IFRS
Convergence and Challenges Ahead
CA Narayanan Nambiar
KPRSN & Co, CA’s
Bangalore
+91 9880304136
nambiarnrn@gmail.com
Welcome
Good evening…
What is IFRS?

IFRS (International
Financial Reporting
Standards) is a set of
accounting standards
developed by the
International Accounting
Standards Board (IASB).
What is IAS?


IAS (International Accounting
standards) is a set of accounting
standards developed by ISAC.
IASC is the predecessor of IASB.
Why IFRS & IAS




Initially International Accounting Standards
Committee (IASC) was responsible for issuing
International standards. They issued IAS 1 to IAS
41
In 2001 International Accounting Standards
Board (IASB) was formed. They took over
responsibility of issuing International Standards.
IASB issued IFRS 1 to IFRS 16 and more and
more on the way.
IFRS & IAS are all International accounting
Standards.
Why do we need Accounting
standards?



Some years back we had not heard of any accounting standards.
We were using GAAP (Generally Accepted Accounting Principles).
We were preparing Financial statements based on what we
learned from accounting books and based on discussions with our
seniors.
However over a period of time companies which started as family
owned businesses grew substantially. To attract more capital
required for expansion owners started listing them with stock
exchanges. Investors needed standardized financial statements to
compare performance and invest in the most suitable companies.
With this standardization was necessary.
Why change from AS to Ind AS?




India has our accounting standards called
AS.
UK has FRS.
US has US GAAP.
However when companies started
expanding from country to country the
need for one standard all over the world
was felt.
What is Ind As?



India is not fully adopting IFRS
We are converging into IFRS
Ind As is the converged version of
IFRS. From original IFRS we have
made some carve outs and then
issued Ind As.
Ind As Implementation



During the G 20 submit of 2008 our
then Prime minister had committed
India’s convergence to IFRS
We had initially decided to converge
to IFRS by 2011.
However there were lot of
implementation problems such as
conflict with the Companies Act etc.
Ind As Implementation




Now these problems are partly solved as a the
Companies Act of 2013 is already passed.
The biggest challenge now is training of our
professionals and support staff.
It is a huge task and we do not have adequate
number of well experienced trainers
The requirements of people with IFRS knowledge
is enormous and is growing in a geometrical
proportion
IFRS & Indian Growth Story

Is India Growing???
India is Developing…
Industrialization
- Steel and coal industry
- - TATA / Reliance /
Airtel

5 important developments of
the last century
Growth of size of Indian companies
2. International companies starting
operations in India
3. International companies setting office in
India to handle Finance functions
4. Indian BPO / KPO companies handling
finance functions of foreign companies.
5. IFRS
1.
Need to incorporate IFRS in the
curriculum



Most Indian companies have to change to
IFRS (IND AS) in the near future.
Companies are looking for Industry ready
graduates and professionals
A basic knowledge of IFRS reduces the
time required to train the graduates and
make them industry ready
Growing relevance of IFRS

Present scenario…
US GAAP
National
Accounting
Standards
IFRS
Growing relevance of IFRS

The future…
IFRS
National
Accounting
Standards
List of International
Accounting Standards (IAS)
Accounting
Standards
(AS)
International
Accounting
Standards(IAS)
Topic
IAS 1(Revised)
Presentation of Financial
Statements
IAS 2 (Revised)
Inventories
IAS 7
Statement of Cash flow
IAS 8 (Revised)
Accounting Policies, Changes in
Accounting Estimates And
Errors
IAS 10 (Revised)
Events after the reporting
period
IAS 11
Construction Contracts
IAS 12
Income taxes
IAS 16 (Revised)
Property, Plant & Equipment
List of International Accounting
Standards (contd.)
Accountin
g
Standards
(AS)
International
Accounting
Standards(IAS)
Topic
IAS 17
Leases
IAS 18
Revenue
IAS 19
Employment benefits
IAS 20
Accounting for Government grants
and Disclosure of Government
Assistance
IAS 21 (Revised)
Effects of Changes in Foreign
Exchange rate
IAS 23 (Revised 1993) Borrowing costs
IAS 24 (Revised)
Related Party Disclosures
List of International Accounting
Standards (Contd.)
Accounting
Standards
(AS)
International
Accounting
Standards(IAS)
Topic
IAS 26
Accounting and reporting by
retirement benefit plans
IAS 27(Revised)
Consolidated and Separate
Financial statements
IAS 28 (Revised)
Investment in Associates
IAS 29
Financial reporting in
hyperinflationary Economies
IAS 32 (Revised)
Financial Instruments:
Presentation
IAS 33(Revised)
Earnings per share
List of International Accounting
Standards (Contd.)
Accounting
Standards
(AS)
International
Accounting
Standards(IAS)
Topic
IAS 34
Interim Financial Reporting
IAS 36
Impairment of Assets
IAS 37
Provisions, Contingent liabilities
and Contingent Assets
IAS 38
Intangible assets
IAS 39
Financial instruments: Recognition
& Measurement
IAS 40(Revised)
Investment Property
IAS 41
Agriculture
List of International Financial
Reporting Standards (IFRS)
Accounting
Standards
(AS)
International
Financial
Reporting
Standards(IAS)
Topic
IFRS 1
First time adoption of IFRS
IFRS 2
Share based payment
IFRS 3
Business combination
IFRS 4
Insurance contracts
IFRS 5
IFRS 6
Noncurrent assets held for sale
and discontinued operations
Exploration for Minerals
IFRS 7
Financial Instruments : disclosure
IFRS 8
Operating segments
IFRS 9
Financial instruments
IFRS 10
Consolidated financial statements
List of International Financial
Reporting Standards (IFRS)
Accounting
Standards
(AS)
International
Financial
Reporting
Standards(IAS)
Topic
IFRS 12
Disclosure of interests in other
entities
IFRS 13
Fair value measurement
IFRS 14
Regulatory Deferral Accounts
IFRS 15
Revenue from Contract with
customers
IFRS 16
Lease Accounting
IFRS – Important aspects


-
Concept of Capital and Capital
maintenance
Substance over form
Consignment sales
Sale and buy back of Inventory
Sale and lease back
IFRS – Important aspects
Assets – past transaction / future
economic benefits / control
- Human resource capital
 Liabilities – present obligation on reporting
date
- Proposed dividend
 Equity – residual interest
- Redeemable Preference shares

IFRS – Important aspects



-
Statement of profit or loss and other
comprehensive income
Statement of changes in equity
Statement of financial position
Any form
Minimum requirements
classification of current and non
current
IFRS – Important aspects



Composite assets accounting
Aircraft (Engines, Landing gear, Fuselage)
Ship
High rise building
Decommissioning/ Dismantling costs
Under IFRS can there be assets with net
book value of Re. 1 when the fair value is
much higher?
IFRS – Important aspects

-
Borrowing cost
Relevant borrowing cost must be
capitalised
IFRS – Important aspects

Intangible assets

Capitalise Development expenditure
IFRS – Important aspects



Investment property
Cost model (same as IAS 16 PPE)
Fair value model (no depreciation,
fair value difference to profit or loss)
IFRS – Important aspects




Impairment of assets
Compare book value with
recoverable amount
Recoverable amount is the higher of
fair value less cost to sell and value
in use
If recoverable amount lower than
book value there is impairment
IFRS – Important aspects




Accounting of impairment
If any individual asset damaged or
destroyed remove / reduce the value of
that asset
If no specific asset destroyed or damaged
then adjust goodwill
However ensure that no asset is reduced
below its recoverable amount
IFRS – Important aspects




CGU
Indications of impairment
Internal (damage / change in use)
External (market interest rates)
IFRS – Important aspects

-
-
Provisions
Present obligation on reporting date
Legal / Constructive
Onerous contracts
IFRS – Important aspects

-
Financial instruments
Financial assets
Financial liabilities
Compound financial instruments
Amortised cost
Fair value
Fair value through profit or loss
Fair value through OCI
Impairment of financial assets
Derivatives
IFRS – Important aspects


-
-
Biological assets
Controlled activity important
Changes on account of growth
Changes on account of fair value
IFRS – Important aspects

Revenue accounting
IFRS – Important aspects

Accounting policy changes, estimates
and errors
IFRS – Important aspects

-
-
Events after the reporting period
Adjusting – adjust Financial
Statements
Non adjusting - disclose
IFRS – Important aspects

-
Income taxes
Current tax
Deferred tax
IFRS – Important aspects

-
Government grants
Capital grant
Revenue grant
IFRS – Important aspects



Employee benefits
Defined contribution
Defined benefit
IFRS – Important aspects

-
-
Cash flow
Operating
Investing
Financing
IFRS – Important aspects

-
-
Inventories
FIFO
AVCO
LIFO - prohibited
IFRS – Important aspects

First time adoption
IFRS – Important aspects

Related party transactions
IFRS – Important aspects

Operating segments
IFRS – Important aspects




Fair value
Stage 1
Stage 2
Stage 3
Significant differences between
IFRS and US GAAP
Historical cost
Indian Accounting
Standards
-
-
Used for valuing the
assets
One of the Accounting
concepts
However PPE maybe
revalued to fair value
Certain derivatives are
carried at fair value but
no accounting standards
on derivative assets and
biological assets issued
by ICAI till date
IFRS/IAS
-
Used for valuation
purpose in general
But some intangible
assets, PPE and
investments maybe
revalued to fair value
US GAAP
-
Do not recommend
revaluation of assets
except for certain types
of securities and
derivatives to fair value
First time adoption of
Accounting Standards
Indian Accounting
Standards
-
No specific guidance on
first time adoption of
accounting frameworks
IFRS/IAS
-
-
Specific statements by
IASB to apply IFRS for
the first time
First time adoption of
IFRS requires full
retrospective application
of IFRS effective at the
reporting date for IFRS
based financial
statements of an entity
There are certain reliefs,
exemptions and imposes
certain requirements and
disclosures
US GAAP
-
First time adoption of US
GAAP requires
retrospective application
However, US GAAP does
not give specific
guidance on first time
adoption of its
accounting principles
Constituents of Financial
Statements (1/3)
Indian Accounting
Standards
-
A company’s standalone
two years balance
sheets, Income
statements, cash flow
statements, accounting
policies and notes
IFRS/IAS
-
Two years’ consolidated
balance sheets, income
statements, cash flow
statements, changes in
equities and accounting
policies and notes
US GAAP
-
For US companies and
SEC Registrants (public
companies), two years’
balance sheets and three
years’ income
statements, cash flow
statements, changes in
equity statement and
accounting policies and
notes
Constituents of Financial
Statements (2/3)
Indian Accounting
Standards
-
A company’s standalone
two years balance
sheets, Income
statements, cash flow
statements, accounting
policies and notes
IFRS/IAS
-
-
Two years’ consolidated
balance sheets, income
statements, cash flow
statements, changes in
equities and accounting
policies and notes
Some circumstances or
voluntarily an entity may
present standalone
financial statements
along with consolidated
financial statements.
US GAAP
Contd.
- In Certain circumstances
for foreign private
issuers, there is a relief
from the three year
requirement
Constituents of Financial
Statements (3/3)
Indian Accounting
Standards
-
A company’s standalone
two years balance
sheets, Income
statements, cash flow
statements, accounting
policies and notes
IFRS/IAS
-
-
Two years’ consolidated
balance sheets, income
statements, cash flow
statements, changes in
equities and accounting
policies and notes
Some circumstances or
voluntarily an entity may
present standalone
financial statements
along with consolidated
financial statements.
US GAAP
Contd.
- Non US companies with
registered securities in
US have an option to
prepare their financial
statements either based
on US GAAP or on IFRS
along with reconciliation
of net income and equity
to US GAAP, as a
disclosure in the notes
Balance sheet
Indian Accounting
Standards
-
-
No particular format
prescribed by AS
Accepts the format
prescribed by the
companies Act or by
industry regulations
(banking, insurance etc.)
However AS state certain
items, which must be
presented on the face of
balance sheet
IFRS/IAS
-
-
No particular format
prescribed
Certain items must be
presented on the face of
the balance sheet as per
requirements of IFRS
Requires a separate
presentation of total
assets and total liabilities
A liquidity presentation
of assets and liabilities is
used instead of a
current/non current
presentation
US GAAP
-
-
Entities may present
either a classified or Non
classified balance sheet
Decreasing order of
liquidity is used for the
presentation of items on
the face of the BS
Public companies should
follow SEC regulation
Income statement (IS)
Indian Accounting
Standards
-
AS do not prescribe a
format
Industry specific formats
prescribed by industry
regulation
AS do not state certain
items to be presented on
the face of the IS
IFRS/IAS
-
-
No format prescribed
Entity may select
presentation of expenses
by function or nature
Expenses by nature are
disclosed as footnote if
an entity selects
functional presentation
IFRS requires certain
items to be presented on
the face of the IS
US GAAP
-
-
-
Requires IS to be
presented in either of
two formats – single step
or multi step
Expenditures are
presented by function
Public companies should
follow SEC regulations
Extraordinary items
Indian Accounting
Standards
-
-
Events or transactions
clearly distinct from the
ordinary activities of the
entity which are not
expected to recur
frequently and regularly
are termed as Extra
ordinary
Disclosure of the nature
and amount of such item
is required in the IS to
perceive the impact on
current and future
projects
IFRS/IAS
-
Not allowed
US GAAP
-
-
Defined as being both
infrequent and unusual, and
are rare
Negative goodwill is
presented as an
extraordinary item on the
faces of IS, net of taxes
Disclosure of such items
required either in the IS or
in the notes
Statements of changes in
share(stock) holders’ equity
Indian Accounting
Standards
-
No separate statement
prepared for it
Separate schedules of
‘Share Capital ’ and
‘Reserves and Surplus’
are prepared to show the
changes in shareholders’
equity
IFRS/IAS
-
-
A primary statement
required to be prepared
as a part of the financial
statements
Statement shows capital
transactions with owners
, accumulated profits’
movement and a
reconciliation of all other
components of equity
US GAAP
-
SEC rules allow certain
information to be
included in the notes and
not in the primary
statement
Accounting Policies
IFRS
-
-
As per revised IAS 1,
statement of financial
position as at the
beginning of the earliest
comparative period
needs to be presented ,
when an entity restates
comparative information,
if material, following a:
Change in accounting
policy,
Correction of an error, or
Reclassification of items
in the financial
statements
Indian GAAP
-
The overall impact of
Indian GAAP
requirements and
practice is that
accounting policy
changes are given
prospective effect
only(expect that a
change in depreciation
method is specifically
required to be effected
retrospectively with
consequent adjustment
in the profit and loss
account of the year of
change).
U.S .GAAP
-
Like IFRSs, accounting
principle changes
generally are made by
adjusting opening equity
and comparatives ,
unless impracticable.
Cash flow statement
IFRS
-
-
Bank overdrafts
repayable on demand
are included in cash and
cash equivalents only if
they form an integral
part of the entity’s cash
management.
Cash flows from
operating activities may
be presented either by
the direct method or the
indirect method
Indian GAAP
-
-
AS3 is silent on the issue
. By implication,
therefore , bank
overdraft are in most
cases a part of cash
flows attributable since
in India bank overdrafts
are similar to cashcredits/advances against
inventories/books debts.
Same as IFRS. However,
listed companies are
required by SEBI
guidelines to present
CFS only under indirect
method . As required by
IRDA guidelines,
insurance companies are
required to use direct
method.
U.S .GAAP
-
-
Like IFRSs, accounting
principle changes
generally are made by
adjusting opening equity
and comparatives ,
unless impracticable.
Same as IFRSs.
Consolidated financial
statement
IFRS
-
Consolidation is based
on a control model which
is the power to govern
he financial and
operating policies of an
entity so as to obtain
benefits from its
activities.
Indian GAAP
-
Consolidation is basically
based on ownership,
directly or indirectly
through subsidiaries, of
more than one-half of
the voting power or
control of the
composition of he Board
of Directors.
U.S .GAAP
-
Consolidation is based
on a controlling financial
interest model ,which
differs in certain respects
from IFRSs.
Associates
IFRS
-
Under IFRSs, associates
generally are accounted
for using the equity
method.
Indian GAAP
-
Like IFRSs, associates
generally are accounted
for using the equity
method . Exception from
using equity method is
when the investment is
acquired and held
exclusively with a view
to its subsequent
disposal in the near
future or the associate
operates under severe
long-term restrictions
that significantly impair
its ability to transfer
funds to the investor.
U.S .GAAP
-
Like IFRSs, equitymethod investees are
accounted for using the
equity method unless
the fair value option is
elected , unlike IFRSs.
Business combinations
IFRS
-
Definition of business
combination has a wider
scope. All business
combinations are
accounted for using
acquisition method, with
specific exemptions . A
business is an integrated
set of activities and
assets that is capable of
being conducted and
managed to provide a
return to investors(or
other owners, members
or participants) by way
of dividends, lower costs
or other economic
benefits . An entity in its
development stage can
meet the definition of a
business.
Indian GAAP
-
Unlike IFRSs, the Indian
GAAP deals only with
amalgamations. There is
liberal use of pooling of
interests method.
U.S .GAAP
-
Like IFRSs, all business
combinations are
accounted for using ,
acquisition method, with
specific exemptions. Like
IFRSs, a business is an
integrated set of
activities and assets that
is capable of being
conducted and managed
to provide a return to
investors(or other
owners, members or
participants) by way of
dividends, lower costs or
other economic benefits
.Like , an entity in its
development stage can
meet the definition of a
business.
Business combinations (contd.)
IFRS
-
Under acquisition
method , the acquired
identifiable assets,
liabilities and contingent
liabilities are recognized
at fair value.
Indian GAAP
-
Under purchase method
, the acquired assets and
liabilities are recognized
at their existing book
values or at fair values.
U.S .GAAP
-
Same as IFRSs.
Revenue
IFRS
-
Revenue from the sale of
goods is recognized
when the entity has
transferred the
significant risks and
rewards of ownership to
the buyer and it no
longer retains control or
managerial involvement
in the goods.
Indian GAAP
-
Unlike IFRSs, the Indian
standard does not list
lack of continuing
managerial involvement
and measurability of cost
among the criteria for
revenue recognition.
Additionally, Indian
Accounting Standards
also permits revenue
recognition when the
seller has transferred to
the buyer the property in
the goods.
U.S .GAAP
-
Like IFRSs, revenue from
the sale of goods is
recognized when the
entity has transferred
the significant risks and
rewards of ownership to
the buyer and it no
longer retains control or
managerial involvement
in the goods. However,
the detailed criteria
underlying these
principles are different
like the requirement of
persuasive evidence.
Constructions Contracts
IFRS
-
Fixed price construction
contracts are accounted
for using the
percentage-ofcompletion method. The
completed contract
method is not permitted.
Indian GAAP
- Same as IFRSs.
U.S .GAAP
-
Unlike IFRSs,
construction
contracts(including fixed
price contracts)are
accounted for using the
percentage-ofcompletion method if
certain criteria are met;
otherwise, unlike IFRSs,
the completed contract
method is used.
Share based payment
IFRS
-
Detailed accounting standard
on all share-based
payments(SBP)is available.
Goods or services received in
a share-based payment
transaction are measured at
fair value. An intrinsic value
approach is permitted only
when the fair value of the
equity instruments cannot be
estimated reliably.
Indian GAAP
-
-
A guidance note is available
for employee share-based
payments. For listed
companies, SEBI guidelines
on the subject are applicable.
Unlike IFRSs, share-based
payment transaction can be
accounted for either by the
fair value method or the
intrinsic method. However,
an entity using the intrinsic
method is required to make
extensive fair value
disclosures.
U.S .GAAP
-
Detailed accounting standard
on all share-based payments
is available.
Like IFRSs, goods or services
received in a share-based
payment transaction are
measured at fair value. Like
IFRSs, an intrinsic value
approach is required in the
rare circumstance that the
fair value of the equity
instruments cannot be
estimated cannot be
estimated reliably. However ,
unlike IFRSs, all non-public
entities may apply an
intrinsic value approach for
liability-classified sharebased payments as an
accounting policy election.
Investment property
IFRS
-
-
Investment property is
property held to earn
rental income or for
capital appreciation or
both.
Property held by a lessee
under an operating lease
may be classified as
investment property if
the definition of
investment property
otherwise is met and the
lessee measures
investment property at
fair value.
Indian GAAP
-
-
There is no detailed
standard available under
the Indian GAAP.
However , limited
guidance is available
under the standard on
investments under which
investment properties
are accounted for as
long-term investments.
No guidance
U.S .GAAP
-
-
Unlike IFRSs, there is no
specific definition of
investment property;
such property is
accounted for as
property n, plant and
equipment unless it
meets the criteria to be
classified as “held for
sale”.
Unlike IFRSs, property
held by a lessee under
an operating lease
cannot be recognized in
the statement of
financial position
Property , Plant and Equipment
IFRS
-
Property, plant and
equipment are
recognized initially at
cost. IFRSs permit
revaluation of property ,
plant and equipment to
fair value if fair value can
be measured reliably. All
items in the same class
are revalued at the same
time and the
revaluations are kept up
to date.
Indian GAAP
-
Like IFRSs, property,
plant and equipment is
recognized initially at
cost. Like IFRSs, Indian
GAAP permits
revaluation of property,
plant and equipment to
fair value if fair value can
be measured reliably.
Unlike IFRSs, revaluation
of the entire class of
assets is not required.
There is no current
restriction on frequency
of valuation.
U.S .GAAP
-
Like IFRSs, property,
plant and equipment is
recognized initially at
cost. Unlike IFRSs, the
revaluation of property,
plant and equipment is
not permitted.
Inventories
IFRS
-
-
-
Generally inventories are
measured at the lower of
cost and net realizable
value.
Decommissioning and
restoration costs
incurred through the
production of inventory
are included in the cost
of that inventory.
The cost of inventory
generally is determined
using the FIFO(first-in,
first-out)or weighted
average cost method.
The use of the LIFO(lastin , first-out)method is
prohibited.
Indian GAAP
U.S .GAAP
-
Same as IFRSs.
-
-
No explicit requirement.
-
-
Same as IFRSs.
-
Unlike IFRSs, generally
inventories are
measured at the lower of
cost and market.
Unlike IFRs, asset
retirement obligations
incurred through the
production of inventory
are added to the
carrying amount of the
related item of property,
plant and equipment.
Unlike IFRSs, the cost of
inventory can be
determined using the
LIFO method in addition
to the FIFO or weighted
average method.
IND AS Carve Outs


IAS 20 – Non monetary Govt. Grant
may be recognised at Fair value or
nominal value
Ind As 20 – Fair value only
IND AS Carve Outs


IAS 21 – Exchange differences must
be recognised in Profit or Loss
IND As 21 – option to recognize in
Other Comprehensive Income
IND AS Carve Outs


IAS 40 – Can be measured using
Cost model or Fair Value model
IND AS 40 – Cost model only
IND AS Carve Outs

IAS 41 – Agriculture

IND As 41 not yet issued
IND AS Carve Outs


IFRS 3 – Gain on Bargain purchase
recognize in Profit or loss
IND AS 103 – Recognize in OCI and
accumulate in Equity as Capital
reserve
Thank you!