This article is intended to make you understand the major impact both in terms of advantages and disadvantages of the adoption of Converged IFRS i.e Indian Accounting standards (Ind AS) on the financial statements and the working of the companies both.
The majority of you are finance professionals. You might have experienced or will experience these questions from the business community that Why IFRS has been adopted or How IFRS is helping Indian Companies or some questions like that.
Instead of keeping this article too technical, I am writing this article in a layman language so that the professionals and students both can easily understand this. So, this is going to be the most simple and predictable article of the day. The points you are going to read will make you realize that you already knew these things but these were scattered in your mind for which I am here to help you.
So, let’s begin.
IFRS: International Financial Reporting Standards
Just like Accounting Standards (AS), IFRS is a set of globally recognized standards that are applied in the preparation and presentation of Financial Statements. These standards are issued by International Accounting Standard Board (IASB).
You might have heard about the term IAS i.e. International Accounting Standard. There are 25 IAS and 16 IFRS till date. Let me clarify that IAS and IFRS are same. IFRS is a new term whereas IAS is old but both are in existence together. For example: “IAS 1: Presentation of Financial Statements”, it is existing as it is but “IAS 11: Construction Contracts” is superseded by IFRS 15.
Ind AS: Indian Accounting Standards
Ind AS is nothing new in terms of basic understanding but yes there is a difference in the applicability of Ind AS as compared to AS.
Ind AS is a converged form of IFRS which has been issued specifically in the context of Indian Companies. Converged form means that IFRS has not been adopted on line by line basis, It has been modified to some context so that it becomes easier for the Indian companies to apply the same. There are 41 Ind AS till date.
It’s been almost 5 years since Ind AS was made applicable. 2015-16 was the year when these standards had been applied voluntarily by few companies and since 2016-17, these standards were made mandatory. The applicability has been done in phases. For eg: In Phase – I, It was applied to Every Company with a Net worth of not less than 500 crores (5 billion) and then it proceeded in other Phases.
Impact of Adoption:
Let’s see the Advantages first:
Serving International Clients: A right professional with the right knowledge is like an army officer with weapons serving the nation. Though there are lots of practicing finance professionals in India, only those professionals who are equipped with the knowledge of IFRS/Ind AS can serve the International clients better in terms of Consultancy, Book Keeping Outsourcing services, etc.
Comparability: Undoubtedly, IFRS can be termed as universal standards as a maximum of developing and developed nations have adopted IFRS which enhances the comparability of Financial Statements at the global level. It helps the competitors across nations to judge the financial positions of each other.
Transparency: It is also related to comparability as the universal standards make the financial statements more transparent. More transparency means easy and reliable comparability.
Quality of Financial Statements: Just observe the flow, I have mentioned comparability and transparency. So, the fulfillment of these objectives will automatically improve the quality of financial statements. This will help the investors, bankers and other stakeholders to put more reliance on the financial statements.
Funds Across the Globe: Better access to and reduction in the cost of capital raised from global capital markets since IFRS are now accepted as a financial reporting framework for companies seeking to raise funds from most capital markets across the globe.
Choices in Choosing Principles: Ind AS are the principle-based standards, therefore it offer choices to the preparers of financial statements to apply the principles of their choice to some extent (where the particular standard permits). For example, PPE (Property, Plant & Equipment) can be valued using either Cost or revaluation model.
This can be a benefit as well as a disadvantage as the adoption of different principles by different companies affects the consistency of the financial statements.
Similarity to AS: Though the implementation of Ind AS was considered as the toughest due to the requirement of updated knowledge and the knowledgeable professionals but the professionals who were having the strong knowledge and understanding of Accounting standards easily grasped the Ind AS due to the lot of similarities in the approaches and the way became easy for them.
Problems Faced By Implementing Ind AS:
Change in Law: The implementation of Ind AS required change in the law to be in tune with these standards. The laws which were governing the financial accounting were automatically become irrelevant immediately after the adoption of Ind AS.
Qualification: When it comes to the qualification part, the first thing strikes to our mind are Chartered Accountants. The Indian Chartered Accountants are considered as one of the most experienced and updated professionals in the context of the financial reporting, taxation, and auditing. The implementation of Ind AS put a challenge amongst the Institute of Chartered Accountants of India to provide or you can say to produce the professionals having thorough knowledge on Ind AS. These things take time. So, it was a lengthy process. A massive change in the syllabus was introduced and the 1st ever exam relevant to Ind AS syllabus was conducted in May 2018 in which only 350 approx. students became the Chartered Accountants. So, one can see the delay in the supply of professionals to the market and too at the slow pace. It impacted the corporates as the biggest challenge in front of them was the lack of required professionals.
Cost: You might have heard “Beggars Have No Choices”. Now, who were the beggars? Obviously the corporates because the implementation has led to the massive demand of the professionals having required knowledge of Ind AS but lack of supply of professionals hiked the professional's fee or the salaries to be paid to the fresher’s too. The companies were more strict in hiring the professionals and were willing to pay more to the deserving candidates. So, in this way, the cost was increased.
The other aspect related to the same is Training Cost. Every big corporate was required to conduct the training programs for the old employees to make them familiar with Ind AS and for the new employees (as usual) to make them familiar with the systems of the entity.
Similarity: We have discussed the same point in advantages. Now, see the other side of the coin too. This view of Similarity disregards significant differences between Indian GAAP and IFRS as well as differences in practical implementation and interpretation of similar standards. Further, certain Indian standards offer accounting policy choices that are not available under IFRS, for example, use of pooling of interests method in accounting for business combinations.
Change: The implementation of Ind AS required the biggest change in the form of change in the format of accounts, accounting policies, and more extensive disclosure requirements. This change put the financial and other challenges related to the knowledge in front of the corporates.
India is a developing country that is headed towards achieving global recognition and the respect. Globalization is playing a major role in that and the financial statements or the financial aspects are the major areas concerning the MNC’s. So, the implementation of Ind AS is helping these companies to become more competent and transparent and helping them to meet the global standards. Further, the advantages of implementation are more than the problems which are not so uncommon whenever any change is welcomed. So, this implementation was a welcoming step which should be appreciated.
For any queries in the above article, the author can be contacted at firstname.lastname@example.org.