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Since the advent of internet, the world has shrunk, distances have lost their importance and information has no more remained the differentiating factor in this global arena. “Globalization”-the BUZZWORD has swept nations within its leap and business at this hour, across the international boundaries has become as easy as it was in the domestic setup.

International Financial Reporting Standards (IFRS) is fast becoming the de facto accounting standard across the world. The adoption of IFRS would result in one set of high-quality, globally accepted Accounting standards that would bring uniformity in reporting and make the world one common market place. The International Accounting Standards Board (IASB) is recognized as global Accounting Standards setter. IFRS formulated by IASB has been adopted by more than 100 countries and rest are in pipeline.

What is IFRS?

IFRS are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries

· These are standards for reporting financial statements applicable to all the companies under its ambit.

· IFRSs are developed and approved by IASB .

· One of the basic features of IFRS is that it is the principle based standard rather than rule based


· There are mainly two methods for the implementation of IFRS viz. Adoption and Convergence.

· The two term though used interchangeably but there is a faint but important difference.

· Adoption- is process of adopting IFRS as issued by IASB, with or without modifications.

Modifications being, generally in the nature of additional disclosures requirement or elimination of alternative treatment. It involves an endorsement of IFRS by legislative or regulatory with minor modifications done by standard setting authority of a country.

· Convergence- is harmonization of national GAAP with IFRS through design and maintenance of accounting standards in a way that financial statements prepared with national accounting standards are in compliance with IFRS.

Following table shows the list of the countries which adopt the IFRS and those countries which have chosen option for convergence.

IFRS Adoption Year IFRS Convergence Year
Australia 2005 China 2007
Israel 2005 Japan 2011
New Zealand 2005 United States 2013

Why convergence is required in India?

The aim has always been to follow the IFRS, to the extent possible, while formulating the Accounting Standards. However, deviations from IFRS have been made due to various unavoidable reasons as mentioned below:

1. To maintain consistency with the Legal and Regulatory Requirements

2. Economic environment

3. Level of preparedness

4. Conceptual differences


Presently Many MNCs are establishing their businesses in various countries with emerging economies and vice versa. Capital markets are becoming integrated worldwide. Many Indian companies are getting listed on overseas stock exchanges. The concern towards the convergence is the fact that IFRS uses fair value as measurement base for valuing most of the items of Financial Statements.

Objectives of IFRS

The main objective of IFRS development is harmonization in financial statements reporting.

Some additional objectives :

1. To create global financial reporting infrastructure.

2. To generate sound business sense among beneficiaries.

3. To generate dimensions of fair presentation of financial statement.

Effect of IFRS

Implementation of IFRS hits many different Law and Statue in India like Companies Act; SEBI Regulations; Banking Laws & Regulations; Insurance Laws & Regulations.

For example How IFRS affects the transaction of Indian Companies, Say Co. A wants to declare dividend the effect of the same under IFRS and Indian GAAP are described below:-

Under IFRS

Dividends to equity instruments holders, when proposed or declared after the balance sheet date, should not be recognised as a liability on the balance sheet date. A company however is required to disclose the amount of Proposed/Declared dividends after the balance sheet date but before the financial statements were authorised for issue.

Indian GAAP

Dividends are reflected in the financial statements of the year to which they relates even if proposed/approved after the year end.


· Effective Comparison of performance with other business

With the acceptance of IFRS by all the nations, the burden on the multinationals in reporting their accounts and profitability will be much less and their accounts will be more comprehensible.

· Increased transparency

Greater transparency in reporting system helps in comparing the performance of the companies outside home country and it will help the investor in judiciously evaluating the entities on foreign lands and taking the decision about their prospective alliances or partners in different countries.

· Universality

Adoption of universal reporting standard will help the users in easily understanding the financial statements and hence make the business decisions.

· Flexibility and Reusability

Repetition of efforts be avoided for companies operating/listed in multiple countries is IFRS adopted hence ensuring greater flexibility and reusability.

· Increase the credibility of Indian companies globally

IFRS will help companies in increasing their creditability as the financial statements will be more comprehensible and transparent and subsequently will help them in attracting foreign investors.

· Ease in partnering with global partners

Foreign investors targeting India or Indian companies seeking foreign alliance will find it easy and comprehensible to understand their financial statements before partnering or forming the alliance.

· Growth of Business

Due to Acceptance of IFRS, the foreign investors be attracted towards Indian Market which will incredibly help in the growth of Indian Business worldwide.

· Inflow of Foreign Capital

In India, tremendous economic growth is a magnet for Foreign investors, which will bring more investment and inflow of foreign currency from overseas market.

· Cost Benefit

Convergence also reduces the costs of preparing the financial statements because of the worldwide acceptance of IFRS by for different countries. Load of preparing financial reporting as per each countries requirement is reduced with the convergence of IFRS


The Indian GAAP is influenced by several standard setters and influenced by Statute, namely Companies Act, Income Tax Act, Banking Regulation Act, Insurance Act etc and directions from regulatory bodies like RBI, SEBI, IRDA. The legal or regulatory requirement will prevail over the IFRS requirement, in case of conflicts. Therefore, pre-conditions for IFRS adoption by India to be effective need amendments in required legislation and clarity on impact of IFRS adoption on Direct and Indirect taxes, especially transactions recorded at fair values.

“ICAI” is actively promoting the IASB's pronouncements in the country with a view to facilitating global harmonization of Accounting Standards and ICAI has pronounced that Indian GAAP will converge into IFRS with effect from April 1, 2011.

The table below set out the applicability of standards to specified class of companies in phase manner:

Phase Specified class of companies Effective Date
I Companies in Nifty 50 & Companies in Sensex 30

Companies having net worth in excess of Rs 1,000 cr.

Companies shares listed on stock exchanges outside India
April 1, 2011
II Companies having net worth in between Rs 500 cr. to Rs. 1,000 cr. April 1, 2013
III All listed companies with net worth less than Rs 500 cr. April 1, 2014

This table has become the history and no implementation can take place as there are many challenges against the same.


Despite several benefits as may be looked out by the different people, there will be several challenges that will be faced on the way of IFRS convergence. Convergence is not just one time technical steps but will impose practical challenges of significant business and regulatory matters like structuring of ESOP, employees training, tax planning, modification of IT system, compliance with debt covenants etc..


· Complex Transition

Transition from GAAP to IFRS is complex as it not only requires changes in the accounting procedures but also in our IT systems. Along with these changes huge costs will be incurred in order to ensure the transition in training people, modifying systems, procedures etc.

· Complexity in Adoption

The researchers feel that the biggest risk in converging Indian GAAP with IFRS is the fact that the accounting entities underestimate the complexity involved in the process. Instead it should be recognized well in advance that teething problems would definitely creep in. Converting to IFRS will increase the complexity with the introduction of concepts such as present value and fair value.

· Reporting System

The disclosure and reporting requirements under IFRS are completely different from the Indian reporting requirements. Companies would have to ensure that the existing business reporting model is amended to suit the reporting requirements of IFRS.

· Risk in adoption

Implementing IFRS has increased financial reporting risk due to technical complexities, manual workarounds and management time taken up with implementation. Another risk involved is that the IFRS do not recognize the adjustments that are prescribed through court schemes and consequently all such items will be recorded through income statement.

· Time

95% of companies in Australia and in the European Union took more than a year to the complete IFRS transition, with 40% taking more than two years. Looking at the Indian scenario, we have already delayed the process from the very beginning. In other countries, regulators released final interpretations two to three years in advance of IFRS deadline and provided step-by-step transition road maps for companies. In India, ICAI took so long to finalize the standard—increasing the confusion around standard interpretation.

· Cost

The IFRS transition is expected to cost Indian firms between Rs. 30 lakh and 1 crore, with an average of 16 internal and three external full-time staff dedicated to the transition. Fifty percent of adopters had to implement entirely new IT systems to accommodate IFRS; only 20% of companies did not implement systems changes. Costs such as auditor fees, systems changes, and reporting costs tend to overrun at the last minute.

· Valuation of Assets

IFRS requires assets to be reported as per the market value instead of historic value as required under GAAP. This may adversely impact the financial statements of a huge number of firms initially and is attracting resistance from a large number of corporate houses.

· Web of Laws

Unlike other countries, the accounting framework in India is subject to a wide number of laws and regulations. With the complete adoption of IFRS, changes need to be incorporated in various regulatory requirements under The Companies Act 1956, Income Tax Act 1961, SEBI, RBI etc

· Inadequate trained people on IFRS

A large pool of people trained on IFRS will be required which is a big challenge for India. Along with the people preparing the financial statements; stakeholders, regulators, auditors, employees, tax authorities, management and people in other decision making bodies need to be trained.

Complexities of the introduction of concepts, such as present value and fair value measurement, recognition and the extent of disclosure required under IFRS. Therefore, to overcome the challenges, a Core Group has been constituted by Indian regulatory to identify inconsistencies between IFRS and as listed below,

Companies Act;

SEBI Regulations;

Banking Laws & Regulations; and

Insurance Laws & Regulations.


The inception of the idea – “Universal financial reporting standard”, more than 100 countries have already adopted it to enjoy the long term benefits derived due to its homogeneity and standardization. Seeing and analyzing the benefits of IFRS, it becomes all the more pertinent for a country like India to adopt it as soon as possible so as to maintain investors’ positive sentiments and also strengthen their faith and credibility in the Indian Market. The adoption might lead to short term investments and initial challenges but the long term benefits are strong enough to justify the initial hassles of implementation and adoptability. A holistic roadmap, with the support of the government, must be chalked out to train all the people from the top management to all the stakeholders involved so as to gain maximum benefits from IFRS. The cost of implementing IFRS should be taken as challenges or opportunities in order to encounter them in the right spirit to ensure smooth convergence with IFRS.


Published by

Samyak Sanghvi
(Article Assistant)
Category Accounts   Report

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