Professional Documents
Culture Documents
Accounts Project IFRS
Accounts Project IFRS
1. Executive Summary 2.
2. Introduction 4.
5. Impact Of IFRS 9.
convergence on Accounting
Practices
9. Bibliography 24.
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Transparent financial information plays a key role in maintaining market confidence, improving
markets’ efficiency by allowing investors to identify risks in a timely manner, contributing to
financial stability and is a pre-requisite in creating premises for sound economic growth. As an
effect of market turbulences resulting from the financial crisis, transparency and comparability of
the financial statements of financial institutions have gained increased importance for market
participants. In this context, ESMA has intensified its reviewing activities, with an increased
focus on the financial statements of financial institutions and together with EBA and ESRB has
undertaken further initiatives to improve the level of confidence in the financial sector by asking
financial institutions to provide better disclosure of financial and risk information in financial
reporting.
Overall ESMA found that disclosures specifically covered by the requirements of IFRS 7 –
Financial Instruments: Disclosures were generally provided and acknowledges the efforts made
by financial institutions to improve the quality of their financial statements. Yet, ESMA
observed a wide variability in the quality of the information provided and identified some cases
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When information was provided outside financial statements (e.g. in a risk report or business
review), in some cases it was unclear whether it was incorporated by reference. In general, users
of financial information would benefit if the information provided in different sections of the
financial report were linked to each other and if information provided across these reports was
consistent or major differences in bases used to provide this information were explained.
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The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be
mandatory in India for financial statements for the periods beginning on or after 1 April 2012.
This will be done by revising existing accounting standards to make them compatible with IFRS.
Reserve Bank of India has stated that the financial statements of banks need to be IFRS-
compliant for periods beginning on or after 1 April 2011.
The ICAI has also stated that IFRS will be applied to companies above INR 1000 crore (INR 10
billion) from April 2011. Phase wise applicability details for different companies in India:
Companies not covered in phase 1 and having a net worth exceeding INR 500 crore (INR 5
billion)
Listed companies not covered in the earlier phases * If the financial year of a company
commences at a date other than 1 April, then it shall prepare its opening balance sheet at the
commencement of immediately following financial year.
On January 22, 2010, the Ministry of Corporate Affairs issued the road map for transition to
IFRS. It is clear that India has deferred transition to IFRS by a year. In the first phase, companies
included in Nifty 50 or BSE Sensex, and companies whose securities are listed on stock
exchanges outside India and all other companies having net worth of INR 1000 crore will
prepare and present financial statements using Indian Accounting Standards converged with
IFRS. According to the press note issued by the government, those companies will convert their
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The press note does not clarify whether the full set of financial statements for the year 2011–12
will be prepared by applying accounting standards convergent with IFRS. The deferment of the
transition may make companies happy, but it will undermine India's position. Presumably, lack
of preparedness of Indian companies has led to the decision to defer the adoption of IFRS for a
year. This is unfortunate that India, which boasts for its IT and accounting skills, could not
prepare itself for the transition to IFRS over last four years. But that might be the ground reality.
Transition in phases Companies, whether listed or not, having a net worth of more than INR 500
crore will convert their opening balance sheet as at April 1, 2013. Listed companies having net
worth of INR 500 crore or less will convert their opening balance sheet as at April 1, 2014. Un-
listed companies having net worth of Rs 500 crore or less will continue to apply existing
accounting standards, which might be modified from time to time. The transition to IFRS in
phases is a smart move. The transition cost for smaller companies will be much lower because
large companies will bear the initial cost of learning and smaller companies will not be required
to reinvent the wheel. However, this will happen only if a significant number of large companies
engage Indian accounting firms to provide them support in their transition to IFRS. If, most large
companies, which will comply with Indian accounting standards convergent with IFRS in the
first phase, choose one of the international firms, Indian accounting firms and smaller companies
will not benefit from the learning in the first phase of the transition to IFRS. It is likely that
international firms will protect their learning to retain their competitive advantage. Therefore, it
is for the benefit of the country that each company makes judicious choice of the accounting firm
as its partner without limiting its choice to international accounting firms. Public sector
companies should take the lead and the Institute of Chartered Accountants of India (ICAI) should
develop a clear strategy to diffuse the learning. Size of companies The government has decided
to measure the size of companies in terms of net worth. This is not the ideal unit to measure the
size of a company. Net worth in the balance sheet is determined by accounting principles and
methods. Therefore, it does not include the value of intangible assets. Moreover, as most assets
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The main objective of this research project is to obtain an understanding of how the IFRS have
brought in a change in the general accounting, presentation and recognization and disclosure
scenarios in the world of accounting and finance, especially with it’s special reference and effect
on the Indian scenario of finance, accounting, presentation and auditing.
Therefore, there arises a need to have an overall understanding of the effect of the previous
Indian accounting standards, issued by the Institute of Chartered Accountants of India (ICAI), on
the accounting, presentation and disclosure scenarios, in the country. Once the relevant standards
are understood and their effects grasped, an attempt can then be made to throw some light on
how those very effects have been modified by the introduction and subsequent substitution of
the IFRS in place of the Indian Accounting Standards.
First, we will understand how the IFRS function, its history and its governing bodies.
Thereafter, we will make an attempt to review the effects of the Indian Standards and the
relevant corresponding IFRS, thereby also understanding the previous and the current effects.
Therefore, in a nutshell, we will understand what IFRS are, and how different do they function
from the Indian AS’, after which we will present our findings and conclusions.
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As part of its convergence strategy, the ICAI has classified IFRS into the following broad
categories :
Category II : IFRS which may require some time to reach a level of technical preparedness by
the industry and professionals, keeping in view the existing economic environment and other
factors (for example, share-based payments).
accounting practices:
Harmonising existing Indian accounting standards with IFRS will have an impact on some
fundamental accounting practices followed in India. A few of these are enumerated below :
Indian GAAP requires financial statements to be prepared on historical cost except for fixed
assets which could be selectively revalued. Use of fair value is presently limited for testing of
impairment of assets, measurement of retirement benefits and 'mark-to-market' accounting for
derivatives. Under IFRS, there is a growing emphasis on fair value.
Considering the overall theme of substance over form, IFRS mandates preparation of
consolidated financial statements to reflect the true picture of the net worth to various
stakeholders. Exceptions for preparation of consolidated financial statements are very limited. In
India, currently consolidated financial statements are mandatory only for listed companies and
that also only for the annual fincmcial statements and not the interim financial statements.
Similarly, Indian accounting continues to be driven by the written contract and the form of the
transaction - as opposed to the substance. Consider, up front fees charged by a telecom service
provider. Under Indian GAAP, several companies recognise such upfront fees as income because
it is contractually non-refundable and is contractually received as fees for the activation process.
Under IFRS, the fee is accounted for in accordance with the substance of the transaction. Under
this approach, the customer pays the upfront activation fee not for any service received by the
customer, but in anticipation of the future services from the telecom company. Thus, despite the
non-refundable nature of the fees, revenue recognition would be deferred over the estimated
period that telecom services will be provided to the customer.
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Indian GAAP requires companies to disclose significant events which are not in the ordinary
course of business as extraordinary items and material items as exceptional to facilitate the
reader to consider the impact of these items on the reported performance. Under IFRS there is no
concept of extraordinary or exceptional since all events/transactions are in the normal course of
business and if an item is material, it can be disclosed separately, but cannot be termed as
'extraordinary' or 'exceptional'.
Under Indian GAAP, changes in accounting policies or rectification of errors (prior period items)
are recognised in the current year's profit and loss account (for errors) and are generally
recognised prospectively (for changes in accounting policies). Under IFRS, the prior period
comparatives are restated in both cases. Indian GAAP does not have the concept of restatement
of comparatives except in case of special-purpose financial statements prepared for public
offering of securities.
Entities in India prepare their general purpose financial statements in Indian rupees. However
under IFRS, an entity measures its assets, liabilities, revenues and expenses in its functional
currency, which is the currency that best reflects the economic substance of the underlying
events and circumstances relevant to the entity i.e.,the currency of the prim<ll1: economic
environment in which the entity operat~: Functional currency of an entity may be different from
the local currency. For example, consider an Indian entity operating in the shipping industry. For
such an entity it is possible that a significant portion of revenues may be derived in foreign
currencies, pricing is determined by global factors, assets are routinely acquired from outside
India and borrowings may be in foreign currencies. All these factors need to be considered to
determine whether the Indian rupee is indeed the functional currency or whether another foreign
currency better reflects the economic environment that most impacts the entity.
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Under Indian GAAP, provision has to be made for proposed dividend, although it may be
declared by the entity and approved by the shareholders after the balance sheet date. Under
IFRS, dividends that are proposed or declared after the balance sheet date are not recognised as
liability at the balance sheet date. Proposed dividend is a non-adjusting event and is recorded as a
liability in the period in which it is declared and approved.
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IFRS 5 Non-current Assets Held for Sale and Discontinued Operations outlines how to account
for non-current assets held for sale (or for distribution to owners). In general terms, assets (or
disposal groups) held for sale are not depreciated, are measured at the lower of carrying amount
and fair value less costs to sell, and are presented separately in the balance sheet. Specific
disclosures are also required for discontinued operations and disposals of non-current assets.
IFRS 5 was issued in March 2004 and applies to annual periods beginning on or after 1 January
2005.
History of IFRS 5
31 March 2004 IFRS 5 Non-current Assets Held for Sale and Discontinued
OperationsClick for Press Release on IFRS 5 (PDF 32k).
22 May 2008 IFRS 5 amended for Annual Improvements to IFRSs 2007 about sale of a
controlling interest in the subsidiary
1 July 2009 Effective date of May and November 2008 amendments to IFRS 5
16 April 2009 IFRS 5 amended for Annual Improvements to IFRSs 2009 about disclosure
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Summary of IFRS 5
Background
IFRS 5 achieves substantial convergence with the requirements of US SFAS 144 Accounting for
the Impairment or Disposal of Long-Lived Assets with respect to the timing of the classification
of operations as discontinued operations and the presentation of such operations. With respect to
long-lived assets that are not being disposed of, the impairment recognition and measurement
standards in SFAS 144 are significantly different from those in IAS 36 Impairment of Assets.
However those differences have not been addressed in the short-term convergence project.
the sale is highly probable, within 12 months of classification as held for sale (subject
to limited exceptions)
the asset is being actively marketed for sale at a sales price reasonable in relation to its
fair value
actions required to complete the plan indicate that it is unlikely that plan will be
significantly changed or withdrawn
The assets need to be disposed of through sale. Therefore, operations that are expected to be
wound down or abandoned would not meet the definition (but may be classified as discontinued
once abandoned). [IFRS 5.13]
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Classification as discontinuing.
A discontinued operation is a component of an entity that either has been disposed of or is
classified as held for sale, and: [IFRS 5.32]
represents either a separate major line of business or a geographical area of operations, and
is part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations, or
is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of
control.
Income statement presentation.
The sum of the post-tax profit or loss of the discontinued operation and the post-tax gain or loss
recognised on the measurement to fair value less cost to sell or fair value adjustments on the
disposal of the assets (or disposal group) should be presented as a single amount on the face of
the statement of comprehensive income. If the entity presents profit or loss in a separate income
statement, a section identified as relating to discontinued operations is presented in that separate
statement. [IFRS 5.33-33A].
Detailed disclosure of revenue, expenses, pre-tax profit or loss and related income taxes is
required either in the notes or in the statement of comprehensive income in a section distinct
from continuing operations. [IFRS 5.33] Such detailed disclosures must cover both the current
and all prior periods presented in the financial statements. [IFRS 5.34]
Overview
IFRS 6 Exploration for and Evaluation of Mineral Resources has the effect of allowing entities
adopting the standard for the first time to use accounting policies for exploration and evaluation
assets that were applied before adopting IFRSs. It also modifies impairment testing of
exploration and evaluation assets by introducing different impairment indicators and allowing
the carrying amount to be tested at an aggregate level (not greater than a segment).
IFRS 6 was issued in December 2004 and applies to annual periods beginning on or after 1
January 2006.
History of IFRS 6
Summary of IFRS 6
Exploration for and evaluation of mineral resources mean the search for mineral resources,
including minerals, oil, natural gas and similar non-regenerative resources after the entity has
obtained legal rights to explore in a specific area, as well as the determination of the technical
feasibility and commercial viability of extracting the mineral resource. [IFRS 6.Appendix A]
Exploration and evaluation expenditures are expenditures incurred in connection with the
exploration and evaluation of mineral resources before the technical feasibility and commercial
viability of extracting a mineral resource is demonstrable. [IFRS 6.Appendix A]
IFRS 6 permits an entity to develop an accounting policy for recognition of exploration and
evaluation expenditures as assets without specifically considering the requirements of paragraphs
11 and 12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. [IFRS
6.9] Thus, an entity adopting IFRS 6 may continue to use the accounting policies applied
immediately before adopting the IFRS. This includes continuing to use recognition and
measurement practices that are part of those accounting policies.
IFRS 6 requires entities recognising exploration and evaluation assets to perform an impairment
test on those assets when facts and circumstances suggest that the carrying amount of the assets
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a. its accounting policies for exploration and evaluation expenditures including the recognition
of exploration and evaluation assets.
b. the amounts of assets, liabilities, income and expense and operating and investing cash flows
arising from the exploration for and evaluation of mineral resources.
An entity shall treat exploration and evaluation assets as a separate class of assets and make the
disclosures required by either IAS 16 or IAS 38 consistent with how the assets are classified.
[IFRS 6.25]
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