International Financial Reporting Standards are the standards which are designed for reporting business affairs, which are understandable all over the world for the purpose of establishing global accounting language. Because of unique way of reporting these standards, companies can be compared at global level.
Introduction to IFRS
Businesses are operating all over the world. Certain organizations have worldwide existence. If we take an example of Infosys, which is an Indian IT company, works all over the world. The accounting information of one particular company in so many countries will be as per that country’s law and reporting standards. Therefore there will be confusion in considering the accounting information. In order to avoid this confusion, International Accounting Standards Board (IASB) has created one unique accounting language which is called as International Financial Reporting Standards most commonly known as IFRS.
Who designed IFRS?
International Accounting Standards Board (IASB), is the standard-setting body of the IFRS. It was founded on 1st April 2001 and it was the successor to the International Accounting Standards Committee.
Why International Financial Reporting Standards?
- Indian companies are listed on other stock exchanges and they have to again re-form their accounting information with GAAP requirement of those companies.
- Also, foreign companies which have subsidiaries in India also have to reform their financial statements as per the reporting standards of India. Foreign Direct Investment (FDI), Financial Institutional Investors (FII’s) are also more comfortable with a uniform way of reporting information.
- IFRS are globally accepted, therefore there is no confusion while dealing with financials of the company.
- These standards and principles are comparatively simple.
- Anybody from anywhere can do judgment of the business on the basis of IFRS reporting standards.
- Also, the International Financial Reporting Standards is a way to minimize costs.
Adoption of IFRS
Many countries in the world like the European Union, Hong Kong, Australia, are using IFRS. As per August 2008 data, more than 113 countries around the world require or permit IFRS reporting and other 85 require IFRS reporting.
Difference between Indian GAAP and IFRS
|Indian accounting standards are not flexible||IFRS are flexible in nature|
|Extraordinary items are reported separately||No provision for reporting extraordinary items|
|No standard for the first-time adoption||It sets the standards for the first-time adoption|
|As per companies act, business is required to report the following financial statements, Balance Sheet Profit and Loss AccountNotes to accounts||IAS-1 require a business to report financials following financial statements-
|The minimum rate of depreciation to be applied by the company is defined by the Companies Act.||IAS-16 Property Plant and Equipment allows management to charge depreciation|
|The Schedule VI to the Companies Act, 1956 specifies Indian Rupees as the reporting currency.||Required to use the functional currency. However, entities may use different currencies.|
Advantages of using IFRS
- Due to the implementation of International Financial Reporting Standards, companies would be better understood in global markets.
- Companies will be able to tap global capital markets and may reduce their cost of capital.
- At the international level, benchmarking would be easy.
- Because of universal global accounting language, internal communications would be easy and improved.
Learn how to prepare financial statements. Sharpen your understanding of International Financial Reporting Standards. Apply International Financial Reporting Standards concepts to accounting methods.
To whom IFRS is applicable?
Public entities or the business’s which include companies which are listed on stock exchanges, part of public interest or public sector, such companies should implement International Financial Reporting Standards.
Generally, these entities include:
- Listed companies
- Mutual Funds
- Insurance companies
- Financial Institutions
- Subsidiaries or Holding companies of the same.
- As of now, IFRS is not applicable to Small Medium Enterprises (SME’s).
Challenges in IFRS
- Implementation of International Financial Reporting Standards involves recruitment of experienced person and training of fresher’s in the IFRS domain.
- Availability and consistency of data can be another issue.
- Managing and handling system capacities
- Management of volatility of results
- Impact on other parallel systems and changes of the same systems.
- A very important obstacle is the amount of cost and time involved in this entire process.
Requirements of IFRS
The IFRS requirements include:
- Company’s financial statement position
- Statement of Comprehensive Income separate statements comprising an Income Statement and separately a Statement of Comprehensive Income, which reconciles Profit or Loss on the Income statement to total comprehensive income
- Statement of Changes in Equity (SOCE)
- Cash Flow Statement or Statement of Cash Flows
- Notes, including a summary of the significant accounting policies
Indian IFRS Scenario
Though The Institute Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory in India for financial statements on or after April 1st, 2012, this plan is failed. The roadmap was given but still, Indian companies are following old Indian GAAP. There is no specific date given for the adoption of IFRS now.
Key players regarding the development and adoption of IFRS
Securities and Exchange Commission is responsible for the supervision and regulation of the securities industry. The Financial Accounting Standards Board (FASB) is a body which establishes and interprets U.S. GAAP. IASB works with the FASB on the convergence of U.S. GAAP and IFRS.
How IFRS differs in key issues from US GAAP?
• In inventory valuation techniques IFRS does not permit Last In, First Out (LIFO).
• International Financial Reporting Standards uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP, making write-downs more likely.
• International Financial Reporting Standards does not permit debt for which a covenant violation has occurred to be classified as non-current unless a lender waiver is obtained before the balance sheet date.
Cost of converting to IFRS
The costs are dependent on the size and nature of the business. However basic costs include staff training, IT support, implementation of International Financial Reporting Standards. Opportunity cost also has a role to play here. As of November 2008, the Securities and Exchange Commission estimated that the largest companies which adopt IFRS early experience around $32 million per company in additional costs.