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1 Chapter 1 Introduction The present chapter describes the evolution and formation of Indian Accounting Standards, International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and their importance for the corporate sector. This chapter covers the meaning of convergence with IFRS and need of convergence of financial accounts with IFRS. It also depicts the major differences between Indian Accounting Standards and IFRS. 1.1 Prologue As we need a language to communicate with others, likewise, business requires a language to communicate with its owners, managers and other stakeholders. This is called accounting language. Accounting is a “business language” which helps in informing the financial results of an enterprise to owners, managers and other stakeholders by financial statements timely prepared by enterprises. Accounting is also held as the soul of a business as it is utterly difficult to carry on any business without proper accomplishing of its affairs (Praveen, 2009). Accounting process requires proper attention and regulation because if it is not properly regulated then it can mislead the owners, managers and stakeholders. It can also present the distorted picture of business rather than true and fair view of business if it is not properly done. In order to maintain transparency, reliability, consistency, adequacy and comparability of financial reporting, it is necessary to know about some accounting principles and policies. Companies have to follow certain principles or rules as their statutory duty and the same are known as Accounting Standards (AS). These standards are written policies or rules which are issued by expert bodies or regulatory bodies to comply the various aspects of recognition, measurement, presentation and disclosure of accounting transactions in the financial statements. Auditors check the conformity of these rules and examine the financial results in a way that financial statements provide "true and fair view" of actual transactions (Indapurkar et al., 2009). It is the primary responsibility of the management to maintain strong internal control to safeguard the recording of all financial operations of the business. The ostensible objective of these accounting standards is to promote the dissemination of timely and useful financial information to investors and certain other parties having an interest in the company’s economic performance. The accounting standards reduce the accounting alternative in the preparation of financial statements within the bounds of rationality, thereby ensuring comparability of financial statements of different enterprises (Bragg, 2011).

Transcript of Chapter 1 Introduction - INFLIBNETshodhganga.inflibnet.ac.in/bitstream/10603/43087/6/06_chapter...

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Chapter 1

Introduction

The present chapter describes the evolution and formation of Indian Accounting Standards,

International Accounting Standards (IAS), International Financial Reporting Standards

(IFRS) and their importance for the corporate sector. This chapter covers the meaning of

convergence with IFRS and need of convergence of financial accounts with IFRS. It also

depicts the major differences between Indian Accounting Standards and IFRS.

1.1 Prologue

As we need a language to communicate with others, likewise, business requires a language to

communicate with its owners, managers and other stakeholders. This is called accounting

language. Accounting is a “business language” which helps in informing the financial results

of an enterprise to owners, managers and other stakeholders by financial statements timely

prepared by enterprises. Accounting is also held as the soul of a business as it is utterly

difficult to carry on any business without proper accomplishing of its affairs (Praveen, 2009).

Accounting process requires proper attention and regulation because if it is not properly

regulated then it can mislead the owners, managers and stakeholders. It can also present the

distorted picture of business rather than true and fair view of business if it is not properly

done. In order to maintain transparency, reliability, consistency, adequacy and comparability

of financial reporting, it is necessary to know about some accounting principles and policies.

Companies have to follow certain principles or rules as their statutory duty and the same are

known as Accounting Standards (AS). These standards are written policies or rules which are

issued by expert bodies or regulatory bodies to comply the various aspects of recognition,

measurement, presentation and disclosure of accounting transactions in the financial

statements. Auditors check the conformity of these rules and examine the financial results in

a way that financial statements provide "true and fair view" of actual transactions (Indapurkar

et al., 2009).

It is the primary responsibility of the management to maintain strong internal control to

safeguard the recording of all financial operations of the business. The ostensible objective of

these accounting standards is to promote the dissemination of timely and useful financial

information to investors and certain other parties having an interest in the company’s

economic performance. The accounting standards reduce the accounting alternative in the

preparation of financial statements within the bounds of rationality, thereby ensuring

comparability of financial statements of different enterprises (Bragg, 2011).

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The London based group, namely, the International Accounting Standards Committee

(IASC), responsible for developing International Accounting Standards (IAS), was

established in June 1973. Between 1973 and 2001, the IASC released International

Accounting Standards. Subsequently, International Accounting Standard Board (IASB) came

into being in India in place of IASC from April 2001. Now IASB has announced its standards

in a series of pronouncements called International Financial Reporting Standards (IFRS).

Every major nation is moving towards adopting them to some extent. Various regulatory and

government bodies are looking to IFRS to fulfill local financial reporting obligations related

to financing or licensing (ICAI, 2009).

The Institute of Chartered Accountant of India (ICAI) as the accounting standards-

formulating body in the country is known to have made efforts to formulate high quality

accounting standards and has been successful in doing so. Indian Accounting Standards have

been changing in the course of time. As the world continues to become globalized, discussion

on convergence of national accounting standards with IFRS has increased significantly. In

India, so far as the ICAI and the governmental authorities such as the National Advisory

Committee (NAC) on accounting standards established under the Companies Act, 1956 and

various regulators such as SEBI and RBI are concerned, the aim has always been to comply

with the IFRS to the extent possible with the objective to formulate sound financial reporting

standards (Singhal and Tulshan, 2009). The ICAI, being a part of the International Federation

of Accountants (IFAC), considers the IFRS and tries to integrate them, to the possible extent,

in the light of the laws, customs, practices and business environment prevailing in India.

Accordingly, the accounting standards issued by the ICAI are based on the IFRS. However,

where departure from IFRS is warranted keeping in view the Indian conditions, the Indian

Accounting Standards have been modified to that extent (ICAI, 2009).

Convergence with IFRS by Indian corporate sector is going to be very challenging, but at the

same time, could also be rewarding. There are many beneficiaries of convergence with IFRS

such as the economy, investors, industries and accounting professionals. The harmonization

of financial reporting and accounting standards is a valuable process that contributes the free

flow of global investment and achieves substantial benefits for all capital markets’

stakeholders (Kapoor and Ruhela, 2013). It facilitates the maintenance of orderly and

efficient capital markets and also helps to increase the capital formation and economic

growth. The financial statements framed under a common set of accounting standards help

the investors to better understand investment opportunities as opposed to financial statements

prepared using a different set of national accounting principles.

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1.2 Financial Reporting

Basically, financial reporting is the process of preparing, presenting and circulating the

financial information in various forms to the users which helps in making vigilant planning

and decision making by users. The core objective of financial reporting is to present financial

information of the business entity which will help in decision making about the resources

provided to the reporting entity and in assessing whether the management and the governing

board of that entity have made efficient and effective use of the resources provided.

1.3 Evolution of Accounting Standards

The American Institute of Chartered Accountants (now it is known as American Institute of

Certified Public Accountants) can be considered as the primary founder of the accounting

standards. During the year 1932-34, the institute collaborated with the New York Stock

Exchange to frame five “rules or principles” of accounting to reduce the deviation in

accounting policies, recommend some disclosures for significant items of financial

statements, and give some valuable suggestions to enhance the reliability or credibility of

financial results. A revolution came in the accounting word in 1959, when American Institute

of Certified Public Accountants (AICPA) established the Accounting Principles Board (APB)

with the crucial objective to provide a solid base for accounting. In 1973, Financial

Accounting Standards Board (FASB) came in existence in place of Accounting Principles

Board (APB). To maintain uniformity in financial accounting practices, United Kingdom has

established an Accounting Standards Committee (ASC) with the purpose to frame accounting

standards which comply with accounting objectives. Prior to the year 1970, accounting

standards were not fascinated and very few academicians or professionals paid their attention

in its processing. But nowadays, the setting board of standards or committee plays vital role

in a number of countries such as New Zealand, India, United Kingdom, Canada, United

States, Australia, etc. In the same way, International Accounting Standards Committee

(IASC) was set up in 1973, to frame International Accounting Standards (IASs). Now the

International Accounting Standard Board has come in place of IASC. The IASC or IASB

comprises the accounting professional bodies of various countries including the Indian

Institute of Chartered Accountants (ICAI, 2009).

1.4 Evolution of Indian Accounting Standards

The council of the ICAI has issued thirty two Indian Accounting Standards. But now they are

only thirty one because accounting standard (AS) 8 relating to “accounting for research and

development” had been withdrawn. The accounting standards established by the Accounting

Standard Board (ASB) set the standards which have to be complied by the business entities

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so that the financial statements are prepared in harmony with generally accepted accounting

principles (GAAPs) (Singhal and Tulshan, 2009). The Indian Accounting Standards are

following as:

AS No

Title of Standards Date of

Applicability

1 Disclosure of accounting policies 1/4/1993

2 Valuation of Inventories 1/4/1999

3 Cash flow statement 1/4/2001

4 Contingencies and events occurring after the B/S date 1/4/1998

5 Net profit or loss for the period, prior period items and changes in accounting policies

1/4/1996

6 Depreciation accounting 1/4/1995

7 Construction contracts 1/4/2002

8 Research & Development Now not so far

9 Revenue recognition 1/4/1993

10 Accounting for fixed assets 1/4/1993

11 The effect of changes in foreign exchange rates 1/4/2004

12 Accounting for government grants 1/4/1994

13 Accounting for investments 1/4/1995

14 Accounting for amalgamations 1/4/1995

15 Employee benefits 1/4/2006

16 Borrowing costs 1/4/2000

17 Segment reporting 1/4/2001

18 Related party disclosures 1/4/2001

19 Lease 1/4/2001

20 Earning per shares 1/4/2001

21 Consolidated financial statement 1/4/2001

22 Accounting for taxes on income 1/4/2001

23 Accounting for investment in associates in consolidated financial statements

1/4/2002

24 Discontinuing operations 1/4/2004

25 Interim financial statements 1/4/2002

26 Intangible assets 1/4/2003

27 Financial reporting of interests in joint ventures 1/4/2002

28 Impairment of assets 1/4/2004

29 Provisions, contingent liabilities and contingent assets 1/4/2004

30 Financial instruments: Recognition and measurement 1/4/2011

31 Financial instruments: Presentation 1/4/2011

32 Financial Instruments: Disclosures 1/4/2011

(Source: Singhal and Tulshan, 2009)

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1.5 Need of Convergence with Global Standards

Each country has its own sets of rules and principles for accounting purpose as India has

Indian Accounting Standards discussed above. Gradually businesses were crossing their

national boundaries for trade and it was felt that there should be some international standards

for accounting so that business can run smoothly without any hurdle of accounting.

International analysts and investors would like to compare the financial statements of

companies while taking the investment decisions (Ahmad and Khan, 2010). The

harmonization of reporting with the other countries of the world will help to build the

confidence in the minds of investors. All these things have led to the growing support for

International Accounting Standards. With a target to achieve these objectives, an

International Accounting Standards Committee was established in June, 1973. The main

purpose of this committee was to build International Accounting Standards so that cross

border business can maintain their accounts properly and will lead to globalization in a

peaceful environment. This committee is presently known as International Accounting

Standards Board (Ankarath et al., 2010). The list of International Accounting Standards

developed by IASC is as follows:

IAS Title of the Standards

IAS1 Presentation of Financial Statements

IAS2 Inventories

IAS7 Cash Flow Statements

IAS8 Policies, Changes in Accounting Estimates and Errors

IAS10 Events after the Balance Sheet Date

IAS11 Construction contracts

IAS12 Income Tax

IAS14 Segment Reporting

IAS16 Property, Plant and Equipment

IAS17 Leases

IAS18 Revenue

IAS19 Employee Benefits

IAS20 Accounting for Government Grants and Disclosure of Government Assistant

IAS21 The Effects of Changes in Foreign Exchange Rates

IAS22 Business Communication

IAS23 Borrowing Costs

IAS24 Related Party Disclosure

IAS26 Accounting and Reporting for Defined Benefit Plans

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IAS27 Consolidated Financial Statements

IAS28 Accounting for Investments in Associates

IAS29 Financial Reporting in Hyperinflationary economies

IAS30 Disclosures in Financial Statements of Banks and Similar institutions

IAS31 Financial Reporting of Interests in Joint Venture

IAS32 Financial Instruments - Disclosure and Presentations

IAS33 Earnings per Share

IAS34 Interim Financial Reporting

IAS35 Discontinuing Operation

IAS36 Impairment of Assets

IAS37 Provisions, Contingent Liabilities and Contingent Assets

IAS38 Intangible Assets

IAS39 Financial Instruments - Recognition and Measurement

IAS40 Investment property

IAS41 Agriculture (Source: Singhal and Tulshan, 2009)

1.6 Evolution of International Financial Reporting Standards

The IASC issued International Accounting Standards during the year 1973-2001. IASC

restructured their organization during the year 1993-1997 and came with new name and fame

as International Accounting Standards Board (IASB) which came into effect on 1st April,

2001. IASB announced its standards in a series of pronouncements which came to be titled as

International Financial Reporting Standards (IFRS). However, IASB does not discard the

standards developed by IASC. Those standards continue to be designated as “International

Accounting Standards” (ICAI, 2009). Therefore, we can state that IFRS means the standards

issued by IASB and IAS means the standards issued by IASC. Similarly, interpretation of

standards is issued by Standards Interpretation Committee (SIC) and the International

Financial Reporting Interpretations Committee (IFRIC) of the IASB. Few nations have

adopted it and some are going to adopt IFRS in future. European Union countries have made

it mandatory from the year 2005 and India planed to converge with IFRS from the year 2011

(Singhal and Tulshan, 2009). IASB issued only thirteen (13) IFRS which are as follows:

IFRS 1 - First-time adoption of International Financial Reporting Standards

IFRS 2 - Share-based payment

IFRS 3 - Business combinations

IFRS 4 - Insurance contracts

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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

IFRS 10 - Consolidated financial statements

IFRS 11- Joint arrangements

IFRS 12- Disclosure of interests in other entities

IFRS 13- Fair Value measurement

1.6.1 IFRS 1 - First-time adoption of International Financial Reporting Standards

The IASB issued the IFRS 1 on June 19, 2003. It applies to all those business concerns which

are going to converge their accounting statements with IFRS from the first time. The IFRS1

has come into with effect from 1st January 2004 and underwent revision during the year 2009.

The revised standard was made effective for annual periods beginning on or after 1 January,

2010. A concern may be a first time adopter if in the preceding year they have prepared their

financial statements in accordance with IFRS for internal use and these IFRS financial

statements were not made available for owners and stakeholders of the companies. But if

IFRS based financial statements were disclosed to owners and stakeholders by an entity for

any reason in the preceding year, then the entity will be considered being an IFRS compliant

and IFRS 1 will not be applicable to the entity. An entity can also be considered a first time

adopter of IFRS if, in the preceding year, entities prepared their financial statements in

compliance with some IFRS but did not consider all IFRS. However, an entity or business

concern can’t be considered as a first time adopter of IFRS if , in the preceding year, its

financial statements complied with IFRS even if the auditors report comprises a certificate of

qualification with respect to conformity with IFRS and compliance with both previous or

local GAAP to IFRS (Singhal and Tulshan, 2009).

The main purpose of IFRS1 is to set out the basic rules or regulations for preparing and

presenting first IFRS financial statements and interim financial statements by business

concerns. The IFRS1 applies to first IFRS complied financial statements and each interim

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report which is presented under IAS 34 for part of the period is covered by first IFRS

financial statements of a business concern (Bragg, 2010).

There are some important tasks which should be considered by an enterprise while

convergening their accounts with IFRS. For examples, they are required to prepare their

opening financial statement in compliance with IFRS on the date of transition, recognize all

types of assets and liabilities which are recognized under IFRS, derecognize all types of

assets and liabilities which are not recognized by IFRS, classify all assets and liabilities as per

IFRS and measure all types of recognized assets and liabilities (Krik, 2009).

As per IFRS1 some exemptions are mandatory and few others are optional which are as

follows:

1. Business combinations

2. Fair value or revaluation as deemed cost

3. Employee benefits

4. Cumulative translation difference

5. Compound financial instruments

6. Assets and liabilities of joint venture, subsidiaries and associates

7. Designation of previously recognized financial instruments

8. Share based payment transactions

9. Insurance contracts

10. Decommissioning liabilities included in cost of PPE

11. Lease

12. Fair value measurement of financial assets or financial liabilities at initial recognition

13. A financial asset or an intangible asset accounted for as per IFRIC 12

14. Borrowing costs

There are few mandatory exemptions as per IFRS1 such as de-recognition of financial assets

and liabilities, estimates, hedge accounting, assets classified as held for sale and discontinued

operations and some issues of accounting for non-controlling interests (Singhal and Tulshan,

2009).

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1.6.2 IFRS 2 - Share-based payment

The major objective of this IFRS is to reflect the effect of share based transitions in the

financial statements of an entity, including expenses associated with transactions in which

share options are granted to employees. It is entailed for an entity to mention all the

transactions which are associated with employees or other parties to be settled either in cash

or other equity instruments of the business entity. This also applies to transmission of equity

instruments of the entity’s parent, or other instruments of another business entity in the same

group as the entity, to parties that have delivered goods or services to the entity (Singhal and

Tulshan, 2009).

Basically there are three types of share-based payment transactions for which this IFRS sets

out the measurement principles and precise requirements:

1. Equity-settled share based payment transactions: in this transaction, the entity takes

delivery of goods or services as consideration for equity instruments of the entity

(including shares or share options).

2. Cash-settled share based payment transactions: In this transaction, the entity receives

goods or services by taking liabilities to the supplier of those goods or services for those

amounts that are based on the price of the entity’s shares or other equity instruments of

the entity.

3. Equity or cash settled share based payment transactions: In this transaction, the entity

obtains the goods or services with a choice of whether the entity settles the transaction in

cash or by issuing equity instruments.

For an entity, it is essential to measure the fair value of the goods or services received for

equity-settled share-based payment transactions. If the entity cannot determine the fair value

of the goods or services received reliably, the entity is required to measure its value, and the

corresponding increase in equity (Bragg, 2010). Furthermore:

(a) If transactions are being processed with employees and others providing similar services,

the entity is required to determine the fair value of the equity instruments granted, as it is

typically not possible to measure the fair value of employee services received reliably.

The fair value of the equity instruments granted is measured at grant date.

(b) If transactions are done with parties other than employees (and those providing similar

services), there is a presumption that the fair value of the goods or services received can

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be determined reliably. The entity can measure the fair value at the date on which goods

or services are received. In rare cases, if the presumption is confuted, then the transaction

is estimated by reference to the fair value of the equity instruments granted, measured at

the date on which entity receives the goods or the counterparty renders services.

(c) The IFRS also stipulates that vesting condition for goods or services measured by

reference to the fair value of the equity instruments granted and market conditions are not

taken into account when measuring the fair value of the shares or options at the relevant

measurement date. Instead, different conditions are taken into account by adjusting the

number of equity instruments included in the measurement of the transaction amounts

consequently, the amount recognized for goods or services received as consideration for

the equity instruments granted is based on the number of equity instruments that

ultimately vest. Therefore, on a collective basis, no amount is recognized for goods or

services received if the equity instruments granted do not vest because of failure to satisfy

a vesting condition (other than a market condition).

(d) The IFRS demands for an entity to measure the fair value of the equity instruments

granted to be based on market prices, after taking into account the terms and conditions

upon which those equity instruments were granted. If the entity cannot estimate the

market price then a valuation technique to estimate the fair value can be used on the

measurement date in an arm’s length transaction between knowledgeable, willing parties

(Singhal and Tulshan, 2009).

In case of cash-settled share-based payment transactions, a company is required to compute

the goods or services received and the liability incurred at the fair value of the liability. Until

the liability is settled, it is essential for the entity to re-estimate the fair value of the liability at

each reporting date and at settlement date, with a few changes in value recognized in profit or

loss for the period (Catty, 2010). In case of share-based payment transactions, the entity can

settle the transaction either in cash or by issuing equity instruments against the goods or

services received. The entity is required to account for that transaction as a transaction of

cash-settled share-based payment if, and to the extent that, the business has incurred a

liability to settle in cash or other assets, or in case of equity-settled share-based payment

transaction no such liability has been incurred. For an entity, it is required to display the

effect of share-based payment transactions in the financial statements of the company

(Wiecek and Young, 2010).

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1.6.3 IFRS 3 - Business combinations

The major objective of this IFRS is to specify all requirements for an entity when it

undertakes a business. Business combination means combining two separate entities in to a

single economic entity. As a result of this, an enterprise obtains the control over the net assets

or operations of other enterprises. The results of this combination can be in a form of single

legal entity or two separate legal entities. If an entity is obtaining the control of one or more

other entities which are not involved in business, then combination of those entities is not a

business combination (Singhal and Tulshan, 2009). This IFRS requires an entity that all

business combinations should be within scope and accounted for by applying the purchase

method only. It is also required for an entity to measure the cost of a business combination at

fair value at the date of exchange of assets given, as well as liabilities incurred or assumed

and equity instruments issued by the acquirer. In addition to this, the whole cost is directly

associated to the combination. It is required for an entity to recognize and measure the value

of goodwill generated due to business combination (Zube, 2011). The value of goodwill will

be measured as the difference between (a) and (b) mentioned below:

(a) Aggregate the fair value of the consideration transferred at the acquisition date, the

amount of a non controlling interest and at the acquiring date, fair value of the acquirer’s

previously held equity interest in the acquire and

(b) The net of the acquisition of the acquisition-date amounts of the acquired assets and the

liabilities

If the difference between above (a) and (b) is negative, the resulting gain will be treated in

profit and loss account as a bargain purchase. If a business combination happens in stages by

successive share purchases then each transaction shall be considered separately by the

acquirer, by the cost of the transaction and fair value information at the date of exchange

transaction respectively, to determine the amount of goodwill allied with respective

transaction (Singhal and Tulshan, 2009).

1.6.4 IFRS 4 - Insurance contracts

An insurance contract is that where one party (the insurer) accepts the insurance risk of

another party (the policy holder) by agreeing to reimburse the amount of policy to the policy

holder if any specified uncertain future events occur and adversely affect the policy holder.

The primary objective of this IFRS for an entity is to determine the financial reporting for the

issued insurance contracts (described in this IFRS as an insurer) until the Board completes the

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second phase of its project on insurance contracts. As per this IFRS some improvements are

required in accounting for insurance contracts by insurers and some amendments are required

in disclosure that explains the amount in an insurer’s financial statements arising from

insurance contracts and helps users of those financial statements understand the amount,

uncertainty and timing of potential cash flows from insurance contracts (Mirza and Holt,

2011).

In particular, the IFRS applies to all types of insurance contracts that an entity issues and to

reinsurance contracts which the entity holds, except for those specified contracts which are

covered by other IFRSs. Financial assets and liabilities of an entity will not be covered under

this IFRS as all these will come under IAS 39 Financial Instruments: Recognition and

Measurement. The IFRS does not apply for product warranties which are directly issued by a

manufacturer, dealers and retailers. Financial guarantee contracts and the direct insurance

contracts in which reporting entity is the policy holder does not come under the scope of this

IFRS 4. The IFRS compels an entity to conduct a test for the adequacy of recognized

insurance liabilities and impairment test for reinsurance assets (Singhal and Tulshan, 2009).

The IFRS permits an insurer to amend its accounting policies related to insurance contracts

only and only then the changes make the financial statements more reliable and relevant for

users to take correct decisions. For an entity, it is required to explain the amounts in financial

statements arising from insurance contracts and provide the information in disclosure which

helps in evaluating the nature and extent of risk from the particular insurance contracts

(Singhal and Tulshan, 2009).

1.6.5 IFRS 5 - Non-current assets held for sale and discontinued operations

The main purpose of this IFRS is to measure the accounting for the assets held for sale, and

the preparation and disclosure of discontinued operations in the financial statements of an

entity. Particularly, the IFRS requires those assets which can be categorized as held for sale

to be measured at the lower degree of carrying amount and fair value less costs to sell, and

the amount of depreciation on such assets to cease. It is required for an entity to present

separately these types of assets on the face of balance sheet and the results of discontinued

operations to be presented separately in the income statement (Walton, 2011).

An entity shall consider those assets as a non-current asset (or disposal group) as held for sale

if its carrying amount will be recovered through only a sale transaction rather than through

continuous use. In this case, the asset (or disposal group) must be offered for instant sale in

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its present condition only on the terms that are usual and customary for sale of such assets (or

disposal groups) and its sale must be highly probable (Singhal and Tulshan, 2009).

For the highly probable sale, there should be a plan to sell these assets and locate the desired

customers and plan must have been initiated by the management. Further, these should be

properly marketed for sale at a price that is reasonable in relation to its current fair value. The

IFRS does not apply to assets raise from employee benefits, deferred tax assets and all the

financial assets within the scope of IAS 39, non-current assets accounted for in accordance

with fair value model in IAS 40, non-current assets measured at fair value less estimated

point of sale costs as per IAS 41 and contractual right under insurance contracts. If an asset is

abandoned then it cannot be classified as held for sale of a non-current asset (or disposal

group) because its carrying amount will be recovered principally through its continuous use

(Krik, 2009).

1.6.6 IFRS 6 - Explorations for and evaluation of mineral resources

The primary objective of this IFRS is to specify the effects of exploration for and evaluation

of mineral resources in the financial reporting of an entity. Basically, exploration and

evaluation expenditures are those which are incurred by an entity associated with the

exploration for and evaluation of mineral resources before the technical feasibility and

commercial viability of extracting a mineral resource are demonstrable. In particular,

exploration and evaluation assets are exploration and evaluation expenditures recognized as

assets according to the entity’s accounting policy. This IFRS state that initially an entity

should measure these assets on cost and subsequently measurement can be at cost or revalued

amount. The IFRS demands for an entity to perform an impairment test when there are

indications that the carrying amount of exploration and evaluation assets exceeds recoverable

amount (Singhal and Tulshan, 2009).

For the purpose of assessing impairment on such assets, an entity shall establish an

accounting policy for distributing exploration and evaluation assets to cash-generating units

or groups of cash-generating units. It is necessary for an entity that each cash-generating unit

or group of units on which an exploration and evaluation asset is allocated shall not be larger

than an operating segment determined in accordance with IFRS 8 Operating Segments. An

entity shall reveal that information and explain the amounts recognized in its financial

statements aroused from the exploration for and evaluation of mineral resources (Bragg,

2011).

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1.6.7 IFRS 7 - Financial instruments: disclosures

The main purpose of this IFRS is to compel entities to prescribe disclosures that enable

financial statements users to measure the significance of financial instruments for the entity’s

financial position and performance; the nature and extent of their risk and how the entity

manage these risks. This IFRS applies to all type of entities, either that have few financial

instruments (eg a manufacturer whose financial instruments are only accounts receivable and

accounts payable) or those that have many financial instruments (eg a financial institution

whose most of the assets and liabilities are financial instruments) (Ankarath et al. 2010). This

IFRS does not apply to those financial instruments which are associated with insurance

contracts and financial instruments, contracts and obligations under share based payment

transactions. An entity can group its financial instruments in different classes that are

appropriate to the nature of the information disclosed and that take into account the

characteristics of those financial instruments (Mcewen, 2009).

An entity shall disclose all information about financial assets and financial liabilities in

accordance with categorization and specially discloses the information when fair value option

is used. The IFRS insist for an entity to disclose hedge accounting and the fair values of each

class of financial assets and financial liabilities. An entity should disclose the qualitative

disclosure relating to each class of risk such as credit risk, liquidity risk and market risk

including sensitivity risk (Singhal and Tulshan, 2009).

1.6.8 IFRS 8 - Operating segments

The primary objective of this IFRS is to disclose such information that enables the users of

financial statements to evaluate the nature and financial effects of the business activities in

which it is engaged and the economic environments in which it operates. This IFRS applies to

the separate or individual financial statements of an entity and to the consolidated financial

statements of a group with a parent whose debt or equity instruments are traded in a public

market. If the parent company presents both separate and consolidated financial statement in

a single financial report then segment information should be presented only on the basis of

consolidated financial statements. The IFRS specifies how an entity should report

information about its operating segments in annual financial statements and, as a

consequential modification to IAS 34 (Interim Financial Reporting), the IAS 34 requires an

entity to report the selected information about its operating segments in interim financial

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reports. It also finds out the requirements for related disclosures about products and services,

geographical areas and major customers (Walton, 2011).

The IFRS compels an entity to report financial and vivid information about its operating

segments. Operating segments are components of an entity that engage in business activities

from which an entity may earn revenues as well as expenditures. Particularly, the operating

results of the operating segments are reviewed by the chief operating decision maker for

making decision regarding allocation of resources and assessing the performance of these

segments. The IFRS requires an entity to report the profit or loss, assets and liabilities of a

operating segment to the users of financial statements. The IFRS also insist an entity to report

the general information about how the entity identified its operating segments and the types

of product and services from which each operating segment derives its revenues. For an

entity, it is necessary to present the information about transactions with major customers

(Singhal and Tulshan, 2009).

1.6.9 IFRS 9 - Financial instruments

This IFRS is replacement of IAS 39 and its major objective is to set some principles for the

financial reporting of financial assets and financial liabilities of an entity’s financial

statements and providing useful information to the users of these financial statements so that

they can take rational decisions. This IFRS prescribes general guidelines such as how an

entity should classify and determine the financial assets and financial liabilities. The IFRS

describes three phases for reporting the value of financial assets and financial liabilities such

as classification and measurement of these assets and liabilities, impairment methodology and

the last phase is hedge accounting (Zube, 2011). When an entity becomes party to the

contractual provisions of the instruments then it is required for the entity to recognize and

measure the financial assets or financial liabilities in its statement of financial position. An

entity shall determine the value of these financial assets or financial liabilities at fair value

plus or minus. But if the fair value of these financial assets or liabilities is not calculated then

the transactional cost which is directly associated during acquisition of these assets or

liabilities shall be considered by the entity (Mirza and Holt 2011).

Financial assets shall be classified on the basis of entity’s business model for managing the

group of financial assets and the contractual cash flow characteristics of the financial asset.

An entity shall measure these assets at amortized cost if and only if when the assets is held in

accordance with business model whose objective is to hold assets in order to collect

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contractual cash flows. It also requires that the contractual terms of the financial asset give

rise on specified dates to cash flows that are sole payments of principal and interest on the

principal amount outstanding. The IFRS states that a financial asset shall be determined by

an entity at fair value unless it is measured at amortized cost. Whenever an entity changes its

business model for managing financial assets then it is required for the entity to reclassify all

affected financial assets (Bragg, 2010).

An entity shall classify and measure all financial liabilities at amortized cost using the

effective interest method except for those financial liabilities which are measured at fair value

through profit or loss. An entity shall measure its financial liabilities at fair value through

profit and loss if that financial liability is held for trading and the financial liability is a

derivative liability etc. The financial liabilities which are measured through FVTPL (Fair

value through profit & loss) should be presented in the statement of comprehensive income

and profit or loss. The amount of change in the fair value that is directly attributable to

change in credit risk should be presented in other comprehensive income statements and the

remaining amount of change in fair value should be shown in profit or loss (Mcewen, 2009).

1.6.10 IFRS 10 - Consolidated financial statements

The main purpose of this IFRS is to disclose the principle for the preparation and presentation

of consolidated financial statements when an entity controls one or more other entities. The

IFRS insist an entity (the parent) to control one or more other entities (subsidiaries) to

disclose consolidated financial statements. The IFRS describes how to apply the principle of

control to identify the parent and subsidiary company. It also specifies the accounting

requirement for the preparation and presentation of consolidated financial statements. In

particular, consolidated financial statements are those in which the assets, liabilities, equity,

income, expenses and cash flows of the parent and its subsidiaries are presented as a single

economic entity (Epstein and Jermakawiez, 2008). The IFRS requires a parent entity to

present consolidated financial statements but some exemption is available to few entities. An

entity controls other entity when it has rights, to variable returns from its involvement in the

entity and has the power to affect those returns in the investee entity. The IFRS reveals

various requirements regarding how to apply the control principle in some circumstances

such as when voting rights or similar rights give an investor powers, including those

circumstances where the investor seizes less than a majority of voting rights and in

circumstances involving potential voting rights and when the investor has control over

specified assets of an investee company (Catty, 2010).

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While preparing the consolidated financial statements, an entity must use uniform accounting

principles and policies for reporting like transactions and other events in similar

circumstances. Intra group balances and transactions must be eliminated. An entity must

disclose the non-controlling interests in subsidiaries while preparing consolidated financial

statement. A parent entity must disclose the change in ownership interest in a subsidiary that

does not result in the parent losing control. But if a parent entity loses control of a subsidiary

then it should derecognize the assets and liabilities of the former subsidiary and present in the

consolidated financial statement (Krik, 2009). When control is lost by parent company then it

should be recognized as any investment retained in the former subsidiary at its fair value and

for any amounts owed by or to the former subsidiary in accordance with relevant IFRS. That

fair value shall be regarded as the fair value on initial recognition of a financial asset in

accordance with IFRS 9 or, when suitable, the cost related to initial recognition of an

investment in an associate or joint venture. A business should recognize the gain or loss

related to the loss of control attributable to the former controlling interest. The disclosure

requirements to a parent entity for interests in subsidiaries are specified in IFRS 12 disclosure

of interests in other entities (Catty, 2010).

1.6.11 IFRS 11 - Joint arrangements

The primary objective of this IFRS is to present the principles of financial reporting by

entities that have an interest in joint arrangements that are controlled jointly. The IFRS

demands an entity to disclose the type of joint arrangement in which it is involved by

assessing its rights and obligations arising from the arrangement. The IFRS is to be applied to

all entities which are the part of joint arrangement. A joint arrangement is that in which two

or more parties have joint control. The IFRS states joint control as the contractual agreement

by two or more parties for sharing the control of an arrangement, which exists only and only

when decisions about the relevant activities (i.e. activities that significantly affect the returns

of the arrangement) are also required with the common consent of the parties sharing the

control (Zube, 2011). The IFRS categorizes joint arrangements into two types- joint

operations and joint ventures. A joint operation is that whereby the parties of joint

arrangement (i.e. joint operators) have rights over the assets and liabilities, relating to the

arrangement. A joint venture is that whereby the parties of joint control of the arrangement

(i.e. joint venture) have rights to the net assets of the arrangement. The type of joint

arrangement of an entity is determined by considering its rights and obligations. A company

assesses its obligations and rights in accordance with the contractual terms agreed by the

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parties to the arrangement and, when relevant, to the other facts and circumstances (Epstein

and Jermakawiez, 2008).

The IFRS requires a joint operator to identify and determine the assets and liabilities (and

recognize the related revenues and expenses) related to its interest in the arrangement in

accordance with relevant IFRS is applicable to the particular liabilities, assets, expenses and

revenues. The IFRS requires a joint venturer to identify and measure an investment by using

the equity method as per rules and principles disclosed under IAS 28 Investments in

Associates and Joint Ventures, unless the business is exempted from pertaining the equity

method as mentioned in that standard. The disclosure requirements for parties of a joint

arrangement are mentioned in the IFRS 12 disclosure of interests in other entities (Bragg,

2010).

1.6.12 IFRS 12 - Disclosure of interests in other entities

The major objective of this IFRS is to compel an entity to present all information that enables

users of its financial statements to evaluate the nature of, and risks related with, its interests in

other entities; and the effect of those interests on its financial statements. The IFRS applies to

only those entities who have an interest in a subsidiary, a joint arrangement, an associate or

an unconsolidated structured entity (Mcewen, 2009). The IFRS presents rules and principles

for disclosure requirement which an entity must keep in mind while disclosing their financial

statements to its users so that they can make a judgment and assumptions of its interest in

another entity or arrangement (ie control, joint control or significant influence), and in

determining the type of joint arrangement in which it has an interest; and the interest that

non-controlling interests have in the group activities and cash flows; and to determine the

nature and extent of significant restrictions on its ability to access or use assets, and settle

liabilities, of the group etc (Mirza and Holt 2011).

The IFRS prescribes minimum disclosures that an entity must keep in mind while presenting

financial statements to its users. An entity can disclose additional information in its financial

statements if the minimum disclosures required by the IFRS are not sufficient to meet the

disclosure objective. The IFRS requires an entity to provide the detailed information to

satisfy the disclosure objective and how much emphasis should be given on each of the

requirements in the IFRS. An entity must follow the principle of relevance while presenting

financial statements so that useful information may not be obscured by either the inclusion of

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a large amount of detailed information or the aggregation of items that have different

characteristics (Krik, 2009).

1.6.13 IFRS 13 - Fair value measurement

The primary objective of this IFRS is to define fair value, determine a framework for

measuring fair value and required disclosure for measuring the fair value. The measurement

and disclosure requirements under this IFRS do not apply on the share-based payment

transactions which comes under the scope of IFRS 2 Share-based Payment leasing

transactions which come under the scope of IAS 17 Leases and measurements which seems

to be fair value but are not fair value, such as the value of net realizable in IAS 2 Inventories

or value use in IAS 36 Impairment of Assets. The disclosures required under this IFRS are

not required for the plan assets which are measured at fair value as per IAS 19 Employee

Benefits retirement benefit plan investments measured at fair value as per IAS 26 Accounting

and Reporting by Retirement Benefit Plans and for all those assets for which recoverable

amount is fair value less costs of disposal as per IAS 36 (Catty, 2010). IFRS 13 states that fair

value is that price which would be received by sale of an asset or settle a liability in an

orderly transaction between market participants at the measurement date (ie an exit price). In

particular, fair value is that price based on the market measurement and not an entity-specific

measurement (Krik, 2009).

The IFRS establishes a fair value hierarchy to increase consistency and comparability in

calculating the fair value and related disclosures. As per fair value hierarchy, the highest

priority is given to the quoted prices (unadjusted) in active markets for identical assets or

liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable

for the asset or liability, either directly or indirectly. An entity shall discloses all the

information to the users of the financial statements such as the assets and liabilities measured

at fair value on a recurring or non-recurring basis and the valuation techniques which are

used to measure the fair value. An entity shall disclose the effect of the measurements on

profit or loss or other comprehensive income for the accounting period (Mackenzie et al.,

2013).

1.7 Need of Convergence with IFRS

Convergence with IFRS means to design and maintain national accounting standards in such

a way that they are in harmony with International Accounting Standards. The converged

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standards would enable Indian corporate sector to be fully IFRS compliant and give an

"unreserved and explicit statement of compliance with IFRS" in their financial statements.

Due to this convergence, India would be a part of that group who has already adopted IFRS.

Convergence does not mean adoption. There is a difference in adoption and convergence

process. Adoption means using IFRS word by word but convergence means modifying own

country’s existing accounting standards in such a way that comply with these IFRS. In India

we have converged our existing Indian Accounting Standards with IFRS and are not adopting

IFRS fully.

Every country has its national accounting standards and has also an International Accounting

Standards of reporting. Therefore, a big question arises as to why should we need IFRS and if

it is required, why should we converge our national accounting standards with IFRS. This

globalization process prompts the business world to make a single accepted accounting

standard so that they can compare with each other. Now day, a business has to adopt different

accounting standards of different countries to present their financial statement for the users of

financial statement. While presenting the financial statements, they may face complexity and

inefficiency. Therefore, the business world call for a single general accepted accounting

standard (IFRS) to remove these problems. Due to this, IFRS comes in the reporting world.

European countries such as Australia, Russia and New Zealand etc. have already adopted

IFRS for listed companies for presenting their financial statements. Canada has decided to

converge its accounting standards with IFRS from the year 2011 (Indapurkar et al., 2009).

Every nation wants to grow and if we want to grow then it is required to follow those

rules/principles which are followed by developed countries. If we do not follow IFRS, then

Indian companies will be isolated from this international platform. Therefore, to sustain and

maintain their position in the global market, we should also converge our local accounting

standards with IFRS.

1.8 International Financial Reporting Interpretations Committee (IFRIC)

Standing Interpretation Committee (SIC) is replaced by IFRIC in March, 2002. The IFRIC

has developed the interpretations of all IASs and IFRSs. The main purpose behind developing

this IFRIC is to interpret all the applications of each IASs and IFRSs and to provide timely

suggestions to IASB. Financial statements cannot comply with IFRS unless it is applied all

applications and interpretation of applicable standards (Singhal and Tulshan, 2009). The list

of IFRIC is here:

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1. IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities

2. IFRIC 2 Members' Shares in Co-operative Entities and Similar Instruments

3. IFRIC 3 Emission Rights Withdrawn June 2005

4. IFRIC 4 Determining Whether an Arrangement Contains a Lease

5. IFRIC 5 Rights to Interests Arising from Decommissioning, Restoration and

Environmental Rehabilitation Funds

6. IFRIC 6 Liabilities Arising from Participating in a Specific Market - Waste Electrical and

Electronic Equipment

7. IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in

Hyperinflationary Economies

8. IFRIC 8 Scope of IFRS 2 Withdrawn effective 1 January 2010

9. IFRIC 9 Reassessment of Embedded Derivatives

10. IFRIC 10 Interim Financial Reporting and Impairment

11. IFRIC 11 IFRS 2: Group and Treasury Share Transactions Withdrawn effective 1

January 2010

12. IFRIC 12 Service Concession Arrangements

13. IFRIC 13 Customer Loyalty Programmes

14. IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding

Requirements and their Interaction

15. IFRIC 15 Agreements for the Construction of Real Estate

16. IFRIC 16 Hedges of a Net Investment in a Foreign Operation

17. IFRIC 17 Distributions of Non-cash Assets to Owners

18. IFRIC 18 Transfers of Assets from Customers

19. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

1.9 India and IFRS

At present, the ASB of the ICAI formulates IFRS based Accounting Standards. Hence, the

Accounting Standards issued by the ICAI depart from the corresponding IFRS in order to

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ensure consistency with the legal, regulatory and economic environment of India. At a

meeting held. The Council of ICAI in its meeting held in May 2006 viewed that full IFRS

may be adopted at a future date, at least for listed and large entities. The Accounting

Standards Board (ASB) in its meeting held in August 2006, endorsed the Council’s view that

there would be several advantages of adopting IFRS. Keeping in view the degree of

difference between IFRS and Indian Accounting Standards, as well as the fact that

convergence with IFRS would be an important policy decision, the ASB formed an IFRS task

force. The objectives of the task force were to explore the approach for achieving

convergence with IFRS, and laying down a road for achieving convergence with IFRS with a

view to make India IFRS compliant (ICAI, 2009).

It was decided that IFRS would be adopted by Indian entities from 1st April 2011. For the

first IFRS compliant financial statements, it is necessary that the comparative financial

statements should also comply with IFRS. As a result, impacted Indian entities required to

start preparing IFRS compliant accounts from 1st April 2010 and preferably much earlier.

With an objective to ensure a smooth convergence with IFRS, the ICAI took up the matter of

convergence with IFRS with national advisory committee on accounting standards (NACAS).

The NACAS was established by the Government of India, Ministry of Corporate Affairs and

various regulators including IRDA, SEBI and RBI (UNCTAD, 2006). ICAI formulated a

work-plan for the effective implementation IFRS from 1 April 2011. Further, ICAI conducted

various IFRS training programs for its members and others concerned parties to train them to

implement IFRS. But due to some impediments, IFRS did not apply in India from 1st April

2011.

1.10 Key Differences between Indian GAAP and IFRS

Even though Indian GAAP is inspired with IFRS, there are significant differences between

them especially in areas of business combinations, group accounts, fixed asset accounting,

presentation of financial statements, accounting for foreign exchange and financial

instruments, to name a few; Indian GAAP is still a long way behind IFRS. A brief of the

fundamental variation among the two is enlisted hereunder:

(i) Presentation and disclosure of financial statements - IFRS requires five

statements such as statement of financial position, a statement of comprehensive

Income/profit or loss account, statement of change in Equity, cash flow statement (SOCIE)

and notes including summary of accounting policies and explanatory notes. But as per

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IGAAP, no separate standard for disclosure is required. For companies, format and disclosure

requirements are set out under Schedule VI of the Companies Act, 1956. Similarly, IRDA

and SEBI set the format and disclosure requirements for banking and insurance entities.

IAS 1 requires disclosure of critical judgments made by management in applying accounting

policies and key sources of estimation uncertainty that have a significant risk of causing a

material adjustment to the carrying amounts of assets and liabilities within the next financial

year. IAS 1 also requires the disclosure of information that enables the users of its financial

statements to evaluate the objectives, policies and processes of the companies for managing

the capital but there is no such requirement under Indian GAAP. IAS 1 prohibits any items to

be disclosed as extra-ordinary items in the financial reporting but AS 5 specifically requires

the disclosure of certain items as extra-ordinary items under IGAAP (PWC, 2006).

(ii) True and fair presentation of financial statements – True and fair

presentation requires the faithful representation of the effect of the transactions in accordance

with the criteria set out in the framework of assets, liabilities, income and expenses. In

extremely rare circumstances if management thinks that compliance with a particular

standard is so misleading then they can leave this standard and should disclose all the reasons

for doing this in the notes. Under IGAAP, true and fair override is not permitted. However,

in terms of hierarchy, local regulations are superior to accounting standards. Accounting

standards by their very nature cannot and do not override the local regulations which govern

the preparation and presentation of financial statements in the country. Departure from

accounting standards and compliances are prohibited by the Company Act 1956, unless it is

permitted under other framework of local regulations. However, ICAI requires the disclosure

of such departure to be made in the financial statements (Deloitte, 2012).

(iii) Presentation - IAS 1 provides guideline and does not prescribe a particular format.

But as per AS 1 (Disclosure of Accounting Policies) does not define any standard

requirements for disclosure of financial statements. As per IFRS, certain minimum items are

to be presented on face of Balance Sheet such as presentation of current/non-current assets

and liabilities. A liquidity presentation provides more relevant and reliable information but as

per IGAAP, schedule VI of the Companies Act 1956 defines the format of balance sheet and

its related statements which are different from the IAS 1 (WIRC, Reference Manual,

2011-12).

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(iv) Inventory valuation technique – IAS 2 specifically deals with the costs of

inventories of an enterprise, providing services but inventories arising in the ordinary course

of business of service providers are excluded from the preview of AS 2. LIFO method is

allowed in determining cost under IAS-2 but it is prohibited under AS 2 (Deloitte, 2012).

(v) Cash flow statements – Under IFRS, bank overdrafts which are repayable on

demand is to be treated as component of cash/cash equivalents but there is no stipulation in

AS 3 for classification of bank overdrafts. As per IFRS, disclosure of dividend and interest

paid can be classified under operating activities or financial activities. But under IGAAP,

disclosure of dividend and interest paid is classified under financing

activity (Standard Chartered, 2012).

(vi) Events occurred after balance sheet date - In IFRS, it is not required to adjust

financial statements if an event occurred after balance sheet date but under IGAAP, events

occurred after the Balance Sheet date is to be adjusted (Study Café. In, 2013).  

(vii) Proposed dividends - IAS 10 provides that proposed dividend should not be shown

as a liability when proposed or declared after the balance sheet date but as per IGAAP, the

companies are required to make provision for proposed dividend, even-though the same is

declared after the balance sheet date (PWC, 2006).

(viii) Prior period items - Under IGAAP, we cover only income and expenses in the

definition of prior period items. The concept of extra ordinary items does not exist under

IFRS as all items are considered as ordinary items. A separate disclosure of extra ordinary

items is required under IGAAP but it is not required under IFRS (Standard Chartered, 2012).

(ix) Fixed assets – Under IFRS, an item of property, plant and equipment (PPE) should be

documented as the asset when it is probable that the future economic benefits associated with

the asset will flow to the enterprise and cost can be measured reliably. On the other hand,

definition of the term fixed asset is less elaborate in AS 10. Under IFRS, subsequent costs are

incurred for replacement of part of fixed asset has to be capitalized but IGAAP states that

these expenses should charged off in profit and loss account, if future benefits from the

expenses does not increase previously assessed standard performance (PWC, 2006).

(x) Depreciation - IAS 16 Property, Plant and Equipments, allows management to charge

depreciation based on useful life of the asset but Schedule XIV of the Companies Act

prescribes minimum rates of depreciation to be charged under IGAAP. Change in the method

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of depreciation is treated as change in accounting estimate under IAS 16 but AS 6 considers

change in method of depreciation as change in accounting policy (Standard Chartered, 2012).

(xi) Revenue recognition - In case of revenue from rendering of services, IAS 18

permits only percentage of completion method but AS 9 allows the completed service

contract method or proportionate completion method (Deloitte, 2012).  

(xii) Accounting for amalgamation and business combinations - IFRS 3 allows

only purchase method for accounting of amalgamation and business combination. Option of

pooling method given under IAS 22 has been withdrawn but AS 14 allows both pooling of

interest method and purchase method. IFRS 3 allows valuation of assets and liabilities at Fair

Value but AS 14 allows valuation at carrying value. Under IFRS 3, Goodwill is allowed to be

tested for impairment and amortization of goodwill is prohibited but AS 14 requires

amortization of goodwill. IFRS 3 recognizes the negative goodwill in income statement but

AS 14 requires negative goodwill to be credited to capital reserve (WIRC, Reference Manual,

2011-12).

(xiii) Employee benefits - As per IAS 19 actuarial gains and losses may be recognized

immediately under profit or loss, in other comprehensive income. And the deferred up to a

maximum with any excess of 10% of the greater of the defined benefit obligation or the fair

value of the plan assets at the end of the previous financial period being amortized over the

expected remaining working lives of the active employee. As per IGAAP actuarial gains and

losses are considered under the statement of profit and loss account. The discount rate used to

discount post employment benefit obligation should be determined by reference to market

yield of high quality corporate bonds, or, if there is no sufficient market in such bonds, on the

basis of market yields of government bonds under IFRS. But IGAAP allowed the use of only

market yields on government bonds. As per IFRS, amortization in twenty years, being

rebuttable presumption but under IGAAP, amortization in ten years, being rebuttable

presumption (PWC, 2006).

(xiv) Segment reporting - Under IFRS, the reportable segments of the previous year are

reported in the current year if the management considers that segment to be of continuing

significance. As per IGAAP, any segment that was a reportable segment in the previous year

because of the 10% criteria it would continue to be recognized as reportable segment even in

current year. If there is any change in identification of segments IFRS requires restatement of

prior period segment information. If not practicable, it requires the disclosure of data for both

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the old and new bases of segmentation. But, AS requires only disclosure of the nature

of the change and the financial effect of the change if reasonably determinable (Deloitte,

2012).

(xv) Related party - The definition of related party includes post employment benefit

plans (e.g. gratuity fund, pension fund) of the enterprise or of any other entity, which is a

related party of the enterprise. Under IGAAP, parties are considered to be related if at any

time during the reporting period one party has the ability to control the other party, or

exercise significant influence over the other party in making financial and or operating

decisions and non executive directors are not included as key managerial

personnel (WIRC, Reference Manual, 2011-12).

(xvi) Lease - Under IFRS, land and building are considered separately. The land element is

normally an operating lease unless title passes to the lessee at the end of the lease term.

Building element is classified as operating or finance lease by applying the classification

criteria. Presently IGAAP does not deal with lease agreements to use lands. IFRS does not

prohibit upward revision in value of un-guaranteed residual value during the lease term but

IGAAP permits only downward revision (Deloitte, 2012).

(xvii) Earnings per share (EPS) - IAS requires the disclosure of EPS in consolidated

financial statements only. But IGAAP requires both basic and diluted EPS to be disclosed

under both the standalone financial statement and the consolidated financial statements. Basic

and diluted EPS of discontinued operation are additionally required under IFRS but no such

requirement exists under IGAAP. IAS 23 does not require the disclosure of EPS with and

without extraordinary item but AS 20 require EPS/DPS with and without extraordinary item.

IAS 23 also require changes in accounting policy to be given retrospective effect for

computing EPS, which means EPS to be adjusted for prior periods presented but AS 20 does

not prescribe such treatment. IAS 23 also prescribes some treatment regarding put options,

forward purchase contract and share based payment transaction in computing EPS but AS 20

does not prescribe such treatment also (Study Café. In, 2013).

(xviii) Deferred tax treatment - IAS 12 is based on balance sheet approach but AS 22

is based on income statement approach. IAS 12 requires numerical reconciliation between tax

expense and pre tax accounting but AS 12 does not require numerical reconciliation between

tax expense and pre tax accounting profit (WIRC, Reference Manual, 2011-12).

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(xix) Interim financial reporting - SEBI requires all listed companies to publish their

interim financial results on quarterly basis but IAS 34 does not mandate the period or the

frequency of published interim financial reports (Study Café. In, 2013).  

(xx) Impairment of assets – under IFRS, once impairment loss is recognized on

Goodwill, reversal is not permitted and only bottom up approach is suggested. Under IGAAP,

in certain conditions, reversal is permitted and in assessing cash generating units for

impairment, bottom up and top down approaches are recommended for allocation of

goodwill. IAS 36 does not apply to investment property and biological assets but Impairment

would apply to investment property under IGAAP (PWC, 2006).

(xxi) Provisions, contingent liabilities and contingent assets – Under IFRS,

where the time value of money is material, a provision should be discounted to its present

value but it is prohibited under IGAAP. IFRS requires that present obligation under an

onerous contract should be recognized and measured as provision but this requirement has

been omitted under IGAAP (Deloitte, 2012).

1.11 Epilogue

The foregoing discussions and explanations reveal that adoption of IFRS is deemed to help

the investors, professionals, industry and the economy at large. The convergence is also

expected to bring a lot of opportunities for Indian companies to easily access foreign capital

market at lower cost and generate capital formation. The convergence has also thrown up

some challenges for Indian companies as they will have to conduct training programs for

accounting professionals resulting into increased expenditure and bring about major changes

in their financial statements in the light of the adoption of fair value principle. The journey of

this convergence requires a vigilant planning for its successful implementation.

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