by Harsh Shah on Friday 25 March 2011, 8:42 PM | Category: Finance| View: 12228 views

 Accounting is an art of recording transactions in the best possible manner, so as to enable the reader to arrive at judgments or conclusions. It is utmost necessary that there are set guidelines called accounting policies or accounting standards. As the capital markets are expanding globally in nature, more and more investors see the need for a common accounting standard.

International Financial Reporting Standards - IFRS is a "principles based" single set of high quality, understandable and enforceable global accounting standards which are drafted lucidly and are easy to understand and apply. These have been issued by International Accounting Standards Board (IASB) and our government has agreed to converge to them. Conversion to IFRS offers companies a number of benefits. Companies that operate in a global environment and comply with foreign reporting standards can streamline their financial reporting. This will drastically reduce the reporting costs by developing common reporting systems and ensures consistency in statutory reporting. The time and effort involved to adjust the accounts according to the requirement of different countries GAAP will be eliminated. Furthermore, comparison and benchmarking of financial data with international competitors would become easy. Apart from this, adoption of IFRS will make cross border acquisitions and joint venture possible and also provide access to foreign capital.

In line with the global trend, the Institute of Chartered Accountants of India (ICAI) proposed a plan for convergence with IFRS for certain defined entities with effect from April 1, 2011. Convergence to IFRS would mean India would join the league of more than 100 countries, which have converged with IFRS.


Implementation of IFRS in India is a herculean task. The challenges faced during implementation of IFRS are

·         The biggest hurdle implementing IFRS is the lack of training facilities and academic courses on IFRS in India.

·         The whole set of financial statements will be required to undergo a drastic change.

·         It would be a challenge to bring about awareness of IFRS and its impact among the users of financial statements.

·         It is observed that implementation of IFRS may result in a number of inconsistencies with the existing laws which include the Companies Act 1956, SEBI Act, banking & insurance laws and regulations.

·         It is important that the taxation laws be acquainted with IFRS compliant financial statements otherwise it would duplicate administrative work.

·         The use of fair value accounting in IFRS can bring a lot of volatility and subjectivity to the financial statements. It also involves a lot of hard work in arriving at the fair value.

·         Companies have to ensure that the existing business reporting model is amended to suit the reporting requirements of IFRS.


TECHNOLOGY SECTOR: The transition to IFRS will improve comparability of reported business performance of Indian technology companies with global technology companies and will result in greater transparency about company's activities to various stakeholders. The transition will also provide way to cross-border acquisitions, enable partnerships and alliances with foreign entities and lower the integration costs.

BANKING SECTOR: In India, there will be a significant impact on banks especially the loan loss provisioning, financial instruments and derivative accounting. The banking industry will also be affected with an impact on the capital-adequacy ratio. Indian banks, being subject to the RBI's rules-based accounting would require to be converged towards principles-based accounting of IFRS.

REAL ESTATE SECTOR: IFRS will allow investment property to be measured at cost with changes in fair value being recognised in profit or loss for the period. Accounting investment properties at fair values can lead to a great deal of volatility in the balance sheet as well as the income statement. Also, the ongoing construction will be considered as inventory for these companies and revenue will be recognised only once the project construction is complete. This is envisaged to be the biggest problem for real-estate companies on transition to IFRS.

MEDIA & TELECOM SECTOR:  These industries usually have bundled transactions and the impact would be mainly in the area of revenue recognition. It is necessary to apply the recognition criteria to the individual identifiable components of a single transaction in order to reflect the substance of the transaction. The decision to account for a transaction in its entirety or unbundle the product into its individual components will have a significant impact on an operator's financial statements.







Components of Financial


Comprises of

·         Balance sheet

·         Profit and Loss A/c

·         Cash flow statement

·         Notes to Accounts

Comprises of

·         Statement of Financial Position

·         Statement of Comprehensive Income

·         Statement of Cash flow

·         Notes to Accounts

·         Statement of Changes in  Equity

Statement of Cash Flows

Mandatory for listed companies but optional for unlisted companies.

Mandatory for all entities.

Component accounting i.e. accounting of each component of the asset

Recommends component accounting.

Mandates component accounting.

Treatment of Goodwill

Goodwill arising on amalgamation in the nature of purchase is amortised over a period of 5 years.

Goodwill is not amortised but is subject to annual impairment test as intangible assets can have indefinite useful life.

Evaluation of Asset

Evaluation of asset is done at the cost price.

Evaluation is done at the fair value i.e. market value.

Evaluation of Intangible assets

Measured at cost only.

Can be measured at cost or revalued amount.

Reassessment of useful life of assets

Not currently required.

Requires annual reassessment of useful life of assets

Format of Statement of Financial Position or Balance Sheet

According to the format prescribed in Schedule VI of the Companies Act 1956.

No particular format prescribed.

Depreciation rates

Depreciation is based on the higher estimate of useful life of the asset.

Allocated on a systematic basis to each accounting period during the useful life of the asset.

Contingent Asset Disclosure

Contingent assets are disclosed as part of the director's report and are not disclosed in the financial statement.

Contingent assets are disclosed in the financial statements only if the inflow of economic benefit is probable.



To conclude with, it can be said that the benefits derived from convergence to IFRS are enormous; though it has got some challenges. It is imperative for the Indian entities to improve their preparedness for adoption of IFRS and get the conversion process right because any error in such process would undermine the company and consequently it will lose out investor's confidence. The most relevant and pressing need is to build adequate skills and extensive knowledge amongst Indian accounting professionals and investors. The transition to IFRS is likely to be challenging for corporate India but if it is planned and managed successfully, it will enhance the quality and transparency of the financial reporting process and further align corporate India to the global economy and global capital markets. 

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