IFRS A GUIDEBOOK On Convergence To Global Accounting Standards VRK100 28032010

A GUIDEBOOK
ON IFRS
INTERNATIONAL
FINANCIAL
REPORTING
STANDARDS
RAMA KRISHNA VADLAMUDI
www.scribd.com/vrk100
www.ramakrishnavadlamudi.blogspot.com
vrk_100@yahoo.co.in
MARCH 28th, 2010

Rama Krishna Vadlamudi, BOMBAY March 28, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
IFRS – A GUIDE BOOK ON TRANSITITION TO

GLOBAL ACCOUNTING STANDARDS
The article analyses the fundamentals of IFRS, the

differences between USGAAP and IFRS and other related
issues in a comprehensive manner.
IFRS ADOPTION AND USE AROUND THE WORLD
More than 120 countries now require or permit the use of IFRSs or
are converging with the International Accounting Standards Board's
(IASB) standards.
The picture below shows the level of IFRS adoption at present. Blue
areas indicate countries that require or permit IFRSs. Grey areas are
countries seeking convergence with the International Accounting
Standards Board (IASB) or pursuing adoption of IFRSs.
Picture courtesy: IASB (2009)
Page 2 of 22
CONTENTS Page
1 Abbreviations used 3
2 Executive Summary 4
3 What is IFRS and its importance? 6
4 What are standard-setting bodies? 7
5 What are IASB and IASC Foundation? 7
6 What is the role of IOSCO? 8
7 Why do we need financial statements? 9
8 What are the objectives of Financial Reporting Standards? 10
9 What is the status of international adoption of IFRS? 11
10 What are the latest developments in IFRS? 11
11 What is global financial standards convergence? 12
12 What are the obstacles to global covergence? 13
13 Why is vital for investors to know about IFRS? 13
14 How does USGAAP compare with IFRS? 13
15 Does India need IFRS standards? 15
16 What is India's roadmap for IFRS convergence? 16
17 What are the issues involved in IFRS convergence in India? 17
18 How are Indian Banks preparing for IFRS? 19
19 What is the importance of new IFRS 9 on profits? 20
20 Some Important IFRS standards 21
1. ABBREVIATIONS USED
ADS : American Depository Share
CBDT : Central Board of Direct Taxes (of India)
FASB : Financial Accounting Standards Board (of the USA)
FCCB : Foreign Currency Convertible Bond
FIFO : First in, first out (a method used in inventory valuation)
FSA : Financial Services Authority (of the UK)
GDR : Global Depository Receipt
IASB : International Accounting Standards Board
IASC : International Accounting Standards Committee
IASCF : International Accounting Standards Committee Foundation
ICAI : Institute of Chartered Accountants of India
IFRS : International Financial Reporting Standards
IOSCO : International Organization of Securities Commissions
IRDA : Insurance Regulatory and Development Authority (of India)
LIFO : Last in, first out (a method used in inventory valuation)
MCA : Ministry of Corporate Affairs (India)
NACAS : National Advisory Committee on Accounting Standards (India)
RBI : Reserve Bank of India
SEBI : Securities and Exchange Board of India
SEC : Securities and Exchange Commission (of the US)
SOX : Sarbanes-Oxley Act
USGAAP : Generally Accepted Accounting Principles of the US
Page 3 of 22
2. EXECUTIVE SUMMARY
The financial year 2011-12 is going to be one of the most significant years since
the introduction of economic reforms in 1991 in india. Its significance can be
gauged from the fact that three important legislations are coming into effect from
April 1, 2011 as per the present indications and available information. They are:
1. Goods and Services Tax – GST (a long-pending reform of indirect taxes)
2. Direct Taxes Code – DTC (proposed to replace Income Tax Act)
3. Adoption of IFRS by companies in the Nifty 50 Sensex 30 indices and

other companies with net worth exceeding Rs 1,000 crore
These new acts are going to be very complex for ordinary investors. The
implications for companies are quite humungous. As such, investors need to be
well prepared for the changes that are going to happen in the next one year. All
these legislations and standards are going to be game changers in India.
Investors who overlook the impact are going to pay a heavy price for their
ignorance.
The valuations of companies and businesses are going to change in a

substantial manner with effect from April 1, 2011. Stock markets are supposed to
act ahead of time. As such, one can expect significant action on the bourses
based on the news flows relating to the introduction and passing of these new
legislations in India’s Parliament.
Ramesh Damani, a veteran broker from Bombay, has gone on record saying that
if the DTC implemented as per the draft released in August 2009, there is going
to be huge sell-off in the stock markets before the deadline of April 1, 2011 (DTC
proposes to eliminate the difference between long-term capital gains and short-
term capital gains on shares and mutual funds. Both LTCG and STCG will be
taxed at the rate of the individuals or others. At present, tax on LTCG is NIL and
tax on STCG is 15 per cent exclusive of surcharge and education cess.)
As such, investors have to familiarize themselves with the provisions and

implications of these new developments. To know about GST & DTC, just click:
Goods and Services Tax-GST-First Discussion Paper

www.scribd.com/doc/20582103
Page 4 of 22
Direct Taxes Code-DTC-Its impact on individuals, etc

Direct Taxes Code-DTC-Its impact on Long-term capital

gains and short-term capital gains of shares/MFs
This article discusses the significance of IFRS (International Financial Reporting
Standards) and its likely impact on the balance sheets of Indian companies.
The financial statements are extensively used by several groups of people –
including analysts, creditors and other stakeholders. Financial statements include
balance sheet, income statement, cash flow statement and others. They provide
useful information to users about the financial position and financial performance
of the company. IFRSs are developed by International Accounting Standards
Board (IASB), a global body headquartered in London. The IFRSs are expected
to replace national standards of respective countries, like, the USGAAP in the
US. They are uniform global accounting standards offering higher transparency
and disclosure requirements.
On 22 January 2010, the Ministry of Corporate Affairs (MCA) in India issued a press
release setting out the roadmap for International Financial Reporting Standards
(IFRS) convergence in India. The roadmap requires IFRS to be made applicable in
three phases starting from April 1, 2011. This is an historic step and will go a long
way in improving transparency and disclosure requirements of financial statements.
Leading Indian companies and banks have already begun to plan the conversion
to IFRS. The convergence to IFRS will have far-reaching implications for Indian
companies – in terms of initial public offers, disclosures, mergers and
acquisitions, fair value of financial assets, publication of quarterly results,
investors’ relations, debt offerings and raising foreign funds. These big
companies have got a year’s time to migrate to IFRS from Indian GAAP.
As of now, more than 120 countries use IFRS standards, including Australia,
New Zealand, the UK, countries in the European Union and African countries.
Japan, Brazil, Canada and India are moving towards IFRS in the next one year in
a phased manner replacing their national standards.
There are several benefits to Indian companies for implementing IFRS: 1. They
can raise money abroad with favourable credit terms; 2. Indian companies will
get international recognition and can avoid publication of financial statements
based on multiple standards; 3. They can list on foreign bourses much more
easily; 4. IFRS enhances the brand value of Indian companies abroad; and 5.
India will be in line with the world in terms of its commitment as part of G-20
Group of nations to implement these uniform global accounting standards.
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The biggest economy US, however, is slow to move from its USGAAP to IFRS. It
has been trying to narrow down the differences between its USGAAP and IFRS
accounting standards. Still, there are significant differences between USGAAP
and IFRS in the following areas: Upward revaluation of fixed assets, LIFO/FIFO
inventory valuation, treatment of extraordinary items and others. There are big
inconsistencies in the treatment of dividend/interest received and
dividend/interest paid between USGAAP and IFRS cash flow statements. The
development of IFRS and its convergence are on an evolutionary phase.
Leading companies and banks in India are gearing up to meet the deadline of 1st
of April 2011 set by the Government of India. The country’s leading bank, State
Bank of India, has set up a separate team to migrate to IFRS. RBI and Indian
Banks Association have been working together to set IFRS guidelines to banks.
3. WHAT IS IFRS AND ITS IMPORTANCE?
IFRS stands for International Financial Reporting Standards. IFRS standards are
set by an international body known as IASB. The objectives of IFRS are to
establish a single set of high quality global accounting standards that can be
adopted by several companies across countries and continents. More than 120
countries have already adopted or are at an advanced stage of implementing the
IFRS at their national level. Countries, like, Australia, the UK, countries in the
European Union and several countries in Africa have already moved toward
IFRS. Countries, like, Brazil, Canada and India are shifting their national
standards to IFRS in the next one year. The US has been making a slow
progress from its USGAAP standards to IFRS and it may take several more
years for complete convergence.
The IFRS standards are more transparent and easily acceptable to several users
of financial statements. Disclosure standards are very high under IFRS.
Comparability of companies’ balances sheets and income statements is much
more easier under IFRS.
The term IFRS refers to the new numbered series of pronouncements that the
IASB is issuing, as distinct from the International Accounting Standards (IASs)
series issued by its predecessor. More broadly, IFRS standards refer to the
entire body of IASB pronouncements, including standards and interpretations
approved by the IASB and IASs and SIC interpretations approved by the
predecessor International Accounting Standards Committee. IASs start from IAS
1 up to IAS 41; while IFRSs start from IFRS 1 up to IFRS 9. Some of the IASs
are superseded by other standards. All these IASs and IFRSs have been
effectively implemented except IFRS 9 which is slated to be implemented with
effect from 1st of January 2013. In addition, IASB has developed another IFRS for
SMEs (Small and Medium-sized Entities) which was implemented in 2009.
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4. WHAT ARE STANDARD-SETTING BODIES?
In general, standard-setting bodies are professional organizations in the private

sector. They are responsible for the formulation, development and setting
accounting standards for corporate bodies and other entities in a particular
country. In the US, the standard-setting body is FASB, the Financial Accounting
Standards Board.
In addition, there are regulatory authorities that take care of regulation and
overall supervision from the Government level. In the US, the regulatory authority
under the government is SEC, the Securities and Exchange Commission and in
the UK, it is called the Financial Services Authority. These regulators oversee the
implementation of accounting standards made by the standard-setting bodies.
Internationally, IASB, the International Accounting Standards Board is
responsible for the creation and development of global standards that are used
by several countries and multi-national corporations (MNCs).
In India, the standard-setting body is ICAI, The Institute of Chartered
Accountants of India, which is a professional body set up under an act of Indian
Parliament for the maintenance of high accounting, auditing and ethical
standards in India. ICAI now is the second largest accounting body in the whole
world. Now, the role of standard setting is taken over by the National Advisory
Committee on Accounting Standards (NACAS) and these accounting standards
are binding on companies and their auditors. However, Guidance Notes are
issued by the ICAI for the benefits of members and some of them are mandatory
and some are recommendatory.
5. WHAT ARE IASB AND IASC FOUNDATION?
Prior to 2001, IASB is known as IASC, the International Accounting Standards

Committee. IASC was established in 1973 and IASB was formed in 2001. The
International Accounting Standards Board, headquartered in London, is a global
body responsible for creation and development of international financial reporting
standards, popularly known as IFRSs. There are four goals of IASB and they are:
1. Developing global accounting standards which are transparent,

understandable, enforceable, consistent and high quality
2. Promoting these standards
3. To work for the convergence of national and accounting standards
4. Taking care of special needs of small and medium entities (SMEs) and
emerging market economies
Page 7 of 22
More than 120 countries now require or

permit the use of IFRSs or are converging with
the International Accounting Standards Board's
(IASB) standards.
The objective of the IASC Foundation and the IASB is to develop, in the public
interest, a single set of high-quality global accounting standards. In pursuit of this
goal, the IASB works in close cooperation with stakeholders around the world,
including investors, national standard-setters, regulators, auditors, academics,
and others who have an interest in the development of high-quality global
standards.
The IASB is the independent standard-setting body of the IASCF. IASB is

supervised by the International Accounting Standards Committee Foundation.
IASCF has got 20 trustees who promote the work of IASB and rigorous
application of IFRSs. India is proud to have one of its leading businessmen, T V
Mohandas Pai, Director and Member of the Board, Infosys Technologies Limited,
Bangalore, as one of the Trustees. His term expires in December 2011. The
IASC Foundation is an independent, not-for profit private sector organization,
working in the public interest.
6. WHAT IS THE ROLE OF IOSCO?
The International Organization of Securities Commissions is an international

forum of capital market regulators of the world. It was set up in 1983. At present,
it has got 110 ordinary members from all the major countries of the world. It
represents about 90 per cent of the securities market regulators in the world. It is
headquartered in Madrid, the capital of Spain.
According to IOSCO, the three objectives of securities regulation are:
The protection of investors;

Ensuring that markets are fair, efficient and transparent; and,
The reduction of systemic risk
Page 8 of 22
The body is responsible for the cooperation among capital market regulators to
promote high standards of regulation in order to maintain just, efficient and sound
markets. The regulators exchange information and unite their efforts to establish
standards; effective surveillance of international securities transactions and
promote the integrity of financial markets around the world. It is also working for
the promotion of uniform regulation.
IOSCO works closely with IASB, IASC Foundation, other standard-setting bodies
and regulators for the global convergence of accounting standards.
SEBI, the capital markets regulator in India, is an ordinary member of IOSCO.

Forwards Markets Commission (FMC), the commodities market regulator in India
is as associate member of IOSCO. The FSA in the UK and the SEC in the US
are ordinary members of IOSCO.
7. WHY DO WE NEED FINANCIAL STATEMENTS?
A variety of users use the financial statements, like, balance sheet, profit and
loss account, cash flow statement and others of companies and other entities.
The body of users includes investors, creditors, credit rating agencies, bankers,
financial analysts, management, regulators, standard-setting bodies, auditors
and shareholders.
The financial statements are most important in security analysis and valuation. In
fact, these are the springboards to know about a company’s financial health and
the soundness of its operations.
With the help of financial statements, the users are expected to assess the
financial position of a company in terms of assets, liabilities and equity. In
addition, they can measure the financial performance in terms of income and
expenses.
Suppose a financial company or a bank is considering a credit proposal for a

company. The bank has to study the financial statements of the company to
evaluate its borrowing needs.
Likewise, an analyst may want to find out the valuation of a listed company for
investment purposes; then she has to necessarily dissect the numbers given in
the financial statements of the company. These are only a few examples.
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According to IASB, the following are the necessary financial statements and
fundamental principles underlying their preparation:
Financial Statements Fundamental Principles
1. Balance Sheet 1. Fair presentation

2. Income Statement or Profit & Loss a/c 2. Going concern
3. Statement of Cash Flows 3. Accrual basis
4. Statement of changes in Equity 4. Consistency
5. Notes to Accounting policies and 5. Materiality
others
1. Easy understandability by users

In order to understand the
financial statements properly, 2. Relevant and timely information
there are four essential features
3. Reliable information free from errors
that financial statements should
satisfy. They are: 4. Comparability of information across
companies
8. WHAT ARE THE OBJECTIVES OF FINANCIAL REPORTING STANDARDS?
As the financial statements are used by a large number of stakeholders, they are
to be prepared by accountants in such a uniform and consistent way so that all
the users of the statements understand them in a like manner. There should not
be any confusion among the users with regard to figures, statistics or
interpretation of the financial statements. There is a need to maintain consistency
in financial statements and to make them understandable to all in a simple and
similar way.
The International Accounting Standards Board (IASB) has expressed the

objective of Financial Reporting in a lucid way:
“The objective of financial statements is to provide information about the financial

position, performance and changes in financial position of an entity; this
information should be useful to a wide range of users for the purpose of making
economic decisions.”
Page 10 of 22
9. WHAT IS THE STATUS OF INTERNATIONAL ADOPTON OF IFRS?
The following table shows the status of IFRS adoption across continents:
(The list is only for information purpose. For accuracy of information, please refer to the
respective countries’ standard setting bodies:
Country Status of IFRS adoption
AFRICA Egypt, Kenya, Malawi, South Africa and Tanzania have made it
mandatory for domestic companies to adopt IFRS
ASIA Japan is adopting IFRS in a phased manner wef 31st of March 2010.
India has made it compulsory for big companies to adopt IFRS from
1.4.2011. China has implemented IFRS for domestic companies.
Around 150 Chinese companies are listed on the Hong Kong Stock
Exchange and they are permitted to use IFRS or HK standards.
Singapore, Burma, Sri Lanka and Hong Kong have implemented
standards similar to IFRSs with some exceptions.
AUSTRALIA Australia and New Zealand have already adopted IFRS
CANADA It is adopting IFRS from 2011
EUROPE The European Union (EU) has already made it mandatory for EU
countries to adopt IFRS since 2005
RUSSIA It has introduced IFRS for banks and other companies in a phased
manner. But Russia's national standards differ from IFRSs significantly.
SOUTH Countries, like, Ecuador, Nicaragua, Peru and Venezuela have
AMERICA adopted IFRS in the past in a phased manner. Brazil is adopting IFRS
with effect from December 2010.
UNITED The US has in principle agreed to switch over to IFRS. The US is trying
STATES for convergence with IFRS but the process is slow and may take
several more years.
10. WHAT ARE THE LATEST DEVELOPMENTS

IN FINACIAL STANDARDS?
Progress toward the goal of global convergence of accounting standards has

been steady. Since 2001, more than 120 countries have required or permitted
the use of International Financial Reporting Standards (IFRSs), while the
remaining major economies have established timelines for convergence with, or
adoption of, IFRSs. The notable exception to convergence of IFRSs is the USA.
Page 11 of 22
The IASB and FASB have made progress towards substantial convergence
between IFRSs and USGAAP. Several memoranda of understanding were
signed since 2006 and in November 2009 the two boards issued a further
statement outlining steps for completing their convergence work by 2011.
Most recently, at their September 2009 meeting in Pittsburgh, US, the Group of
20 Leaders (G20) reaffirmed their commitment to global convergence in
accounting standards, calling for a single set of high-quality, global accounting
standards within the context of their independent standard-setting process, and
complete their convergence project by June 2011. Japan is moving towards IFRS
with effect from 31st of March 2011 in a phased manner. Brazil too is shifting
towards IFRS with effect from December 2010.
11. WHAT IS GLOBAL FINANCIAL STANDARDS CONVERGENCE?
The degree of globalization has increased by several folds in the past two
decades. This calls for a need to have uniform and consistent set of regulations
that can be used by investors and analysts across the world. From the principles
of consistency, uniformity and correct interpretation of financial statements, there
is a vital need for adoption of single set of standards that are useful to all types of
global users of financial statements. As of now, more than 120 countries have
adopted IFRS standards at their national level – some partially and some fully.
The USA, the biggest country financially, is yet to adopt these standards creating
a need to unite their standards with those at the international level. As such,
IASB and FASB have been working together to move towards the goal of single
set of accounting standards accepted by the entire world. This is necessary to
achieve the objective of eliminating the differences between IFRS and USGAAP.
Towards this direction, both IASB and FASB came to an agreement in 2002
known as “Norwalk Agreement” setting out their commitment to the development
of compatible accounting standards that are useful to all. The FASB has been
working with IASB for convergence of USGAPP to IFRS and narrow the
differences. However, full alignment between IFRS and USGAAP, for a creating
a unique set of globally accepted accounting principles, may take much longer
time according to the present indications. A common set of high quality global
standards remains a priority for both the IASB and the FASB.
Accounting Scandals involving corporations, like, the Enron Corporation,
Worldcom and Arthur Andersen of the US in the early 2000s, have highlighted
the role of accounting standards in maintaining utmost integrity. These high
profile scandals have led to the introduction of Sarbanes-Oxley Act (SOX) in the
US in 2002 in order to strengthen investor protection laws. Even India suffered
corporate scandals from the likes of Satyam Computers in early 2009.
Page 12 of 22
12. WHAT ARE THE OBSTACLES TO GLOBAL CONVERGENCE?
However, the global convergence of accounting standards is not a smooth matter

for a variety of reasons. One important factor that is creating hurdles for
convergence is the powerful lobby of some corporations who have got vested
interests in keeping the existing standards which may be lax in certain cases.
And then there are dissimilarities between various standard-setting bodies and
regulators in order to protect their own national standards that may be more
useful in a domestic context. This has led to some political pressures also.
13. WHY IS IT VITAL FOR INVESTORS TO KNOW ABOUT IFRS?
Accounting standards are important for companies. For example, on March 31,
2009, Government of India diluted accounting standard AS-11, pertaining to
mark-to-market provisioning for foreign exchange-related gains and losses;
allowing foreign exchange losses to be deducted from the cost of fixed cost for
the financial year 2008-09 by postponing the implementation of AS-11 from
March 31, 2009 to March 31, 2011. This dilution has helped quite a few large
companies (like, Reliance Communications, Tata Motors, JSW Steel, Sterlite
Industries, M&M, Bharat Forge and Ashok Leyland) report a better profit picture
as on 31st of March 2009.
Likewise, the IFRS migration is going to impact the Indian companies in different
ways in terms of their profits, quarterly results, treatment of extraordinary items,
consolidated financial statements, etc. Only experts can fathom the impact on
profits and the size of the balance sheet. One can expect research reports from
brokerages, research houses and firms in the next one year, detailing the impact
of the newly developed accounting standards. Assessing the impact of IFRS
standards on holding companies with several subsidiaries – foreign as well as
local – is much more complex due to the enormity of IFRS standards and its
Framework. It will be a Himalayan task for analysts to decipher the ramifications
from a balance sheet and income statement perspective.
14. HOW DOES IFRS COMPARE WITH USGAAP?
There are significant differences between IFRS and USGAAP. While calculating
financial ratios, analysts need to be aware of them. For example, USGAAP
allows LIFO method of inventory valuation which allows US companies to report
lower profits and consequently pay lower taxes in an inflationary environment.
Page 13 of 22
By using LIFO method, US companies will be able to show higher raw material
cost in the income statement which depresses the net income* and resulting in
lower taxes for them.
This will ultimately gets reflected in profitability ratios, like, Return on Equity
(RoE), etc. With lesser profits to declare, the companies will show lower RoE.
Historical data suggests that the difference in RoE for IFRS and USGAAP
calculations can be as large as 3 to 4 per cent in several cases.
(* The word ‘net income’ is used in the context of international terminology and followed in the US and
other countries. Net income is equal to net profit – the latter word is used in India for profit after tax. In
this article, whenever the word ‘net income’ is used, it is used in the context of net profit only.)
There are a large number of differences between the provisions of these two
standards. Presenting all of them is outside the scope of this article. Following
are some of the main differences:
IFRS USGAAP
1. Principles based approach 1. A combination of principles and rules

based approach
2. Upward revaluation of assets (property, 2. Upward revaluation of assets is not
plant & equipment) and intangible assets allowed
is allowed
3. Weighted average cost and FIFO are 3. Weighted average cost, LIFO & FIFO
permitted for inventory valuation; LIFO is are allowed for inventory valuation
not permitted
4. IFRS does not allow any items to be 4. Extraordinary items shall be reported
classified as "extraordinary items" in the income statement, net of tax,
below income from continuing
operations
5. While consolidating accounts for long-term 5. USGAAP uses a dual model based on
investments, IFRS uses a voting control voting control and economic control
method for consolidation for consolidation
6. Deferred tax assets and liabilities are 6. Deferred tax assets and liabilities are
classified net as NON-CURRENT on the classified as current or non-current,
balance sheet with additional disclosures based on the classification of related
tax asset or liability for financial
reporting
Note: USGAAP allows LIFO method of inventory valuation, which allows US companies
to report lower profits and pay lower taxes during an inflationary period
Page 14 of 22
DIFFERENCES IN CASH FLOW STATEMENTS: There are significant differences

in Cash Flow statements (Operating, Investing or Financing activity):
IFRS USGAAP
1. Interest received can be Operating or 1. Interest received is Operating activity

investing activity
2. Dividend received can be Operating or 2. Dividend received is Operating activity
investing activity
3. Interest paid can be Operating or 3. Interest paid is Operating activity
financing activity
4. Dividends paid can be Operating or 4. Dividends paid is Financing activity
financing activity
As can be seen from above, IFRS permits more flexibility in classifying cash flows
15. DOES INDIA NEED IFRS STANDARDS?
With increased globalization, several Indian companies have acquired large

assets and expanded their businesses abroad through stake buys, outright
acquisition and others. Uniform accounting rules, like, IFRS are extremely useful
to such companies. With the adoption of IFRS, raising funds abroad through
ADS, GDR or FCCB will be quite easy for Indian companies. Migration to IFRS
will lower the cost of raising money as it will obviate the need for preparing a
multiple set of financial statements (like, Indian GAAP, USGAAP or other).
Moreover, the entire world is moving towards IFRS or accounting standards that
bear close resemblance to IFRS. IFRS is expected to increase the transparency
in financial statements which will help investors, creditors and other stakeholders
in a better manner.
Even during the summit meeting of the Group of 20 leaders (G-20) held in
September 2009, India had committed itself to global convergence in accounting
standards and complete the convergence project by June 2011.
Several Indian companies and banks have created separate bodies for eventual
implementation of IFRS as per the roadmap for transition. IFRS-compliant
financial statements have a high brand value globally and the transition to IFRS
will allow Indian companies to list their shares on foreign bourses much more
easily. Companies may be able to get better credit rating from agencies.
Page 15 of 22
16. WHAT IS INDIA'S ROADMAP FOR IFRS?
The Indian Government had on 22nd of January 2010 released the roadmap for
convergence of Indian Accounting Standards with the globally acknowledged
International Financial Reporting Standards (IFRS). The Core Group, constituted by
the Ministry of Corporate Affairs for convergence of Indian Accounting Standards
with IFRS from 1st of April 2011, that held its meeting on 11th of January 2010
had agreed for a clear roadmap. There will be two sets of accounting standards:
FIRST SET OF ACCOUNTING STANDARDS

PHASE 1
Date Coverage
Opening balance a. Companies which are part of NSE Index – Nifty 50
sheet as at 1 April
2011* b. Companies which are part of BSE Sensex – 30
c. Companies whose shares or other securities are

listed on a stock exchange outside India
d. Companies, whether listed or not, having net worth
of more than Rs 1,000 crore
PHASE 2
Date Coverage
Opening balance Companies (whether listed or not) not covered in
sheet as at 1 April phase 1 and having net worth exceeding Rs 500
2013* crore, but not exceeding Rs 1,000 crore
PHASE 3
Date Coverage
Opening balance Listed companies (not covered in phase 1 and 2)
sheet as at 1 April having net worth of Rs 500 crore or less
2014*
* When the accounting year ends on a date other than 31st March, the
conversion of the opening Balance Sheet will be made in relation to the first
Balance Sheet which is made on a date after 31st March.
If an Indian company's financial year is April to March, that company will have to shift
to IFRS with effect from FY 2011-12, if it falls under phase 1. Accordingly, the
company will have to reset its balance sheet for FY 2010-11 as per IFRS.
Page 16 of 22
According to an Economic Times’ estimate, IFRS will be adopted by about 400

Indian companies from 1st of April 2011 in the First Phase of implementation.
This is highly significant from a stock market point of view.
SECOND SET OF ACCOUNTING STANDARDS

Companies which fall in the following categories will not be required to follow
the notified accounting standards which are converged with the IFRS (though
they may voluntarily opt to do so) but need to follow only the notified
accounting standards which are not converged with the IFRS. These
companies are: -
a. Non-listed companies which have a net worth of Rs. 500 crores or less and
whose shares or other securities are not listed on Stock Exchanges outside
India
b. Small and Medium Companies (SMCs).
The salient features of the roadmap are:
1. There will be two separate sets of Accounting Standards under Section

211(3C) of the Companies Act, 1956 – as given above
2. First set would comprise of the Indian Accounting Standards which are
converged with the IFRSs which shall be applicable to the specified class
of companies – the details are given above
3. The second set would comprise of the existing Indian Accounting
Standards and would be applicable to other companies, including Small
and Medium Companies (SMCs). But IFRS convergence will only be
voluntary for SMCs.
4. For Banking and Insurance companies there will be a separate roadmap
5. The ICAI has submitted to the MCA revised Schedule VI to the
Companies Act, 1956. The NACAS shall review the draft and submit a
revised Schedule VI to the MCA. Amendments to Schedule XIV will also
be carried out in a time bound manner.
17. WHAT ARE THE ISSUES INVOLVED IN

IFRS CONVERGENCE IN INDIA?
The transition to convergence between Indian GAAP and IFRS is not going to be
smooth. As mentioned above, the transition is going to be done in a phased
manner in the next four years. The following are some of the issues that need to
be sorted out before the elimination of differences:
Page 17 of 22
INCOME TAX ISSUES:

CBDT is working with ICAI to examine the direct tax issues arising out of
the convergence between IFRS and Indian GAAP
It remains to be seen whether CBDT will full adopt IFRS for taxation
purposes
The problem of income tax will get more complicated for Indian
companies which have acquired several subsidiaries abroad, while
preparing the consolidated financial statements
Consolidated financial statements concern companies having joint
ventures, subsidiaries and associates. According to IFRS norms,
companies will have to present their interim financial statements (like
quarterly results) also on a consolidated basis.
Some experts contend the draft Direct Taxes Code (DTC) is very averse
to IFRS and does not recognize fair value measurement
Fair value accounting concept is the bedrock of IFRS
IMPLEMENTATION and COMPLIANCE COSTS:
The cost of implementation of IFRS convergence is going to be huge
Training cost of making employees being aware of IFRS provisions and
implications is also very big
AMENDMENTS TO VARIOUS LAWS:
Before implementation of IFRS, various laws need to be amended and
approved in Indian Parliament
Some of the laws that need to amended are Companies Act (specifically
Schedule VI of the Act), Income Tax Act (or the proposed Direct Taxes
Code), SEBI norms, banking laws like the Banking Regulation Act,
insurance laws, etc
INSURANCE COMPANIES:
Under IFRS a large part of the premium of insurance companies is

treated as investment liability (as against Indian GAAP treating it as
revenue) as they have to return it to the investors. This will create a big
dent in their financial statements. IRDA regulates financial reporting by
insurance companies in India.
IT AND ERP SYSTEMS:
Convergence to IFRS requires companies to upgrade their IT and ERP
systems in a robust manner
There is a need to improve their Management Information Systems (MIS)
The convergence to IFRS is a big opportunity for IT companies training
institutions and tax consultants
Page 18 of 22
DIFFERENCES BETWEEN IFRS and Indian GAAP (Cash Flows):
IFRS Indian GAAP
1. Interest received can be Operating or 1. Interest received is Investing activity.

investing activity In case of a financial enterprise, it is
operating activity.
2. Dividend received can be Operating or 2. Dividend received is Investing activity.
investing activity In case of a financial enterprise, it is
operating activity.
3. Interest paid can be Operating or 3. Interest paid is Financing activity.
financing activity In case of a financial enterprise, it is
operating activity.
4. Dividends paid can be Operating or 4. Dividends paid is Financing activity
financing activity
18. HOW ARE BANKS PREPARING FOR IFRS?
With the Government deciding to implement IFRS with effect from 1st of April
2011 in a phased manner, RBI is expected to come with clarifications on how
IFRS will be implemented in Indian Banks. The regulator is a member of a
committee convened by the ministry of corporate affairs to finalize IFRS rules
that will be applicable in India.
Indian Banks Association (IBA), an industry body of Indian Banks, has set up a
committee to guide banks in shifting towards IFRS framework. A lot of issues
have to be addressed and banks have to adopt IFRS suitably to fit India’s need.
The following issues will have a big impact on banks while adopting IFRS:
1. Provisioning for NPAs will change radically. Indian Banks currently follow
RBI norms and Indian Accounting Standards according to which losses
due to non-performing assets is based on what is actually incurred. But
under IFRS, banks will have to make an estimation of all future NPAs
based on an expectation of losses leading to upfront recognition of losses.
2. Presentation of financial statements
3. Financial Instruments-Disclosures: The two main categories of disclosures
required by the new IFRS standard No. 7 are: (i). information about the
significance of financial instruments and (ii). information about the nature
and extent of risks (liquidity risk, market risk and credit risk) arising from
financial instruments. The IFRS 7 provides for extensive disclosures under
the above two categories and it will be a daunting task for the banks to
disclose all such information in their financial statements.
Page 19 of 22
4. Financial instruments and derivatives accounting: At present, valuation of

investments by banks are classified as Helf for Trading (HTM), Available
for Sale (AFS) and Held to Maturity (HTM). Under IFRS, all these
investments are all mostly required to be treated as Held for Trading and
they should be valued at fair value in the books. Fair value is defined as
the amount at which an asset could be exchanged, or a liability settled,
between willing and knowledgeable parties or market participants. When
the asset or liability trades regularly, its fair value is usually readily
available from its market price. All derivative instruments are to be
recognized at fair value on the balance sheet under IFRS.
State Bank of India, the country’s biggest commercial bank, has formed a
separate team to work on a smooth transition from Indian GAAP to IFRS.
19. WHAT IS THE IMPACT NEW IFRS 9 ON PROFITS?
HDFC Limited is an Indian-based financial institution renowned the world over. It

has got huge investments which are quoted at book value. The balance sheet
value of these several unquoted investments is very low. And their market value
could be much higher by several folds. When HDFC moves towards IFRS from
1st of April 2010, how does the new standards affect the valuation of its unquoted
investments, whose market value could be in hundred of crores of rupees? It
remains to be seen whether HDFC will have to pay income tax on the difference
between book value and the fair value of these investments. How the Indian tax
authorities will interpret and implement the provisions of IFRS is in the realm of
speculation.
Now, HDFC Limited has decided to unlock the value of its unquoted investments
by transferring them to a Special Purpose Vehicle (SPV) and selling a portion of
their investments in small portions to private equity or other investors. This is an
interesting move by the company. Is it creating an SPV in order to move
smoothly towards IFRS convergence or is it a simple case of unlocking value?
The IASB has introduced a new standard, namely IFRS 9, relating to Financial
Instruments: classification and measurement of financial assets. This is going to
be effective from 1st of January 2013. The details are given below:
Overview of IFRS 9:
The new standard IFRS 9 is expected to be implemented with effect from 1st of
January 2013. It will replace the existing IAS 39. According to IFRS 9, all
financial assets are initially measured at fair value plus, in the case of a financial
asset not at fair value through profit or loss, transaction costs.
Page 20 of 22
IFRS 9 divides all financial assets that are currently in the scope of IAS 39 into
two classifications – those measured at amortised cost and those measured at
fair value. The new IFRS 9 does away with the classification of Available for Sale
(AFS) and Held to Maturity (HTM) categories for financial assets (under the
existing IAS 39), which are extensively used by companies and banks now.
Debt instruments: A debt instrument that meets the following two conditions can
be measured at amortised cost (net of any writedown for impairment): 1. An
entity is holding the financial asset to collect the future cash flows and 2. The
contractual cash-flows are solely payments of principal and interest.
All other debt instruments must be measured at fair value through profit or loss
(FVTPL).
Equity instruments: All equity investments in scope of IFRS 9 are to be
measured at fair value in the balance sheet, with value changes recognised in
profit or loss, except for those equity investments for which the entity has elected
to report value changes in 'other comprehensive income'. There is no 'cost
exception' for unquoted equities.
'Other comprehensive income' option: If an equity investment is not held for
trading, an entity can make an irrevocable election at initial recognition to
measure it at fair value through other comprehensive income (FVTOCI) with only
dividend income recognized in profit or loss.
Derivatives: All derivatives, including those linked to unquoted equity
investments, are measured at fair value. Value changes are recognised in profit
or loss unless the entity has elected to treat the derivative as a hedging
instrument in accordance with IAS 39, in which case the requirements of IAS 39
apply.
20. SOME IMPORTANT IFRS STANDARDS
The following are the standards in the series of IFRSs:

IFRS DETAILS
1 First Time Adoption of IFRSs
2 Share-based Payment
3 Business Combinations
4 Insurance Contracts
5 Non-current assets held for sale and discontinued operations
6 Exploration for and Evaluation of Mineral Assets
7 Financial Instruments: Disclosures
8 Operating Segments
9 Financial Instruments: Classification and measurement of financial assets
Page 21 of 22
Sources:
1. www.iasb.org
2. www.iosco.org
3. www.iasplus.com
4. Press release of Ministry of Company Affairs
5. Newspapers and websites
6. www.cfainstitute.org
Disclaimer: The views of the author are personal. This research paper is prepared for
information purpose to the general reader only. For correct interpretation of the
provisions and tax-related matters, readers are advised to consult their recognized tax
consultants or qualified chartered accountants.
To view my previous article on IFRS written in 2007, just click:
IFRS-THE NEW ACCOUNTING STANDARDS

In addition to articles mentioned above, the following documents may be of some

interest to you:
To know new income tax slabs for FY 2010-11, JUST CLICK:

Retirement Plans with HIGHEST SAFETY for Indians-03012010

BEST TAX SAVING MUTUAL FUNDS

RELIANCE DIVERSIFIED POWER SECTOR FUND-Is it worth investing?
What is Sensex and its importance in Indian Stock markets
COVER, COVER and WHAT INSURANCE COVER?
Page 22 of 22

IFRS A GUIDEBOOK On Convergence To Global Accounting Standards VRK100 28032010

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A GUIDEBOOK

MARCH 28th, 2010

IFRS – A GUIDE BOOK ON TRANSITITION TO

The article analyses the fundamentals of IFRS, the

IFRS ADOPTION AND USE AROUND THE WORLD

Picture courtesy: IASB (2009)

1. Goods and Services Tax – GST (a long-pending reform of indirect taxes)

2. Direct Taxes Code – DTC (proposed to replace Income Tax Act)

3. Adoption of IFRS by companies in the Nifty 50 Sensex 30 indices and

The valuations of companies and businesses are going to change in a

As such, investors have to familiarize themselves with the provisions and

Goods and Services Tax-GST-First Discussion Paper

Direct Taxes Code-DTC-Its impact on individuals, etc

Direct Taxes Code-DTC-Its impact on Long-term capital

3. WHAT IS IFRS AND ITS IMPORTANCE?

4. WHAT ARE STANDARD-SETTING BODIES?

In general, standard-setting bodies are professional organizations in the private

5. WHAT ARE IASB AND IASC FOUNDATION?

Prior to 2001, IASB is known as IASC, the International Accounting Standards

1. Developing global accounting standards which are transparent,

More than 120 countries now require or

The IASB is the independent standard-setting body of the IASCF. IASB is

6. WHAT IS THE ROLE OF IOSCO?

The International Organization of Securities Commissions is an international

According to IOSCO, the three objectives of securities regulation are:

The protection of investors;

SEBI, the capital markets regulator in India, is an ordinary member of IOSCO.

7. WHY DO WE NEED FINANCIAL STATEMENTS?

Suppose a financial company or a bank is considering a credit proposal for a

Financial Statements Fundamental Principles

1. Balance Sheet 1. Fair presentation

1. Easy understandability by users

8. WHAT ARE THE OBJECTIVES OF FINANCIAL REPORTING STANDARDS?

The International Accounting Standards Board (IASB) has expressed the

“The objective of financial statements is to provide information about the financial

9. WHAT IS THE STATUS OF INTERNATIONAL ADOPTON OF IFRS?

Country Status of IFRS adoption

10. WHAT ARE THE LATEST DEVELOPMENTS

Progress toward the goal of global convergence of accounting standards has

11. WHAT IS GLOBAL FINANCIAL STANDARDS CONVERGENCE?

12. WHAT ARE THE OBSTACLES TO GLOBAL CONVERGENCE?

However, the global convergence of accounting standards is not a smooth matter

13. WHY IS IT VITAL FOR INVESTORS TO KNOW ABOUT IFRS?

14. HOW DOES IFRS COMPARE WITH USGAAP?

1. Principles based approach 1. A combination of principles and rules

DIFFERENCES IN CASH FLOW STATEMENTS: There are significant differences

1. Interest received can be Operating or 1. Interest received is Operating activity

15. DOES INDIA NEED IFRS STANDARDS?

With increased globalization, several Indian companies have acquired large

16. WHAT IS INDIA'S ROADMAP FOR IFRS?

FIRST SET OF ACCOUNTING STANDARDS

c. Companies whose shares or other securities are

According to an Economic Times’ estimate, IFRS will be adopted by about 400

SECOND SET OF ACCOUNTING STANDARDS

The salient features of the roadmap are:

1. There will be two separate sets of Accounting Standards under Section

17. WHAT ARE THE ISSUES INVOLVED IN

INCOME TAX ISSUES:

Under IFRS a large part of the premium of insurance companies is

DIFFERENCES BETWEEN IFRS and Indian GAAP (Cash Flows):

IFRS Indian GAAP

1. Interest received can be Operating or 1. Interest received is Investing activity.