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September 8th, 2007
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GENESIS OF IFRS
International Financial Reporting Standards are standards adopted by the
International Accounting Standards Board (IASB), a body earlier known as IASC (C for
Committee). The London-based Board started its operations in 2001 for developing
global accounting standards. IFRS came into limelight when the European Union
decided to adopt it for all its member countries starting 2005. Since then, IFRS has
spread swiftly all over the world. IFRS standards are principle-based whereas US GAAP
standards are rule-based. Indian standards are basically modeled on the basis of IFRS.
COVERGENCE
APPLICABILITY
In the USA, the Securities and Exchange Commission (SEC, akin to our SEBI) is
proposing to eliminate, for IFRS foreign filers, the reconciliation requirement to US
GAAP. In April 2007, SEC lined up proposals to allow companies listed in the US to
choose betwen IFRS or US GAAP for reporting purposes to make a choice from 2009.
• This will greatly bolster the ability of Indian companies to raise and attract foreign
capital at low cost
• Once Indian companies adopt IFRS, the global acceptability of them will be
enhanced
With the ongoing integration of Indian economy with the global economy, several
Indian companies are becoming truly multi-national. Tata Steel has recently acquired
Corus, UK, creating the fifth biggest steel producer in the world. Hindalco Industries has
taken over Novelis Inc. Companies, like, Dr.Reddy’s, Aban Offshore, Sun Pharma, and
Bharat Forge have acquired foreign firms thus globalising the world.
Significant differences exist between the Indian GAAP and the IFRS. An example is
accounting for amalgamations and mergers. Indian GAAP is very liberal in this respect
whereas IFRS is rather stringent.
• In India, fixed assets are valued at the price they were bought (historical cost)
after allowing for depreciation. But this historical cost does not reflect the current
fair market value of assets. Once IFRS is implemented, such anomalies will be
removed.
Indian companies, including banks, will have to gear up themselves for the
deadline set by the ICAI for the implementation of IFRS. The proposed standards would
mark a shift from the principle of conservatism and prudence in accounting to a regime
of faithful representation. The proposed revision of standards would bring in refined
measurement of assets and liabilities. The chain effects of differential interest rates,
transfer pricing within corporate groups, directed lending (government-supported interest
incentives) etc., would be recognized in balance sheets. RBI is likely to set up a
committee to study the implications of the IFRS-compliant standards for the banking
sector.
At present, State Bank Group has been reconciling its financial statements under
Indian GAAP with US GAAP. In future, it will be mandatory for State Bank Group to
adopt IFRS thus eliminating the need for reconciliation with the US GAAP.