INTRODUCTION

OF
INTERNATIONAL FINANCIAL
REPORTING STANDARDS
(IFRS)
 Today’s Discussion:
1. What is IFRS
2. Purpose of Financial Reporting Standards
3. How are IFRS developed
4. IFRS framework
5. Why IFRS
6. Principle based standards
7. IFRS in India
8. Benefits in Indian Context
9. Opportunities and Challenges
10. The way ahead
WHAT IS IFRS?
 What is IFRS?

• IFRS is a globally recognized set of Standards for the preparation of

financial statements by business entities.

• Those Standards prescribe:

• the items that should be recognized as assets, liabilities, income and
expense
• how to measure those items;
• how to present them in a set of financial statements; and
• related disclosures about those items.
FINANCIAL REPORTING
STANDARDS - PURPOSE
 Purpose
• Transparency:
– Enhances international comparability and quality of information
– Enables market participants to make informed decision
• Accountability:
– Reducing the information gap between the providers of capital and the
people to whom they have entrusted their money. – vital importance to
regulators around the world.
• Efficiency:
– Helps investors to identify opportunities and risks across the world,
– For businesses, the use of a single, trusted accounting language lowers
the cost of capital and reduces international reporting costs.
HOW ARE IFRS DEVELOPED
 How are IFRS developed
• IFRS is developed by the IASB
• It is supported by an external IFRS Advisory Council, an Accounting Standards
Advisory Forum (ASAF) of national standard-setters and an IFRS Interpretations
Committee (the ‘Interpretations Committee’) to offer guidance when divergence in
practice occurs.
• It follows a thorough, open, participatory and transparent due process.
• Engages with investors, regulators, business leaders and the global accountancy
profession at every stage of the process. The due process includes:
– opportunities for public comment at various stages in the development of a Standard;
– IASB deliberations at meetings that are open to public observation and are webcast; and
– public availability of all of the agenda papers that form the basis for the IASB’s deliberations as
well as all of the comments received from interested parties.
– collaborates with the worldwide standard-setting community.
Structure of IFRS Foundation
Standards development process
Standards development process
IFRS FRAMEWORK
 IFRS Framework

The IFRS Framework addresses:

• the objective of financial reporting
• the qualitative characteristics of useful financial information of the
reporting entity
• the definition, recognition and measurement of the elements from which
financial statements are constructed
• concepts of capital and capital maintenance

IFRS Framework…
Role of Conceptual Framework
 Conceptual Framework sets out agreed concepts that underlie financial
reporting
 objective, qualitative characteristics, element definitions.
 IASB uses Conceptual Framework to set standards which
 enhances consistency across standards
 enhances consistency over time as Board members change
 provides benchmark for judgments
 Framework’s role in applying IFRSs
 Preparers use the Framework to make the judgments that are necessary to
apply IFRSs
 Auditors and regulators assess those judgements
 Investors, lenders and others consider those judgements when using IFRS
financial information to inform their decisions

If no specific IFRS requirement

• Use judgement to develop a policy that results in relevant information that
faithfully represents (i.e., complete, neutral and error free)
WHY IFRS?
 Benefits to Capital Markets
• Credibility of local market to foreign investors

• More cross-border investment

• Efficient capital allocation

• Comparability across political boundaries

• Facilitates global education and training

Benefits to Companies
• Lower cost of capital

• Facilitates raising capital abroad

• Integrated IT systems

• “One set of books” + easier consolidation

• Better understanding of financial statements from business partners
abroad
PRINCIPLE BASED
STANDARDS
 A Principle based standard.
• No exceptions

• Core principles (objectives)

• No inconsistencies

• Tied to conceptual framework

• Judgement

• Minimum guidance
UPCOMING CHANGES
 Upcoming Changes
• The IASB has issued its proposal to revise the Conceptual Framework
(the ‘ED’ or ‘the proposed Framework’). The primary purpose of the
Framework is to assist the IASB by identifying concepts it will use when
developing and revising standards. It will not be ‘GAAP’

• The IASB has proposed new guidance to encourage entities to use a

consistent description of segments across all forms of reporting to
investors. Segment disclosures to bring in more insight on the
‘management view’.

• Discussion on the Principles of Disclosure project as part of its Disclosure

Initiative – More guidance on presentation on face vs notes.
IFRS IN INDIA
IFRS in India
• SEBI has given the option to listed entities to prepare and file consolidated
financial statements in conformity with IFRS as issued by IASB.
• Approximately 11 companies (mainly ones with foreign listings) use the
IFRS option.
• In 2013, India revised its Companies Act to require consolidated financial
statements and to establish a two-tier system of accounting standards:
– Tier 1 is the new set of Indian Accounting Standards (Ind AS) described
above, for listed and large companies.
– Tier 2 is the existing Accounting Standards, for smaller companies.
Ind AS - Process
• The process is neither endorsement nor adoption of IFRS.
• The IFRS are used as the base for issuing corresponding Ind ASs with
changes in IFRS wherever necessary.
• The Ind ASs will become part of the law
• The drafts of the Ind ASs prepared on the basis of IFRS are exposed for
public comments and discussed with the necessary interest groups wherever
necessary.
• Thereafter, considering the comments the Accounting Standards Board of
the ICAI finalises the Ind AS, which is then approved by the Council of the
ICAI.
• The Ind AS so approved by the Council is reviewed by NACAS which
recommends the Ind AS to the Government.
• The Government thereafter notifies the Ind AS in the Official Gazette as
part of law.
IND AS Title
IND AS – 1 Presentation of Financial Statements
IND AS – 2 Inventories
IND AS – 7 Statement of Cash Flows
IND AS – 8 Accounting Policies, Changes in Accounting Estimates and Errors
IND AS – 10 Events after the Reporting Period
IND AS – 12 Income Taxes
IND AS – 16 Property, Plant and Equipment
IND AS – 17 Leases
IND AS – 19 Employee Benefits
IND AS – 20 Accounting for Government Grants and Disclosure of Government
Assistance
IND AS – 21 The Effects of Changes in Foreign Exchange Rates
IND AS – 23 Borrowing Costs
IND AS – 24 Related Party Disclosures
IND AS – 27 Separate Financial Statements
Notified Ind AS
Notified Ind AS…
IND AS Title
IND AS – 28 Investments in Associates and Joint Ventures
IND AS – 29 Financial Reporting in Hyperinflationary Economies
IND AS – 32 Financial Instruments: Presentation
IND AS – 33 Earnings per Share
IND AS – 34 Interim Financial Reporting
IND AS – 36 Impairment of Assets
IND AS – 37 Provisions, Contingent Liabilities and Contingent Assets
IND AS – 38 Intangible Assets
IND AS – 40 Investment Property
IND AS – 41 Agriculture
IND AS – 101 First - time Adoption of Indian Accounting Standards
IND AS – 102 Share-based Payment
IND AS Title
IND AS – 103 Business Combinations
IND AS – 104 InsuranceContracts
IND AS – 105 Non-current Assets Held for Sale and Discontinued Operations
IND AS – 106 Exploration for and Evaluation of Mineral Resources
IND AS – 107 Financial Instruments : Disclosure
IND AS – 108 Operating Segments
IND AS – 109 Financial Instruments
IND AS – 110 Consolidated Financial Statements
IND AS – 111 Joint Arrangements
IND AS – 112 Disclosure of Interests in Other Entities
IND AS – 113 Fair Value Measurement
IND AS – 114 Regulatory DeferralAccounts
IND AS – 115 Revenue from Contractswith Customers
Notified Ind AS…
THE APPROACH
The Step by Step approach
• Companies will have to follow a step by step approach to make the transition
to Ind AS a smooth process.

• They will first have to prepare an opening balance sheet as per Ind AS on 1
April 2015.

• They will have to continue reporting their financial statements for the year
ending 31 March 2016 as per the existing Indian GAAP.
• However, they will also need to compile their financial statements as per Ind
AS for the year ending 31 March 2016.

• This parallel system of accounts will be required for one year ending March
2016 so that comparative Ind AS information can be provided. So for the
year FY 2015-16, companies will have to evaluate accounting implication of
 transactions both under existing accounting standards as well as Ind AS
frameworks.
The Step by Step approach…
As part of this Ind AS transition process, companies will also have to prepare

• A reconciliation of equity between Ind AS and Indian GAAP on 1 April

2015 and 31 March 2016, and

• A reconciliation of income for the year ending March 2016 between Ind AS
and Indian GAAP.

• These reconciliations will be included in the first Ind AS financial

statements, so that the investors and users can ascertain the real impact of
Ind AS adoption.
Ind AS - ROADMAP
Applicability

• The Indian Accounting Standards (“Ind AS”) were notified on 16

February 2015 by the Ministry of Corporate Affairs (“MCA”).

• MCA notified the Companies (Indian Accounting Standards) Rules,

2015 which specified the Ind AS applicable to certain class of
companies and set out the dates of applicability.
Voluntary Adoption

• Companies may voluntarily adopt Ind AS for financial statements for

accounting periods beginning on or after 1 April 2015, with the
comparatives for the periods ending 31 March 2015 or thereafter.

• Once a company opts to follow the Ind AS, it will be required to

follow the same for all the subsequent financial statements.
Mandatory Adoption

Criteria Threshold
Companies whose equity and/or debt securities ` 500 crores or more
are listed or are in the process of listing on any
stock exchange in India or outside India (listed
companies) and having net worth

Unlisted companies having a net worth of ` 500 crores or more

Holding, subsidiary, joint venture or associate
companies of the listed and unlisted companies
covered above.

• Comparative for these financial statements will be periods ending 31

March 2016 or thereafter.
For the accounting periods beginning on or after 1 April 2016
Mandatory Adoption…
Criteria Threshold
Listed companies having net worth of Less than ` 500 crores
Unlisted companies having a net worth of More than ` 250 crores but
less than ` 500 crores or
more
Holding, subsidiary, joint venture or associate
companies of the listed and unlisted companies covered
above.

• Comparative for these financial statementswill be periods ending 31

March 2017 or thereafter.
For the accounting periods beginning on or after 1 April 2017
Road Map will not be applicable to
• Companies whose securities are listed or in the process of listing on SME
exchanges.

• Companies not covered by the roadmap in the “Mandatory adoption”.

• Insurance companies, banking companies and non-banking finance

companies.

• These companies should continue to apply existing Accounting Standards

prescribed in the Annexure to the Companies (Accounting Standards)
Rules, 2006, unless they opt for voluntary adoption. Insurance companies,
banking companies and non-banking finance companies cannot voluntarily
adopt the Ind AS.
THE CARVE OUTS
The Carve Outs

• Ind AS 21 (corresponding to IAS 21 The Effects of Changes in Foreign

Exchange Rates) permits an option to recognize exchange differences
arising on translation of certain long-term monetary items from foreign
currency to functional currency directly in equity.

• IAS 28 Investments in Associates requires that difference between the

reporting period of an associate and that of the investor should not be
more than three months, in any case. The phrase ‘unless it is
impracticable’ has been provided in Ind AS 28.
The Carve Outs…
• An exception has been included to the definition of ‘financial liability’
Ind AS 32 (corresponding to IAS 32 Financial Instruments: Presentation)
to consider the equity conversion option embedded in a convertible bond
 denominated in foreign currency to acquire a fixed number of entity’s
own equity instruments as an equity instrument if the exercise price is
fixed in any currency.

• IFRS 3 requires bargain purchase gain arising on business combination to

be recognized in profit or loss. Ind AS 103 (corresponding to IFRS 3
Business Combinations) requires the same to be recognized in other
comprehensive income and accumulated in equity as capital reserve,
unless there is no clear evidence for the underlying reason for
classification of the business combination as a bargain purchase, in which
case, it shall be recognised directly in equity as capital reserve.
The Carve Outs…

• Ind AS 101 First-time Adoption of Indian Accounting Standards, provides an

entity an option to use carrying values of all items of property, plant and
equipment as on the date of transition in accordance with previous GAAP as
an acceptable starting point under Ind AS.
OPTIONS REMOVED
Options removed
Presentation of Financial Statements
• Option to follow different terminology for the titles of financial statements
has been removed; only one terminology for the titles is required uniformly.
• Option to present analysis of expenses function-wise is removed; only
nature-wise classification of expenses permitted.

Statement of Cash Flows

• Option to classify interest paid and interest and dividends received as items
of operating cash flows is removed for entities other than financial entities;
these items are required to be classified as financing activity and investing
activity, respectively.
• Option to classify dividend paid as an item of operating activity removed; it
has to be classified as financing activity only.
Options removed
Accounting for Government Grants and Disclosure of Government
Assistance
• Option to measure non-monetary government grants at nominal value
removed; such grants are required to be measured at fair value only.
• Option to present the grants related to assets by deducting the amount of
grants in arriving at the carrying amount of the asset is removed;

Intangible Assets
• The option to measure intangible asset acquired by way of government grant
at nominal amount plus any expenditure that is directly attributable to
prepare the asset has been removed; only fair value measure is required for
recognizing such intangible assets.
EXEMPTIONS
Exemptions
First-time adoption of Ind AS: Ind AS 101

• An entity moving from Indian GAAP to Ind AS needs to apply the

requirements of Ind AS 101
• The basic requirement is for full retrospective application of all Ind AS,
effective at the reporting date.
• There are a number of optional exemptions and mandatory exceptions to the
requirement of retrospective application.
• The exemptions cover standards for which it is considered that
retrospective application could prove too difficult or could result in a cost
likely to exceed related benefits to users
Optional Exemptions
• Share-based payment transactions
• Insurance contracts
• Deemed cost
• Leases
• Cumulative translation differences
• Investment in subsidiaries, joint ventures and associates
• Assets and liabilities of subsidiaries, joint ventures and associates
• Compound financial instruments
• Designation of previously recognized financial instruments
• Fair value measurement of financial assets or financial liabilities at initial
recognition
• Decommissioning liabilities included in the cost of property, plant and
equipment
Optional Exemptions…

• Financial assets or intangible assets accounted for in accordance with service

concession arrangements
• Borrowing costs
• Extinguishing financial liabilities with equity instruments
• Severe hyperinflation
• Joint arrangements
• Stripping costs in the production phase of a surface mine
• Designation of contracts to buy or sell a non-financial item
• Revenue from contracts with customers
• Non-current assets held for sale and discontinued operations
Mandatory Exemptions…
• Derecognition of financial assets and liabilities
• Hedge accounting
• Non-controlling interests
• Classification and measurement of financial assets
• Impairment of financial assets
• Embedded derivatives
• Government loans
• Estimates
BENEFITS IN INDIAN CONTEXT
 Benefits
 Cross border investments leading to economic growth
 Comparability of financial statements of any two companies anywhere in
the world
 Globalization of economy and world trade For multinational
companies:
 Consolidation of group financial statements made easier
 Mergers and acquisitions made easier
 Access to multinational funds
 The job of governments and standard setters in the developing countries
made easier
 Administrative costs of accessing the capital markets around the world
reduced.
OPPORTUNITIES &
CHALLENGES
 Opportunities for Chartered Accountants
 Training

 Reporting Systems

 Fair Valuation

 Taxation

 Management Compensation Plans

 Transition to IndAS

 Others
 Opportunities for Chartered Accountants…
Training

• Professional accountants are looked upon to ensure successful

implementation of IFRS / IndAS.

• The biggest hurdle for the professionals in implementing IFRS /

IndAS is the lack of training facilities and academic courses on
IFRS in India.

• There exists a tremendous opportunity for training the

professionals

Reporting Systems:
 Opportunities for Chartered Accountants…
• 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
IndAS, for which they need Chartered Accountants and trained
professionals.

• Chartered Accountants can also assist in developing reporting

systems which are in line with the requirements of IndAS.

• Assistance in development of proper internal control and

minimizing the risk of business disruption during the transition
period.
Management Compensation Plan:
 Opportunities for Chartered Accountants…
• The terms and conditions relating to management compensation
plans would also have to be changed. This is because the financial
results under IFRS are likely to be very different from those under
the Indian GAAP.

• The contracts would have to be re-negotiated which is also a big

challenge.

• Chartered Accountants and other professionals can play a key role

in the same.

Fair Valuation:

• IndAS uses fair value as a measurement base for valuing most of

the items of financial statements.
 Opportunities for Chartered Accountants…
• The use of fair value accounting can bring a lot of volatility and
subjectivity to the financial statements.

• It also involves a lot of hard work in arriving at the fair value and
valuation experts have to be used.

• Chartered Accountants can play key role as fair valuation experts.

Taxation:

• IndAS convergence would affect most of the items in the financial

statements and consequently the tax liabilities would also undergo
a change.
 Opportunities for Chartered Accountants…
• Thus consulting in taxation laws will also become critical to
address the treatment of tax liabilities arising on convergence from
Indian GAAP to IFRS.
Handle Transitional Issues:

• Given the new set of standards which are in offing, the transition
is going to be a challenge, trained CA’s can play a key role in the
same.

• Adoption of new set of standards, would imply preparing a new

set of financial statements in line with the new standards. CA’s
have a very promising role to play.

Actuarial Services:
 Opportunities for Chartered Accountants…
• Presently, the requirement for obtaining actuary valuation is only
prescribed class of companies.

• Going forward, the more companies would be covered in this

ambit mainly due to new standards.

• There exists great opportunities for the CA’s in this field also.
 Challenges
 Awareness about international practices: Adoption of IFRS means that the
entire set of financial statements will be required to undergo a drastic
change.

 Training: Professional accountants are looked upon to ensure successful

implementation of IFRS. Training of professionals will be a challenge.

 Amendments to the existing law: It is observed that implementation of

IFRS may result in a number of inconsistencies with the existing laws
which include the Companies Act 1956 (Companies Act, 2013) , SEBI
regulations, banking laws and regulations and the insurance laws and
regulations. Currently, the reporting requirements are governed by various
regulators in India and their provisions override other laws.
 Taxation: Thus the taxation laws should address the treatment of tax
liabilities arising on convergence from Indian GAAP to IFRS.
Challenges…
 Fair Value: IFRS uses fair value as a measurement base for valuing most of
the items of financial statements. The use of fair value accounting can
bring a lot of volatility and subjectivity to the financial statements. It also
involves a lot of hard work in arriving at the fair value and valuation
experts have to be used. Moreover, adjustments to fair value result in gains
or losses which are reflected in the income statements.

 Management compensation plan: The terms and conditions relating to

management compensation plans would also have to be changed. This is
because the financial results under IFRS are likely to be very different from
those under the Indian GAAP
 Reporting Systems: 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.
WAY FORWARD
 Way Forward
For Professionals

 High level of preparedness

 Acclimatization with the standards Dealing with convergence
issues

For Companies

 Gearing up for convergence

 Training of staff
 Transition in reporting
 Balancing the requirements and reporting
THANK YOU