International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company

accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. The rules to be followed by accountants to maintain books of accounts which is comparable, understandable, reliable and relevant as per the users internal or external. IFRS began as an attempt to harmonise accounting across the European Union but the value of harmonisation quickly made the concept attractive around the world. They are sometimes still called by the original name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new International Accounting Standards Board took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standardsInternational Financial Reporting Standards (IFRS). In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgement, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework.

International financial reporting standards Globalization of financial markets has meant an increased focus on international standards in accounting and has intensified efforts towards a single set of high quality, globally acceptable set of accounting standards. Financial statements prepared in different countries according to different set of rules, mean numerous national sets of standards, each with its own set of interpretation about a similar transaction, making it difficult to compare, analyse and interpret financial statements across nations. A financial reporting system supported by strong governance, high quality standards, and firm regulatory framework is the key to economic development. Indeed, sound financial reporting standards underline the trust that investors place in financial reporting information and thus play an important role in contributing to the economic development of a country. Needless to mention, internationally accepted accounting standards play a major role in this

entire process. It is in this context that the role of an independent, global standard-setting body such as the International Accounting Standards Board (IASB) is of critical importance. The principal objectives of the IASB are: a. to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standardsetting body, the IASB; b. to promote the use and rigorous application of those standards; c. to take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and d. to bring about convergence of national accounting standards and IFRSs to high quality solutions.

Adoption of IFRS[edit source | editbeta]

IFRS are used in many parts of the world, including the European Union, India, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, Chile, South Africa, Singapore and Turkey. As of August 2008, more than 113 countries around the world, including all of Europe, currently require or permit IFRS reporting and 85 require IFRS reporting for all domestic, listed companies, according to the U.S. Securities and Exchange Commission.[9] It is generally expected that IFRS adoption worldwide will be beneficial to investors and other users of financial statements, by reducing the costs of comparing alternative investments and increasing the quality of information.[10] Companies are also expected to benefit, as investors will be more willing to provide financing.[10] Companies that have high levels of international activities are among the group that would benefit from a switch to IFRS. Companies that are involved in foreign activities and investing benefit from the switch due to the increased comparability of a set accounting standard.[11] However, Ray J. Ball has expressed some skepticism of the overall cost of the international standard; he argues that the enforcement of the standards could be lax, and the regional differences in accounting could become obscured behind a label. He also expressed concerns about the fair value emphasis of IFRS and the influence of accountants from non-common-law regions, where losses have been recognized in a less timely manner.

phases
The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory in India for financial statements for the periods beginning on or after 1 April 2012, but this plan has been failed and IFRS/IND-AS (Coverged IFRS) are still not applicable. There was a roadmap as given below but still Indian companies are following old Indian GAAP.There is no clear new date of adoption of IFRS. Reserve Bank of India has stated that financial statements of banks need to be IFRScompliant for periods beginning on or after 1 April 2011. The ICAI has also stated that IFRS will be applied to companies above INR 1000 crore (INR 10 billion) from April 2011. Phase wise applicability details for different companies in India: Phase 1: Opening balance sheet as at 1 April 2011* i. Companies which are part of NSE Index Nifty 50 ii. Companies which are part of BSE Sensex BSE 30 a. Companies whose shares or other securities are listed on a stock exchange outside India b. Companies, whether listed or not, having net worth of more than INR 1000 crore (INR 10 billion) Phase 2: Opening balance sheet as at 1 April 2012* Companies not covered in phase 1 and having net worth exceeding INR 500 crore (INR 5 billion) Phase 3: Opening balance sheet as at 1 April 2014* Listed companies not covered in the earlier phases * If the financial year of a company commences at a date other than 1 April, then it shall prepare its opening balance sheet at the commencement of immediately following financial year. On 22 January 2010, the Ministry of Corporate Affairs issued the road map for transition to IFRS. It is clear that India has deferred transition to IFRS by a year. In the first phase, companies included in Nifty 50 or BSE Sensex, and companies whose securities are listed on stock exchanges outside India and all other companies having net worth of INR 10 billion will prepare and present financial statements using Indian Accounting Standards converged with IFRS. According to the press note issued by the government, those companies will convert their first balance sheet as at 1 April 2011, applying accounting standards convergent with IFRS if the accounting year ends on 31 March. This implies that the transition date will be 1 April 2011. According to the earlier plan, the transition date was fixed at 1 April 2010.

The press note does not clarify whether the full set of financial statements for the year 2011 12 will be prepared by applying accounting standards convergent with IFRS. The deferment of the transition may make companies happy, but it will undermine India's position. Presumably, lack of preparedness of Indian companies has led to the decision to defer the adoption of IFRS for a year. This is unfortunate that India, which boasts for its IT and accounting skills, could not prepare itself for the transition to IFRS over last four years. But that might be the ground reality. Transition in phases Companies, whether listed or not, having net worth of more than INR 5 billion will convert their opening balance sheet as at 1 April 2013. Listed companies having net worth of INR 5 billion or less will convert their opening balance sheet as at 1 April 2014. Un-listed companies having net worth of Rs5 billion or less will continue to apply existing accounting standards, which might be modified from time to time. Transition to IFRS in phases is a smart move. The transition cost for smaller companies will be much lower because large companies will bear the initial cost of learning and smaller companies will not be required to reinvent the wheel. However, this will happen only if a significant number of large companies engage Indian accounting firms to provide them support in their transition to IFRS. If, most large companies, which will comply with Indian accounting standards convergent with IFRS in the first phase, choose one of the international firms, Indian accounting firms and smaller companies will not benefit from the learning in the first phase of the transition to IFRS. It is likely that international firms will protect their learning to retain their competitive advantage. Therefore, it is for the benefit of the country that each company makes judicious choice of the accounting firm as its partner without limiting its choice to international accounting firms. Public sector companies should take the lead and the Institute of Chartered Accountants of India (ICAI) should develop a clear strategy to diffuse the learning. Size of companies The government has decided to measure the size of companies in terms of net worth. This is not the ideal unit to measure the size of a company. Net worth in the balance sheet is determined by accounting principles and methods. Therefore, it does not include the value of intangible assets. Moreover, as most assets and liabilities are measured at historical cost, the net worth does not reflect the current value of those assets and liabilities. Market capitalisation is a better measure of the size of a company. But it is difficult to estimate market capitalisation or fundamental value of unlisted companies. This might be the reason that the government has decided to use 'net worth' to measure size of companies. Some companies, which are large in terms of fundamental value or which intend to attract foreign capital, might prefer to use Indian accounting standards convergent with IFRS earlier than required under the road map presented by the government. The government should provide that choice

Comparison chart
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GAAP
Generally Accepted Accounting Principles

IFRS
International Financial Reporting Standards

Stands for:

Introduction (from Wikipedia):

Generally accepted accounting principles (GAAP) refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice.

International Financial Reporting Standards are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries.

Used in:

United States

Over 110 countries, including those in the European Union

Performance elements:

Revenue or expenses, assets or liabilities, gains, losses,comprehensive income

Revenue or expenses, assets or liabilities

Required documents in financial statements:

Balance sheet, income statement, statement of comprehensive income, changes in equity, cash flow statement, footnotes

Balance sheet, income statement, changes in equity, cash flow statement, footnotes

Inventory Estimates:

Either last-in, first-out or first-in, firstout

Only first-in, first-out

Inventory Reversal:

Prohibited

Permitted under certain criteria

Purpose of the framework:

US GAAP (or FASB) framework has no provision that expressly requires management to consider the framework in the absence of a standard or interpretation for an issue.

Under IFRS, company management is expressly required to consider the framework if there is no standard or interpretation for an issue.

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GAAP
In general, broad focus to provide relevant info to a wide range of stakeholders. GAAP provides separate objectives for business and nonbusiness entities.

IFRS
In general, broad focus to provide relevant info to a wide range of stakeholders. IFRS provides the same set of objectives for business and nonbusiness entities.

Objectives of financial statements:

Underlying assumptions:

The "going concern" assumption is not well-developed in the US GAAP framework.

IFRS gives prominence to underlying assumptions such as accrual and going concern.

Qualitative characteristics:

Relevance, reliability, comparability and understandability. GAAP establishes a hierarchy of these characteristics. Relevance and reliability are primary qualities. Comparability is secondary. Understandability is treated as a userspecific quality.

Relevance, reliability, comparability and understandability. The IASB framework (IFRS) states that its decision cannot be based upon specific circumstances of individual users.

Definition of an asset:

The US GAAP framework defines an asset as a future economic benefit.

The IFRS framework defines an asset as a resource from which future economic benefit will flow to the company.

Different IFRS
International Financial Reporting Standards (IFRS) are principles-based Standards, Interpretations and the Framework adopted by the International Accounting Standards Board (IASB). IFRS represent a set of internationally accepted accounting principles used by companies to prepare financial statements. The goal with IFRS is to make international comparisons as easy as possible. More than 100 countries around the world currently require or permit IFRS reporting. Approximately 85 of those countries require IFRS reporting for all domestic, listed companies. All member states of the EU are required to use IFRS as adopted by the EU for listed

companies since 2005. The US is also gearing towards IFRS. While some countries require all companies to adhere to IFRS, others merely allow it or try to coordinate their own countrys standards to be similar. IFRS include the following Standards:

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 IFRS 9 Financial Instruments

Advantages of converting to IFRS Well, globalization to start with for sure. By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier. Furthermore, companies with subsidiaries in countries that require or permit IFRS may be able to use one accounting language company-wide. Companies also may need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS, or if they have a foreign investor that must use IFRS. Companies may also benefit by using IFRS if they wish to raise capital abroad. Some points that we had listed in a previous post are:
Improves investor confidence across the world with transparency and comparability Improves inter-unit/ inter-firm/inter-industry comparison Group consolidation made easy with same standard by all companies in group wherever located Acceptability of financial statements across all stock exchanges, which facilitates entry of any Indian company to any stock exchange across the globe.

To develop a unified set of accounting and reporting standards

To build a single global financial reporting language An accounting framework with global acceptance High quality, transparent, understandable, globally enforceable More cross border transactions Access to international capital and investments Enhance confidence of global stakeholders

Facilitate international acquisitions and mergers Peer to Peer Comparison Disadvantages of converting to IFRS Despite a belief by some of the inevitability of the global acceptance of IFRS, others believe that U.S. GAAP is the gold standard, and that a certain level of quality will be lost with full acceptance of IFRS. Further, certain U.S. issuers without significant customers or operations outside the United States may resist IFRS because they may not have a market incentive to prepare IFRS financial statements. They may believe that the significant costs associated with adopting IFRS outweigh the benefits. Some other challenges could be:

The market valuation concepts may be a challenge in quite a few situations. Not being rule based, it may develop challenges at certain stages of implementation. First time adoption needs to be planned quite in advance, any delays will delay deployment.

Requirements of IFRS[edit source | editbeta]

See Requirements of IFRS. IFRS financial statements consist of (IAS1.8)

a Statement of Financial Position a Statement of Comprehensive Income separate statements comprising an Income Statement and separately a Statement of Comprehensive Income, which reconciles Profit or Loss on the Income statement to total comprehensive income a Statement of Changes in Equity (SOCE) a Cash Flow Statement or Statement of Cash Flows notes, including a summary of the significant accounting policies

Comparative information is required for the prior reporting period (IAS 1.36). An entity preparing IFRS accounts for the first time must apply IFRS in full for the current and comparative period although there are transitional exemptions (IFRS1.7). On 6 September 2007, the IASB issued a revised IAS 1 Presentation of Financial Statements. The main changes from the previous version are to require that an entity must:

present all non-owner changes in equity (that is, 'comprehensive income' ) either in one Statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the Statement of changes in equity. present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies the new standard. present a statement of cash flow.

make necessary disclosure by the way of a note.

The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009. Early adoption is permitted.

What is IFRS?
IFRS stands for International Financial Reporting Standards and it is a set of principles and rules for reporting various transactions and items in the financial statements. Just like United States have their US GAAP, Canada has its Canadian GAAP, United Kingdom has its UK GAAP etc, the WORLD will have its world GAAP that is under construction right now. But its not called world GAAPit is called IFRS. Now be careful. Before some time, IFRS was calledIAS (International Accounting Standards). Indeed, the first standards carried the name starting with IAS, e.g. IAS 1 Presentation of Financial Statements. Exactly 41 standards started with IAS. But then, IASs were renamed to IFRS. After renaming and rebranding the titles of new standards start with IFRS. If you would like to know more about content of IFRS, just sign up for our free IFRS course in the side bar.

Why do we need IFRS?

Today, everything in the world comes closer than ever before. Things are harmonizing and people learn to think and act global. And indeed, you can see that in every step you makeyou can shop the same items anywhere in the world, you can get the same food in McDonalds anywhere in the world, you can even fly anywhere in the world in less than 24 hours. Accounting and financial reporting are no exception. This is where IFRS has its own spotit will serve as unified set of principles for financial reporting anywhere in the world.

What is the main benefit of IFRS?

In todays ever globalizing world, the key concept is COMPARABILITY.Just imagine yourself as the owner of multinational holding who wants to review financial results of your companies in different countries. Butevery country uses different accounting rules!

For example, revenues are reported on accrual basis in 1 country, and on cash basis in another country. How can you say which of your companies has better sales if those figures are incomparable? Or even if you are small investor playing on the stock exchange and you (hopefully) look to financial statements of your prospect investment before buying. How can you read those statements if everybody reports differently? So you get the picture. IFRS gives us united global set of accounting and reporting rules, so that you understand financial statements from whatever country. And not only this if your company wants access to international capital or to stock exchange, it must present its financial statements in compliance with IFRS.

Who reports under IFRS?

Currently, there are over 120 countries who adopted IFRS, some of them fully, some of them partially. The aim is to adopt IFRS by 2015. The fact is that one of major players in the global market, the United States still use their US GAAP. In this case, US GAAP and IFRS shall rather approach each other and gradually eliminate differences or converge. The IFRS convergence process should have been finished by 2012. But, FASB (issuer of US GAAP) and IASB (issuer of IFRS) slowed down the convergence process and new deadline is somewhere around 2015. Moreover, SEC (Securities and Exchange Commission) should have decided about incorporation ofIFRS for U.S. issuers until the end of 2011, but the decision has been delayed by few more months.

IFRS in India
Conversion is much more than a technical accounting issue. IFRS or Ind AS may significantly affect any number of 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 re-assess financial reporting and take a clean sheet of paper approach to financial policies and processes. In early 2010, the Ministry of Corporate Affairs (MCA) issued various press releases on the IFRS roadmap and convergence plan for India specifying the convergence date to be 1 April, 2011, through 2014 for select Indian companies.

Since the timeline in the roadmap is no longer valid for Phase I companies, the new implementation date for Ind AS is awaited from the MCA. It is unclear if the MCA will release a fresh roadmap or just amend the implementation date. Understanding IFRS or Ind AS and its implications is a business imperative for Indian companies.

Certain clarifications on IFRS roadmap issued by the MCA Comparatives Companies preparing opening balance sheet as at 1st April, 2011 in accordance with the IFRSconverged accounting standards will show previous years figures as per non -converged accounting standards. However, an option is given to add an additional column and present comparatives using IFRS-converged accounting standards. In such case, the opening balance sheet shall be prepared as at 1st April, 2010. Early application Companies covered in Phase II and III, have an option to early application of IFRS-converged accounting standards only for the financial year commencing on 1st April, 2011 or thereafter. Cut off date to ascertain the application of IFRS-converged accounting standards For Banks and NBFCs Balance Sheet as at 31st March, 2011 or the first Balance Sheet for accounting period which ends after that date. For other companies - Balance Sheet as at 31st March, 2009 or the first Balance Sheet for accounting period which ends after that date. Net worth Net worth is defined as Share Capital plus Reserve less Revaluation Reserve, Miscellaneous

Expenditure and Debit Balance of the Profit and Loss Account. It is to be calculated on the basis of standalone audited balance sheet of the company. There has been no announcement regarding (i) quarterly reporting under the IFRS-converged accounting standards and (ii) adoption of IFRS for SMEs in India. The MCA press releases have brought some clarity to Indian companies but more clarifications around the applicability and transition provisions are required. With IFRS set to become the future Indian GAAP and IFRS being a moving target, Indian companies should actively monitor and participate in the IASBs standard setting process.