KCG - Portal of Journals

Year-1 | Issue-6 | Continuous Issue-6 | May - June 2013

Effects on Financial Statement of IFRS

Introduction ::

International Financial Reporting Standards (IFRS) are accounting rules which are applied while preparing the balance sheet and Income Statement of Company and are developed by the IFRS foundation. They 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. Many major economies in the world are underway to adopt IFRS. 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.

In the absence of a Standard or an Interpretation that specifically applies to a transaction, management must use its judgments in developing and applying an accounting policy that results in information that is relevant and reliable. In making that judgment, IAS 8.11 requires management to consider the definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework.

What is IFRS…?

IFRS is International Financial Reporting Standard & is applied while preparing Financial Statements. All countries are expected to apply IFRS.

A set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are issued by the International Accounting Standards Board.

IFRS are sometimes confused with International Accounting Standards (IAS), which are the older standards that IFRS replaced. (IAS were issued from 1973 to 2000.)

IFRS in India ::

Conversion is much more than a technical accounting issue. IFRS or Ind AS may significantly affect any number of a company’s day-to-day operations and may even impact the reported profitability of the business itself. Conversion brings a one-time opportunity to comprehensively re-assess financial reporting and take ‘a clean sheet of paper’ approach to financial policies and processes.

In early 2010, the Ministry of Corporate Affairs (MCA) issued various press releases on the IFRS roadmap and convergence plan for India specifying the convergence date to be 1 April, 2011, through 2014 for select Indian companies.

Understanding IFRS or Ind AS and its implications is a business imperative for Indian companies.

Requirements of IFRS ::

Comparative information is required for the prior reporting period. An entity preparing IFRS accounts for the first time must apply IFRS in full for the current and comparative period although there are transitional exemptions.

The main changes from the previous version are to require that an entity must:

Present all non-owner changes in equity either in one Statement of comprehensive income or in two statements. Components of comprehensive income may not be presented in the Statement of changes in equity.
Present a statement of financial position as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies the new standard.
Present a statement of cash flow.
Make necessary disclosure by the way of a note.

Objective of financial statements ::

A financial statement should reflect true and fair view of the business affairs of the organization. As statements are used by various constituents of the society / regulators, they need to reflect true view of the financial position of the organization. and it is very helpful to check the financial position of the business for a specific period.

IFRS authorize three basic accounting models::

( I ) Current Cost Accounting:
Current Cost Accounting under Physical Capital Maintenance at all levels of inflation and deflation under the Historical Cost paradigm as well as the Capital Maintenance in Units of Constant Purchasing Power paradigm.

( II ) Financial capital maintenance in nominal monetary units:
Financial capital maintenance in nominal monetary units, i.e., globally implemented Historical cost accounting during low inflation and deflation only under the traditional Historical Cost paradigm.

( III ) Financial Capital Maintenance in Units of Constant Purchasing power:
CMUCPP – in terms of a Daily Consumer Price Index or daily rate at all levels of inflation and deflation Capital Maintenance in Units of Constant Purchasing Power paradigm.

Convergence to IFRS ::

India has opted for convergence to International Financial Reporting Standards. The paradigm shift in the economic environment during the last few years has led to increasing attention being devoted to accounting standards as a means towards ensuring transparent financial reporting by corporate. In recent years, the need for international harmonization of Accounting Standards followed in different countries has grown considerably as cross border transfers of capital are becoming increasingly common. Accounting harmonization is a process which is essential for improving international comparability of Financial Statements. Switching to IFRS would allow people to see various companies from different parts of the world on the same plane.

Investor base would increase as the financial reports become comparable. Houston and Rein stein point out that international accounting harmonization will trim down the costs of doing business, especially across national borders, than will contribute towards greater efficiency of the market regulations and will reduce the costs for conducting financial statements analysis and investment in international context. Indian Accounting Standards will be more or less in line with IFRS. Ministry of Corporate Affairs has till date notified 35 Indian Accounting Standards converged with International Financial Reporting Standards. In its press release 25th February 2011, the Ministry has stated that these Indian Accounting Standards will be implemented in a phased manner.

Major Difference between Existing Indian Accounting Standards and IFRS ::

(1) AS 1 Disclosure of Accounting Policies :
International Financial Reporting Standards requires the classification of assets and liabilities under the heading current Assets and current liabilities. Also extraordinary items are not shown separately as per IFRS.

(2) AS 2 Valuation on Inventory :
International Financial Reporting Standards provides guidelines for inventory of service providers.

(3) AS 3 Cash Flow Statement :
As per IFRS, Bank Overdraft is specifically included in cash and cash equivalent and extraordinary items are not disclosed separately.

(4) AS 4 Contingencies and Events occurring after Balance Sheet date :
As per International Financial Reporting Standards, Dividend proposed is not shown as liability.

(5) AS 5 Net Profit or loss for the period, Prior Period Items and Changes in Accounting Policies :
As per International Financial Reporting Standards Adjustment for change in accounting policy and correction of errors are made in opening balance of retained earnings and in current year profit and loss.

(6) AS 9 Revenue Recognition :
In International Financial Reporting Standards, service revenue is recognized only by percentage of completion method. Completed service contract method is not allowed. In case of exchange of goods of similar nature, no revenue is recognized.

(7) AS 14 Accounting for Amalgamation :
As per International Financial Reporting Standards only purchase method is allowed for accounting of amalgamation. It requires acquired assets and liabilities to be recorded at fair value. Goodwill is not amortised but tested for impairment on annual basis. Profit and loss account and not to capital reserve.

Impacts of International Financial Reporting Standards on Financial Statements ::

It is expected that once International Financial Reporting Standards is implemented, it will have an impact on the financial statement of Indian companies. There will be changes in accounting practices related to areas like revenue recognition, Inventory Valuation, service sector, Accounting for taxes on Income, Current and non-current classification, Fixed Assets accounting, Business combination and useful life of Intangible Assets. One this standards are implemented, Indian companies will have to followed the following principles while preparing their Balance Sheet.

Recognize all assets and liabilities whose recognition is required by International Financial Reporting Standards.

Derecognize assets or liabilities whose recognition is not permitted by International Financial Reporting Standards.

Classify all assets and liabilities in accordance with International Financial Reporting Standards.

Measure all recognized assets and liabilities in accordance with applicable International Financial Reporting Standards.

It is not inflation doing the eroding. Inflation and deflation have no effect on the real value of non-monetary items. It is the implementation of the stable measuring unit assumption.

Constant real value non-monetary items are non-monetary items with constant real values over time whose values within an entity are not generally determined in a market on a daily basis.

All constant real value non-monetary items are always and everywhere measured in units of constant purchasing power at all levels of inflation and deflation under CMUCPP in terms of a Daily CPI or daily rate under the Capital Maintenance in Units of Constant Purchasing Power paradigm. The constant purchasing power gain or loss is calculated when current period constant items are not measured in units of constant purchasing power.

Historic and current period monetary items are required to be inflation-adjusted on a daily basis in terms of a daily index or rate under the Capital Maintenance in Units of Constant Purchasing Power paradigm. The net monetary loss or gain as defined in IAS 29 is required to be calculated and accounted when they are not inflation-adjusted on a daily basis during the current financial period. Inflation-adjusting the total money supply in terms of a daily index or rate under complete co-ordination would result in zero cost of inflation in only the entire money supply in an economy.

Variable real value non-monetary items are non-monetary items with variable real values over time. Examples include quoted and unquoted shares, property, plant, equipment, inventory, intellectual property, goodwill, foreign exchange, finished goods, raw material, etc.

Current period variable real value non-monetary items are required to be measured on a daily basis in terms of IFRS excluding the stable measuring unit assumption under the Capital Maintenance in Units of Constant Purchasing Power paradigm. When they are not valued on a daily basis, then they as well as historic variable real value non-monetary items are required to be updated daily in terms of a daily rate as indicated above. Current period impairment losses in variable real value non-monetary items are required to be treated in terms of IFRS. They are constant real value non-monetary items once they are accounted. All accounted losses and profits are constant real value non-monetary items.

Conclusion ::

The purpose of this article was to Financial Statements prepared as per International Financial Reporting Standards. Indian Accounting Standards will be more or less in line with IFRS. It is expected that once the new Accounting Standards are implemented, it will have a major impact on the Financial Statements of Indian Companies. However, there are motives and opportunities for international differences of practice to exist within IFRS usage. Some of the original motives for international accounting differences may still be effective in an IFRS context, though in different ways. The opportunities for different IFRS practices are divided into eight types. Hypotheses relating to each of these are proposed, and some ways of testing them are suggested. Some implications of the existence of different national versions of IFRS are noted. The aim of this article is to major effect on the financial statements of International Financial Reporting Standards.

REFERENCES :

The Chartered Account Journal-Volume-July:2013

WWW.ICAI.org

Bos knowledge Kotak

***************************************************

Prof. K.S.Parmar
Government Arts and Commerce College, Kadoli
Ta : Himmatnagar, Dist : Sabarkantha.

Prof. H.G.Patel
Government Arts and Commerce College, Songadh.
Ta : Songadh, Didt : Tapi.