Is India ready for IFRS?

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BALASUBRAMANYA B N

CCI STUDENT....

44687 Points Joined January 2009

Thus, countries have adapted to IFRS in different ways often embedding local cultures and that is why there are no standard rules; only broad
principles which define the outer boundary of accounting. Countries have adapted to IFRS in different ways, often embedding local cultures and that is why there are no standard rules; only broad principles which define the outer boundary of accounting. IFRS is truly a tornado that is still gaining strength.

After shaking the accounting world, it is causing a major shake-up in the way organisations are managed. Employees are affected directly by IFRS as often their compensation is based on reported earnings which itself has undergone a big change, what with reporting increases or decreases in asset values in the profit & loss account and changed rules of depreciation and amortisation.

Top management has, thus, to work out new targets of earnings depending on the direction of impact caused by the new accounting principles. Earnings will no more be a steady figure that can be easily targeted depending as it is not just on sales and expenses but also changes in asset values and the ability to measure those correctly.

Besides the need for sharpening crucial forecasting skills to set appropriate targets, motivation models for employees have to be re-worked especially for years in which declines in asset values are anticipated. Budgets can no more be made by simply adding 10-15% to the previous budgeted figures.

Each item will require concerted attention and a much better understanding of specific product/service and general market conditions. Is India ready for all this? From the current flurry of activities of organising workshops and special training programmes by both government and non-government entities, it seems that only the first level of preparation is being undertaken.

To be adequately prepared for IFRS, senior management has to also shape up by analysing which management models and strategies will work best for their organisations facing a huge level of turbulence.

An entire roadmap to IFRS adoption within the next twelve months is essential for all organisations in India as the changeover to the new system of accounting has to take place in 2011. The governmental system of grants, subsidies and even anti-dumping is set for a big change dependent as these items are on the way costs and revenues are measured.

Replies (2)

BALASUBRAMANYA B N

CCI STUDENT....

44687 Points Joined January 2009

The International Financial Reporting Standards (IFRS) is a novel way of looking at accounting. Be it the preparation of accounts or the way they
are presented, IFRS challenges the status quo without providing definite answers.

Be it valuation of assets or liabilities or even revenue recognition, there is enough room for professional judgement within the broader arena of rules governing them. IFRS questions valuation of fixed assets on historical cost basis, questions application of uniform rates of depreciation on all components of a fixed asset as also the amortisation of intangible assets such as goodwill or patents.

One of the governing principles of the existing accounting practices was that of objectivity under which actual costs are reported, thereby leaving no scope for judgement. But accountants all along knew that objectivity was being achieved at the cost of relevancy. By not showing the current market values of assets, the investor was not being given relevant information for crucial decisions of investing or raising money from domestic or international markets.

Instead of focusing on popular measures of earnings such as earnings before interest and taxes (EBIT) or earnings before depreciation, interest and taxes, IFRS focuses on Income before Extraordinary Items and Income after Extraordinary Items.

Further, by making off-balance sheet transactions as part of accounts, it brings a whole new meaning to the reported numbers. It defines control of entities not through percentage of holdings but by the decision-making power inherent in the parent company.

Earlier, consolidated accounts of many multinational companies did not include accounts of special entities because shareholding was less than 51% although management control was absolute. IFRS wants to plug these loopholes and usher in much more transparency in reported figures.

IFRS, by forcing a change of thinking, has become the new management mantra. Management defines success as being non-conformist and that is what IFRS focuses on. IFRS is also clear that there are multiple ways of challenging the status quo.