Indian GAAP: Towards

Convergence with IFRS

Dr. Jaskiran Arora

Monday, July 6, 2009 JK Padampat Singhania Institute, Gurgaon.
 Flow of the presentation
 What & Why IFRS?
 Indian Accounting standards

 Benefits & Challenges for IFRS

 Key differences between Indian GAAP &

IFRS
 Impact on IT Sector

 Case-Study : Infosys Technologies Limited

Monday, July 6, 2009

 What is IFRS?
 International Financial Reporting Standards (IFRS)
are developed by IASB, private sector
organization, based in London and began its
operations in 2001.
 International Accounting Standards (IAS) issued
by IASC, predecessor body of IASB, continue to be
applicable.
 IFRS Comprises: 8 IFRSs and 31 IASs.
 It started of with EU making IFRS mandatory from
2005 onwards.
 By 2011 more than 150 countries would have
adopted IFRS.
Monday, July 6, 2009
 Accounting Standard – Indian
Background
 ICAI, constituted the Accounting Standards
Board (ASB) on 21st April, 1977
 At a meeting held in May 2006, the Council

of ICAI expressed the view to adopt IFRS.

 The ASB, at a meeting held in August 2006,

considered the matter and decided to form

an IFRS Task Force.
 Based on the recommendation of the IFRS

Task Force, the Council of ICAI, at its 269th

meeting, decided to converge with IFRS, for
accounting periods commencing on or after
1 April 2011.
Monday, July 6, 2009
 Benefits of IFRS
 Improved access to international
capital markets
 Lower cost of capital
 Enable benchmarking with global
peers
 Escape multiple reporting
 Reflects true value of acquisitions
 New opportunities
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 IFRS Challenges
 Shortage of resources
 Training
 Information systems
 Taxes
 Communication
 Management compensation and debt
covenants
 Distributable profits
 Alignment with other statutory bodies
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 Key Difference: IGAAP &
IFRS
1. Presentation of financial
statements:
 True and fair provisions.
 Presentation of a statement of
comprehensive income
 Prohibits presentation of an extraordinary
items Information to evaluate the entity’s
objectives,
 Restatement for prior period items or
change in accounting policy

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 Key Difference: IGAAP &
IFRS
1. Business Combinations:
 Amalgamation & Acquisitions
 Purchase method of accounting
o Fair value of consideration, assets, liabilities
and contingent liabilities acquired
o Identification of intangible assets
 Goodwill to be tested for impairment
annually.
 Negative goodwill to be credited to P & L
a/c and not capital reserve.

Monday, July 6, 2009

 Key Difference: IGAAP &
IFRS
1. Financial Instruments:
 Financial instrument classified as liability or
equity in accordance with substance i.e.
Preference share
 Compound financial instruments to be split
into liability and equity components
 IAS 39 prescribes detailed rules on
recognition and measurement of financial
instruments i.e. FVPL, AFS, HTM and L&R
 IAS 39 also lays the standards on
derivatives
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 Key Difference: IGAAP &
IFRS
1. Income Taxes:
 IAS 12 is based on the balance Income
Taxes sheet liability method which focuses
on temporary differences whereas AS 22
Accounting for Taxes on Income is based on
the income statement liability method,
which focuses on timing differences
 Convincing evidence required that sufficient
taxable profit will be available under IFRS
for carrying tax losses, where as in IGAAP
three should be virtual certainty.
Monday, July 6, 2009
 Key Difference: IGAAP &
IFRS
1. Employee benefits & share based
payments:
 Actuarial gains and losses on defined benefit
plans
o Actuarial Gain / loss below 10% corridor
need not be recognized
o Actuarial Gain / loss above 10% corridor
can be deferred over remaining service
period or on accelerated basis
 Termination benefit – constructive as against
obligation legal obligation
IFRS
 Monday, requires ESOP expense to be
July 6, 2009
 Key Difference: IGAAP &
IFRS
1. Property, Plant & Equipment:
 Major repairs and overhaul expenditure
capitalized under IFRS whereas, Indian GAAP
requires these to be charged off to the profit
and loss account as incurred.
 IFRS requires estimates of useful lives and
residual values to be reviewed at least at
each financial year-end. In Indian GAAP,
there is no need for an annual review of
estimates of useful lives and residual values.

Monday, July 6, 2009

 Key Difference: IGAAP &
IFRS
1. Revenue recognition:
 Measurement
o Fair value / charges to customer
o Discounting
 Multiple element contracts
 Embedded derivatives

Monday, July 6, 2009

 Impact on IT Sector

 Technology companies enter into

bundled contracts and multiple
offerings.
 Stock options
 Outsourcing contracts
 Discounting of receivables &
payables
 Foreign exchange derivatives
Monday, July 6, 2009
Case Study – Infosys (P& L
IGAAP)

Monday, July 6, 2009

 Case Study – Infosys
(Income Statement IFRS)

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 Case Study – Infosys (B/S
IGAAP)

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Case Study –
Infosys
(Balance
Sheet IFRS)

Monday, July 6, 2009

 Reconciliation of Indian and
IFRS financial statements
2009 2008
Indian GAAP - standalone 5,819 4,470
Net profits of subsidiary companies 169 189
Minority interest - -
Indian GAAP - consolidates 5,988 4,659
Amortization of Goodwill (6) (29)
Share based compensation (7) (13)
IFRS net income 5,975 4,617
IFRS net income (USD million) 1,281 1,163

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 Case Study – Infosys (Ratio
Analysis)
Ratio Analysis
IFRS ($) Indian GAAP (Rs.)
2009 2008 2009 2008
Sales 4,663 4,176 21,693 16,692
Gross Profit 1,964 1,723 9,928 7,485
Operating Profit 1,374 1,159 6,434 4,640
Net Profit 1,281 1,163 5,988 4,659
Equity  3,784 3,916 18,254 13,795
Current Assets 3,120 3,127 16,646 13,018
Current Liabilities 537 549 3,872 4,191

Gross Profit Ratio (%) 42.12% 41.26% 45.77% 44.84%

Operating Profit Ratio (%) 29.47% 27.75% 29.66% 27.80%
Net Profit Ratio (%) 27.47% 27.85% 27.60% 27.91%
Return on Equity 33.85% 29.70% 32.80% 33.77%

Current Ratio (Times) 5.810056 5.695811 4.29907 3.10618

Monday, July 6, 2009
Monday, July 6, 2009
 Thank You

Monday, July 6, 2009