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By all account –well by most account it’s a done deal. After years of planning, world is heading towards convergence of accounting standard.   

It refers to the goal of establishing  a single set of high quality  accounting standard that will be used internationally , and in particular the effort to reduce differences between the GAAPs  and IFRS.  When the standards are applied rigorously and consistently, capital market participants will have higher quality information and can make better decisions.

IFRS - International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB). These are becoming the global standard for the preparation of public company financial statements.

IASB - IASB is an independent accounting standard-setting body, which consists of 14 members from nine countries and is based in London. This organization took over from the International Accounting Standards Committee in 2001. It is funded by contributions from major accounting firms, private financial institutions and industrial companies, central and development banks, and other international and professional organizations throughout the world.

Why IFRS - IASB follows a thorough and transparent due process in developing IFRSs as high quality, globally accepted accounting standards. These standards are not only robust but tend to gain a wide and ready acceptability among the users of financial statements, promote transparency and provide a suitable standard for accounting practices in general. Financial statements prepared based on international reporting standards also helps the companies to tap the global financial markets with greater ease since the lenders and capital providers can make well informed estimates about the financial health of the company.

Difference between convergence and adoption-

Adoption would mean full-fledged use of IFRS as issued by the IASB by the Indian public companies.

Convergence means that the Indian Accounting Standards (AS) and the International Financial Reporting Standards (IFRS) would, over time, continue working together to develop high quality, compatible accounting standards.

IFRS and the Revised Indian Accounting Standards –

 They are not the same. India wants to converge with IFRS and not adopt IFRS and there are some differences between IFRS and revised AS. For example, the terminologies are different as against the Indian Accounting Standards.

There are some conceptual differences in some standards-

Indian Accounting Standards:

Balance Sheet

Statement of Profit and Loss Account

Approval for the financial statement for issue


Statement of Financial Position

Statement of Comprehensive Income

Authorization of the financial statements for issue

Major differences between existing Indian Standards and IFRS -

The major difference is in fair value accounting. Also, some new concepts and models have been introduced. For example, Acquisition Method in lieu of Purchase Method in business combinations. Also, certain practices have been removed. For example, the LIFO method has been removed in accounting of inventories.

For implementing the Converged AS, there is a need to change other regulatory requirements –

The changes in the regulations relating to SEBI, RBI and IRDA are required to be aligned with IFRS. The Institute of Chartered Accountants of India is liaising with the respective regulators to enable a smooth t    transition.

Benefits of Convergence

Convergence Indian GAAP to IFRS is expected to result in several benefits to   Indian entities. Some of them are-

Better Comparability and Transparency - IFRS will facilitate apple to apple financial comparison of companies regardless where they are based. It may also result in greater transparency about a company's activities to outsiders. As Indian businesses become more global in terms of their operations and investor base, IFRS would enable a comparison of Indian companies with global peers.

Companies that reside in different jurisdictions may be required to prepare a dual set of financial statements for external financial reporting; one for the local statutory financial reporting in the home country and second for the reporting to the parent company (assuming that the parent company follows IFRS). The increase in efforts of finance function introduces complexity in financial reporting and increase cost of finance function. Group wise adoption of IFRS will eliminate the need for such multiple reporting. (Swiss pharmaceutical giant ROCHE group, which operates in more than 100 countries, likely to save more than $100 million)

IFRS eliminates barriers to cross border listings by ensuring that financial statements are more transparent. Even in cases where listing in overseas exchanges is permitted using Indian GAAP, international investors generally ascribe an additional risk premium if the underlying financial information is not prepared in accordance with the international standards. Thus, the adoption of global standards may reduce the risk premium and consequently the cost of capital.

IFRS are accepted as a financial reporting framework for companies seeking admission to almost all of the world's stock exchanges. Currently, several companies that seek to raise capital and list securities in any other Stock Exchange may be required to convert their financial statements to IFRS to meet the regulatory requirements or to meet the expectations of the investment bankers and investors. In such cases unless the company has previously adopted IFRS, it would be required to convert its historical financial statements to IFRS for the purpose of listing, which may result in delays and additional costs relating to dual set of financial statements.

Issues and Challenges in Convergence with International Financial Reporting Standards (IFRS)

Generic challenges-

Certain fundamental requisites such as amendments to the Companies Act, notification of the converged standards, resolution of tax treatment under IFRS, etc are still to be completed. These are critical for the roll out of an accounting regime converged with IFRS. Though MCA issued a press release in February 2011 publishing 35 Indian Accounting Standards converged with IFRS (named as IND AS), the press released dampened the enthusiasm for the convergence process by not specifying the date of implementation. It only stated that the IND AS will be implemented after various issues including tax related issues are resolved with other government departments.

Specific challenges-

1) Skill development

Skill development has to go beyond the financial reporting functions, and would encompass other areas such as credit analysis, treasury management, and the complex hedge accounting rules. Credit analysis skills would facilitate interpreting IFRS converged financial statements of borrowers. Since financial statements are used by various other agencies/stakeholders, they also need to be educated in IFRS to varying degrees to enable them to appreciate financial reporting in a converged environment.

2) Technological changes

Banks have invested significant resources in technology such as core banking solutions, networking, etc. The current Information Technology system in Indian banks is attuned to Indian GAAP. They may now need to substantially modify/dovetail these systems to adapt to an IFRS based environment on account of changes in accounting and presentation requirements. Since the fundamental aspect of classification and measurement of financial instruments under IFRS is at divergence from the existing stipulations, every subsequent stage which follows from classification and measurement will also be different and this warrants significant changes in the IT.Systems.

Economic Environment-

Some IFRS require fair value approach to be followed, for example:

· IAS 39, Financial Instruments: Recognition and Measurement

· IAS 41, Agriculture

The markets of many economies such as India normally do not have adequate depth and breadth for reliable determination of fair values. With a view to provide further guidance on the use of fair value approach, the IASB is developing a document. Till date, no viable solution of objective fair value measures is available.

SME Concerns-

In emerging economies like India, a significant part of the economic activities is carried on by small- and medium-sized entities (SMEs). Such entities face problems in implementing the accounting standards because of:

· Scarcity of resources and expertise with the SMEs to achieve compliance.

· Cost of compliance not commensurate with the expected benefits.

In India, exemptions/ relaxations have been provided to SMEs. These exemptions/ relaxations are primarily related to disclosure requirements, though some exemptions/ relaxations from measurement principles have also been provided,

e.g., AS 28 - Impairment of Assets and AS 15 - Employee Benefits.

Keeping in view the difficulties faced by the SMEs, the IASB is developing an IFRS for SMEs.

Other problems -

Finally nitty-gritty problems that are slowing the process down as well.

For instance – a significant number of foreign languages of the standard must be approved by IASB. 70% of countries that have signed on to use them, but IASB haven’t approved all of those.

Also training worldwide is available in only 80% of countries pledged to using standard says study.

Summing Up-

The capital markets are the joint creation of many different stakeholders – investors, corporate, securities exchanges, lenders, accountants and auditors and market information packagers, among others. Every stakeholder stands to gain from active participation in shaping the successive phases of the convergence process. We must all help ensure that it remains focused on delivering a more effective, market-oriented reporting model built on principle-based standards that can be applied in a cost-effective manner. We can all contribute to this outcome.

Way forward -

The RBI, ICAI on its part has already taken several measures to assess the situation, promote skill development, engage stakeholders and monitor developments. A Working Group to Address Implementation Issues in IFRS has been set up to facilitate a smooth transition to an IFRS converged environment. Six sub-groups have been formed to address the issues arising on classification and measurement of financial assets, financial liabilities and hedge accounting, presentation and disclosure requirements, fair value measurement, impairment, and residuary issues.

Conclusion –

If you can reduce cost of capital worldwide by even a basic few point, that’s an enormous amount of money

According to a survey of 59 countries , 95% companies says that they have adopted international standard , in remaining more than 40% said they are planning to adopt this.

More refined measurements of performance and state of affairs, and Enhanced disclosures leading to greater transparency.

The roles of Indian accounting standards, which are becoming closer to IFRS, have assumed a great significance from the point of view of global financial reporting. The Indian GAAP has conceptual differences with IFRS and our legal and regulatory frameworks need to be amended to adopt IFRS. The bridge to successful IFRS reporting can be crossed only with strenuous efforts of experienced professionals. India’s blue-chip companies have begun to align their accounting standards to the International Financial Reporting Standards (IFRS), two years ahead of the mandatory time for the switchover.


Published by

Mohit Lohia
(CA Final)
Category Accounts   Report

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