Wednesday, September 18

IFRS - An Introduction

IFRSInternational Financial Reporting Standards (IFRS) is a term that has been thrown around a plenty in accounting discussions and professional circles for the last two years or so. So what is IFRS? Where and how is it formulated? Why and how are we converging to it?. Pulin Doshi a Chartered account digs deep into IFRS for the benefit of students and aspirants.

Let's consider the above questions one by one.

IFRS is a set of accounting standards developed by the International Accounting Standards Board (IASB). It encompasses IFRS, IAS and IFRS Interpretations Committee (IFRIC) & Standard Interpretations Committee (SIC) interpretations. As of now, there are 13 IFRSs (5 applicable after January 1, 2013/2015), 28 IASs (3 amended IASs applicable after January 1, 2013), 16 IFRIC interpretations and 11 SIC interpretations.

The road map for implementation of IFRS as published by The Institute of Chartered Accountants of India (ICAI) stated that IFRS shall be applicable from 1st April 2011. However, due to 'n' number of reasons, the deadline was not enforced and the implementation of IFRS now stands deferred indefinitely. However, one thing is certain that IFRS will be implemented in India. It is just a question of 'when' and not 'if'.

Approximately 120 nations and reporting jurisdictions permit or require IFRS for domestic listed companies, although approximately 90 countries have fully conformed to IFRS.

With this background, let us understand the basics of IFRS and how they are formulated.

Standards setting process:

Like in India the Accounting Standards Board (ASB) is the body in charge of issue of Indian Accounting Standards, IFRSs are issued by IASB. The IASB is an independent group of 15 expert members with an appropriate mix of recent practical experience in:
  1. Setting accounting standards,
  2. Preparing, auditing, or using financial reports, and
  3. Accounting education.

Also, broad geographical diversity is required. The IASB is supported by IFRS Interpretations Committee (IFRIC). The Standard setting process comprises of six stages, viz:
  1. Setting the agenda
  2. Planning the project
  3. Developing and publishing the discussion paper
  4. Developing and publishing the exposure draft
  5. Developing and publishing the standard
  6. After the standard is issued

1. Setting the agenda (Need for a standard or amendment)

The primary driving factor to evaluate the merit of adding a potential item to the agenda of IASB is the needs of the investors. By developing high quality accounting standards, IASB seeks to deal with the need for better quality financial information that is useful to all the users of financial statements. Such information will also be of value to preparers of financial statements and managements for decision making purposes. The IASB's discussions of potential projects and its decisions to adopt new projects take place in public IASB meetings.

Before reaching such decisions the IASB consults the IFRS Advisory Council and accounting standard-setting bodies on proposed agenda items and setting priorities. The IASB's approval to add agenda items, as well as its decisions on their priority, is by a simple majority vote at an IASB meeting.

2. Project planning
Each proposed standard or amendment is treated as a project. After adding an item to its active agenda, the IASB decides as to whether to conduct the project on its own or to involve other standard setter/s. Senior members of the technical staff will establish teams and working groups to work on the project. The project manager draws up a project plan.

3. Developing and publishing discussion paper
Although a discussion paper is not mandatory, the IASB normally publishes it as its first publication on any major new topic to comprehensively explain the issue, list down proposed possible approaches and solicit early comments. All discussions of technical issues related to the draft paper take place in public sessions.

4. Developing and publishing the exposure draft
Unlike a discussion paper, an exposure draft sets out a specific proposal in the form of a proposed standard (or amendment to an existing standard).
Publication of an exposure draft is a mandatory step in the process. An exposure draft is the IASB's main vehicle for consulting the public.

5. Developing and publishing the standard
The IASB develops the standard in its meeting after considering the comments received on the exposure draft. After resolving issues brought to their attention by the comments to the exposure draft, the IASB considers whether it should expose its revised proposals for public comment, for example by publishing a second exposure draft. After satisfying itself on the conclusions on the issues arising from the exposure draft, it instructs the staff to draft the IFRS. An IFRS is issued after the due process is completed, all outstanding issues are resolved, and the IASB members have balloted in favour of publication.

6. After issue of the standard:
After an IFRS is issued, the IASB members hold regular meetings with interested parties, including other standard-setting bodies, to help understand unanticipated issues related to the practical implementation and potential impact of its proposals.

Having understood how IFRSs are formulated, we can now better understand why India is converging to IFRS?

Businesses today are going global and spreading in different countries. Foreign investors are investing in India; Indian companies are investing abroad, getting loans from foreign financial institutions. This makes it necessary to have a uniform set of accounting standards to evaluate their investment decisions and to compare entities across geographies.

Entities will be able to raise funds at lower cost from world markets and also cost of financial reporting will be reduced due to elimination of the requirement of reporting under multiple accounting standards.

IFRS convergence will also open employment opportunities for accounting professionals within India and abroad.

So how is India converging to IFRS?

The important term to understand here is 'converge'. India is 'converging' to IFRS and not 'adopting' IFRS. This means we shall not be applying IFRS verbatim but will be issuing our own 'version' of IFRS. This version is known as 'Ind-AS'. In February 2011, Ministry of Corporate Affairs ('MCA') has notified 35 new standards known as 'Ind-AS'. Under Ind-AS, certain of the IFRIC and SIC interpretations have been clubbed with the main standard itself.

We have made considerable changes to IFRS to make them more suitable and acceptable to the Indian corporate. These changes are popularly known as 'carve-outs'. Details with respect to major carve-outs pertaining to different topics, along with its accounting and industry implications, will be covered in the respective topics. Ind-ASs are available on the Ministry of Corporate Affairs (MCA) website.

Again, IFRS is a moving target. It keeps changing and evolving. It remains to be seen as to how well the standard setters in India are able to cope with the amendments in the existing pronouncements and issue of new ones. As of now, the rumored date in professional circles for implementation of IFRS is April 1, 2015.

Many issues still remain; whether the overseas investors will accept Ind-AS accounts after all the changes, which set of accounts will be used for tax filings, when will India actually converge to IFRS? We will be discussing these issues appropriately in further posts.


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