INTERNATIONAL FINANCIAL REPORTING STANDARDS - INTERNATIONAL FINANCIAL REPORTING STANDARDS

Notes 9 Pages

Bengaluru City University

Bachelor of Business Administration

Contributed by

Prajwal Hallale

CORPORATE ACCOUNTING AND REPORTING, 2ND SEMESTER BBA, BANGALORE CENTRAL UNIVERSITY

Vinutha T.N, Assistant Professor, MES Institute of Management
1

Unit 4: INTERNATIONAL FINANCIAL REPORTING STANDARDS
International Financial Reporting Standards; Meaning of IFRS; Relevance of IFRS in India;
Merits and limitations of IFRS; Process of setting IFRS; Practical challenges in implementing
IFRS; Convergence of IFRS in India; List of International Financial Reporting Standards
issued by IASB.

An accounting standard is a common set of principles, standards, and procedures that define
the basis of financial accounting policies and practices. Accounting standards apply to the full
breadth of an entity's financial picture, including assets, liabilities, revenue, expenses and
shareholders' equity

The International Accounting Standards Board (i.e. IASB) was set up in 2001 to develop
International Financial Reporting Standards (i.e. IFRS). It means a principle-based Accounting
Standard (AS) drafted in comparatively simple and clear language than most of our Accounting
Standard.

International Financial Reporting Standards, commonly called IFRS, are accounting
standards issued by the IFRS Foundation and the International Accounting Standards
Board (IASB). They constitute a standardised way of describing the company’s financial
performance so that company financial statements are understandable and comparable across
international boundaries. They are particularly relevant for companies with shares or securities
listed on a public stock exchange.

International Financial Reporting Standards (IFRS) set common rules so that financial
statements can be consistent, transparent and comparable around the world. They specify how
companies must maintain and report their accounts, defining types of transactions and other
events with financial impact. IFRS were established to create a common accounting language,
so that businesses and their financial statements can be consistent and reliable from company
to company and country to country.

The IFRS Foundation sets the standards to “bring transparency, accountability and efficiency
to financial markets around the world… fostering trust, growth and long-term financial stability
in the global economy.” Companies benefit from the IFRS because investors are more likely
to put money into a company if the company's business practices are transparent.
IFRS are used in at least 120 countries, as of March 2018, including those in the European
Union (EU) and many in Asia and South America, but the U.S. uses Generally Accepted
Accounting Principles (GAAP).
IFRS are sometimes confused with International Accounting Standards (IAS), which are the
older standards that IFRS replaced. IAS was issued from 1973 to 2000, and the International
Accounting Standards Board (IASB) replaced the International Accounting Standards
Committee (IASC) in 2001.
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CORPORATE ACCOUNTING AND REPORTING, 2ND SEMESTER BBA, BANGALORE CENTRAL UNIVERSITY

Vinutha T.N, Assistant Professor, MES Institute of Management
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Standard IFRS Requirements
IFRS covers a wide range of accounting activities. There are certain aspects of business practice
for which IFRS set mandatory rules.
• Statement of Financial Position: This is also known as a balance sheet. IFRS
influences the ways in which the components of a balance sheet are reported.
• Statement of Comprehensive Income: This can take the form of one statement, or it
can be separated into a profit and loss statement and a statement of other income,
including property and equipment.
• Statement of Changes in Equity: Also known as a statement of retained earnings, this
documents the company's change in earnings or profit for the given financial period.
• Statement of Cash Flow: This report summarizes the company's financial transactions
in the given period, separating cash flow into Operations, Investing, and Financing.
HISTORY OF IFRS
The International Accounting Standards Committee (IASC) was established in June 1973 by
accountancy bodies representing ten countries. It devised and published International
Accounting Standards (IAS), interpretations and a conceptual framework.
In 2001 the International Accounting Standards Board (IASB) replaced the IASC with a remit
to bring about convergence between national accounting standards through the development of
global accounting standards. The IASB has continued to develop standards calling the new
standards "International Financial Reporting Standards" (IFRS).
In 2002 the European Union (EU) agreed that, from 1 January 2005, International Financial
Reporting Standards would apply for the consolidated accounts of the EU listed companies,
bringing about the introduction of IFRS to many large entities. Other countries have since
followed the lead of the EU.

FEATURES OF IFRS
1. IFRS are principle-based accounting standards as compared to rule-based accounting
standards as is the case with Indian Accounting standards.
2. IFRS are drafted in a clear and simple language and are easy to understand and apply.
3. IFRS emphasise that various transactions should be treated on the basis of their
economic substance rather than their legal form.
4. Under the IFRS, the fixed assets are recorded at current cost.
5. Under IFRS, the assets, liabilities, revenues and expenses are reported in its functional
currency which means the currency of the place where the entity operates.
6. Under IFRS the useful life of the asset has to be computed again and again until the
asset is actually removed from the books of accounts.
7. IFRS make it compulsory to adopt Component Accounting. Under component
accounting, depreciation is not calculated simply on the total value of an asset but on
the cost of important parts of the equipment or asset.
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CORPORATE ACCOUNTING AND REPORTING, 2ND SEMESTER BBA, BANGALORE CENTRAL UNIVERSITY

Vinutha T.N, Assistant Professor, MES Institute of Management
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NEED FOR IFRS
1. Uniformity: IFRS provide single set of accounting standards that would enable
internationally standardize and assure better quality on a global screen. The main
purpose of development of IFRS is harmonisation in reporting of financial statements.
2. International capital: IFRS would also permit international capital to flow more
freely, enabling companies to develop consistent global practices on accounting
problems.
3. Regulators: IFRS would be beneficial to regulators too, as a complexity associated
with understanding various reporting regimes would be reduced.
4. Investors: IFRS give a better understanding to the financial statements and assess the
investment opportunities other than Home Country. Financial Statements following
IFRS give better and cohesive information to the investors.
5. Accounting professionals: IFRS also benefit the Accounting Professionals in a way
that they will be able to sell their services in the different parts of world. Accounting
Professionals can provide their services to those countries which follow IFRS.
6. Sound Business Sense: IFAS will generate sound business sense among the
beneficiaries because it will develop global reporting culture.
RELEVANCE OF IFRS
• IASB Standards are known as International Financial Reporting Standards (IFRS).
• All International Accounting Standards (IAS) and Interpretations issued by the former
IASC" and SI continue to be applicable unless and until they are amended or withdrawn
• IFRS apply to the general-purpose financial statements and other financial reporting by
profit-oriented entities-those engaged in commercial, industrial, financial and similar
activities regardless of their legal form.
• Entities other than profit-oriented business entities may also find IFRS appropriate
• General purpose financial statements are intended to meet the common needs of
shareholders, creditors, employees, and the public at large for information about an
entity's financial position, performance, and cash flows.
• Many companies having subsidiaries and holding company in different countries are
required to follow dual set of accounting standards. The transition to IFRS will be
helpful in saving time and cost.
• Other financial reporting includes information provided outside financial statements
that assists in the interpretation of a complete set of financial statements or improves
users ability to make efficient economic decisions.
• IFRS apply to individual company and consolidated financial statements.
• A complete set of financial statements includes a balance sheet, an income statement, a
cash flow statement, a statement showing either all changes in equity or changes in
equity other than those arising from investments, by a distribution to owners, a
summary of accounting policies, and explanatory notes.
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• In developing Standards, IASB intends not to permit choices in accounting treatment.
Further, IASB intends to reconsider the choices in existing IAS with a view to reducing
the number of those choices.
DIFFERENCE BETWEEN IFRS AND INDIAN ACCOUNTING STANDARDS
1. IFRS are based on Principles contrary to the Indian Accounting Standards which are
based on Rules. For example, under schedule III of the Companies Act, Redeemable
Preference Shares are shown under the head 'Share Capital' but IFRS require that they
should be shown under the head Loans.
2. IFRS are based on the concept of 'Fair Value' but Indian Accounting Standards are
based on the concept of 'Historical Cost' concept.
3. The Indian environment and global environment are different which leads to a huge gap
between AS issued by ICAI and IFRS issued by IASB. So to bridge the gap between
AS and IFRS. 1CAI issued Indian Accounting Standards (Ind AS) converged with
IFRS.
DIFFICULTIES OR CHALLENGES IN ADOPTING IFRS
Following are the difficulties or challenges in adopting IFRS by India:
1. Concept: IFRS are more principle-based and there is a scope of subjective judgement.
The information in the financial statements is presented on the basis of substance
rather than rule. On the other hand, Indian Accounting Standards are rigid being rules-
based. Subjective judgement is not permitted in Indian Accounting Standards. Rules
will have to be updated for adopting IFRS.
2. Legal compliance: Application of IFRS is totally based on the investors' need Their
interests are given priority over law. On the other hand, in Indian Accounting Standards
the legal compliance gate priority over investor's needs.
3. Framework provided: IFRS provide a wide framework for financial reporting. No
such framework is present in Indian Accounting Standards.
4. True and fair view: In IFRS true and fair concept has no relevance. In Indian
Accounting Standards, there is an emphasis on the concept of true and fair view.
5. Presentation of financial statements: IFRS clearly provide guidelines and overall
requirement in presenting financial statements of companies. Indian Accounting
standards do not define clear requirements for disclosure in the financial statements.
6. Trained Personnel: There is lack of trained personnel for adopting IFRS and they will
have to undergo training and learning programmes for adopting IFRS.
IFRS IN INDIA
In India Accounting standards are formulated by the Council of the Institute of Chartered
Accountants of India. It has been made clear by the Institute that while formulating the
accounting standards, the Accounting Standard Board (set up in 1977) will keep in view
customs, usages, applicable laws and the business environment in India, the Institute of Cost
Accountants of India, International Accounting Standards and IFRS. In July 2007, the Council
of the Institute of Chartered Accountants of India set a target of adopting IFRS for all listed.
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public interest and large entities from accounting periods beginning on or after 1st April, 2011.
Thus, India decided to converge with IFRS in 2007 and Institute of Chartered Accountants o
India started the process of developing a complete set of accounting standards that ae
converged with IFRS and accounting standards developed with an idea of convergence with
IFRS are known as Ind ASs (i.e. Indian Accounting Standards).
With an objective to ensure smooth transition to IFRS from 1 April, 2011, ICAI is taking the
matter of convergence with IFRS with National Advisory Committee on Account Standards
(NACAS) established by the Ministry of Corporate Affairs, Government of India and other
regulators including Reserve Bank of India (RBI), Insurance Regulatory and Development
Authority (IRDA) and the Securities and Exchange Board of India (SEBI).
The Core Group for IFRS convergence formed by MCA has recommended convergence to
IFRS as under:
PHASE I (OPENING BALANCE SHEET AS AT 1 APRIL, 2011)
1. Companies which are part of BSE-Sensex 30 and NSE-Nifty 50:
2. Companies whose shares or other securities are listed outside India; Companies
whether listed or not, having net worth of more than 1,000 crores.
PHASE II (OPENING BALANCE SHEET AS AT 1 APRIL, 2013)
1. Companies are not covered in Phase 1 and having net worth exceeding 500 crores.
PHASE III (OPENING BALANCE SHEET AS AT 1 APRIL, 2014)
1. Listed companies not covered in 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). Separate Road Map
would be prepared for banking and insurance companies. The Issue of convergence
with IFRS has made good progress.
OBJECTIVES OF IFRS
1. To develop a single set of high quality, understandable and enforceable global
accounting standards that will form the stable platform for international accounting.
2. The correct adoption of IFRS will bring more transparency and a higher degree of
comparability, both of which promise many benefits for the organisations as well as
economies. Most important objective of IFRS is to make the comparison and
interpretation of the financial statements across the world easier.
3. To promote the use and rigorous application of those standards.
4. To take account of as appropriate, the special needs of small and medium-sized entities
and emerging economies.
5. To bring about convergence of national accounting standards and International
Accounting Standards and International Financial Reporting Standards (IFRS) to high
quality solutions.
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CORPORATE ACCOUNTING AND REPORTING, 2ND SEMESTER BBA, BANGALORE CENTRAL UNIVERSITY

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6. To make the information included in financial statements reliable so that users can take
correct decisions.
7. To report the information on time i.e. undue delays should be avoided.
8. To identify the trends in the financial position and performance so that users must be
able to compare the financial statements of different enterprises.
Since 2001 the Accounting Standards issued by the International Accounting Standard Board
are designated as International Financial Reporting Standards (IFRS). IASB achieves its
objectives primarily by developing and publishing International Financial Reporting Standards
(IFRSS) for general purpose financial statements and other financial reporting. The objective
of International Financial Reporting Standards is to meet the common information needs of
wide range of users such as shareholders, creditors, employees and public at large relating to
financial statements. So far IASB has issued sixteen Financial Reporting Standards given as
follows
List of IFRS Standards issued by IASB
IFRS-1. First-time Adoption of International Financial Reporting Standards
IFRS-2. Share-based Payment
IFRS-3. Business Combinations
IFRS-4. Insurance Contracts
IFRS-5. Non-current Assets Held for Sale and Discontinued Operations
IFRS-6. Exploration for and Evaluation of Mineral Resources
IFRS-7. Financial Instruments: Disclosures
IFRS-8. Operating Segments
IFRS-9. Financial Instruments
IFRS 10. Consolidated Financial Statements
IFRS 11. Joint Arrangements
IFRS 12. Disclosure of Interests in Other Entities
IFRS 13. Fair Value Measurement
IFRS 14. Regulatory Deferral Accounts
IFRS 15. Revenue from Contracts with Customers
IFRS 16. Leases
IFRS 17. Insurance Contract (Superseded by IFRS 4)

CONVERGENCE OF IFRS IN INDIA
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CORPORATE ACCOUNTING AND REPORTING, 2ND SEMESTER BBA, BANGALORE CENTRAL UNIVERSITY

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Need for Convergence with IFRS
The globalisation of the business world and the regulations, which support it, as well as the
development of e-commerce make it imperative to have a single globally accepted financial
reporting system. A number of multi-national companies are establishing their businesses in
various countries with emerging economies and vice versa. The entities in emerging economies
are increasingly accessing the global markets to fulfil their capital needs by getting their
securities listed on the stock exchanges outside their country. Capital markets are, thus,
becoming integrated consistent with this World-wide trend. More and more Indian companies
are also being listed on overseas stock exchanges. Sound financial reporting structure is
imperative for economic well-being and effective functioning of capital markets.
The use of different accounting frameworks in different countries, which require inconsistent
treatment and presentation of the same underlying economic transactions, creates confusion for
users of financial statements. This confusion leads to inefficiency in capital markets across the
world. Therefore, increasing complexity of business transactions and globalisation of capital
markets call for a single set of high-quality accounting standards. High standards of financial
reporting strengthen the trust investors place in financial and non- financial information. Thus,
it has become the need of the day to have a single set of globally accepted accounting standards
has prompted many countries to pursue convergence of national accounting standards with
IFRS.
Benefits of Achieving Convergence with IFRS
The economy, investors, industry and accounting professionals all stand to gain from the
convergence.
1. The Economy: The convergence benefits the economy by increasing growth of its
international business. It assists the maintenance of orderly and efficient markets and
also helps to increase the capital formation and thereby economic growth. It encourages
international investors to invest and thereby leads to more foreign capital flows to the
country.

2. Investors: The investors who wish to invest outside their own country want the
information that is more relevant, reliable, timely and comparable across the
jurisdictions. Financial statements prepared using a common set of accounting
standards help investors better understand investment opportunities as opposed to
financial statements prepared using a different set of national accounting standards. To
understanding the financial statements better, global investors have to incur more cost
in terms of the time and efforts to convert the financial statements so that they can
confidently compare opportunities. Investors' confidence would be strong if accounting
standards used are globally accepted. Convergence with IFRSS add to investors'
understanding and confidence in high quality financial statements.

3. The Industry: The industry is able to raise capital from foreign markets at lower cost
if it can create confidence in the minds of foreign investors that their financial
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Vinutha T.N, Assistant Professor, MES Institute of Management
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statements comply with globally accepted accounting standards. With the diversity in
accounting standards from country to country, enterprises which operate in different
countries face a multitude of accounting requirements prevailing in the countries. The
burden of financial reporting reduces with convergence of accounting standards
because it simplifies the process of preparing the individual, group financial statements,
and thereby reduces the costs of preparing the financial statements using different sets
of accounting standards

4. The Accounting Professionals: It offers accounting professionals more opportunities
in any part of the world if same accounting practices prevail throughout the world. They
are able to advise the clients on financial reporting to fulfil the compliance of any
regulatory body of any country of the world.

5. Comparison: The convergence will make comparison easier with a foreign competitor
if a company presents its financial statements according to IFRS.
PROBLEMS AND CHALLENGES
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.
1. Difference in GAAP and IFRS: Adoption of IFRS means that the entire set of
financial statements will have to undergo a drastic change. The differences are wide
and very deep routed. It would be a challenge to the accountants to bring about
awareness of IFRS and its impact among the users of financial statements.

2. Training and Education: Lack of training facilities and academic courses on IFRS
will also pose challenge in India. There is a need to be educated on IFRS and its
application. Charles Noski, former chief financial officer and Vice Chairman of the
Board of AT&T Corporation and a former Deloitte & Touche partner noted that
"Educating 100,000 employees on how they must do their business is not a trivial
activity,"

3. Legal and Regulatory Considerations: Currently, the reporting requirements are
governed by various regulators in India and their provisions override other laws. IFRS
does not recognise such overriding laws. The regulatory and legal requirements in India
will make difficult the adoption of IFRS unless the same is addressed by respective
regulatory.

4. Taxation: IFRS convergence would affect most of the items in the financial statements
and consequently the tax liabilities would also undergo a change. Thus the taxation laws
should address the treatment of tax liabilities arising on convergence from Indian
GAAP to IFRS.

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5. Fair Value Measurement: 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.

6. Re-negotiation of Contract: The contracts would have to be re-negotiated which is
also a big challenge. This is because the financial results under IFRS are likely to be
very different from those under the Indian GAAP.

7. Reporting Systems: Companies would have to make efforts to ensure that the existing
business reporting model is amended to suit the reporting requirements of IFRS, Th
information systems would have to be designed to capture new requirements related to
fixed assets, segment disclosures, related party transactions, etc.
Conversion is much more than a technical accounting issue. IFRS or Ind AS may significantly
affect any number of a company's day-to-day operations and may even impact the reported
profitability of the business itself. Since the timeline in the roadmap is no longer valid, the new
implementation date for Ind AS is awaited from the MCA (i.e. Ministry of Corporate Affairs).
It is unclear if the MCA will release a fresh roadmap or just amend the implementation date.
Understanding IFRS or Ind AS and its implications is a business imperative for Indian
companies to give the desired results.
Important Questions for Section B & C
• Features of IFRS
• Merits and Demerits of IFRS
• Challenges
• Convergence of IFRS
• List any 10 IFRS Standards issued by IASB
SELF-ASSESSMENT QUESTIONS
State giving reasons, whether the following statements are 'TRUE' or 'FALSE':
1. International Financial Reporting Standards are issued by International Accounting
Standards Board.
2. IFRS are rule-based.
3. Under IFRS, the fixed assets are valued at historical cost.
4. IFRS create common or uniform provision for the valuation of assets and liabilities.
5. Under IFRS, it would be difficult to commit fraud.

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