IFRS Convergence in India

International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an

independent, not-for-profit organization called the International Accounting Standards Board (IASB). The goal
of IFRS is to provide a global framework for how companies prepare and disclose their financial
statements. Having an international standard is especially important for large companies that have subsidiaries
in different countries. Adopting a single set of world-wide standards will simplify accounting procedures by
allowing a company to use one reporting language throughout. A single standard will also provide investors and
auditors with a cohesive view of the position of the company.
IFRS is used in many parts of the world including European Nations, Australia, Hong Kong, Malaysia, Pakistan,
GCC Countries, Russia, South Africa, Singapore and Turkey. As of December 2013, more than 110 countries
around the world currently require or permit IFRS reporting. Approximately 92 of those countries require IFRS
reporting for all domestic listed companies. More countries expected to transition to IFRS by 2015. Proponents
of IFRS as an international standard maintain that the cost of implementing IFRS could be offset by the
potential for compliance to improve credit ratings.
The story so far in India
India has come a long way since the issuance of the Concept Paper on Convergence with IFRSs in India by
the Institute of Chartered Accountants of India (ICAI, a statutory body established for the regulation of the
profession of Chartered Accountants in India) in 2007. In February 2011, the Ministry of Corporate Affairs
(MCA, the regulator of Corporate affairs in India), issued 35 Ind ASs i.e. the Indian Accounting Standards
equivalent to the International Financial Reporting Standards (IFRSs). Though substantially similar to the
IFRSs, the Ind ASs have some carve outs to ensure that these standards are suitable for application in Indian
economic environment. The IFRS-converged accounting standards deal with mark-to-market projections and
valuation of financial assets among other things.
Initially these new standards were slated for use for accounting periods commencing on or after 1 April 2011 in
a phased manner. However, the effective date for adoption of the Ind ASs was deferred pending resolution of
various implementation issues including tax related issues with the concerned departments to ensure a smooth
transition. Also, industry bodies had sought postponement arguing the industry needed more time to prepare.
Since then, there have been two key developments.
First, is the issuance of Revised Schedule VI by the MCA, which is applicable to financial statements prepared
for accounting periods commencing on or after 1 April 2011. Revised Schedule VI provides the format and
guidelines for preparation of Balance Sheet and Statement of Profit and Loss in India. Revised Schedule VI
brings in many concepts from IFRS like the Balance Sheet where assets and liabilities are required to be
classified as Current and Non-Current and additional disclosures. However, since the base standards i.e. the
notified Accounting Standards have not changed, there could be instances where there may be a conflict
between the provisions of the Revised Schedule VI and the notified Accounting Standards. In such a scenario,
the provisions of the notified Accounting Standards will prevail over the provisions of the Revised Schedule VI
as explicitly stated therein.
Secondly, the Companies Act 2013 has come in force which contains many requirements aligned to IFRS. For
instance, the new Act prohibits a prescribed class of companies from using Securities Premium (also called

Additional Paid-in capital) to write off the premium payable on redemption of debentures and preference
shares. Under IFRS, such premium is typically charged to profit-and-loss as interest expense. The Act also
mandates component accounting for depreciation. Additionally, it permits the prescribed class of companies to
depart from prescribed useful lives. These provisions allow companies to follow IFRS requirement.
Impact of IFRS in India
Adoption of IFRS by Indian corporates is going to be very challenging but at the same time could also be
rewarding. Indian corporates are likely to reap significant benefits from adopting IFRS. The European Union's
experience highlights many perceived benefits as a result of adopting IFRS. Overall, most investors, financial
statement preparers and auditors were in agreement that IFRS improved the quality of financial statements and
that IFRS implementation was a positive development for EU financial reporting (2007 ICAEW Report on 'EU
Implementation of IFRS and the Fair Value Directive').
Although a detailed analysis of the differences between IFRS and Ind AS is out of the scope of this write-up,
following

broad

points

of

Accounting Area
Business Combinations

Consolidation

Employee Stock Ownership Plans

Financial Instruments

difference

can

be

noticed

Treatment under current Indian

GAAP
Acquisitions are accounted at book
values of identifiable assets and
liabilities of the acquiree, with the
excess of consideration over the
net book value recognized as
goodwill
Many Indian companies, for legal
or operational reasons, operate
through structured entities known
as special purpose entities (SPEs).
SPEs are common in securitization
transaction, land acquisitions,
outsourcing and sub-contracting
arrangements. Many of these
arrangements are not consolidated
under Indian GAAP as they do not
meet the definition of a subsidiary
Indian GAAP permits ESOPs to be
accounted for using either the
intrinsic value method or the fair
value method, and most entities
follow the intrinsic method. The
intrinsic method does not result in
a P&L charge unless the ESOPs are
priced at a discount over the
intrinsic price
Classification is normally based on
form rather than substance. For

between

the

two

of

them:

Treatment under IFRS

Accounting is done for all assets
including hidden intangibles at fair
value. As the assets are recognized
at fair value, amortization of these
assets will reduce future year profit
Under IFRS, many such SPEs may
have to be consolidated as these
entities are in substance controlled
through an auto-pilot mechanism
or through legal/contractual
provisions determined at inception.
The consolidation of SPEs under
IFRS may have a substantial impact
on the P&L account, net asset and
gearing position, and also certain
key ratios such as debt-equity.
ESOPs are accounted using the fair
value method, which results in a
P&L charge. This will result in
lower profits for companies that
use ESOPs for remunerating
employees

IFRS requires a financial

instrument to be classified as a

example, redeemable preference

shares are recorded as equity and
the preference dividend as
dividend rather than as interest
cost.
Derivatives

Companies do not have fair-valued

derivatives and embedded
derivatives on their books as there
are no mandatory standards. Many
that have fair-valued derivatives do
not recognize losses as they claim
those to be for hedging purposes
Sales made on deferred payment
terms are recognized at the
nominal value of consideration.

Revenue Recognition

liability or equity in accordance

with its substance. redeemable
preference shares are treated as a
liability and the preference
dividend is recognized as interest
cost
All derivatives and embedded
derivatives are fair-valued, and
hedging is permitted only where
stringent criteria relating to
documentation and effectiveness
are fulfilled
Sales made on deferred payment
terms are accounted as a
combination of financing and
operating activity. The fair value of
the revenue is recognized in the
period of sale whereas the imputed
interest amount is recognized as
interest income over the credit
term

The implementation is expected to cause some upheaval in companies' finances in the initial stage as the
standards call for projecting assets' real value. Various sectors, including banking and real estate would be hit,
experts have argued. For instance, a realtor in India can currently account for his revenues as and when a unit
of a real estate project is sold to a buyer. After the adoption of IFRS, however, revenues will be recognized only
after the buyer gets the possession.
IFRS requires application of fair value principles in certain situations and this would result in significant
differences from financial information currently presented, especially relating to financial instruments and
business combinations. Given the current economic scenario, this could result in significant volatility in
reported earnings and key performance measures like EPS and P/E ratios. Indian companies will have to build
awareness amongst investors and analysts to explain the reasons for this volatility in order to improve
understanding,

and

increase

transparency

and

reliability

of

their

financial

statements.

This situation is worsened by the lack of availability of professionals with adequate valuation skills, to assist
Indian corporates in arriving at reliable fair value estimates. This is a significant resource constraint that could
impact comparability of financial statements and render some of the benefits of IFRS adoption ineffective. Some
other significant impacts that the implementation of IFRS could have in India are shown as under:

More transparent financial

reporting of a company's
activities, benefitting
investors, customers and
other key stakeholders in
India and overseas

Improvement in
comparability of financial
information and financial
performance with global
peers and industry
standards

Better quality of financial

reporting due to consistent
application of accounting
principles and improvement
in reliability of financial
statements

How will
IFRS impact
Indian
companies

Better access to and

reduction in the cost of
capital raised from global
capital markets since IFRS
accepted as a financial
reporting framework for
companies across the globe

Stringent income recognition

rules, specifically impacting
Banks and Real Estate sector

Commitment by the authorities

After the enactment of the Companies Act, 2013, the Ministry of Corporate Affairs has now shifted its focus on
rolling out international reporting standards for Indian companies. In July 2014, the Finance Minister of India,
Mr. Arun Jaitley, in his Budget speech proposed the adoption of the new Indian Accounting Standards by
Indian companies. The Council (governing body) of the ICAI, at its last meeting, held on March 20-22, 2014,
has finalized the roadmap for the implementation. The revised roadmap recommends Ind AS to be
implemented for the preparation of Consolidated Financial Statements of listed companies and unlisted
companies as per the following phases:

Phase 1: To be implemented by companies having net worth of over Rs. 1,000 crore for
accounting periods beginning from April 1,2015

Phase 2: To be implemented by both listed and unlisted companies having net worth
of over Rs. 500 crore but less than Rs. 1,000 crore for accounting periods beginning
from April 1, 2016

The stand-alone financial statements will continue to be prepared as per the existing notified Accounting
Standards which would be upgraded over a period of time. The recommendation of the ICAI to implement Ind
AS for preparation of only the Consolidated Financial Statements would have the advantage that Ind AS would
have no tax implications as well as implications for computation of managerial remuneration and dividend
distribution etc., since, for these purposes, the existing notified Accounting Standards would continue to be

used as is the practice in almost all countries that have adopted or converged with IFRS. This approach would
enable India also to be become an IFRS-converged country as promised by it as a part of its G-20 commitments.
The roadmap also proposes that the previous year comparatives for the year 2015-16 shall be prepared in
accordance with Ind AS as against the previous roadmap which required the same to be prepared in accordance
with the existing notified Accounting Standards, which was done at that time because the time for
implementation of Ind AS was very short. This proposal would also be another step to make Ind AS convergent
with IFRS, as without this, Ind AS would not be considered to be IFRS-converged. It is felt that for preparation
of previous year comparatives also, the time presently proposed is sufficient.
Concluding Remarks
IFRS convergence, in recent years, has gained momentum all over the world. As the capital markets become
increasingly global in nature, more and more investors see the need for a common set of accounting standards.
India being one of the key global players, migration to IFRS will enable Indian entities to have access to
international capital markets without having to go through the cumbersome conversion and filing process. It
will lower the cost of raising funds, reduce accountants fees and enable faster access to all major capital
markets. Furthermore, it will facilitate companies to set targets and milestones based on a global business
environment rather than an inward perspective. Furthermore, convergence to IFRS, by various group entities,
will enable management to bring all components of the group into a single financial reporting platform. This
will eliminate the need for multiple reports and significant adjustment for preparing consolidated financial
statements or filing financial statements in different stock exchanges.

Conversion is much more than a technical accounting issue. IFRS in India may significantly affect a companys
day-to-day operations and may even impact the reported profitability of the business itself. Conversion brings
a one-time opportunity to comprehensively reassess financial reporting and take a clean sheet of paper
approach to financial policies and processes. It is imperative for companies which have already performed a
diagnostic study for IFRS to revisit their diagnostic study, as IFRS itself is a moving target and gets regularly
updated. Companies also need to consider that some IFRS may not be applicable when the diagnostic study in
process, but their applicability in future may result in material changes to the financials. Understanding IFRS
and its implications is a business imperative for Indian companies.

Tanul Mukesh Saxena

Citations
The facts and information supplied in this article at many places has been procured from the
following websites/reports:
1.
2.
3.
4.
5.
6.
7.
8.
9.

www.livemint.com
economictimes.indiatimes.com
www.ey.com
archive.indianexpress.com
www.icai.org
www.pwc.in
www.mca.gov.in
www.asa.in
2007 ICAEW Report on 'EU Implementation of IFRS and the Fair Value Directive'