In this article, Yogesh Sharma discusses the meaning of IFRS and the Legal Sources of IFRS in India.

Meaning of IFRS

In 1973, representatives of various Accounting bodies from Netherlands, Mexico. Canada, France Germany, Japan UK & US formed International Accounting Standards Committee(IASC). In 1989, a conceptual framework was published by the IASC which was called Preparation and Presentation of Financial Statements. In 2001, International Accounting  Standard Board accepts IASC regulations. IASC was replaced by the IRS foundation and its International Accounting Standard body in 2001. In the year 2003, International Accounting Standards Board holds the meeting and approved First international Financial Report Standards called IFRS 1.

What is IFRS?

The word IFRS stands for International Financial Standards. It is the set of uniform accounting standards which is used by the companies, accountants, auditors, investors, regulators & tax authorities etc of different nations for preparing books of the accounts or Annual Financial Statements. Accounting Standards are a set of principles which are followed by companies in preparing its financial statements which help in checking the performance of the company annually. In other words, IFRS is rules which have uniform accounting language which is followed worldwide. It is also known as a principles-based set of standards which are easy to understand & Apply. These Standards are controlled and governed by the IFRS Foundation. IFRS Foundation is a non-profit organization who develops the same set of quality understandable and enforceable accounting principles which is used by nations worldwide. These Standards are drafted  & updated by the IRS foundation’s Accounting Standards Board. At present IFRS standards are used by almost 140 nations.

Why IFRS?

1. It brings transparency in the financial statements of the companies. It helps the investors to take better economic decisions.
2. These standards strengthen accountability by removing the bridge between the people who invest the capital and the person whom money is given.
3. It improves the economic efficiency of the companies.
4. It helps the companies to identify the business opportunities and risk associated with the business.
5. There is a use of single accounting Language over the globe.
6. It lowers the capital cost and reduces international reporting cost to regulate affairs across the globe.

Structure of IFRS

• Monitoring Body – The organization is overseen by the Monitoring body, consisting of public authorities, such as financial Market Regulators.

• Trustees –  The Trustees are responsible for the government and oversight of the Board, promoting IFRS Standards and securing the organization’s funding.
• International Accounting Standards Board – It is the standard-setting body, made up of experts from diverse professional backgrounds and Geographical Regions

Some Important IFRS

IFRS 1 – 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 Assets

IFRS 7 –  Financial Instruments Disclosures

IFRS 8 – Operating Segments

IFRS 9 – Financial Instruments

Methods for Implementation of IFRS

There are two methods which are used by different countries to implement IFRS they are:

1. Adoption – Adoption means adopting IFRS or taking something as it is. It means companies applying for IFRS would be implemented in the same manner issue by the International Accounting Standards Board. Adoption of IFRS means counties implementing standards which are the blueprint of the IFRS.
2. Convergence – Convergence means implementing IFRS with some modifications or changes. Government alters or amend the IFRS rule according to the requirement of their nation.

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India & IFRS 

Background

Earlier we were following the Accounting Standards issued by Institute of Chartered Accountants of India (ICAI)  in 2000. These accounting standards were called Generally Accepted Accounting Standards (GAAP). Under Indian GAAP, ICAI issued 39 Accounting Standards from which 36 was followed. Indian GAAP was the Accounting Standards which was designed according to the Indian context. Indian GAAP was based on the principal of the conservatism which means ‘Anticipate for profits and provide for all losses’. Institute drafted these rules to bring a set pattern of accounting standards considering the local conditions.

In the year 1991, the government of India introduced Globalization and liberalization, opening the gates for the global market and removing trade quotas and trade barriers. As IFRS came into existence in 2001- uniform accounting standards for the world and it was increasingly being recognized as a Global Reporting Standards for Financial Statements. As the global market became increasingly integrated many countries were adopting IFRS. India is getting globalized,  getting more foreign direct investments, growth was also improving & India has its own accounting treatments which were ineffective to trade outside the country. It was an urgent need to change the accounting standards and treatments and implement IFRS, the single accounting standards in India.

What are the challenges before India in implementing IFRS

1. Increase in cost initially due to dual reporting requirement which entity might have meet till full convergence is achieved
2. Current Accounting framework in India is deeply affected by laws and regulations. For the implementation of IFRS may require a change in regulations & laws
3. All Stakeholders, employees, auditors regulators tax authorities etc would need to aware about IFRS.
4. Organizations would need to incur additional cost for modifying their current accounting and procedure for meeting the disclosure and reporting requirements.

Why it was necessary for India to implement IFRS

1. It is Globally Accepted.
2. It provides New Opportunities
3. Single Accounting Language
4. Reduce any hindrance in trading outside the country
5. High Quality & understandable Standards and principles
6. It allows the exercise of professional judgment.

Legal Source of IFRS in India: Ind As

With the implementation of Indian Accounting Standards, Ministry of Corporate Affairs filled the gap in the Indian Accounting standards by making it par with the globally accepted Accounting principles. The Legal source of the IFRS in India can be found in the Indian Accounting Standards which is basically known as the Ind As. National Advisory body constituted under Section 210 C of Indian Companies Act, 1956 recommends the ministry of corporate affairs about the implementation of Indian Accounting Standards. Ind As is a customized version of the IFRS implemented in India. Ind As was notified vide Ministry of Corporate Affairs notification dated February 16, 2015, and  March 30, 2016. Section 133 of the Companies Act also states that Indian Accounting standards should be followed throughout the country by company, auditors & Stakeholders etc. On 16 Feb 2015 MCA notified 39 Ind As and on March 30, 2016, MCA deleted one Ind As and notified two more Ind As. As now there are 40 Ind As notified and applicable to Indian companies.

Ind As converged with IFRS

Ind As are converged with the International Financial Reporting Standards(IFRS).Convergence with IFRS means India has used IFRS with some modifications and changes in consideration to the requirement of the nation.

Indian Accounting Standards has taken IFRS and done three adjustments. After 3 class of adjustments into IFRS, later is known as Indian Accounting Standards. In Parallel to IFRS 1 to IFRS 14, MCA has notified Ind As 101 to Ind As 114. Some IFRS interpretations are put in the

Appendix of Ind As which is an integral part of standards.

Indian As = IFRS + Carve outs – Carve Ins + Removal of Options

Carve out – A different treatment in Ind As as compared to IFRS. In some cases, Indian Accounting Standards uses different treatment for accounting. It means in IFRS some treatment was given and on the same problem in Ind As we are doing some another treatment.

Carve ins –  An Additional guidance is inserted in Ind As which is not there in  IFRS. For eg – Accounting of Common Control Transaction is inserted in Ind As but is not there in IFRS.

Removal of Options –  It means that for some IFRS, the choice for accounting treatment is available but for some standards in Ind As those choices have been removed.

Ind As is a new set of global accounting standards which India has started to adopt in phase wise manner from the year 2016 onwards.

For Companies other than Banking, Insurance, and NBFC

1. Voluntary Phase –  It is the phase in which any company other than the Banking, insurance, and NBFC can voluntarily adopt Indian Accounting Standards from 1st April 2015.
2. Phase 1 – In this phase, Listed/ Unlisted Companies having a net worth of Rs 500 crore or its holding. subsidiaries, joint ventures or associate company will adopt Ind As from 1st April 2016.
3. Phase 2 – In this phase, companies whose equity or debt securities are listed or in process of getting listed in any recognized Stock Exchange. Or                                      Unlisted companies having a net worth of more than Rs 250 crore or more but less than Rs 500 Crore. Or                                                                                                    Above companies  holding, subsidiaries, joint ventures or associate Company

   will adopt Ind As from 1st April 2017.

For Non-Banking Finance Company

1. Phase 1 – In this phase, Listed/ Unlisted NBFC’s having a net worth of Rs 500 crore or its holdings. subsidiaries, joint ventures or associate company will adopt Ind As from 1st April 2018.
2. Phase 2 – In this phase, NBFC ’s equity or debt securities are listed or in process of getting listed in any recognized Stock Exchange. Or                                                      Unlisted NBFC’s having a net worth of more than Rs 250 crore or more but less than Rs 500 Crore. Or                                                                                                            Above NBFC’s  holding, subsidiaries, joint ventures or associate company

will adopt Ind As from 1st April 2019.

For Bank and Insurance

1. Banking – All Scheduled Commercial Banks except Regional Rural Bank (RRB’s) will adopt IFRS from 1st April 2018
2. Insurance – As per IRDA circular dated June June 28, 2017, all insurance companies in India are required to adopt Ind As from April 1, 2020.

Benefits of implementing IFRS in India

1. It will benefit the economy by increasing the growth of International Business
2. Implementation of IFRS in India would encourage foreign investment which impacts foreign capital inflow in Account.
3. It will reduce the cost of compliance
4. IFRS would open many opportunities door for professionals to serve internal clients.

Why Standards of IFRS is criticized

1. International Financial Reporting Principles (IFRS) is not been followed by the US. Instead of using IFRS, US uses US-GAAP.
2. During Zimbabwe’s hyperinflationary period of 6 years, IAS 29 Financial Reporting in Hyperinflationary Economies did not give any positive result
3. IAS 29 is still executed in the country of Venezuela and Belarus.
4. There are still some flaws in the accounting standards and treatments of IFRS
5. Extraordinary loss or gain still not defined in the IFRS.
6. IFRS gives unlimited power to the International Accounting Standards Board. It can have a negative impact on the world market.
7. Standards of IFRS are complex and costly. It is difficult for Small-Medium Sized Enterprises to implement IFRS.

Conclusion

In today’s dynamic world International financial Reporting Standard plays a vital role in providing transparency, accuracy, accountability in Financial Statements of the companies. IFRS is the single accounting language which stables the economic efficiency of the companies and they can run the business out of the boundaries of the country without any fear. IFRS is a unique, easily understandable, high quality, Global Accounting Standards. Legal sources for implementation of IFRS can be found in Indian Accounting Standards(Ind As). Indian As is converged with the IFRS with some modifications. It is concluded that the modified form of the IFRS had implemented in India through Ind As in 2015.

References

1. Structure of IFRS, International Financial Reporting Standards,  https://www.ifrs.org/-/media/feature/about-us/who-we-are/who-we-are-english-2018-final.pdf
2. Framework for the preparation and presentation of financial statements in accordance with the Indian Accounting Standards,  https://www.icai.org/post.html?post_id=13724