Harmonization of Financial Accounting with IFRS:

Opportunities and Challenges for Indian firms

Paper presented by Mr. Dipak V. Patel

Author is Faculty Member at Faculty of Business Administration ,Dharmsinh Desai
University, Nadiad,Kheda District, Gujarat State, India.

Abstract

International Financial Reporting Standards (IFRS) and their predecessor, International

Accounting Standards (IAS) is gaining in worldwide recognition. All publicly traded
companies in the EU must adopt them by 2005 and many other countries either have
adopted them or plan to do so in the near future. The Institute of Chartered Accountants
of India (ICAI) has announced that India will adopt international standards starting
April 1, 2011. Implementing that decision will not be easy, for a variety of reasons. Not
all international standards have been translated into Indian. Many Indian accountants
are not sufficiently familiar with international standards to implement them. Some Indian
universities have only recently started teaching international standards and the
continuing education programs of the various Indian accounting associations are not yet
prepared to offer comprehensive courses on international standards. Current Indian
accounting standards conflict with international standards in several important ways and
these conflicts will not be resolved in the near future. This paper reviews the literature on
this subject and give basic introduction of IFRS and its benefits to Indian corporate and
also highlight some of the challenges in front of the Indian corporate to have a IFRS.

Background
The International Accounting Standards Board (IASB) took charge in 2001 and formally
adopted the framework for the preparation and presentation of financial statements –
which set out its understanding of ‘the conceptual framework that underlies the
preparation and presentation of financial statements’. The statement is not an accounting
standard and does not override any specific International Accounting Standards (‘IAS’).
The IASB's framework is divided into the following seven major sections:

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  The objective of financial statements
 Underlying assumptions
 Qualitative characteristics of financial statements
 The elements of financial statements
 Recognition of the elements of financial statements
 Measurement of the elements of financial statements
The IASB then decided to introduce one set of globally acceptable accounting standards
across all the European countries. It announced that the new accounting standards issued
by the IASB would be designated ‘International Financial Reporting Standards’
(hereinafter ‘IFRS’), at the same time as the existing standards would continue to be
designated 'International Accounting Standards (‘IAS’). Presumably, this change was
made in order to enable the Board to distinguish between the new standards issued by
them, and those that they had inherited from the former International Accounting
Standards Committee Board. As per the European Commission's regulation, all European
(‘EU’) Companies listed on a regulated market should prepare their consolidated
accounts in accordance with the IFRS, by 2005 at the latest. This implies that the much-
talked-about notion of harmonized financial reporting under a single set of accounting
standards is now a practical reality. Clearly, Europe's decision has encouraged several
other countries to adopt a similar path.
Research Methodology
The study is carried out by an extensive literature review; we have identified the major
challenges and benefits of adopting IFRS and also highlight the problems of the
accounting facing the global process of harmonization. The major objectives of the study
are: first, to understand the concept of IFRS, second, to know the major challenges and
opportunities to adopting IFRS, third, to know the major benefits of adopting IFRS , and
fourth, to know the difference between IFRS and Indian GAAP. This paper is based on
secondary and available data. Moreover it is difficult to compare all GAAP and IFRS
before implementation of IFRS to India
Understanding IFRS

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IFRS has recently emerged as the numero-uno accounting framework, with widespread
global acceptance. The IASB, a private sector body, develops and approves IFRS. The
IASB replaced the IASC in 2001. IASC issued IAS from 1973 to 2000. Since then, IASB
has replaced some IAS with new IFRS and has adopted or proposed new IFRS on topics
for which there was no previous IAS. Through committees, both, the IASC and IASB
have issued Interpretations of Standards. The term IFRS has both, a narrow and a broad
meaning. Narrowly, IFRS refers to the new numbered series of pronouncements that the
IASB is issuing, as distinct from the IAS1 series issued by its predecessor. More broadly,
IFRS refers to the entire body of IASB pronouncements, including standards and
interpretations approved by the IASB2, IASC, and SIC. Till date, IASB has issued 30 IAS
and 8 IFRS. It has also issued 11 SICs and 13 IFRICs to provide guidance on some
interpretation issues arising from IAS and IFRS. However, the application of IFRS
requires an increased use of fair values for measurement of assets and liabilities. The
focus in IFRS is more towards getting the balance sheet right and hence brings significant
volatility in the income statement.
IFRS – A truly Global Accounting Standard
The year 2000 was significant for IAS, now known as IFRS. The International
Organization of Securities Commission formally accepted the IAS core standards as a
basis for cross border listing globally. In June 2000, the European Commission passed a
requirement for all listed companies in the European Union to prepare their CFS3 using
IFRS (for financial years beginning 2005). Since 2005, the acceptability of IFRS has
increased tremendously. There are now more than 100 countries across the world where
IFRS is either required or permitted. This figure does not include countries such as India,
which do not follow IFRS but their national GAAP is inspired by IFRS.

1
'International Accounting Standards (IAS)

2
International accounting standard board (IASB), International accounting standard committee (IASC),
Standing Interpretations Committee (SIC):- The board of the International Accounting Standards
Committee (IASC) formed the Standing Interpretations Committee (SIC) in 1997. It was founded with the
objective of developing interpretations of International Accounting Standards (IASs) to be applied where
the standards are silent or unclear.

3
Consolidated Financial Statements (CFS)

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IFRS: An Indian Perspective
The issue of convergence with IFRS has gained significant momentum in India. At
present, the ASB of the ICAI formulates Accounting Standards based on IFRS, however,
these standards remain sensitive to local conditions, including the legal and economic
environment. Accordingly, the Accounting Standards issued by the ICAI depart from the
corresponding IFRS in order to ensure consistency with the legal, regulatory and
economic environments of India. At a meeting held in May 2006, the Council of ICAI
expressed the view that full IFRS may be adopted at a future date, at least for listed and
large entities. The ASB4, at a meeting held in August 2006, considered the matter and
supported the Council’s view that there would be several advantages of converging with
IFRS. Keeping in mind the extent of differences between IFRS and Indian Accounting
Standards, as well as the fact that convergence with IFRS would be an important policy
decision, the ASB decided to form an IFRS Task Force. The objectives of the Task Force
were to explore: (i) the approach for achieving convergence with IFRS, and (ii) laying
down a road map for achieving convergence with IFRS with a view to make India IFRS-
compliant. Based on the recommendation of the IFRS Task Force, the Council of ICAI, at
its 269th meeting, decided to adopt a ‘big bang’ approach and fully converge with IFRS
issued by IASB, from accounting periods commencing on or after 1 April 2011. IFRS
will be adopted for listed and other public interest entities such as banks, insurance
companies and large sized organizations. With an objective to ensure smooth transition to
IFRS from 1 April 2011, ICAI will take up the matter of convergence with IFRS with
NACAS. The NACAS was established by the Ministry of Corporate Affairs, Government
of India, and various regulators including RBI, IRDA and SEBI. ICAI will formulate a
work-plan to ensure that IFRS are effectively adopted from 1 April 2011. Further, ICAI
will conduct IFRS training programs for its members and others concerned to prepare
them to implement IFRS. ICAI will also discuss with the IASB, those areas where
changes in certain IFRS may be required, keeping in view to the Indian conditions.

IFRS: Blazing Need

4
Accounting standard board (ASB)

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The average firm in India has management accounting systems that are about 10 or 20
years behind what is now state of the art. As competition intensifies, the firms in India
will implement better management accounting systems. There is a huge opportunity to
dramatically improve profitability with better management accounting systems.

There is immense opportunity staring us in the face in the empire of financial accounting
as well. India should adopt International Financial Reporting Standards (IFRS) right
away. Already more than 200 companies in China have adopted IFRS. While China does
not have as long a tradition with modern accounting as India does, it is progressing much
faster than India.

Indian accounting standards are fairly closely aligned with IFRS. So the switch to IFRS
will be fairly easy. The potential benefits for us are immense. Academic research shows
that foreign investors are more likely to invest in firms whose accounting is similar to
accounting of the country of the investors. Thus we can attract more foreign capital and
lower the cost of capital for our firms by adopting IFRS. It is time for corporate India to
lobby for the early and quick adoption of IFRS. This will benefit not only Indian
businesses and capital markets but also labor. Job opportunities for Indian accountants
will jump once the world realizes and recognizes that accounting in India is identical to
that in Western Europe, which adopted IFRS in 2005.

Besides, the eventual adoption of IFRS by all countries appears inevitable. If we adopt
IFRS now, we will have an opportunity to shape it. If we are one of the last to join the
bandwagon, we will not have any real opportunity to influence and shape how
international accounting standards are set. Since this window of opportunity will pass
fairly soon, we need the Indian industry, government, and the accounting profession to
move quickly towards adopting IFRS. The use of international financial reporting
standards (IFRS) as a universal financial reporting language is gaining momentum across
the globe. Over a 100 countries in the European Union, Africa, West Asia and Asia-
Pacific regions either require or permit the use of IFRS. The Institute of Chartered
Accountants of India (ICAI) had released a concept paper on Convergence with IFRS in
India, detailing the strategy for adoption of IFRS in India with effect from April 1, 2011.

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This has been strengthened by a recent announcement from the ministry of corporate
affairs (MCA) confirming the agenda for convergence with IFRS in India by 2011. Even
in the US there is an ongoing debate regarding the adoption of IFRS replacing US GAAP.

A single system of financial reporting would benefit a host of constituents. With quality
standards, consistently applied, investor understanding and confidence rises. That
translates to strong, stable, liquid markets. With quality reporting, investors wouldn’t
need to compensate for a lack of under- standing by demanding a risk premium. With
consistent application and the resulting comparability investors and analysts have an
easier time knowing how to best allocate capital. Having one financial language reduces
preparation and audit costs. No longer is there a need to learn different standards, or keep
current in them, at the expense of more fruitful pursuits. Regulation can be easier if
properly coordinated. Education and training become easier and more focused.
Convergence of accounting standards has played a major role in the growing acceptance
of IFRS. As the differences narrow between IFRS and other widely-accepted accounting
systems, resistance to IFRS is beginning to fall away. U.S. GAAP is a system that is
widely accepted. While not without faults, it has steered the world’s largest economy for
over 60 years, since formal standard setting began in 1939. It has been influential in
standard setting elsewhere in the world. Convergence does not mean that two sets of
accounting standards ultimately become identical. Convergence means that where
transactions are the same or similar, the accounting should be the same, or there should
be enough transparency in the disclosures to allow the reader to understand the
differences. So we can say that it is necessary to have IFRS in India as it has globalized
economy.
Clearly, the Financial Services Action Plan to integrate financial markets in India makes
no sense, if investors have to rely on financial statements based on differing local
GAAPs. A common accounting standard increases investor transparency and
comparability. As users become more familiar and confident with IFRS, the cost of
capital for companies using IFRS should fall. It should lead to more efficient capital
allocation and greater cross-border investment, thereby promoting growth and
employment in India. Furthermore, we are all aware of the challenges that globalization

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and a rapidly industrializing in the world. Now more than ever, we need to press on with
the Lisbon agenda and increase the efficiency of the Indian economy. A common
accounting standard based on IFRS, rather than a thicket of different national standards,
is therefore not a luxury, but rather an absolute necessity. Some of the merits are
highlighted here.
1. Improved access to International capital markets
Many Indian entities are expanding or making significant acquisitions in the global arena
—for which huge capital is required. Majority of stock exchanges require financial
information prepared under IFRS. Migration to IFRS will enable Indian entities to have
access to international capital markets, without the risk premium involved in Indian
GAAP financial statements.
2. Lower cost of capital
Migration to IFRS will lower the cost of raising funds, as it will eliminate the need for
preparing a dual set of financial statements. It will also reduce accountants’ fees, abolish
risk premium and will enable access to all major capital markets as IFRS is globally
acceptable.
3. Enable benchmarking with global peers and improve brand value
Adoption of IFRS will enable companies to gain a broader and deeper understanding of
the entity’s relative standing by looking beyond country and regional milestones. Further,
adoption of IFRS will facilitate companies to set targets and milestones based on global
business environment, rather than merely local ones.
4. Escape Multiple Reporting
Convergence to IFRS, by all group entities, will enable company managements to get all
components of the group on one financial reporting platform. This will eliminate the need
for multiple reports and significant adjustment for preparing CFS or filing financial
statements in different stock exchanges.
5. Reflects true value of acquisitions

In Indian GAAP, business combinations, with few exceptions, are recorded at carrying
values and not at fair values of net assets taken over. Purchase consideration paid for
intangible assets not recorded in the acquirer’s books is usually not reflected separately in

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the financial statements; instead the amount gets added to goodwill. Hence, true value of
the business combination is not communicated through financial statements. IFRS will
overcome this flaw as it mandates accounting for net assets taken over in a business
combination at fair value. It also requires recognition of intangible assets, even though
they have not been recorded in the acquirer’s financial statements.
Adopting IFRS in India: Challenges
In India, the convergence of GAAP (generally accepted accounting principles) with
International Financial Reporting Standard (IFRS) will pose various challenges on the tax
and regulatory front which companies, investors and regulators will have to grapple with.
In substance, for IFRS to become a reality in India by 2011, significant changes in the
regulatory framework will be required. The following major challenges are there to
adopting IFRS in India.
1. Shortage of Resources
With the convergence to IFRS, implementation of SOX5, strengthening of corporate
governance norms, increasing financial regulations and global economic growth,
accountants are most sought after globally. Accounting resources is a major challenge
globally and will remain so in the short-term. India, with a population of more than 1
billion, has only approximately 145,000 Chartered Accountants, which is far below its
requirement.
2. Training
If IFRS has to be uniformly understood and consistently applied, training needs of all
stakeholders, comprising CFOs, auditors, audit committees, teachers, students, analysts,
regulators, and tax authorities need to be addressed. It is crucial that IFRS is introduced
as a full subject in universities and Chartered Accountancy syllabus.
3. Information systems
Financial accounting and reporting systems must be able to produce robust and consistent
data for reporting financial information. The systems must also be capable of capturing
new information for required disclosures, such as segment information, fair values of

5
Sarbanes Oxley Compliance (SOX), The Sarbanes-Oxley Act requires organizations to select and
implement a suitable internal control framework. Section 404 of SOX stipulates that management must
demonstrate control over financial reporting and changes to existing and new software in IT.

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financial instruments, and related party transactions. As financial accounting and
reporting systems are modified and strengthened to deliver information in accordance
with IFRS, entities need to enhance their IT security in order to minimize the risk of
business interruption—particularly to address potential fraud, cyber terrorism, and data
corruption.
4. Taxes
IFRS convergence will have a significant impact on financial statements and
consequently tax liability. Tax authorities should ensure that there is clarity on the tax
treatment of items arising out of convergence to IFRS. For example, will government
authorities tax unrealized gains arising out of the accounting required by the standards on
financial instruments? From an entity’s point of view, a thorough review of existing tax
planning strategies is essential to test their alignment with changes created by IFRS. Tax
and other regulatory issues as well as the risks involved will have to be considered by the
entities.
5. Communication
IFRS may significantly change reported earnings and various performance indicators.
Managing market expectations and educating analysts will therefore be critical. A
company’s management must understand the differences in the way the entity’s
performance will be viewed, both internally and in the market place, and agree on key
messages to be delivered to investors and other stakeholders. Reported profits may be
different from perceived commercial performance due to the increased use of fair values
and the restriction on existing practices such as hedge accounting. Consequently, the
indicators for assessing both, business and executive performance, will need to be
revisited.
6. Management compensation and debt agreement

The amount of compensation calculated and paid under performance-based executive and
employee compensation plans may be materially different under IFRS, as the entity’s
financial results may be considerably different. Significant changes to the plan may be
required to reward an activity that contributes to an entity’s success within the new

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regime. Re-negotiating contracts that referenced reported accounting amounts, such as
bank covenants, may be required on convergence to IFRS.
7. Distributable profits
IFRS is fair value driven, which results very often in unrealized gains and losses.
Whether this can be considered for the purpose of computing distributable profits will
have to be debated, in order to ensure that distribution of unrealized profits will not
eventually lead to reduction of share capital.
8. Information availability and reliability
Until recently, financial accounting data for many firms were unavailable for a lot of
countries. Many of these detailed data may not be provided for companies in other
countries. Either the data providers do not collect the information or firms do not
disclosure them. The causes of this not-collected information can be demand, which not
justify the costs. Failure by data providers to supply reported information can be
overcome by the researcher through additional information collection efforts. Experience
in providing the data should lead to a more reliable product, and users should have a
clearer understanding of how the information are provided. The information collection
and presentation for other countries are relatively new and may not be fully understood
by researchers.

The accuracy of this accounting information depends on the level of country’s

development. That’s why the reliability of the results is another challenge for
international accounting research. Researchers may have the economic resources needed
to purchase international information and May also be well trained in econometric and
other methods needed to perform statistical tests. Anyway, having the data and being able
to provide a series of statistical tests may not lead to productive research. Unless the
researchers have an understanding of the unique national characteristics and how they
impact the research question, incorrect inferences can be made.
9. Exporting theories and accepted business practices to other countries
without considering the relation between national characteristics and the research
question being investigated, like: culture, accounting tales, legal system, auditing, tax
system, ownership structure, financing sources, political factors, because they differ a lot

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in many countries suggest that accounting research theories should, be examined in
countries other than those in which they were developed. Such studies can either support
or deny the universality of each theory." In this purpose we are questioning the appliance
of the IFRS’s in the Muslim countries where because of shari’a’s law the interest on
money loan is prohibited. So being a sin how will adjust the IFRS their concept of value
in time of the money in a country which do not consider moral that money have a price in
time through interest?
10. Relevance of the results.
The importance of the international accounting research is to offer new understanding to
the existing body of research. When we discuss of the accounting globalization, we have
to analyze the importance of international factors on accounting information. So, we can
speak firsts about growth in international equity and bond markets, resulting in the
expansion of international investment by investors and globalization of capital markets.
Investors who want to diversify their portfolios to international markets must understand
foreign financial statement. They are familiar with their accounting measurement and
reporting rules and are also familiar with understanding how the local business
environment interacts with financial accounting information to indicate firm value.
11. Different perception of the financial information.
There are many issues that can arise when performing analyses of foreign companies,
because some financial statement analysis techniques may not be appropriate in other
countries. For sample, a high debt-to-asset ratio indicates higher risk for U.S. companies,
but can mean lower risk for Japanese companies. Even with these difficulties investors
seem more willing than ever to venture into foreign markets. International accounting
research can provide insights into understanding how current financial statements relate
to future performance and overall firm value. In addition, the evidence is clear that capital
markets are more globalize than ever. Events such as the Asian and Russian financial
crises and September 11, 2001 show that national economies have become increasingly
tied to one another. Factors affecting firm performance and value in one country may
have an impact in other countries. The world no longer operates in single country or
regionally segmented markets. International factors directly impact national investments.
12. Non-existence of functional professional accounting organizations.

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For all practical purposes more than a half of all African countries do not have functional
accounting organizations. In these countries, therefore, existence of IFAC 6 and
implementation of IFRS are out of question. IFAC faces the daunting task of assisting
these countries to first develop functional professional accounting organizations. A
plethora of accounting standards, methodologies and reporting formats following the
practices of metropolitan mother companies are found in countries without a functional
accounting profession.
13. The standards must be translated into the native languages.
Many of these countries do not well developed languages that can conveniently be used
as a vehicle for translating IFAC and IFRS standards. In addition, many countries use
more than one language and a choice may have to be made regarding the language to be
used for financial reporting. Translation and use of accounting terminology can be
confusing, rendering the original intent of the standard incomprehensible and irrelevant.
This language barrier is also pertinent to translation of training materials and other
resources. These translations must also be sensitive to the rapidly changing nature of
IFRS and communicate modifications in a timely manner.
14. The effective execution
The effective execution of these standards also requires a preexisting solid accounting
infrastructure with corporate governance and financial reporting practices already in
place. This is not always the case in developing nations.
15. Contradiction in professional accounting and local laws
A contrasting problem is encountered in some of the countries with well-established
professional accounting organizations and national laws and regulations that are difficult
to reconcile with the very different standards imposed by IFRS. These nations frequently
have social customs and political systems that also operate counter to IFRS dictates. This
attempt to “erase the local in the interest of harmonizing with the global” is not always
successful. Enforcement concerns are also dependent on the laws of the lands involved
and these vary widely by country and are virtually nonexistent in some nations. To be

6
It stands for the International Federation of Accountants. The global organization for the accountancy
profession, IFAC is committed to protecting the public interest by developing high quality international
standards, promoting strong ethical values, encouraging quality practice, and supporting the development
of all sectors of the profession around the world.

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effective locally, international standards need the force of law and this is often lacking as
is the mechanism to establish a legal framework by which to ensure compliance and
disciplining of offenders.
16. Change in existing business model
For companies, the requirement to adopt IFRS is not merely a technical exercise
involving the reordering of information and rearrangement of the financial statements.
Conversion to IFRS will often challenge fundamentally a company's existing business
model. It will provide a unique opportunity for the company to re examine and reengineer
the way it looks at itself through its internal management reporting. It will affect the way
the company presents itself to investors and other users of its financial statements.
17. Failure may lead to competitive disadvantage
It is vital that company managements recognize the far-reaching impact that IFRS will
have on their businesses. Failure to do so could place their companies at a competitive
disadvantage. The adoption of IFRS is not simply a matter of choosing different
accounting policies; it involves the adoption of an entirely different system of
performance measurement and communication with the markets. There will be
substantially increased levels of transparency for many companies – for example, through
expanded segmental disclosures and the recognition of derivatives on balance sheets at
fair value.
18. Company can not hide its weakness
From the users' perspective, analysts will perhaps for the first time have truly transparent
and comparable data about all companies within a particular industry on a global basis.
Companies will be benchmarked against their cross-border competitors and key
performance indicators will be compared. As a result, companies presently operating in
less than transparent and semi-protected financial reporting environments will soon have
no place to hide.
Although entities are frequently required to adopt new accounting standards under their
national Generally Accepted Accounting Principles (‘GAAP’), adopting IFRS, an entirely
different basis of accounting, poses a distinct set of problems:
o The sheer magnitude of the effort involved in adopting a large number of new
accounting standards.

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 o The requirements of individual standards will often differ significantly from those
under an entity's previous GAAP.
o Information may need to be collected that was not required under the previous
GAAP.
o Practical experience of applying a principles-based system of financial reporting
standards such as IFRS does not exist in many entities.
Adopting IFRS in India: Opportunities
Benefits from the IFRS wave will not be restricted to Indian corporate. In fact, it will
open up a host of opportunities in the services sector. With a wide pool of accounting
professionals, India can emerge as an accounting services hub for the global community.
As IFRS is fair value focused, it will provide significant opportunities to professionals,
including, accountants, valuers and actuaries, which in-turn will boost the growth
prospects for the BPO segment in India. The following are the main opportunities for
adopting IFRS
o Valuation: IFC and many lenders find that IFRS improve the key metrics that
analysts use to measure and evaluate clients’ performance and price shares. Under
IFRS, all equity and quasi equity instruments are fair valued.
o Transparency: The extensive requirements under IFRS lead to greater
transparency— a new feature for many organizations, especially in emerging
markets. Transparency will give small companies in underdeveloped and
developing nations a better chance of raising capital.
o Comparability: With widespread use, the common standards of IFRS will enable
capital providers throughout the world to analyze and compare companies,
making the process of raising capital less expensive and more competitive.
Prerequisites for transition to IFRS

At the outset, it should be understood that changing from Indian GAAP to IFRS is not
merely changing from one set of accounting policies to another. It is much more, since it
not only has significant accounting consequences but also has far reaching business
consequences. Hence, the process of conversion should be taken seriously and not done

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in a casual manner. Any mistake in the conversion could invite negative publicity and
regulator action
1. Impact assessment
This process entails a detail impact assessment between Indian GAAP and IFRS
accounting policies and identifies areas of differences and challenges, which the
management might face, such as: 1 Business Combinations 2 Financial Instruments (It
should be noted that ICAI has recently approved AS 30, AS 31 and AS 32 which are
based on IFRS) 3 Group Accounts 4Fixed Assets and Investment Property 5Presentation
of Financial Statements 6 Share-based Payments Impact assessment is an enabler to
produce IFRS financial statements that compare to and eventually replace, an entity’s
current financial statements. However, it is equally important for the entity to see how
IFRS information will affect the perception of its business performance.

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 2. Business re-engineering
Converting is not just a technical exercise. It provides executives with opportunities to
challenge the way in which their organization is viewed and evaluated by investors, other
key stake-holders, and competitors. Every important decision that an entity makes will be
affected by IFRS, making it essential for the management to anticipate changes in the
market perception.
3. IFRS conversion programme
The transition to IFRS is a complex and time-consuming process. Entities need to undertake
a preliminary study before proceeding for IFRS conversion, which will give them an
opportunity to challenge the way it is viewed and evaluated by the outside world. Entities
should identify a dedicated team, which will work on the conversion exercise and ensure
that the management is fully geared to meet reporting deadlines. Experience strongly
suggests that major conversions to IFRS may take 18 months or more, and less complex
conversions may take between 6 to 12 months.

First-time adoption of IFRS

ICAI has announced full convergence with IFRS issued by IASB from accounting periods
commencing on or after 1 April 2011. All listed entities and public interest entities such as
banks, insurance entities, and large sized entities shall adopt IFRS. This is subject to regulatory
endorsements. Presently more than 100 countries require or permit the use of IFRS.
Preparation for adopting IFRS
Entities need to develop the work plan for smooth transition to IFRS. The staff needs to be
trained for IFRS to allow them to effectively implement IFRS. Certain areas in IFRS will have
impact on the entity in a significant way. These areas need to be identified.
What does IFRS 1 entail?
Entities need to apply accounting policies in its IFRS financial statements that are in compliance
with IFRS, effective as of the balance sheet date of the first IFRS financial statements. IFRS
requires minimum one year of comparatives to be presented. Therefore, when an entity follows
IFRS for the first time in its financial statements for the year-end 31 March 2012, it needs to
give the financial information for the year ended 31 March 2011 as a comparative. This
comparative information also needs to be in compliance with IFRS. Therefore, the opening

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balance sheet of the comparative year, i.e., balance sheet as at 1 April 2010, needs to be in
compliance with IFRS. This is referred as the opening balance sheet. In simple words, three
balance sheets and two profit and loss accounts would be required. Though IFRS will be
mandatory from accounting periods commencing on or after 1 April 2011, the requirement for
an IFRS compliant balance sheet as at 1 April 2010 and IFRS compliant interim financial
statements will mean that the 2011 date in practice would be significantly advanced.
Transition from Indian GAAP to IFRS: - Assets and liabilities in the opening
balance sheet not meeting IFRS definitions
Assets and liabilities recognized under Indian GAAP that do not qualify for recognition under
IFRS needs to be eliminated from the opening balance sheet. For example, deferred revenue
expenditure of share issue expenses does not meet the definition of intangible asset under IAS
38. Therefore, it cannot be carried in the IFRS opening balance sheet. Entities also need to
gather information required to be disclosed in the IFRS balance sheet that is not disclosed in
Indian GAAP. For example, Indian GAAP prohibits disclosure of contingent assets, whereas
IFRS require such disclosure. Therefore, entities need to develop the system to capture such
information. Proposed dividends cannot be disclosed as liability in IFRS. Therefore, this
liability will be eliminated in the opening IFRS balance sheet.

Assets and liabilities not recognized in Indian GAAP: - Some of the examples are:
 All derivative financial assets and liabilities and embedded derivatives need to be
recognized in IFRS opening balance sheet. If these are not recorded under Indian GAAP,
entities need to bring them on the IFRS balance sheet
 IFRS require restructuring provisions to be recognized based on constructive obligation.
Indian GAAP permits recognizing such provision only when legal obligation arises.
Therefore, if an entity had constructive obligation on the opening balance sheet date, it
needs to record the provision in the IFRS balance sheet. If there was no legal obligation
by that date, Indian GAAP balance sheet would not have recorded such provision
 IAS 12 is based on the balance sheet liability approach. AS 22 requires deferred taxes to
be recognized based on the income statement liability approach. Therefore, temporary
differences for which deferred tax is not recognized under Indian GAAP need to be

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 identified on the opening balance sheet date and deferred tax should be recognized
accordingly under IFRS
IFRS classification of assets and liabilities
Asset and liability classifications under Indian GAAP balance sheet does not conform to IFRS.
Therefore, the assets and liabilities need to be classified to draw up the opening IFRS balance
sheet in accordance with IFRS requirements Indian GAAP balance sheet does not have a
separate class as equity. Therefore, items which meet the definition of equity under IFRS need
to be identified first and then to be classified into this class in the opening IFRS balance sheet.
 There may be acquired intangible assets in the past business combinations, which do not
meet the definition of intangible assets under IFRS. These need to be classified as
goodwill and vice versa in the opening balance sheet
 IFRS 1 provides exemption from split accounting of compound financial instruments
when certain conditions are satisfied. When this exemption cannot be availed by the
entity, compound financial instruments need to be split into equity and liability portions
for their appropriate classification. Those items which are liabilities but are classified as
equity under Indian GAAP, such as mandatory redeemable preference shares, need to be
reclassified as liability in the opening balance sheet
Conclusion
It was always clear that a first-time adoption standard driven by the desire to avoid undue cost
and effort would have to include exemptions that would permit first-time adopters to apply
IFRS in a practical manner. Inevitably, the range of options available in IFRS 1 means that
similar entities may produce dissimilar IFRS financial statements. For example, the first-time
adoption rules on hedge accounting derecognizing and estimates will result in financial
statements that still owe much to the first-time adopter's previous GAAP. Nevertheless, the
effect of these exemptions and exceptions will most likely fade quickly. In the long run only the
effect of the business combinations and 'fair value or revaluation as deemed cost' exemptions
will be enduring. However, even the impact of those exemptions will be relatively insignificant
compared with, for example, the huge effect an acquisition has on the comparability of financial
statements from one period to another. For first-time adopters, IFRS 1 represents a marked
improvement over the theoretically pure but practically unworkable SIC-8. It is therefore no
surprise to see that many first-time adopters are applying IFRS 1 early. Still, some first-time

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adopters of IFRS will have concerns about, for example, the complexity of the first-time
adoption exemption for share-based payments. Others will complain about the unfairness of a
business combination exemption that does not allow an adjustment of goodwill for items other
than intangible assets, contingencies and impairments. Overall the IAS Board is to be
complemented for taking a practical approach to first time adoption. It has steered a reasonable
course between practicality and theoretical perfection that most preparers will, with effort, be
able to follow.

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