economic performance. The accounting standards reduce the accounting alternative in the
preparation of financial statements within the bounds of rationality, thereby ensuring
comparability of financial statements of different enterprises (Bragg, 2011).
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The London based group, namely, the International Accounting Standards Committee
(IASC), responsible for developing International Accounting Standards (IAS), was
established in June 1973. Between 1973 and 2001, the IASC released International
Accounting Standards. Subsequently, International Accounting Standard Board (IASB) came
into being in India in place of IASC from April 2001. Now IASB has announced its standards
in a series of pronouncements called International Financial Reporting Standards (IFRS).
Every major nation is moving towards adopting them to some extent. Various regulatory and
government bodies are looking to IFRS to fulfill local financial reporting obligations related
to financing or licensing (ICAI, 2009).
The Institute of Chartered Accountant of India (ICAI) as the accounting standards-
formulating body in the country is known to have made efforts to formulate high quality
accounting standards and has been successful in doing so. Indian Accounting Standards have
been changing in the course of time. As the world continues to become globalized, discussion
on convergence of national accounting standards with IFRS has increased significantly. In
India, so far as the ICAI and the governmental authorities such as the National Advisory
Committee (NAC) on accounting standards established under the Companies Act, 1956 and
various regulators such as SEBI and RBI are concerned, the aim has always been to comply
with the IFRS to the extent possible with the objective to formulate sound financial reporting
standards (Singhal and Tulshan, 2009). The ICAI, being a part of the International Federation
of Accountants (IFAC), considers the IFRS and tries to integrate them, to the possible extent,
in the light of the laws, customs, practices and business environment prevailing in India.
Accordingly, the accounting standards issued by the ICAI are based on the IFRS. However,
where departure from IFRS is warranted keeping in view the Indian conditions, the Indian
Accounting Standards have been modified to that extent (ICAI, 2009).
Convergence with IFRS by Indian corporate sector is going to be very challenging, but at the
same time, could also be rewarding. There are many beneficiaries of convergence with IFRS
such as the economy, investors, industries and accounting professionals. The harmonization
of financial reporting and accounting standards is a valuable process that contributes the free
flow of global investment and achieves substantial benefits for all capital markets’
stakeholders (Kapoor and Ruhela, 2013). It facilitates the maintenance of orderly and
efficient capital markets and also helps to increase the capital formation and economic
growth. The financial statements framed under a common set of accounting standards help
the investors to better understand investment opportunities as opposed to financial statements
prepared using a different set of national accounting principles.
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1.2 Financial Reporting
Basically, financial reporting is the process of preparing, presenting and circulating the
financial information in various forms to the users which helps in making vigilant planning
and decision making by users. The core objective of financial reporting is to present financial
information of the business entity which will help in decision making about the resources
provided to the reporting entity and in assessing whether the management and the governing
board of that entity have made efficient and effective use of the resources provided.
1.3 Evolution of Accounting Standards
The American Institute of Chartered Accountants (now it is known as American Institute of
Certified Public Accountants) can be considered as the primary founder of the accounting
standards. During the year 1932-34, the institute collaborated with the New York Stock
Exchange to frame five “rules or principles” of accounting to reduce the deviation in
accounting policies, recommend some disclosures for significant items of financial
statements, and give some valuable suggestions to enhance the reliability or credibility of
financial results. A revolution came in the accounting word in 1959, when American Institute
of Certified Public Accountants (AICPA) established the Accounting Principles Board (APB)
with the crucial objective to provide a solid base for accounting. In 1973, Financial
Accounting Standards Board (FASB) came in existence in place of Accounting Principles
Board (APB). To maintain uniformity in financial accounting practices, United Kingdom has
established an Accounting Standards Committee (ASC) with the purpose to frame accounting
standards which comply with accounting objectives. Prior to the year 1970, accounting
standards were not fascinated and very few academicians or professionals paid their attention
in its processing. But nowadays, the setting board of standards or committee plays vital role
in a number of countries such as New Zealand, India, United Kingdom, Canada, United
States, Australia, etc. In the same way, International Accounting Standards Committee
(IASC) was set up in 1973, to frame International Accounting Standards (IASs). Now the
International Accounting Standard Board has come in place of IASC. The IASC or IASB
comprises the accounting professional bodies of various countries including the Indian
Institute of Chartered Accountants (ICAI, 2009).
1.4 Evolution of Indian Accounting Standards
The council of the ICAI has issued thirty two Indian Accounting Standards. But now they are
only thirty one because accounting standard (AS) 8 relating to “accounting for research and
development” had been withdrawn. The accounting standards established by the Accounting
Standard Board (ASB) set the standards which have to be complied by the business entities
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so that the financial statements are prepared in harmony with generally accepted accounting
principles (GAAPs) (Singhal and Tulshan, 2009). The Indian Accounting Standards are
following as:
AS No
Title of Standards Date of
Applicability
1 Disclosure of accounting policies 1/4/1993
2 Valuation of Inventories 1/4/1999
3 Cash flow statement 1/4/2001
4 Contingencies and events occurring after the B/S date 1/4/1998
5 Net profit or loss for the period, prior period items and changes in accounting policies
1/4/1996
6 Depreciation accounting 1/4/1995
7 Construction contracts 1/4/2002
8 Research & Development Now not so far
9 Revenue recognition 1/4/1993
10 Accounting for fixed assets 1/4/1993
11 The effect of changes in foreign exchange rates 1/4/2004
12 Accounting for government grants 1/4/1994
13 Accounting for investments 1/4/1995
14 Accounting for amalgamations 1/4/1995
15 Employee benefits 1/4/2006
16 Borrowing costs 1/4/2000
17 Segment reporting 1/4/2001
18 Related party disclosures 1/4/2001
19 Lease 1/4/2001
20 Earning per shares 1/4/2001
21 Consolidated financial statement 1/4/2001
22 Accounting for taxes on income 1/4/2001
23 Accounting for investment in associates in consolidated financial statements
1/4/2002
24 Discontinuing operations 1/4/2004
25 Interim financial statements 1/4/2002
26 Intangible assets 1/4/2003
27 Financial reporting of interests in joint ventures 1/4/2002
28 Impairment of assets 1/4/2004
29 Provisions, contingent liabilities and contingent assets 1/4/2004
30 Financial instruments: Recognition and measurement 1/4/2011
31 Financial instruments: Presentation 1/4/2011
32 Financial Instruments: Disclosures 1/4/2011
(Source: Singhal and Tulshan, 2009)
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1.5 Need of Convergence with Global Standards
Each country has its own sets of rules and principles for accounting purpose as India has
Indian Accounting Standards discussed above. Gradually businesses were crossing their
national boundaries for trade and it was felt that there should be some international standards
for accounting so that business can run smoothly without any hurdle of accounting.
International analysts and investors would like to compare the financial statements of
companies while taking the investment decisions (Ahmad and Khan, 2010). The
harmonization of reporting with the other countries of the world will help to build the
confidence in the minds of investors. All these things have led to the growing support for
International Accounting Standards. With a target to achieve these objectives, an
International Accounting Standards Committee was established in June, 1973. The main
purpose of this committee was to build International Accounting Standards so that cross
border business can maintain their accounts properly and will lead to globalization in a
peaceful environment. This committee is presently known as International Accounting
Standards Board (Ankarath et al., 2010). The list of International Accounting Standards
developed by IASC is as follows:
IAS Title of the Standards
IAS1 Presentation of Financial Statements
IAS2 Inventories
IAS7 Cash Flow Statements
IAS8 Policies, Changes in Accounting Estimates and Errors
IAS10 Events after the Balance Sheet Date
IAS11 Construction contracts
IAS12 Income Tax
IAS14 Segment Reporting
IAS16 Property, Plant and Equipment
IAS17 Leases
IAS18 Revenue
IAS19 Employee Benefits
IAS20 Accounting for Government Grants and Disclosure of Government Assistant
IAS21 The Effects of Changes in Foreign Exchange Rates
IAS22 Business Communication
IAS23 Borrowing Costs
IAS24 Related Party Disclosure
IAS26 Accounting and Reporting for Defined Benefit Plans
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IAS27 Consolidated Financial Statements
IAS28 Accounting for Investments in Associates
IAS29 Financial Reporting in Hyperinflationary economies
IAS30 Disclosures in Financial Statements of Banks and Similar institutions
IAS31 Financial Reporting of Interests in Joint Venture
IAS32 Financial Instruments - Disclosure and Presentations
IAS33 Earnings per Share
IAS34 Interim Financial Reporting
IAS35 Discontinuing Operation
IAS36 Impairment of Assets
IAS37 Provisions, Contingent Liabilities and Contingent Assets
IAS38 Intangible Assets
IAS39 Financial Instruments - Recognition and Measurement
IAS40 Investment property
IAS41 Agriculture (Source: Singhal and Tulshan, 2009)
1.6 Evolution of International Financial Reporting Standards
The IASC issued International Accounting Standards during the year 1973-2001. IASC
restructured their organization during the year 1993-1997 and came with new name and fame
as International Accounting Standards Board (IASB) which came into effect on 1st April,
2001. IASB announced its standards in a series of pronouncements which came to be titled as
International Financial Reporting Standards (IFRS). However, IASB does not discard the
standards developed by IASC. Those standards continue to be designated as “International
Accounting Standards” (ICAI, 2009). Therefore, we can state that IFRS means the standards
issued by IASB and IAS means the standards issued by IASC. Similarly, interpretation of
standards is issued by Standards Interpretation Committee (SIC) and the International
Financial Reporting Interpretations Committee (IFRIC) of the IASB. Few nations have
adopted it and some are going to adopt IFRS in future. European Union countries have made
it mandatory from the year 2005 and India planed to converge with IFRS from the year 2011
(Singhal and Tulshan, 2009). IASB issued only thirteen (13) IFRS which are as follows:
IFRS 1 - First-time adoption of International Financial Reporting Standards
IFRS 2 - Share-based payment
IFRS 3 - Business combinations
IFRS 4 - Insurance contracts
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IFRS 5 - Non-current assets held for sale and discontinued operations
IFRS 6 - Exploration for and evaluation of mineral resources
IFRS 7 - Financial instruments: disclosures
IFRS 8 - Operating segments
IFRS 9 - Financial instruments
IFRS 10 - Consolidated financial statements
IFRS 11- Joint arrangements
IFRS 12- Disclosure of interests in other entities
IFRS 13- Fair Value measurement
1.6.1 IFRS 1 - First-time adoption of International Financial Reporting Standards
The IASB issued the IFRS 1 on June 19, 2003. It applies to all those business concerns which
are going to converge their accounting statements with IFRS from the first time. The IFRS1
has come into with effect from 1st January 2004 and underwent revision during the year 2009.
The revised standard was made effective for annual periods beginning on or after 1 January,
2010. A concern may be a first time adopter if in the preceding year they have prepared their
financial statements in accordance with IFRS for internal use and these IFRS financial
statements were not made available for owners and stakeholders of the companies. But if
IFRS based financial statements were disclosed to owners and stakeholders by an entity for
any reason in the preceding year, then the entity will be considered being an IFRS compliant
and IFRS 1 will not be applicable to the entity. An entity can also be considered a first time
adopter of IFRS if, in the preceding year, entities prepared their financial statements in
compliance with some IFRS but did not consider all IFRS. However, an entity or business
concern can’t be considered as a first time adopter of IFRS if , in the preceding year, its
financial statements complied with IFRS even if the auditors report comprises a certificate of
qualification with respect to conformity with IFRS and compliance with both previous or
local GAAP to IFRS (Singhal and Tulshan, 2009).
The main purpose of IFRS1 is to set out the basic rules or regulations for preparing and
presenting first IFRS financial statements and interim financial statements by business
concerns. The IFRS1 applies to first IFRS complied financial statements and each interim
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report which is presented under IAS 34 for part of the period is covered by first IFRS
financial statements of a business concern (Bragg, 2010).
There are some important tasks which should be considered by an enterprise while
convergening their accounts with IFRS. For examples, they are required to prepare their
opening financial statement in compliance with IFRS on the date of transition, recognize all
types of assets and liabilities which are recognized under IFRS, derecognize all types of
assets and liabilities which are not recognized by IFRS, classify all assets and liabilities as per
IFRS and measure all types of recognized assets and liabilities (Krik, 2009).
As per IFRS1 some exemptions are mandatory and few others are optional which are as
follows:
1. Business combinations
2. Fair value or revaluation as deemed cost
3. Employee benefits
4. Cumulative translation difference
5. Compound financial instruments
6. Assets and liabilities of joint venture, subsidiaries and associates
7. Designation of previously recognized financial instruments
8. Share based payment transactions
9. Insurance contracts
10. Decommissioning liabilities included in cost of PPE
11. Lease
12. Fair value measurement of financial assets or financial liabilities at initial recognition
13. A financial asset or an intangible asset accounted for as per IFRIC 12
14. Borrowing costs
There are few mandatory exemptions as per IFRS1 such as de-recognition of financial assets
and liabilities, estimates, hedge accounting, assets classified as held for sale and discontinued
operations and some issues of accounting for non-controlling interests (Singhal and Tulshan,
2009).
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1.6.2 IFRS 2 - Share-based payment
The major objective of this IFRS is to reflect the effect of share based transitions in the
financial statements of an entity, including expenses associated with transactions in which
share options are granted to employees. It is entailed for an entity to mention all the
transactions which are associated with employees or other parties to be settled either in cash
or other equity instruments of the business entity. This also applies to transmission of equity
instruments of the entity’s parent, or other instruments of another business entity in the same
group as the entity, to parties that have delivered goods or services to the entity (Singhal and
Tulshan, 2009).
Basically there are three types of share-based payment transactions for which this IFRS sets
out the measurement principles and precise requirements:
1. Equity-settled share based payment transactions: in this transaction, the entity takes
delivery of goods or services as consideration for equity instruments of the entity
(including shares or share options).
2. Cash-settled share based payment transactions: In this transaction, the entity receives
goods or services by taking liabilities to the supplier of those goods or services for those
amounts that are based on the price of the entity’s shares or other equity instruments of
the entity.
3. Equity or cash settled share based payment transactions: In this transaction, the entity
obtains the goods or services with a choice of whether the entity settles the transaction in
cash or by issuing equity instruments.
For an entity, it is essential to measure the fair value of the goods or services received for
equity-settled share-based payment transactions. If the entity cannot determine the fair value
of the goods or services received reliably, the entity is required to measure its value, and the
corresponding increase in equity (Bragg, 2010). Furthermore:
(a) If transactions are being processed with employees and others providing similar services,
the entity is required to determine the fair value of the equity instruments granted, as it is
typically not possible to measure the fair value of employee services received reliably.
The fair value of the equity instruments granted is measured at grant date.
(b) If transactions are done with parties other than employees (and those providing similar
services), there is a presumption that the fair value of the goods or services received can
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be determined reliably. The entity can measure the fair value at the date on which goods
or services are received. In rare cases, if the presumption is confuted, then the transaction
is estimated by reference to the fair value of the equity instruments granted, measured at
the date on which entity receives the goods or the counterparty renders services.
(c) The IFRS also stipulates that vesting condition for goods or services measured by
reference to the fair value of the equity instruments granted and market conditions are not
taken into account when measuring the fair value of the shares or options at the relevant
measurement date. Instead, different conditions are taken into account by adjusting the
number of equity instruments included in the measurement of the transaction amounts
consequently, the amount recognized for goods or services received as consideration for
the equity instruments granted is based on the number of equity instruments that
ultimately vest. Therefore, on a collective basis, no amount is recognized for goods or
services received if the equity instruments granted do not vest because of failure to satisfy
a vesting condition (other than a market condition).
(d) The IFRS demands for an entity to measure the fair value of the equity instruments
granted to be based on market prices, after taking into account the terms and conditions
upon which those equity instruments were granted. If the entity cannot estimate the
market price then a valuation technique to estimate the fair value can be used on the
measurement date in an arm’s length transaction between knowledgeable, willing parties
(Singhal and Tulshan, 2009).
In case of cash-settled share-based payment transactions, a company is required to compute
the goods or services received and the liability incurred at the fair value of the liability. Until
the liability is settled, it is essential for the entity to re-estimate the fair value of the liability at
each reporting date and at settlement date, with a few changes in value recognized in profit or
loss for the period (Catty, 2010). In case of share-based payment transactions, the entity can
settle the transaction either in cash or by issuing equity instruments against the goods or
services received. The entity is required to account for that transaction as a transaction of
cash-settled share-based payment if, and to the extent that, the business has incurred a
liability to settle in cash or other assets, or in case of equity-settled share-based payment
transaction no such liability has been incurred. For an entity, it is required to display the
effect of share-based payment transactions in the financial statements of the company
(Wiecek and Young, 2010).
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1.6.3 IFRS 3 - Business combinations
The major objective of this IFRS is to specify all requirements for an entity when it
undertakes a business. Business combination means combining two separate entities in to a
single economic entity. As a result of this, an enterprise obtains the control over the net assets
or operations of other enterprises. The results of this combination can be in a form of single
legal entity or two separate legal entities. If an entity is obtaining the control of one or more
other entities which are not involved in business, then combination of those entities is not a
business combination (Singhal and Tulshan, 2009). This IFRS requires an entity that all
business combinations should be within scope and accounted for by applying the purchase
method only. It is also required for an entity to measure the cost of a business combination at
fair value at the date of exchange of assets given, as well as liabilities incurred or assumed
and equity instruments issued by the acquirer. In addition to this, the whole cost is directly
associated to the combination. It is required for an entity to recognize and measure the value
of goodwill generated due to business combination (Zube, 2011). The value of goodwill will
be measured as the difference between (a) and (b) mentioned below:
(a) Aggregate the fair value of the consideration transferred at the acquisition date, the
amount of a non controlling interest and at the acquiring date, fair value of the acquirer’s
previously held equity interest in the acquire and
(b) The net of the acquisition of the acquisition-date amounts of the acquired assets and the
liabilities
If the difference between above (a) and (b) is negative, the resulting gain will be treated in
profit and loss account as a bargain purchase. If a business combination happens in stages by
successive share purchases then each transaction shall be considered separately by the
acquirer, by the cost of the transaction and fair value information at the date of exchange
transaction respectively, to determine the amount of goodwill allied with respective
transaction (Singhal and Tulshan, 2009).
1.6.4 IFRS 4 - Insurance contracts
An insurance contract is that where one party (the insurer) accepts the insurance risk of
another party (the policy holder) by agreeing to reimburse the amount of policy to the policy
holder if any specified uncertain future events occur and adversely affect the policy holder.
The primary objective of this IFRS for an entity is to determine the financial reporting for the
issued insurance contracts (described in this IFRS as an insurer) until the Board completes the
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second phase of its project on insurance contracts. As per this IFRS some improvements are
required in accounting for insurance contracts by insurers and some amendments are required
in disclosure that explains the amount in an insurer’s financial statements arising from
insurance contracts and helps users of those financial statements understand the amount,
uncertainty and timing of potential cash flows from insurance contracts (Mirza and Holt,
2011).
In particular, the IFRS applies to all types of insurance contracts that an entity issues and to
reinsurance contracts which the entity holds, except for those specified contracts which are
covered by other IFRSs. Financial assets and liabilities of an entity will not be covered under
this IFRS as all these will come under IAS 39 Financial Instruments: Recognition and
Measurement. The IFRS does not apply for product warranties which are directly issued by a
manufacturer, dealers and retailers. Financial guarantee contracts and the direct insurance
contracts in which reporting entity is the policy holder does not come under the scope of this
IFRS 4. The IFRS compels an entity to conduct a test for the adequacy of recognized
insurance liabilities and impairment test for reinsurance assets (Singhal and Tulshan, 2009).
The IFRS permits an insurer to amend its accounting policies related to insurance contracts
only and only then the changes make the financial statements more reliable and relevant for
users to take correct decisions. For an entity, it is required to explain the amounts in financial
statements arising from insurance contracts and provide the information in disclosure which
helps in evaluating the nature and extent of risk from the particular insurance contracts
(Singhal and Tulshan, 2009).
1.6.5 IFRS 5 - Non-current assets held for sale and discontinued operations
The main purpose of this IFRS is to measure the accounting for the assets held for sale, and
the preparation and disclosure of discontinued operations in the financial statements of an
entity. Particularly, the IFRS requires those assets which can be categorized as held for sale
to be measured at the lower degree of carrying amount and fair value less costs to sell, and
the amount of depreciation on such assets to cease. It is required for an entity to present
separately these types of assets on the face of balance sheet and the results of discontinued
operations to be presented separately in the income statement (Walton, 2011).
An entity shall consider those assets as a non-current asset (or disposal group) as held for sale
if its carrying amount will be recovered through only a sale transaction rather than through
continuous use. In this case, the asset (or disposal group) must be offered for instant sale in
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its present condition only on the terms that are usual and customary for sale of such assets (or
disposal groups) and its sale must be highly probable (Singhal and Tulshan, 2009).
For the highly probable sale, there should be a plan to sell these assets and locate the desired
customers and plan must have been initiated by the management. Further, these should be
properly marketed for sale at a price that is reasonable in relation to its current fair value. The
IFRS does not apply to assets raise from employee benefits, deferred tax assets and all the
financial assets within the scope of IAS 39, non-current assets accounted for in accordance
with fair value model in IAS 40, non-current assets measured at fair value less estimated
point of sale costs as per IAS 41 and contractual right under insurance contracts. If an asset is
abandoned then it cannot be classified as held for sale of a non-current asset (or disposal
group) because its carrying amount will be recovered principally through its continuous use
(Krik, 2009).
1.6.6 IFRS 6 - Explorations for and evaluation of mineral resources
The primary objective of this IFRS is to specify the effects of exploration for and evaluation
of mineral resources in the financial reporting of an entity. Basically, exploration and
evaluation expenditures are those which are incurred by an entity associated with the
exploration for and evaluation of mineral resources before the technical feasibility and
commercial viability of extracting a mineral resource are demonstrable. In particular,
exploration and evaluation assets are exploration and evaluation expenditures recognized as
assets according to the entity’s accounting policy. This IFRS state that initially an entity
should measure these assets on cost and subsequently measurement can be at cost or revalued
amount. The IFRS demands for an entity to perform an impairment test when there are
indications that the carrying amount of exploration and evaluation assets exceeds recoverable
amount (Singhal and Tulshan, 2009).
For the purpose of assessing impairment on such assets, an entity shall establish an
accounting policy for distributing exploration and evaluation assets to cash-generating units
or groups of cash-generating units. It is necessary for an entity that each cash-generating unit
or group of units on which an exploration and evaluation asset is allocated shall not be larger
than an operating segment determined in accordance with IFRS 8 Operating Segments. An
entity shall reveal that information and explain the amounts recognized in its financial
statements aroused from the exploration for and evaluation of mineral resources (Bragg,
2011).
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1.6.7 IFRS 7 - Financial instruments: disclosures
The main purpose of this IFRS is to compel entities to prescribe disclosures that enable
financial statements users to measure the significance of financial instruments for the entity’s
financial position and performance; the nature and extent of their risk and how the entity
manage these risks. This IFRS applies to all type of entities, either that have few financial
instruments (eg a manufacturer whose financial instruments are only accounts receivable and
accounts payable) or those that have many financial instruments (eg a financial institution
whose most of the assets and liabilities are financial instruments) (Ankarath et al. 2010). This
IFRS does not apply to those financial instruments which are associated with insurance
contracts and financial instruments, contracts and obligations under share based payment
transactions. An entity can group its financial instruments in different classes that are
appropriate to the nature of the information disclosed and that take into account the
characteristics of those financial instruments (Mcewen, 2009).
An entity shall disclose all information about financial assets and financial liabilities in
accordance with categorization and specially discloses the information when fair value option
is used. The IFRS insist for an entity to disclose hedge accounting and the fair values of each
class of financial assets and financial liabilities. An entity should disclose the qualitative
disclosure relating to each class of risk such as credit risk, liquidity risk and market risk
including sensitivity risk (Singhal and Tulshan, 2009).
1.6.8 IFRS 8 - Operating segments
The primary objective of this IFRS is to disclose such information that enables the users of
financial statements to evaluate the nature and financial effects of the business activities in
which it is engaged and the economic environments in which it operates. This IFRS applies to
the separate or individual financial statements of an entity and to the consolidated financial
statements of a group with a parent whose debt or equity instruments are traded in a public
market. If the parent company presents both separate and consolidated financial statement in
a single financial report then segment information should be presented only on the basis of
consolidated financial statements. The IFRS specifies how an entity should report
information about its operating segments in annual financial statements and, as a
consequential modification to IAS 34 (Interim Financial Reporting), the IAS 34 requires an
entity to report the selected information about its operating segments in interim financial
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reports. It also finds out the requirements for related disclosures about products and services,
geographical areas and major customers (Walton, 2011).
The IFRS compels an entity to report financial and vivid information about its operating
segments. Operating segments are components of an entity that engage in business activities
from which an entity may earn revenues as well as expenditures. Particularly, the operating
results of the operating segments are reviewed by the chief operating decision maker for
making decision regarding allocation of resources and assessing the performance of these
segments. The IFRS requires an entity to report the profit or loss, assets and liabilities of a
operating segment to the users of financial statements. The IFRS also insist an entity to report
the general information about how the entity identified its operating segments and the types
of product and services from which each operating segment derives its revenues. For an
entity, it is necessary to present the information about transactions with major customers
(Singhal and Tulshan, 2009).
1.6.9 IFRS 9 - Financial instruments
This IFRS is replacement of IAS 39 and its major objective is to set some principles for the
financial reporting of financial assets and financial liabilities of an entity’s financial
statements and providing useful information to the users of these financial statements so that
they can take rational decisions. This IFRS prescribes general guidelines such as how an
entity should classify and determine the financial assets and financial liabilities. The IFRS
describes three phases for reporting the value of financial assets and financial liabilities such
as classification and measurement of these assets and liabilities, impairment methodology and
the last phase is hedge accounting (Zube, 2011). When an entity becomes party to the
contractual provisions of the instruments then it is required for the entity to recognize and
measure the financial assets or financial liabilities in its statement of financial position. An
entity shall determine the value of these financial assets or financial liabilities at fair value
plus or minus. But if the fair value of these financial assets or liabilities is not calculated then
the transactional cost which is directly associated during acquisition of these assets or
liabilities shall be considered by the entity (Mirza and Holt 2011).
Financial assets shall be classified on the basis of entity’s business model for managing the
group of financial assets and the contractual cash flow characteristics of the financial asset.
An entity shall measure these assets at amortized cost if and only if when the assets is held in
accordance with business model whose objective is to hold assets in order to collect
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contractual cash flows. It also requires that the contractual terms of the financial asset give
rise on specified dates to cash flows that are sole payments of principal and interest on the
principal amount outstanding. The IFRS states that a financial asset shall be determined by
an entity at fair value unless it is measured at amortized cost. Whenever an entity changes its
business model for managing financial assets then it is required for the entity to reclassify all
affected financial assets (Bragg, 2010).
An entity shall classify and measure all financial liabilities at amortized cost using the
effective interest method except for those financial liabilities which are measured at fair value
through profit or loss. An entity shall measure its financial liabilities at fair value through
profit and loss if that financial liability is held for trading and the financial liability is a
derivative liability etc. The financial liabilities which are measured through FVTPL (Fair
value through profit & loss) should be presented in the statement of comprehensive income
and profit or loss. The amount of change in the fair value that is directly attributable to
change in credit risk should be presented in other comprehensive income statements and the
remaining amount of change in fair value should be shown in profit or loss (Mcewen, 2009).
1.6.10 IFRS 10 - Consolidated financial statements
The main purpose of this IFRS is to disclose the principle for the preparation and presentation
of consolidated financial statements when an entity controls one or more other entities. The
IFRS insist an entity (the parent) to control one or more other entities (subsidiaries) to
disclose consolidated financial statements. The IFRS describes how to apply the principle of
control to identify the parent and subsidiary company. It also specifies the accounting
requirement for the preparation and presentation of consolidated financial statements. In
particular, consolidated financial statements are those in which the assets, liabilities, equity,
income, expenses and cash flows of the parent and its subsidiaries are presented as a single
economic entity (Epstein and Jermakawiez, 2008). The IFRS requires a parent entity to
present consolidated financial statements but some exemption is available to few entities. An
entity controls other entity when it has rights, to variable returns from its involvement in the
entity and has the power to affect those returns in the investee entity. The IFRS reveals
various requirements regarding how to apply the control principle in some circumstances
such as when voting rights or similar rights give an investor powers, including those
circumstances where the investor seizes less than a majority of voting rights and in
circumstances involving potential voting rights and when the investor has control over
specified assets of an investee company (Catty, 2010).
17
While preparing the consolidated financial statements, an entity must use uniform accounting
principles and policies for reporting like transactions and other events in similar
circumstances. Intra group balances and transactions must be eliminated. An entity must
disclose the non-controlling interests in subsidiaries while preparing consolidated financial
statement. A parent entity must disclose the change in ownership interest in a subsidiary that
does not result in the parent losing control. But if a parent entity loses control of a subsidiary
then it should derecognize the assets and liabilities of the former subsidiary and present in the
consolidated financial statement (Krik, 2009). When control is lost by parent company then it
should be recognized as any investment retained in the former subsidiary at its fair value and
for any amounts owed by or to the former subsidiary in accordance with relevant IFRS. That
fair value shall be regarded as the fair value on initial recognition of a financial asset in
accordance with IFRS 9 or, when suitable, the cost related to initial recognition of an
investment in an associate or joint venture. A business should recognize the gain or loss
related to the loss of control attributable to the former controlling interest. The disclosure
requirements to a parent entity for interests in subsidiaries are specified in IFRS 12 disclosure
of interests in other entities (Catty, 2010).
1.6.11 IFRS 11 - Joint arrangements
The primary objective of this IFRS is to present the principles of financial reporting by
entities that have an interest in joint arrangements that are controlled jointly. The IFRS
demands an entity to disclose the type of joint arrangement in which it is involved by
assessing its rights and obligations arising from the arrangement. The IFRS is to be applied to
all entities which are the part of joint arrangement. A joint arrangement is that in which two
or more parties have joint control. The IFRS states joint control as the contractual agreement
by two or more parties for sharing the control of an arrangement, which exists only and only
when decisions about the relevant activities (i.e. activities that significantly affect the returns
of the arrangement) are also required with the common consent of the parties sharing the
control (Zube, 2011). The IFRS categorizes joint arrangements into two types- joint
operations and joint ventures. A joint operation is that whereby the parties of joint
arrangement (i.e. joint operators) have rights over the assets and liabilities, relating to the
arrangement. A joint venture is that whereby the parties of joint control of the arrangement
(i.e. joint venture) have rights to the net assets of the arrangement. The type of joint
arrangement of an entity is determined by considering its rights and obligations. A company
assesses its obligations and rights in accordance with the contractual terms agreed by the
18
parties to the arrangement and, when relevant, to the other facts and circumstances (Epstein
and Jermakawiez, 2008).
The IFRS requires a joint operator to identify and determine the assets and liabilities (and
recognize the related revenues and expenses) related to its interest in the arrangement in
accordance with relevant IFRS is applicable to the particular liabilities, assets, expenses and
revenues. The IFRS requires a joint venturer to identify and measure an investment by using
the equity method as per rules and principles disclosed under IAS 28 Investments in
Associates and Joint Ventures, unless the business is exempted from pertaining the equity
method as mentioned in that standard. The disclosure requirements for parties of a joint
arrangement are mentioned in the IFRS 12 disclosure of interests in other entities (Bragg,
2010).
1.6.12 IFRS 12 - Disclosure of interests in other entities
The major objective of this IFRS is to compel an entity to present all information that enables
users of its financial statements to evaluate the nature of, and risks related with, its interests in
other entities; and the effect of those interests on its financial statements. The IFRS applies to
only those entities who have an interest in a subsidiary, a joint arrangement, an associate or
an unconsolidated structured entity (Mcewen, 2009). The IFRS presents rules and principles
for disclosure requirement which an entity must keep in mind while disclosing their financial
statements to its users so that they can make a judgment and assumptions of its interest in
another entity or arrangement (ie control, joint control or significant influence), and in
determining the type of joint arrangement in which it has an interest; and the interest that
non-controlling interests have in the group activities and cash flows; and to determine the
nature and extent of significant restrictions on its ability to access or use assets, and settle
liabilities, of the group etc (Mirza and Holt 2011).
The IFRS prescribes minimum disclosures that an entity must keep in mind while presenting
financial statements to its users. An entity can disclose additional information in its financial
statements if the minimum disclosures required by the IFRS are not sufficient to meet the
disclosure objective. The IFRS requires an entity to provide the detailed information to
satisfy the disclosure objective and how much emphasis should be given on each of the
requirements in the IFRS. An entity must follow the principle of relevance while presenting
financial statements so that useful information may not be obscured by either the inclusion of
19
a large amount of detailed information or the aggregation of items that have different
characteristics (Krik, 2009).
1.6.13 IFRS 13 - Fair value measurement
The primary objective of this IFRS is to define fair value, determine a framework for
measuring fair value and required disclosure for measuring the fair value. The measurement
and disclosure requirements under this IFRS do not apply on the share-based payment
transactions which comes under the scope of IFRS 2 Share-based Payment leasing
transactions which come under the scope of IAS 17 Leases and measurements which seems
to be fair value but are not fair value, such as the value of net realizable in IAS 2 Inventories
or value use in IAS 36 Impairment of Assets. The disclosures required under this IFRS are
not required for the plan assets which are measured at fair value as per IAS 19 Employee
Benefits retirement benefit plan investments measured at fair value as per IAS 26 Accounting
and Reporting by Retirement Benefit Plans and for all those assets for which recoverable
amount is fair value less costs of disposal as per IAS 36 (Catty, 2010). IFRS 13 states that fair
value is that price which would be received by sale of an asset or settle a liability in an
orderly transaction between market participants at the measurement date (ie an exit price). In
particular, fair value is that price based on the market measurement and not an entity-specific
measurement (Krik, 2009).
The IFRS establishes a fair value hierarchy to increase consistency and comparability in
calculating the fair value and related disclosures. As per fair value hierarchy, the highest
priority is given to the quoted prices (unadjusted) in active markets for identical assets or
liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly. An entity shall discloses all the
information to the users of the financial statements such as the assets and liabilities measured
at fair value on a recurring or non-recurring basis and the valuation techniques which are
used to measure the fair value. An entity shall disclose the effect of the measurements on
profit or loss or other comprehensive income for the accounting period (Mackenzie et al.,
2013).
1.7 Need of Convergence with IFRS
Convergence with IFRS means to design and maintain national accounting standards in such
a way that they are in harmony with International Accounting Standards. The converged
20
standards would enable Indian corporate sector to be fully IFRS compliant and give an
"unreserved and explicit statement of compliance with IFRS" in their financial statements.
Due to this convergence, India would be a part of that group who has already adopted IFRS.
Convergence does not mean adoption. There is a difference in adoption and convergence
process. Adoption means using IFRS word by word but convergence means modifying own
country’s existing accounting standards in such a way that comply with these IFRS. In India
we have converged our existing Indian Accounting Standards with IFRS and are not adopting
IFRS fully.
Every country has its national accounting standards and has also an International Accounting
Standards of reporting. Therefore, a big question arises as to why should we need IFRS and if
it is required, why should we converge our national accounting standards with IFRS. This
globalization process prompts the business world to make a single accepted accounting
standard so that they can compare with each other. Now day, a business has to adopt different
accounting standards of different countries to present their financial statement for the users of
financial statement. While presenting the financial statements, they may face complexity and
inefficiency. Therefore, the business world call for a single general accepted accounting
standard (IFRS) to remove these problems. Due to this, IFRS comes in the reporting world.
European countries such as Australia, Russia and New Zealand etc. have already adopted
IFRS for listed companies for presenting their financial statements. Canada has decided to
converge its accounting standards with IFRS from the year 2011 (Indapurkar et al., 2009).
Every nation wants to grow and if we want to grow then it is required to follow those
rules/principles which are followed by developed countries. If we do not follow IFRS, then
Indian companies will be isolated from this international platform. Therefore, to sustain and
maintain their position in the global market, we should also converge our local accounting
standards with IFRS.
1.8 International Financial Reporting Interpretations Committee (IFRIC)
Standing Interpretation Committee (SIC) is replaced by IFRIC in March, 2002. The IFRIC
has developed the interpretations of all IASs and IFRSs. The main purpose behind developing
this IFRIC is to interpret all the applications of each IASs and IFRSs and to provide timely
suggestions to IASB. Financial statements cannot comply with IFRS unless it is applied all
applications and interpretation of applicable standards (Singhal and Tulshan, 2009). The list
of IFRIC is here:
21
1. IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities
2. IFRIC 2 Members' Shares in Co-operative Entities and Similar Instruments
3. IFRIC 3 Emission Rights Withdrawn June 2005
4. IFRIC 4 Determining Whether an Arrangement Contains a Lease
5. IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and
Environmental Rehabilitation Funds
6. IFRIC 6 Liabilities Arising from Participating in a Specific Market - Waste Electrical and
Electronic Equipment
7. IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in
Hyperinflationary Economies
8. IFRIC 8 Scope of IFRS 2 Withdrawn effective 1 January 2010
9. IFRIC 9 Reassessment of Embedded Derivatives
10. IFRIC 10 Interim Financial Reporting and Impairment
11. IFRIC 11 IFRS 2: Group and Treasury Share Transactions Withdrawn effective 1
January 2010
12. IFRIC 12 Service Concession Arrangements
13. IFRIC 13 Customer Loyalty Programmes
14. IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction
15. IFRIC 15 Agreements for the Construction of Real Estate
16. IFRIC 16 Hedges of a Net Investment in a Foreign Operation
17. IFRIC 17 Distributions of Non-cash Assets to Owners
18. IFRIC 18 Transfers of Assets from Customers
19. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments
1.9 India and IFRS
At present, the ASB of the ICAI formulates IFRS based Accounting Standards. Hence, the
Accounting Standards issued by the ICAI depart from the corresponding IFRS in order to
22
ensure consistency with the legal, regulatory and economic environment of India. At a
meeting held. The Council of ICAI in its meeting held in May 2006 viewed that full IFRS
may be adopted at a future date, at least for listed and large entities. The Accounting
Standards Board (ASB) in its meeting held in August 2006, endorsed the Council’s view that
there would be several advantages of adopting IFRS. Keeping in view the degree of
difference between IFRS and Indian Accounting Standards, as well as the fact that
convergence with IFRS would be an important policy decision, the ASB formed 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 for achieving convergence with IFRS with a
view to make India IFRS compliant (ICAI, 2009).
It was decided that IFRS would be adopted by Indian entities from 1st April 2011. For the
first IFRS compliant financial statements, it is necessary that the comparative financial
statements should also comply with IFRS. As a result, impacted Indian entities required to
start preparing IFRS compliant accounts from 1st April 2010 and preferably much earlier.
With an objective to ensure a smooth convergence with IFRS, the ICAI took up the matter of
convergence with IFRS with national advisory committee on accounting standards (NACAS).
The NACAS was established by the Government of India, Ministry of Corporate Affairs and
various regulators including IRDA, SEBI and RBI (UNCTAD, 2006). ICAI formulated a
work-plan for the effective implementation IFRS from 1 April 2011. Further, ICAI conducted
various IFRS training programs for its members and others concerned parties to train them to
implement IFRS. But due to some impediments, IFRS did not apply in India from 1st April
2011.
1.10 Key Differences between Indian GAAP and IFRS
Even though Indian GAAP is inspired with IFRS, there are significant differences between
them especially in areas of business combinations, group accounts, fixed asset accounting,
presentation of financial statements, accounting for foreign exchange and financial
instruments, to name a few; Indian GAAP is still a long way behind IFRS. A brief of the
fundamental variation among the two is enlisted hereunder:
(i) Presentation and disclosure of financial statements - IFRS requires five
statements such as statement of financial position, a statement of comprehensive
Income/profit or loss account, statement of change in Equity, cash flow statement (SOCIE)
and notes including summary of accounting policies and explanatory notes. But as per
23
IGAAP, no separate standard for disclosure is required. For companies, format and disclosure
requirements are set out under Schedule VI of the Companies Act, 1956. Similarly, IRDA
and SEBI set the format and disclosure requirements for banking and insurance entities.
IAS 1 requires disclosure of critical judgments made by management in applying accounting
policies and key sources of estimation uncertainty that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within the next financial
year. IAS 1 also requires the disclosure of information that enables the users of its financial
statements to evaluate the objectives, policies and processes of the companies for managing
the capital but there is no such requirement under Indian GAAP. IAS 1 prohibits any items to
be disclosed as extra-ordinary items in the financial reporting but AS 5 specifically requires
the disclosure of certain items as extra-ordinary items under IGAAP (PWC, 2006).
(ii) True and fair presentation of financial statements – True and fair
presentation requires the faithful representation of the effect of the transactions in accordance
with the criteria set out in the framework of assets, liabilities, income and expenses. In
extremely rare circumstances if management thinks that compliance with a particular
standard is so misleading then they can leave this standard and should disclose all the reasons
for doing this in the notes. Under IGAAP, true and fair override is not permitted. However,
in terms of hierarchy, local regulations are superior to accounting standards. Accounting
standards by their very nature cannot and do not override the local regulations which govern
the preparation and presentation of financial statements in the country. Departure from
accounting standards and compliances are prohibited by the Company Act 1956, unless it is
permitted under other framework of local regulations. However, ICAI requires the disclosure
of such departure to be made in the financial statements (Deloitte, 2012).
(iii) Presentation - IAS 1 provides guideline and does not prescribe a particular format.
But as per AS 1 (Disclosure of Accounting Policies) does not define any standard
requirements for disclosure of financial statements. As per IFRS, certain minimum items are
to be presented on face of Balance Sheet such as presentation of current/non-current assets
and liabilities. A liquidity presentation provides more relevant and reliable information but as
per IGAAP, schedule VI of the Companies Act 1956 defines the format of balance sheet and
its related statements which are different from the IAS 1 (WIRC, Reference Manual,
2011-12).
24
(iv) Inventory valuation technique – IAS 2 specifically deals with the costs of
inventories of an enterprise, providing services but inventories arising in the ordinary course
of business of service providers are excluded from the preview of AS 2. LIFO method is
allowed in determining cost under IAS-2 but it is prohibited under AS 2 (Deloitte, 2012).
(v) Cash flow statements – Under IFRS, bank overdrafts which are repayable on
demand is to be treated as component of cash/cash equivalents but there is no stipulation in
AS 3 for classification of bank overdrafts. As per IFRS, disclosure of dividend and interest
paid can be classified under operating activities or financial activities. But under IGAAP,
disclosure of dividend and interest paid is classified under financing
activity (Standard Chartered, 2012).
(vi) Events occurred after balance sheet date - In IFRS, it is not required to adjust
financial statements if an event occurred after balance sheet date but under IGAAP, events
occurred after the Balance Sheet date is to be adjusted (Study Café. In, 2013).
(vii) Proposed dividends - IAS 10 provides that proposed dividend should not be shown
as a liability when proposed or declared after the balance sheet date but as per IGAAP, the
companies are required to make provision for proposed dividend, even-though the same is
declared after the balance sheet date (PWC, 2006).
(viii) Prior period items - Under IGAAP, we cover only income and expenses in the
definition of prior period items. The concept of extra ordinary items does not exist under
IFRS as all items are considered as ordinary items. A separate disclosure of extra ordinary
items is required under IGAAP but it is not required under IFRS (Standard Chartered, 2012).
(ix) Fixed assets – Under IFRS, an item of property, plant and equipment (PPE) should be
documented as the asset when it is probable that the future economic benefits associated with
the asset will flow to the enterprise and cost can be measured reliably. On the other hand,
definition of the term fixed asset is less elaborate in AS 10. Under IFRS, subsequent costs are
incurred for replacement of part of fixed asset has to be capitalized but IGAAP states that
these expenses should charged off in profit and loss account, if future benefits from the
expenses does not increase previously assessed standard performance (PWC, 2006).
(x) Depreciation - IAS 16 Property, Plant and Equipments, allows management to charge
depreciation based on useful life of the asset but Schedule XIV of the Companies Act
prescribes minimum rates of depreciation to be charged under IGAAP. Change in the method
25
of depreciation is treated as change in accounting estimate under IAS 16 but AS 6 considers
change in method of depreciation as change in accounting policy (Standard Chartered, 2012).
(xi) Revenue recognition - In case of revenue from rendering of services, IAS 18
permits only percentage of completion method but AS 9 allows the completed service
contract method or proportionate completion method (Deloitte, 2012).
(xii) Accounting for amalgamation and business combinations - IFRS 3 allows
only purchase method for accounting of amalgamation and business combination. Option of
pooling method given under IAS 22 has been withdrawn but AS 14 allows both pooling of
interest method and purchase method. IFRS 3 allows valuation of assets and liabilities at Fair
Value but AS 14 allows valuation at carrying value. Under IFRS 3, Goodwill is allowed to be
tested for impairment and amortization of goodwill is prohibited but AS 14 requires
amortization of goodwill. IFRS 3 recognizes the negative goodwill in income statement but
AS 14 requires negative goodwill to be credited to capital reserve (WIRC, Reference Manual,
2011-12).
(xiii) Employee benefits - As per IAS 19 actuarial gains and losses may be recognized
immediately under profit or loss, in other comprehensive income. And the deferred up to a
maximum with any excess of 10% of the greater of the defined benefit obligation or the fair
value of the plan assets at the end of the previous financial period being amortized over the
expected remaining working lives of the active employee. As per IGAAP actuarial gains and
losses are considered under the statement of profit and loss account. The discount rate used to
discount post employment benefit obligation should be determined by reference to market
yield of high quality corporate bonds, or, if there is no sufficient market in such bonds, on the
basis of market yields of government bonds under IFRS. But IGAAP allowed the use of only
market yields on government bonds. As per IFRS, amortization in twenty years, being
rebuttable presumption but under IGAAP, amortization in ten years, being rebuttable
presumption (PWC, 2006).
(xiv) Segment reporting - Under IFRS, the reportable segments of the previous year are
reported in the current year if the management considers that segment to be of continuing
significance. As per IGAAP, any segment that was a reportable segment in the previous year
because of the 10% criteria it would continue to be recognized as reportable segment even in
current year. If there is any change in identification of segments IFRS requires restatement of
prior period segment information. If not practicable, it requires the disclosure of data for both
26
the old and new bases of segmentation. But, AS requires only disclosure of the nature
of the change and the financial effect of the change if reasonably determinable (Deloitte,
2012).
(xv) Related party - The definition of related party includes post employment benefit
plans (e.g. gratuity fund, pension fund) of the enterprise or of any other entity, which is a
related party of the enterprise. Under IGAAP, parties are considered to be related if at any
time during the reporting period one party has the ability to control the other party, or
exercise significant influence over the other party in making financial and or operating
decisions and non executive directors are not included as key managerial
personnel (WIRC, Reference Manual, 2011-12).
(xvi) Lease - Under IFRS, land and building are considered separately. The land element is
normally an operating lease unless title passes to the lessee at the end of the lease term.
Building element is classified as operating or finance lease by applying the classification
criteria. Presently IGAAP does not deal with lease agreements to use lands. IFRS does not
prohibit upward revision in value of un-guaranteed residual value during the lease term but
IGAAP permits only downward revision (Deloitte, 2012).
(xvii) Earnings per share (EPS) - IAS requires the disclosure of EPS in consolidated
financial statements only. But IGAAP requires both basic and diluted EPS to be disclosed
under both the standalone financial statement and the consolidated financial statements. Basic
and diluted EPS of discontinued operation are additionally required under IFRS but no such
requirement exists under IGAAP. IAS 23 does not require the disclosure of EPS with and
without extraordinary item but AS 20 require EPS/DPS with and without extraordinary item.
IAS 23 also require changes in accounting policy to be given retrospective effect for
computing EPS, which means EPS to be adjusted for prior periods presented but AS 20 does
not prescribe such treatment. IAS 23 also prescribes some treatment regarding put options,
forward purchase contract and share based payment transaction in computing EPS but AS 20
does not prescribe such treatment also (Study Café. In, 2013).
(xviii) Deferred tax treatment - IAS 12 is based on balance sheet approach but AS 22
is based on income statement approach. IAS 12 requires numerical reconciliation between tax
expense and pre tax accounting but AS 12 does not require numerical reconciliation between
tax expense and pre tax accounting profit (WIRC, Reference Manual, 2011-12).
27
(xix) Interim financial reporting - SEBI requires all listed companies to publish their
interim financial results on quarterly basis but IAS 34 does not mandate the period or the
frequency of published interim financial reports (Study Café. In, 2013).
(xx) Impairment of assets – under IFRS, once impairment loss is recognized on
Goodwill, reversal is not permitted and only bottom up approach is suggested. Under IGAAP,
in certain conditions, reversal is permitted and in assessing cash generating units for
impairment, bottom up and top down approaches are recommended for allocation of
goodwill. IAS 36 does not apply to investment property and biological assets but Impairment
would apply to investment property under IGAAP (PWC, 2006).
(xxi) Provisions, contingent liabilities and contingent assets – Under IFRS,
where the time value of money is material, a provision should be discounted to its present
value but it is prohibited under IGAAP. IFRS requires that present obligation under an
onerous contract should be recognized and measured as provision but this requirement has
been omitted under IGAAP (Deloitte, 2012).
1.11 Epilogue
The foregoing discussions and explanations reveal that adoption of IFRS is deemed to help
the investors, professionals, industry and the economy at large. The convergence is also
expected to bring a lot of opportunities for Indian companies to easily access foreign capital
market at lower cost and generate capital formation. The convergence has also thrown up
some challenges for Indian companies as they will have to conduct training programs for
accounting professionals resulting into increased expenditure and bring about major changes
in their financial statements in the light of the adoption of fair value principle. The journey of
this convergence requires a vigilant planning for its successful implementation.
28
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