INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

Introduction

International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade and are particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards. The rules to be followed by accountants to maintain books of accounts which is comparable, understandable, reliable and relevant as per the users internal or external.

Accounting provides companies, investors, regulators and others with a standardised way to describe the financial performance of an entity. Accounting standards present guidelines to the preparers of financial statements with a set of rules to abide by when preparing an entity’s accounts, ensuring this standardization across the market. Companies listed on public stock exchanges are legally required to publish financial statements in accordance with the relevant accounting standards.

What is IFRS?

International Financial Reporting Standards (IFRS Standards) is a single set of accounting standards, developed and maintained by the International Accounting Standards Board (the Board) with the intention of those standards being capable of being applied on a globally consistent basis—by developed, emerging and developing economies—thus providing investors and other users of financial statements with the ability to compare the financial performance of publicly listed companies on a like-for-like basis with their international peers.

IFRS Standards are now mandated for use by more than 100 countries, including the European Union and by more than two-thirds of the G20. The G20 and other international organisations have consistently supported the work of the the Board and its mission of global accounting standards.

IFRS Standards are developed by the the International Accounting Standards Board (IASB), the standard-setting body of the IFRS Foundation—a public-interest organisation with award-winning levels of transparency and stakeholder participation. Its 150 London-based staff are from almost 30 different countries. The Board’s 12 members are appointed and overseen by 22 Trustees from around the world, who are in turn accountable to a Monitoring Board of public authorities.

International Accounting Standards Board (IASB)

International Accounting Standards Board is an independent, privately – funded accounting standard setter based in London. Contributors include major accounting firms, private financial institutions, industrial companies throughout the world, central and development banks, and other international and professional organisations.

In March 2001 the International Accounting Standards Committee (IASC) Foundation was formed as a not for profit corporation incorporated in the USA. The IASC Foundation is the parent entity of the IASB. In July 2010 it changed its name to the International Financial Reporting Standards (IFRS) Foundation.

In 2001, to strengthen the independence, legitimacy and quality of the international accounting-standard-setting process, the IASC Board was broad based and replaced by the International Accounting Standards Board (IASB) as the body in charge of setting the international standards. It was decided by IASB that all effective IAS issued by the IASC as well as the interpretations issued by the SIC are adopted as its own standards. Those IAS continue to be in force to the extent they are not amended or withdrawn by the IASB. New standards issued by IASB would have prefix of ‚IFRS‛ and new interpretations would be issued by the International Financial Reporting Interpretation Committee (IFRIC).

From April 2001the IASB assumed the accounting standard setting responsibilities from the predecessor body, the International Accounting Standards Committee (IASC). The 14 members of the IASB come from nine countries and have a variety of backgrounds with a mix of auditors, preparers of financial statements, users of financial statements and an academic.

Objectives of the IASB

The following are the formal objectives of the IASB:

1. Develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards based on clearly articulated principles that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the various capital markets of the world and other users of the information to make economic decisions.

2. Promote the use and rigorous application of those standards.

3. Work actively with national standard-setters to bring about convergence of national accounting standards and IFRSs to high quality solutions.

Role of the IASB

Under the IFRS Foundation Constitution, the IASB has complete responsibility for all technical matters of the IFRS Foundation including:

Full discretion in developing and pursuing its technical agenda, subject to certain consultation requirements with the Trustees and the public

a. The preparation and issuing of IFRSs (other than Interpretations) and exposure drafts, following the due process stipulated in the Constitution

b. The approval and issuing of Interpretations developed by the IFRS Interpretations Committee.

The Accounting Standards Advisory Forum (ASAF)

The Accounting Standards Advisory Forum (ASAF) is an advisory group to the International Accounting Standards Board (IASB), consisting of national accounting standard-setters and regional bodies with an interest in financial reporting. The principal purpose of the new advisory group is to provide technical advice and feedback to the IASB.

The Global Preparers Forum (GPF)

The Global Preparers Forum (GPF) is an independent body with members drawn from a variety of industry and geographical backgrounds. It has been sponsored by a number of international or national preparer organisations specifically to provide the IASB with input from the international preparer community. Its members have considerable practical experience of financial reporting and are established commentators on accounting matters in their own right or through working with representative bodies in which they are involved.

Investor Resources

International Financial Reporting Standards (IFRSs) are aimed at ensuring that financial statements provide information that existing and potential investors and other capital providers need to make capital allocation decisions. Although as an investor your priority might not be the standard-setting process, it is important that the IASB gets your input, because the results of our projects will ultimately influence the information that you get from financial statements. So that we can better meet your needs, we want to make it as easy as possible for you to provide input on our work. Detailed accounting background or knowledge is not a requirement to speak to us about or provide feedback on our projects and proposals.

International Financial Reporting Standards (IFRS)

IFRS is a refined system of financial reporting which is going to benefit all the stake holders in the coming years, together with improved corporate governance and increased free flow of capital across the globe. International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements. IFRS is sometimes confused with International Accounting Standards (IAS), which are older standards that IFRS has now replaced. The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry-specific reporting.

IFRS Foundation

The IFRS Foundation is the legal entity under which the International Accounting Standards Board (IASB) operates. The Foundation is governed by a board of 22 trustees. IFRS Foundation is the new name of International Accounting Standards Committee (IASC), approved in January 2010.

IFRS Advisory Council

The IFRS Advisory Council is the formal advisory body to the IASB and the Trustees of the IFRS Foundation. It consists of a wide range of representatives from groups that are affected by and interested in the work of IASB. These include investors, financial analysts and other users of financial statements, as well as preparers, academics, auditors, regulators, professional accounting bodies and standard setters. Members of the Advisory Council are appointed by the Trustees.

IFRS Interpretations Committee

The IFRS Interpretations Committee is the interpretive body of the IFRS Foundation. Its mandate is to review on a timely basis widespread accounting issues that have arisen within the context of current IFRSs. The work of IFRS Interpretations Committee is aimed at reaching consensus on the appropriate accounting treatment (IFRIC Interpretations) and providing authoritative guidance on those issues.

Importance of IFRS

The following are the major importance of International Financial Reporting Standards:

a. A business can present its financial statements on the same basis as its foreign competitors, making comparisons easier.

b. Companies with subsidiaries in countries that require or permit IFRS may be able to use one accounting language company-wide.

c. Companies may need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS, or if they have a foreign investor that must use IFRS.

d. Capital market regulators must be aware of only one set of accounting standards and the companies will experience efficiency in raising capital and reduced information processing cost.

e. The companies will no longer required to prepare its financial statement under different GAAP and make the task of listing shares in foreign exchange easier.

List of the International Financial Reporting Standards (IFRSs)

IFRS 1 - First-time Adoption of International Financial Reporting Standards.

IFRS 2 - Share-based Payment.

IFRS 3 - Business Combinations.

IFRS 4 - Insurance Contracts.

IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations.

IFRS 6 - Exploration for and Evaluation of Mineral 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 Interest in Other Entities.

IFRS 13 - Fair Value Measurement.

IFRS 14 - Regulatory Deferral Accounts.

IFRS 15 - Revenue from Contracts with Customers.

Summary of IFRSs

The technical summary of important IFRSs is as under:

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

IFRS 1 was issued at 1 January 2013. The objective of this IFRS is to ensure that an entity’s first IFRS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high quality information that:

a. is transparent for users and comparable over all periods presented;

b. provides a suitable starting point for accounting in accordance with International Financial Reporting Standards (IFRSs); and

c. can be generated at a cost that does not exceed the benefits.

An entity shall prepare and present an opening IFRS statement of financial position at the date of transition to IFRSs. This is the starting point for its accounting in accordance with IFRSs. An entity shall use the same accounting policies in its opening IFRS statement of financial position and throughout all periods presented in its first IFRS financial statements. Those accounting policies shall comply with each IFRS effective at the end of its first IFRS reporting period. The IFRS requires disclosures that explain how the transition from previous GAAP to IFRSs affected the entity’s reported financial position, financial performance and cash flows.

IFRS 2 - Share-based Payment

IFRS 2 was issued at 1 January 2012. The objective of this IFRS is to specify the financial reporting by an entity when it undertakes a share-based payment transaction. The IFRS requires an entity to recognise share-based payment transactions in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity. There are no exceptions to the IFRS, other than for transactions to which other Standards apply. This also applies to transfers of equity instruments of the entity’s parent, or equity instruments of another entity in the same group as the entity, to parties that have supplied goods or services to the entity.

The IFRS prescribes various disclosure requirements to enable users of financial statements to understand:

a. the nature and extent of share-based payment arrangements that existed during the period;

b. how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined; and

c. the effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position.

IFRS 3 - Business Combination

This states that all business combinations are accounted for using purchase accounting, with limited exceptions. A business combination is to bringing together of separate entities or business into one reporting entity. A business can be operated managed for the purpose of providing return to investors or lower costs. An entity in its development stage can meet the definition of a business.

In some cases the legal subsidiary is identified as the acquirer for accounting purposes (reverse acquisition).The date of acquisition is the date on which effective control is transferred to the acquirer. The cost of acquisition is the amount of cash equivalents paid, plus the fair value of other purchase considerations given, plus any cost directly attributable to the acquisition. The fair values of securities issued by the acquirer are determined at the date of exchange. Costs directly attributable to the acquisition may be internal costs but cannot be general administrative costs. There is no requirement for directly attributable cost to be incremental.

IFRS 4 - Insurance Contracts

IFRS 4 was issued at 1 January 2013. The objective of this IFRS is to specify the financial reporting for insurance contracts by any entity that issues such contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance contracts.  

In particular, this IFRS requires:

a. limited improvements to accounting by insurers for insurance contracts.

b. Disclosure that identifies and explains the amounts in an insurer’s financial statements arising from insurance contracts and helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts. An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. The IFRS applies to all insurance contracts(including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds, except for specified contracts covered by other IFRSs.

The IFRS permits an insurer to change its accounting policies for insurance contracts only if, as a result, its financial statements present information that is more relevant and no less reliable, or more reliable and no less relevant. In particular, an insurer cannot introduce any of the following practices, although it may continue using accounting policies that involve them:

a. measuring insurance liabilities on an undiscounted basis.

b. Measuring contractual rights to future investment management fees at an amount that exceeds their fair value as implied by a comparison with current ees charged by other market participants for similar services.

c. Using non-uniform accounting policies for the insurance liabilities of subsidiaries.

The IFRS requires disclosure to help users understand:

(a) the amounts in the insurer’s financial statements that arise from insurance contracts.

(b) The nature and extent of risks arising from insurance contracts.

IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations

This IFRS was issued at 1 January 2013. The objective of this IFRS is to specify the accounting for assets held for sale, and the presentation and disclosure of discontinued operations. In particular, the IFRS requires:

a. assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying amount and fair value less costs to sell, and depreciation on such assets to cease;

b. an asset classified as held for sale and the assets and liabilities included within a disposal group classified as held for sale to be presented separately in the statement of financial position; and

c. the results of discontinued operations to be presented separately in the statement of comprehensive income.

The IFRS: (a) adopts the classification ‘held for sale’. (b) Introduces the concept of a disposal group, being a group of assets to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. (c) Classifies an operation as discontinued at the date the operation meets the criteria to be classified as held for sale or when the entity has disposed of the operation.

An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale, and (a) represents a separate major line of business or geographical area of operations, (b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or (c) is a subsidiary acquired exclusively with a view to resale.

IFRS 6 - Explorations for and Evaluation of Mineral Resources

IFRS 6 was issued at 1 January 2012. The objective of this IFRS is to specify the financial reporting for the exploration for and evaluation of mineral resources. Exploration and evaluation expenditures are expenditures incurred by an entity in connection with the exploration for and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Exploration for and evaluation of mineral resources is the search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral resource. Exploration and evaluation assets are exploration and evaluation of expenditures recognised as assets in accordance with the entity’s accounting policy.

An entity shall determine an accounting policy for allocating exploration and evaluation assets to cash- generating units or groups of cash-generating units for the purpose of assessing such assets for impairment. Each cash-generating unit or group of units to 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 disclose information that identifies and explains the amounts recognised in its financial statements arising from the exploration for and evaluation of mineral resources.

IFRS 7 - Financial Instruments: Disclosures

This IFRS was issued at 1 January 2012. The objective of this IFRS is to require entities to provide disclosures in their financial statements that enable users to evaluate: (a) the significance of financial instruments for the entity’s financial position and performance; and (b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks. The qualitative disclosures describe management’s objectives, policies and processes for managing those risks. The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel. Together, these disclosures provide an overview of the entity’s use of financial instruments and the exposures to risks they create.

The IFRS applies to all entities, including entities that have few financial instruments (e.g. a manufacturer whose only financial instruments are accounts receivable and accounts payable) and those that have many financial instruments (e.g. a financial institution most of whose assets and liabilities are financial instruments). When this IFRS requires disclosures by class of financial instrument, an entity shall group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. An entity shall provide sufficient information to permit reconciliation to the line items presented in the statement of financial position.

IFRS 8 - Operating Segments

IFRS 8 was issued at 1 January 2013. An entity shall disclose information to enable users of its financial statements to evaluate the nature and financial effects of the business activities in which it engages and the economic environments in which it operates.

This IFRS shall apply to:

 (a) the separate or individual financial statements of an entity:

1. whose debt or equity instruments are traded in a public market (a

domestic or foreign stock exchange or an over-the-counter market, including local and

regional markets), or

2. that files, or is in the process of filing, its financial statements

with a securities commission or other regulatory organisation for the purpose of

issuing any class of instruments in a public market; and

(b) the consolidated financial statements of a group with a parent:

1. whose debt or equity instruments are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or

2. that files, or is in the process of filing, the consolidated financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market.

The IFRS requires an entity to report a measure of operating segment profit or loss and of segment assets. It also requires an entity to report a measure of segment liabilities and particular income and expense items if such measures are regularly provided to the chief operating decision maker. It requires reconciliations of total reportable segment revenues, total profit or loss, total assets, liabilities and other amounts disclosed for reportable segments to corresponding amounts in the entity’s financial statements.

IFRS 9 - Financial Instruments

IFRS 9 was issued in July 2014.IFRS 9 is built on a logical, single classification and measurement approach for financial assets that reflects the business model in which they are managed and their cash flow characteristics. Built upon this is a forward-looking expected credit loss model that will result in more timely recognition of loan losses and is a single model that is applicable to all financial instruments subject to impairment accounting. In addition, IFRS 9 addresses the so-called ‘own credit’ issue, whereby banks and others book gains through profit or loss as a result of the value of their own debt falling due to a decrease in credit worthiness when they have elected to measure that debt at fair value. The Standard also includes an improved hedge accounting model to better link the economics of risk management with its accounting treatment.

IFRS 10 - Consolidated Financial Statements

IFRS 10 was issued at 1 January 2013.The objective of this IFRS is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. To meet the objective, this IFRS:

a. requires an entity (the parent) that controls one or more other entities (subsidiaries) to present consolidated financial statements;

b. defines the principle of control, and establishes control as the basis for consolidation;

c. sets out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee; and

d. sets out the accounting requirements for the preparation of consolidated financial statements. Consolidated financial statements are the financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. The IFRS requires an entity that is a parent to present consolidated financial statements. The IFRS defines the principle of control and establishes control as the basis for determining which entities are consolidated in the consolidated financial statements.

When preparing consolidated financial statements, an entity must use uniform accounting policies for reporting like transactions and other events in similar circumstances. Intra-group balances and transactions must be eliminated. Non controlling interests in subsidiaries must be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.

IFRS 11 - Joint Arrangements

IFRS 11 was issued in May 2011. It establishes principles for the financial reporting by parties to a joint arrangement. IFRS 11 improves the accounting for joint arrangements by introducing a principle- based approach that requires a party to a joint arrangement to recognise its rights and obligations arising from the arrangement. Such a principle-based approach will provide users with greater clarity about an entity’s involvement in its joint arrangements by increasing the verifiability, comparability and understandability of the reporting of these arrangements.

The disclosure requirements allow users to gain a better understanding of the nature, extent and financial effects of the activities that an entity carries out through joint arrangements. The disclosure requirements for joint arrangements have been placed in IFRS 12 Disclosure of Interests in Other Entities.

IFRS 12 - Disclosure of Interests in Other Entities

IFRS 12 applies to entities those have an interest in subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 does not apply to:

a. Post-employment benefit plans or other long term employee benefit plans to which IAS 19 Employee Benefits applies ,

b. Separate financial statements, where IAS 27 Separate Financial Statements applies ,

c. An interest held by an entity that participates in, but does not have joint control or significant influence over, a joint arrangement , and

d. Interests accounted for in accordance with IFRS 9 Financial Instruments, except for interests in an associate or joint venture measured at fair value as required by IAS 28 Investments in Associates and Joint Ventures.

IFRS 13 - Fair Value Measurement

IFRS 13 was issued at 1 January 2013. This IFRS (a) defines fair value; (b) sets out in a single IFRS a framework for measuring fair value; and (c) requires disclosures about fair value measurements. The IFRS applies to IFRSs that require or permit fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements), except in specified circumstances.

A fair value measurement assumes that a financial or non-financial liability or an entity’s own equity instrument (e.g. equity interests issued as consideration in a business combination) is transferred to a market participant at the measurement date. The transfer of a liability or an entity’s own equity instrument assumes the following:

a. A liability would remain outstanding and the market participant transferee would be required to fulfil the obligation. The liability would not be settled with the counterparty or otherwise extinguished on the measurement date.

b. An entity’s own equity instrument would remain outstanding and the market participant transferee would take on the rights and responsibilities associated with the instrument. The instrument would not be cancelled or otherwise extinguished on the measurement date.

An entity shall disclose information that helps users of its financial statements assess both of the following: (a) for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the statement of financial position after initial recognition, the valuation techniques and inputs used to develop those measurements. (b) for recurring fair value measurements using significant unobservable inputs (Level 3), the effect of the measurements on profit or loss or other comprehensive income for the period.

IFRS 14 - Regulatory Deferral Accounts.

IFRS 14 Regulatory Deferral Accounts permits an entity which is a first-time adopter of International Financial Reporting Standards to continue to account, with some limited changes, for 'regulatory deferral account balances' in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. Regulatory deferral account balances, and movements in them, are presented separately in the statement of financial position and statement of profit or loss and other comprehensive income, and specific disclosures are required.

IFRS 14 was originally issued in January 2014 and applies to an entity's first annual IFRS financial statements for a period beginning on or after 1 January 2016.

IFRS 14 Regulatory Deferral Accounts permits an entity which is a first-time adopter of International Financial Reporting Standards to continue to account, with some limited changes, for 'regulatory deferral account balances' in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. Regulatory deferral account balances, and movements in them, are presented separately in the statement of financial position and statement of profit or loss and other comprehensive income, and specific disclosures are required.

IFRS 14 was originally issued in January 2014 and applies to an entity's first annual IFRS financial statements for a period beginning on or after 1 January 2016.

IFRS 14 was originally issued in January 2014 and applies to an entity's first annual IFRS financial statements for a period beginning on or after 1 January 2016.

IFRS 14 Regulatory Deferral Accounts permits an entity which is a first-time adopter of International Financial Reporting Standards to continue to account, with some limited changes, for 'regulatory deferral account balances' in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements. Regulatory deferral account balances, and movements in them, are presented separately in the statement of financial position and statement of profit or loss and other comprehensive income, and specific disclosures are required.

Objective

The objective of IFRS 14 is to specify the financial reporting requirements for 'regulatory deferral account balances' that arise when an entity provides good or services to customers at a price or rate that is subject to rate regulation.

Scope

IFRS 14 is permitted, but not required, to be applied where an entity conducts rate-regulated activities and has recognised amounts in its previous GAAP financial statements that meet the definition of 'regulatory deferral account balances' (sometimes referred to 'regulatory assets' and 'regulatory liabilities').

IFRS 14 is an optional standard that is intended to encourage rate-regulated entities to adopt IFRS while bridging the gap with similar entities that already apply IFRS, but which do not recognise regulatory deferral accounts. This would be achieved by requiring separate presentation of the regulatory deferral account balances (and movements in these balances) in the statement of financial position and statements of profit or loss and other comprehensive income.

IFRS 14 excludes those deferral account balances arising from rate-regulated activities that are assets and liabilities required to be recognised in accordance with other IFRS standards and the conceptual framework. Consequently, for regulatory deferral account balances that are recognised and measured separately from other standards, the application of IFRS 14 would be rather straightforward. For example, for storm damage costs and volume or purchase price variances that will be recovered in future rates are frequently recorded in separate regulatory deferral accounts.

IFRS 15 - Revenue from Contracts with Customers.

IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after 1 January 2018. On 12 April 2016, clarifying amendments were issued that have the same effective date as the standard itself.

            IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers.

Objective

The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. [IFRS 15:1] Application of the standard is mandatory for annual reporting periods starting from 1 January 2018 onwards. Earlier application is permitted.

Scope

IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except for: leases within the scope of IAS 17 Leases; financial instruments and other contractual rights or obligations within the scope of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures; insurance contracts within the scope of IFRS 4 Insurance Contracts; and non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.

The five-step model framework

The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This core principle is delivered in a five-step model framework: [IFRS 15:IN7]

Identify the contract(s) with a customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations in the contract Recognise revenue when (or as) the entity satisfies a performance obligation.

Scope of the International Financial Reporting Standards

a. IFRSs are not intended to be applied to immaterial items and they are not retrospective.

b. Within each individual country local regulations govern, to a greater or lesser degree, the issue of financial statements.

c. IFRSs concentrate on essentials and are designed not to be too complex; otherwise they would be impossible to apply on a worldwide basis.

d. IFRSs do not override local regulations on financial statements.

Merits of IFRS

1. IFRS brings improvement in comparability of financial information and financial performance with global peers and industry standards. This will result in more transparent financial reporting of a company’s activities which will benefit investors, customers and other key stakeholders in India and overseas.

2. The adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements. This, in turn, will lead to increased trust and reliance placed by investors, analysts and other stakeholders in a company’s financial statements.

3. IFRS provide better access to the capital raised from global capital markets since IFRS are now accepted as a financial reporting framework for companies seeking to raise funds from most capital markets across the globe. Thus, IFRS increase the efficiencies of global capital management.

4. IFRS minimize the obstacles faced by Multi-national Corporations by reducing the risk associated with dual filings of accounts. A recent decision by the US Securities and Exchange Commission (SEC) permits foreign companies listed in the US to present financial statements in accordance with IFRS. This means that such companies will not be required to prepare separate financial statements under Generally Accepted Accounting Principles in the US (US GAAP). Therefore, Indian companies listed in the US would benefit from having to prepare only a single set of IFRS compliant financial statements, and the consequent saving in financial and compliance costs.

5. The impact of globalization causes spectacular changes in the development of Multi-national Corporations in India. This has created the need for uniform accounting practices which are more accurate, transparent and which satisfy the needs of the users. Implementation of uniform accounting practices i.e., IFRS will provide much better quality information.

6. Uniform accounting standards (IFRS) enable investors to understand better the investment opportunities as against multiple sets of national accounting standard.

7. With the help of IFRS, investors can increase the ability to secure cross border listing.

8. The world's economies are becoming more integrated and having one accounting system will make life a little less complicated for both the companies and the investors.

9. As multinational businesses continue to grow and expand, a thorough knowledge of IFRS is now essential for internationally active, growing businesses.

10. There seems to be worldwide consensus surrounding the need for one global set of high-quality accounting standards and that IFRS is currently best positioned to fulfill that need.

11. In today's global economy the consistency of one reporting standard will make it more efficient for investors to research and compare financial statements globally and more effectively.

12. IFRS adoption leads to higher market liquidity, more investment flows through foreign mutual funds, and more favourable terms in private debt contracting, greater analyst coverage, and lower stock return synchronicity.

Limitations of IFRS

1. The perceived benefits from IFRS’ adoption are based on the experience of IFRS compliant countries in a period of mild economic conditions. Any decline in market confidence in India and overseas coupled with tougher economic conditions may present significant challenges to Indian companies.

2. IFRS requires application of fair value principles in certain situations and this would result in significant differences in financial information currently presented, especially in relation to financial instruments and business combinations. Given the current economic scenario, this could result in significant volatility in reported earnings and key performance measures like EPS and P/E ratios. Indian companies will have to build awareness amongst investors and analysts to explain the reasons for this volatility in order to improve understanding, and increase transparency and reliability of their financial statements.

3. This situation is worsened by the lack of availability of professionals with adequate valuation skills, to assist Indian corporate in arriving at reliable fair value estimates. This is a significant resource constraint that could impact comparability of financial statements and render some of the benefits of IFRS’ adoption ineffective.

4. Although IFRS are principles-based standards, they offer certain accounting policy choices to preparers of financial statements. For example, the use of a cost-based model or a revaluation model in accounting for investment properties. This could reduce consistency and comparability of financial information to a certain extent and therefore reduce some of the benefits from IFRS’ adoption.

5. IFRS are formulated by the International Accounting Standards Board (IASB) which is an international standard body. However, the responsibility for enforcement and providing guidance on implementation vests with the local government and accounting and regulatory bodies, such as the ICAI in India. Consequently, there may be differences in interpretation or practical application of IFRS provisions, which could further reduce consistency in financial reporting and comparability with global peers. The ICAI will have to make adequate investments and build infrastructure to ensure compliance with IFRS.

6. Even if the IFRS is implemented, there would still be differences in financial reporting, and financial statements would not be “identical” because of the differences in national laws, economic conditions, and objectives.

7. The environmental factors such as culture, language, and legal system affect how IFRS is applied.

8. The differing backgrounds of the people in numerous countries applying IFRS means that interpretative differences will arise because of different historical practices.

9. If some countries interpret the IFRS differently than other countries, the financial statements between those countries would not be comparable.

10. The audit fees of public accounting firms increase after the transition to IFRS.

11. The costs of application by companies, such as changing the internal systems to make it compatible with the new reporting standards, training costs and etc., are increased.

12. It will take a substantial amount of time to convert to IFRS completely, depending on the size of the company.

Requirements of the IFRS

A complete set of financial statements, includes the following components, is required under IFRS:

a) A Statement of Financial Position as at the end of the reporting period.

b) A Statement of Profit or Loss and Other Comprehensive Income for the reporting period.

c) A Statement of Changes in Equity (SOCE) for the reporting period.

d) A Cash Flow Statement or Statement of Cash Flows for the reporting period.

e) Notes comprising a summary of significant accounting policies and other explanatory information.

f) A Statement of financial position at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies  items in its financial statements.

Practical challenges in implementing IFRS

1. There is a need for a change in several laws and regulations governing financial accounting and reporting in India. In addition to accounting standards, there are legal and regulatory requirements that determine the manner in which financial information is reported or presented in the financial statements. For example, the Companies Act determines the classification and accounting treatment for redeemable preference shares as equity instruments of a company, whereas these may be considered to be a financial liability under IFRS. The Companies Act also prescribes the format for presentation of financial statements for Indian companies, whereas the presentation requirements are significantly different under IFRS. Similarly, the Reserve Bank of India regulates the financial reporting for banks and other financial institutions, including the presentation format and accounting treatment for certain types of transactions. In the absence of adequate clarity and assurance that Indian laws and regulations will be amended to conform to IFRS, the conversion process may not gain momentum.

2. There is a lack of adequate professionals with practical IFRS conversion experience and therefore many companies will have to rely on external advisers and their auditors. This is magnified by a lack of preparedness amongst Indian corporate as this project may be viewed simply as a project management or an accounting issue which can be left to the finance function and auditors. However, it should be noted that IFRS conversion will involve a fundamental change to an entity’s financial reporting systems and processes. It will require a detailed knowledge of the standards and the ability to consider their impact on business transactions and performance measures.  

3. Another potential pitfall is viewing IFRS accounting rules as similar to Generally Accepted Accounting Principles in India (Indian GAAP), since Indian accounting standards have been formulated on the basis of principles in IFRS. However, this view disregards significant differences between Indian GAAP and IFRS as well as differences in practical implementation and interpretation of similar standards. Further, certain Indian standards offer accounting policy choices which are not available under IFRS, for example, use of pooling of interests method in accounting for business combinations.

4. Convergence is not just a one-time technical step but will impose practical challenges of significant business and regulatory matters like structuring of ESOP schemes, training of employees, tax planning, modification of IT system, compliance with debt covenants.

5. Educating investors to understand the changed financial reporting under IFRS is challenging due to differences in various conceptual, practical, legal and implementation methods.

6. The regulatory and legal requirements in India will pose a challenge unless the same is been addressed by respective regulatory. For example the present direct tax laws do not address any tax implications likely to arise from IFRS transitions.

7. Complexities in the introduction of concepts such as present value and fair value measurement, recognition and the extent of disclosure required under IFRS are other challenges. Examples:

Treatment of expenses like premium payable on redemption of debentures, discount allowed on issue of debentures, underwriting commission paid on issue of debentures etc are different. This would bring a change in the income statement leading to enormous confusion and complexities.  Financial statements are more complex under IFRS and thereby would pose a challenge in making useful decision.

Convergence between IFRSs and US GAAP

Meaning of convergence with IFRS

In general terms, convergence with IFRS means to achieve harmony with IFRS. In precise terms convergence can be considered as ‚to design and maintain national accounting standards in a way that financial statements prepared in accordance with national accounting standards draw unreserved statement of compliance with IFRS‛. Thus, ‘convergence with IFRS’ means adoption of IFRS with certain exceptions, wherever necessary.

Need for convergence with IFRS

In the present era of globalization and liberalization, the World has become an economic village. The globalization of the business world and the attendant structures and the regulations, which support it, as well as the development of e-commerce make it imperative to have a single globally accepted financial reporting system. A number of multi-national companies are establishing their businesses in various countries with emerging economies and vice versa. The entities in emerging economies are increasingly accessing the global markets to fulfill their capital needs by getting their securities listed on the stock exchanges outside their country. Capital markets are, thus, becoming integrated consistent with this world-wide trend. More and more Indian companies are also being listed on overseas stock exchanges. Sound financial reporting structure is imperative for economic well-being and effective functioning of capital markets.

The use of different accounting frameworks in different countries, which require inconsistent treatment and presentation of the same underlying economic transactions, creates confusion for users of financial statements. This confusion leads to inefficiency in capital markets across the world. Therefore, increasing complexity of business transactions and globalization of capital markets call for a single set of high quality accounting standards. High standards of financial reporting underpin the trust investors place in financial and non-financial information. Thus, the case for a single set of globally accepted accounting standards has prompted many countries to pursue convergence of national accounting standards with IFRS.

The IASB and the US Financial Accounting Standards Board (FASB) have been working together since 2002 to achieve convergence of IFRSs and US Generally Accepted Accounting Principles (GAAP). A common set of high quality global standards remains a priority of both the IASB and the FASB. In September 2002 the IASB and the FASB agreed to work together, in consultation with other national and regional bodies, to remove the differences between international standards and US GAAP. This decision was embodied in a Memorandum of Understanding (MoU) between the boards known as the Norwalk Agreement. The boards’ commitment was further strengthened in 2006 when the IASB and FASB set specific milestones to be reached by 2008.

In the light of progress achieved by the boards and other factors, the US Securities and Exchange Commission (SEC) removed in 2007 the requirement for non-US companies registered in the US to reconcile their financial reports with US GAAP if their accounts complied with IFRSs as issued by a proposed road map on adoption of IFRSs for domestic US companies. In 2008 the two boards issued an update to the MoU, which identified a series of priorities and milestones, emphasising the goal of joint projects to produce common, principle based standards.

The Group of 20 Leaders (G20) called for standard setters to re-double their efforts to complete convergence in global accounting standards. Following this request, in November 2009the IASB and FASB published a progress report describing and intensification of their work programme, including the hosting of monthly joint board meetings and to provide quarterly updates on their progress on convergence projects. In April 2012 the IASB and FASB published a joint progress report in which they describe the progress made on financial instruments, including a joint expected loss impairment (‘provisioning’) approach and a more converged approach to classification and measurement.

In February 2013 the IASB and FASB published a high level update on the status and timeline of the remaining convergence projects. The report includes an update on the impairment phase of the joint project on financial instruments. The listed companies of European Union State including UK, France and Germany, have adopted IFRS since 2005. The process of converging towards IFRS is still going on in India.

Benefits of achieving convergence with IFRS

There are many beneficiaries of convergence with IFRS such as the economy, investors, industry and accounting professionals.

1. Economy

As the markets expand globally, the need for convergence also increases. The convergence benefits the economy by increasing growth of its international business. It facilitates maintenance of orderly and efficient capital markets and also helps to increase the capital formation and thereby economic growth. It encourages international investing and thereby leads to more foreign capital flows to the country.

2. Investors

A strong case for convergence can be made from the viewpoint of the investors who wish to invest outside their own country. Investors want the information that is more relevant, reliable, timely and comparable across the jurisdictions. Financial statements prepared using a common set of accounting standards help investors better understand investment opportunities as opposed to financial statements prepared using a different set of national accounting standards. Investors’ confidence would be strong if accounting standards used are globally accepted. Convergence with IFRS contributes to investors’ understanding and confidence in high quality financial statements.

3. Industry

A major force in the movement towards convergence has been the interest of the industry. The industry is able to raise capital from foreign markets at lower cost if it can create confidence in the minds of foreign investors that their financial statements comply with globally accepted accounting standards. With the diversity in accounting standards from country to country, enterprises which operate in different countries face a multitude of accounting requirements prevailing in the countries. The burden of financial reporting is lessened with convergence of accounting standards because it simplifies the process of preparing the individual and group financial statements and thereby reduces the costs of preparing the financial statements using different sets of accounting standards.

4. Accounting professionals

Convergence with IFRS also benefits the accounting professionals in a way that they are able to sell their services as experts in different parts of the world. It offers them more opportunities in any part of the world if same accounting practices prevail throughout the world. They are able to quote IFRS to clients to give them backing for recommending certain ways of reporting. Also, their mobility to work in different parts of the world increases.

IFRS in India

IFRS convergence, in recent years, had gained momentum in this world. As the capital markets become increasingly global in nature, more and more investors see the need for a common set of accounting standards. India being one of the global players, migration to IFRS will enable Indian entities to have access to international capital markets without having to go through the cumbersome conversion and filing process. It will lower the cost of raising funds, reduce accountants’’ fees and enable faster access to all major capital markets. Furthermore it will facilitate companies to set targets and milestones based on a global business environment rather than an inward perspective.

Furthermore, convergence to IFRS, by various group entities, will enable management to bring all components of the group into a single financial reporting platform. This will eliminate the need for multiple reports and significant adjustment for preparing consolidated financial statements or filing financial statements in different stock exchanges.

Benefits of IFRS over the Indian GAAP

The following are the reasons for adoption of IFRS inspite of Indian GAAP:

1. Improve transparency in accounting system.

2. Globally accepted.

3. New opportunity.

4. Allows exercise of professional judgement.

5. IFRS are increasingly being recognised as Global Reporting Standards for financial statements.

6. Indian GAAP is becoming rare because it has some limitations in comparison with IFRS.

7. As global capital markets become increasingly integrated, many countries are adopting IFRs.

8. More than 100 countries already permit the use of IFRS in their countries.

Benefits of IFRS in India

The following are the benefits to India by the implementation of IFRS:

1. It would benefit the economy by increasing the growth of international business.

2. It would encourage foreign investment which results in foreign capital inflows into the country.

3. It would reduce the cost of compliance.

4. IFRS would open many opportunities for the professionals to serve the international clients.

Challenges in implementation of IFRS in India

There are certain challenges in implementation of IFRS in India. They include:

1. Increase in cost initially due to dual reporting requirement, which entity might have to meet till the full convergence is achieved.

2. Current accounting framework in India is deeply affected by laws and regulations. It is required to make amendments in various laws and regulations.

3. All stakeholders, employees, auditors, regulators, tax authorities etc. would need to aware about IFRS. They need to be trained.

4. Organisations would incur additional costs for modifying their current accounting procedures for meeting the new disclosures and reporting requirements.