International Financial Reporting Standards (IFRS)...2

Having seen what is IFRS and why we need IFRS, let us now get into the IFRS little more. The approach I am going to take is, discuss on the following lines:

• How this IFRS evolved (to give a brief background)
  
• Give some background on the implementation in the world
• How many standards that are there?
• The plan in India for the convergence
• Give a brief summary of each of the standards

Do let me know if you need to have any more details that need to be covered.

How this IFRS evolved?

In 1973, the International Standard setting began through an agreement reached by 9 worldwide professional accounting bodies and resulted in the formulation of the International Accounting Standards Committee (IASC). The IASC comprised representatives from 14 countries and was the international standard setting body.

In 2000, the IASC's constitution was amended and a group of trustees were appointed. The IASC was renamed as the International Accounting Standards Board (IASB). IASB issues the IFRS. We saw in the earlier post that many countries in Europe and Asia Pacific made it mandatory and also the US. Having understood the benefits and seeing the universal acceptance, it was decided that India will also follow the suit.

In India, the accounting standards are issued by the Institute of Chartered Accountants of India (ICAI) and they are working on a smooth convergence with IFRS from the accounting period beginning on or after 1st April, 2011. Does that mean that we need to wait till 2011? The answer is NO. Why NO?

If you adopt IFRS for the period ending 31-mar-2011, you need to re-state the previous year's figures also under IFRS. So you need to convert the previous year's (period ending 31-Mar-2010) also under IFRS. So you need to do the exercise in 2009 close itself. We need to gear up in getting us prepared for the convergence.

There are many questions raised, as to :
1. whether it can be implemented in India?
2. whether it is that easy to implement?
3. what is the impact on Income tax?
4. Do we need to maintain separate set of books?
5. to what type of companies, the IFRS will be made mandatory?

You can add more questions...I do not have answers to most of the questions. ICAI is putting all its efforts to make it possible. But it has to work with the following regulators to make sure that the convergence is smooth and seamless:

a. RBI (reporting for the Banking companies)
b. IRDA (reporting for Insurance Companies)
c. Ministry of Corporate Affairs (for companies) & SEBI (for Listed companies)

Why do ICAI need to work with them? As you may be aware that the presentation of Financial Statements are governed by these authorities. For example, Schedule VI to the Companies Act, 1956 prescribes the minimum data that every company incorporated under the Act should publish in its audited Annual Accounts. Also, the Income Tax Act and Rules need to be changed/modified to take into consideration the future change in the accounting per IFRS. For example, if the financial statments are presented on a fair value basis, there bound to be unrecognised gain or loss. This will have an impact on the taxability.

Okay, while the ICAI is working on achieving their goal, let us start our preparation in understanding the IFRS. Let us start our journey with the assumption that ICAI is able to get the concurrence from the ministry to make it happen, as planned.

Some abbreviations that would be mostly used in the discussions,

• ASB - Accounting Standards Board (in India)
• GAAP - Generally Accepted Accounting Principles
• IAS - International Accounting Standards
• IASB - International Accounting Standards Board
• ICAI - Institute of Chartered Accountants of India
• IFRIC - International Financial Reporting Interpretations Committee
• IRDA - Insurance Regulatory Development Authority
• MCA - Ministry of Corporate Affairs (in India)
  
• NACAS - National Advisory Committee on Accounting Standards
• RBI - Reserve Bank of India
• SEC - Securities and Exchange Commission (in US)
• SEBI - Securities and Exchange Board of India

Following are the IFRS that are issued till date:

• 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

Let us get into each one of them slowly. I will also try to show how this differ from our Indian Accounting Standards and also USGAAP (to some extent)

Cheers,
Gopal