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.
