56 Ifrs e y

Journey to IFRS
A guide on transition to IFRS
Confederation of Indian Industry

2 Journey to IFRS : A guide on transition to IFRS
Journey to IFRS
A guide on
transition to IFRS
Journey to IFRS : A guide on transition to IFRS 3

Foreword
I am happy to present this seminal work on transition to the International

Financial Reporting Standards “Journey to IFRS?” from the Confederation of
Indian Industry and Ernst & Young. This is a key initiative to map the process
of integrating internationally recognized financial standards with the financial
statements as presented in India.
Over a 100 countries across the world have formally accepted IFRS in order to
bring about standardization and therefore, greater comparability in presentation
of financial statements. In the Indian context, the Institute of Chartered
Accountants of India (ICAI) has also mandated convergence with IFRS from the
accounting period commencing on or after April 1, 2011 for listed and other
public interest entities such as banks, insurance and large–sized entities. The
Ministry of Corporate Affairs has also affirmed that its initiative for harmonization
of the Indian Accounting Standards with IFRS would now be continued with the
intention of achieving convergence with IFRS by 2011 for large public
interest entities.
While convergence is desirable and would be facilitated by the fact that historically
Indian standards have been principle-based; given the nature of accounting and
peculiarities of the Indian economic environment, implementation of convergence
would have its own set of complexities. The level of technical preparedness of
industry, accounting professionals’ experience with international standards
and economic environment prevailing in the country would pose challenges to
convergence. The Industry should be aware of these challenges and tackle them
through advance planning, without delaying the IFRS convergence target of
April 1, 2011 set by ICAI. It is in this context that this ‘Guide on Transition to IFRS’
would be useful in answering the questions relating to the impact on financial
statements delineating the significant dissimilarities between IFRS and Indian
GAAP and the implementation and maintenance process.
We are thankful to Ernst & Young, our partner in this endeavour, for sharing
their knowledge for preparing the Indian industry to gear up to the challenge of
transition to IFRS.
C. Banerjee
Director General – CII

Foreword
The International Financial Reporting Standards (IFRS) are rapidly emerging as

a globally accepted accounting framework with over 100 countries mandating or
permitting IFRS.
IFRS was implemented in January 2005 with more than 8,000 EU listed
companies adopting these standards. With its inherent benefits in the global
economy, countries like Australia, Hongkong, China and the Middle East have
mandated IFRS compliance for publicly listed companies. In what is seen as a
strong endorsement for IFRS, the U.S Securities & Exchange Commission (SEC)
has also allowed foreign private filers in the U.S. to file IFRS-compliant
financial statements.
In line with this emerging global trend, the Institute of Chartered Accountants
of India (ICAI) has announced a Convergence Declaration for all public interest
entities from 1 April 2011. This will result in significant benefits for cross-border
investments, capital flow, enhanced comparability, reporting transparency and
reduction in the cost of capital and compliance for enterprises.
While the convergence declaration and the impending deadline are becoming
common knowledge, how many of us have actually started any preparations?
As our experiences in other parts of the world have shown, IFRS cannot be
looked as a mere technical exercise limited to change from one set of accounting
principles to another. The consequences are far more than financial reporting
issues and extend to significant business and regulatory matters including
implications on performance indicators, compliance with debt covenants,
structuring of ESOP schemes, training of employees, modification of IT systems,
implication of mergers and acquisitions and tax planning. With IFRS, basic
definitions will change. Preference equity will become loans; dividends will
become interest while hedge accounting and fair value will arrive in all its glory
and complexity.
Our latest publication, ‘Journey to IFRS’ is an integrated endeavour to address
issues and recommend measures around first-time IFRS adoption challenges,
conversion efforts and resource requirements. We have talked about strategies
which companies can adopt for transitioning to IFRS, the key differences between
Indian GAAP and IFRS as also its impact on an organisation’s financial reporting.
Notwithstanding its benefits, the transition to IFRS will be challenging, as some of
us are already witnessing. It is therefore imperative to assess the impact of IFRS
and immediately embark upon taking the first steps towards a conversion plan.
What is required is a positive and pro-active approach from all stakeholders – the
regulators, the ICAI, the profession and the industry.
Rajiv Memani
Country Managing Partner -
Ernst & Young, India
Chairman – Accounting Standard
Committee - CII

1. Overview of IFRS............................................................................. 8
1.1. What is IFRS?........................................................................ 8
1.2. IFRS – A truly Global Accounting Standard............................... 8
1.3. IFRS and India....................................................................... 9
1.4. Benefits of adopting IFRS for Indian companies...................... 10
1.5. IFRS challenges................................................................... 10
2. Getting ready for transition to IFRS.............................................. 12
2.1. Impact assessment.............................................................. 12
2.2. Business re-engineering....................................................... 13
2.3. IFRS conversion programme................................................. 13
3. First-time adoption of IFRS........................................................... 14
3.1. Background......................................................................... 14
3.2. Preparation for adopting IFRS............................................... 14
3.3. First-time adoption.............................................................. 14
3.4. What does IFRS 1 entail?...................................................... 15
3.5. Transition from Indian GAAP to IFRS..................................... 15
4. Impact of key differences............................................................... 17
4.1. Presentation of financial statements..................................... 17
4.2. Business combinations......................................................... 19
4.3. Group accounts................................................................... 21
4.4. Financial instruments........................................................... 23
4.5. Income taxes....................................................................... 25
4.6. Employee benefits and share-based payments....................... 27
4.7. Fixed Assets, intangibles, investment property and leases....... 29
4.8. Segment reporting.............................................................. 31
4.9. Revenue recognition............................................................ 33
List of abbreviations.............................................................................. 35

1. Overview of IFRS
1.1. What is IFRS? issued 30 IAS and 8 IFRS. It has also
IFRS has recently emerged as the issued 11 SICs and 13 IFRICs to provide
numero-uno accounting framework, guidance on some interpretation issues
with widespread global acceptance. The arising from IAS and IFRS. In this
IASB, a private sector body, develops publication, the term ‘IFRS’ has been
and approves IFRS. The IASB replaced used in the broader context.
the IASC in 2001. IASC issued IAS
IFRS is principle based, drafted
from 1973 to 2000. Since then, IASB
lucidly and easy to understand and
has replaced some IAS with new IFRS
apply. However, the application of
and has adopted or proposed new
IFRS requires an increased use of fair
IFRS on topics for which there was no
values for measurement of assets and
previous IAS. Through committees,
liabilities. The focus in IFRS is more
both, the IASC and IASB have issued
towards getting the balance sheet right
Interpretations of Standards.
and hence brings significant volatility in
The term IFRS has both, a narrow the income statement.
and a broad meaning. Narrowly, IFRS
1.2. IFRS – A truly Global
refers to the new numbered series
Accounting Standard
of pronouncements that the IASB is
The year 2000 was significant for
issuing, as distinct from the IAS series
IAS, now known as IFRS. The
issued by its predecessor. More broadly,
International Organisation of Securities
IFRS refers to the entire body of IASB
Commission formally accepted the IAS
pronouncements, including standards
core standards as a basis for cross-
and interpretations approved by the
border listing globally. In June 2000,
IASB, IASC, and SIC. Till date, IASB has

the European Commission passed a standards remain sensitive to local
requirement for all listed companies conditions, including the legal and
in the European Union to prepare economic environment. Accordingly,
their CFS using IFRS (for financial the Accounting Standards issued by
years beginning 2005). Since 2005, the ICAI depart from the corresponding
the acceptability of IFRS has IFRS in order to ensure consistency
increased tremendously. with the legal, regulatory and economic
environments of India.
There are now more than 100
countries across the world where IFRS At a meeting held in May 2006, the
is either required or permitted. This Council of ICAI expressed the view
figure does not include countries such that full IFRS may be adopted at a
as India, which do not follow IFRS but future date, at least for listed and large
their national GAAP is inspired by IFRS. entities. The ASB, at a meeting held in
The table below provides a snapshot of August 2006, considered the matter
IFRS acceptability globally. and supported the Council’s view that
there would be several advantages of
Domestic listed entities Number of
countries converging with IFRS. Keeping in mind
the extent of differences between IFRS
IFRS required for all 77
and Indian Accounting Standards, as
domestic listed companies
well as the fact that convergence with
IFRS permitted for 24
IFRS would be an important policy
decision, the ASB decided to form an
IFRS required for some 4 IFRS Task Force. The objectives of the
Task Force were to explore: (i) the
IFRS not permitted for 32 approach for achieving convergence
with IFRS, and (ii) laying down a
137 road map for achieving convergence
with IFRS with a view to make India
Considering that more than 100 out of
IFRS-compliant.
137 countries require or permit IFRS,
this should not leave any doubt that Based on the recommendation of the
IFRS is now numero-uno. This status IFRS Task Force, the Council of ICAI, at
has been unequivocally accepted by its 269th meeting, decided
the SEC as well. The SEC has passed a to adopt a ‘big bang’ approach and
ruling to allow the use of IFRS without fully converge with IFRS issued
reconciliation to US GAAP in the by IASB, from accounting periods
financial reports filed by foreign private commencing on or after 1 April 2011. 
issuers, thereby giving foreign private IFRS will be adopted for listed and
issuers a choice between IFRS and other public interest entities such as
US GAAP. In addition, the SEC is also banks, insurance companies and large-
examining the possibility of treating sized organisations.
US and foreign issuers at par by also
With an objective to ensure smooth
providing US issuers the alternative to
transition to IFRS from 1 April
use IFRS. This is a milestone proposal
2011, ICAI will take up the matter of
that will bring almost the entire world
convergence with IFRS with NACAS.
on one single uniform accounting
The NACAS was established by
platform, i.e., IFRS.
the Ministry of Corporate Affairs,
1.3. IFRS and India Government of India, and various
The issue of convergence with IFRS regulators including RBI, IRDA and
has gained significant momentum in SEBI. ICAI will formulate a work-plan
India. At present, the ASB of the ICAI to ensure that IFRS are effectively
formulates Accounting Standards adopted from 1 April 2011. Further,
based on IFRS, however, these ICAI will conduct IFRS training

programmes for its members and managements to get all components
others concerned to prepare them of the group on one financial reporting
to implement IFRS. ICAI will also platform. This will eliminate the need
discuss with the IASB, those areas for multiple reports and significant
where changes in certain IFRS may be adjustment for preparing CFS or filing
required, keeping in view the financial statements in different
Indian conditions. stock exchanges.
1.4. Benefits of adopting IFRS for Reflects true value of acquisitions

Indian companies In Indian GAAP, business combinations,
The decision by ICAI to converge with with few exceptions, are recorded at
IFRS is a milestone decision and is carrying values and not at fair values
likely to provide significant benefits to of net assets taken over. Purchase
Indian corporates. consideration paid for intangible assets
not recorded in the acquiree’s books
Improved access to International
is usually not reflected separately
capital markets
in the financial statements; instead
Many Indian entities are expanding or
the amount gets added to goodwill.
making significant acquisitions in the
Hence, true value of the business
global arena—for which huge capital is
combination is not communicated
required. Majority of stock exchanges
through financial statements. IFRS
require financial information prepared
will overcome this flaw as it mandates
under IFRS. Migration to IFRS will
accounting for net assets taken over in
enable Indian entities to have access to
a business combination at fair value. It
international capital markets, without
also requires recognition of intangible
the risk premium involved in Indian
assets, even though they have not
GAAP financial statements.
been recorded in the acquiree’s
Lower cost of capital financial statements.
Migration to IFRS will lower the cost
New opportunities
of raising funds, as it will eliminate
Benefits from the IFRS wave will not be
the need for preparing a dual set of
restricted to Indian corporates. In fact,
financial statements. It will also reduce it will open up a host of opportunities
accountants’ fees, abolish risk in the services sector. With a wide
premium and will enable access to pool of accounting professionals,
all major capital markets as IFRS is India can emerge as an accounting
globally acceptable. services hub for the global community.
Enable benchmarking with global As IFRS is fair value focused, it will
provide significant opportunities to
peers and improve brand value
professionals, including, accountants,
Adoption of IFRS will enable
valuers and actuaries, which in-turn will
companies to gain a broader and
boost the growth prospects for the
deeper understanding of the entity’s
BPO/KPO segment in India.
relative standing by looking beyond
country and regional milestones. 1.5. IFRS challenges
Further, adoption of IFRS will Shortage of Resources
facilitate companies to set targets and With the convergence to IFRS,
milestones based on global business implementation of SOX, strengthening
environment, rather than merely of corporate governance norms,
local ones. increasing financial regulations and
global economic growth, accountants
Escape Multiple Reporting are most sought after globally.
Convergence to IFRS, by all group Accounting resources is a major
entities, will enable company challenge globally and will remain

so in the short-term. India, with a Communication
population of more than 1 billion, has IFRS may significantly change reported
only approximately 145,000 Chartered earnings and various performance
Accountants, which is far below indicators. Managing market
its requirement. expectations and educating analysts
will therefore be critical. A company’s
Training management must understand the
If IFRS has to be uniformly understood differences in the way the entity’s
and consistently applied, training needs performance will be viewed, both
of all stakeholders, comprising CFOs, internally and in the market place, and
auditors, audit committees, teachers, agree on key messages to be delivered
students, analysts, regulators, and tax to investors and other stakeholders.
authorities need to be addressed. It Reported profits may be different from
is imperative that IFRS is introduced perceived commercial performance
as a full subject in universities and due to the increased use of fair
Chartered Accountancy syllabus. values and the restriction on existing
Information systems practices such as hedge accounting.
Financial accounting and reporting Consequently, the indicators for
systems must be able to produce robust assessing both, business and executive
and consistent data for reporting performance, will need to be revisited.
financial information. The systems Management compensation and
must also be capable of capturing new debt covenants
information for required disclosures, The amount of compensation
such as segment information, fair calculated and paid under
values of financial instruments, and performance-based executive and
related party transactions. As financial employee compensation plans may
accounting and reporting systems are be materially different under IFRS,
modified and strengthened to deliver as the entity’s financial results may
information in accordance with IFRS, be considerably different. Significant
entities need to enhance their IT changes to the plan may be required
security in order to minimise the risk to reward an activity that contributes
of business interruption—particularly to an entity’s success within the new
to address potential fraud, cyber regime. Re-negotiating contracts
terrorism, and data corruption. that referenced reported accounting
Taxes amounts, such as bank covenants, may
IFRS convergence will have a significant be required on convergence to IFRS.
impact on financial statements Distributable profits
and consequently tax liability. Tax IFRS is fair value driven, which
authorities should ensure that there is results very often in unrealised
clarity on the tax treatment of items gains and losses. Whether Tax planning
arising out of convergence to IFRS. For
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relations
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review of existing tax planning reduction of share capital. business

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2. Getting ready for
transition to IFRS
At the outset, it should be understood •  Business Combinations
that changing from Indian GAAP to •  Financial Instruments (It should
IFRS is not merely changing from one be noted that ICAI has recently
set of accounting policies to another. approved AS 30, AS 31 and AS 32
It is much more, since it not only has which are based on IFRS)
significant accounting consequences
•  Group Accounts
but also has far reaching business
consequences. Hence, the process of •  Fixed Assets and Investment
conversion should be taken seriously Property
and not done in a casual manner. Any •  Presentation of Financial Statements
mistake in the conversion could •  Share-based Payments
invite negative publicity and
Impact assessment is an enabler to
regulatory action.
produce IFRS financial statements that
2.1. Impact assessment compare to and eventually replace, an
This process entails a detail impact entity’s current financial statements.
assessment between Indian GAAP and However, it is equally important for
IFRS accounting policies and identifies the entity to see how IFRS information
areas of differences and challenges, will affect the perception of its
which the management might face, business performance.
such as:

2.2. Business re-engineering to undertake and implement this
Converting is not just a technical process, which entails the following:
exercise. It provides executives with
•  Assessment of existing practices:
opportunities to challenge the way
performing the accounting diagnostic
in which their organisation is viewed and identifying industry issues
and evaluated by investors, other key and benchmarks
stake-holders, and competitors. Every
important decision that an entity •  Comparison of Indian GAAP
makes will be affected by IFRS, with IFRS: assessing business
making it essential for the management impact and performing an IT
to anticipate changes in the diagnostic surrounding major
market perception. accounting differences identified
through comparison
2.3. IFRS conversion programme •  Gather IFRS practices followed:
The transition to IFRS is a complex tailoring the team with appropriate
and time-consuming process. Entities expertise based on the current
need to undertake a preliminary study practices followed in IFRS and
before proceeding for IFRS conversion, preparing a detailed timetable
which will give them an opportunity
to challenge the way it is viewed and Step 2: Solution development process
evaluated by the outside world. IFRS requires many changes in IT.
The ‘Solution Development’ process
Entities should identify a dedicated identifies the required changes by
team, which will work on the developing and documenting scenarios,
conversion exercise and ensure that preparing accounting manuals in
the management is fully geared to compliance with IFRS, and determining
meet reporting deadlines. Experience critical IT changes required.
strongly suggests that major
conversions to IFRS can take 18 Step 3: Implementation and
months or more, and less complex maintenance process
conversions can take between 6 to Implementation of IFRS will require
12 months. assistance from experts. This process
also involves preparation of the
Step 1: Diagnostic and design process first IFRS financial statements. The
The time and effort required to conduct process involves restating the opening
a ‘Diagnostic and Design’ process will balance sheet, restating the financial
vary depending on the nature of an statements for comparative period, and
entity. Typically, entities such as banks
preparing IFRS financial statements for
or a company with several subsidiaries
the first year. The maintenance process
will require significant time and effort
involves consistently following
IFRS updates.
Diagnostic and design Solution development Implementation and

maintenance
 Perform the accounting  Develop and document

diagnostic scenarios (estimated  Restate opening
impacts, necessary balance sheet
 Identify industry issues changes in reporting)
and benchmarks
 Restate balance sheet
 Assess business impact
(eg, reporting, tax,  Prepare accounting account for comparative
investor relations, etc.) manual information
 Perform an IT diagnostic
surrounding major  Prepare full year IFRS
accounting differences Financial Statements
 Determine IT critical
 Tailor the team with changes required and
appropriate expertise launch development  Follow IFRS updates
 Prepare detailed when appropriate. (new interpretations and
timetable standards)

3. First-time adoption
of IFRS
3.1. Background 3.3. First-time adoption
ICAI has announced full convergence IFRS 1 First-time Adoption of
with IFRS issued by IASB from International Financial Reporting
accounting periods commencing on or Standards prescribes the procedures
after 1 April 2011. All listed entities that an entity is required to follow
and public interest entities such as when adopting IFRS for the first-time.
banks, insurance entities, and large- An entity that makes an explicit and
sized entities shall adopt IFRS. This is unreserved statement of compliance
subject to regulatory endorsements. with IFRS for the first time is the first-
Presently more than 100 countries time adopter. Even if the entity has
require or permit the use of IFRS. prepared IFRS information for internal
management use, it will be the first
3.2. Preparation for adopting IFRS
time adopter only when such statement
Entities need to develop the work plan
is made in its financial statements.
for smooth transition to IFRS. The staff
Even if the entity has complied with
needs to be trained for IFRS to allow
some of the IFRS in the earlier years,
them to effectively implement IFRS.
it will be a first-time adopter when it
Certain areas in IFRS will have impact
makes the above mentioned statement
on the entity in a significant way. These
in its financial statements.
areas need to be identified.

3.4. What does IFRS 1 entail? assets, whereas IFRS require such
Entities need to apply accounting disclosure. Therefore, entities need
policies in its IFRS financial statements to develop the system to capture
that are in compliance with IFRS, such information. Proposed dividends
effective as of the balance sheet date cannot be disclosed as liability in
of the first IFRS financial statements. IFRS. Therefore, this liability will be
IFRS requires minimum one year eliminated in the opening IFRS
of comparatives to be presented. balance sheet.
Therefore, when an entity follows
Assets and liabilities not recognised in
IFRS for the first time in its financial
Indian GAAP
statements for the year-end 31 March
Some of the examples are:
2012, it needs to give the financial
information for the year ended 31 •  All derivative financial assets and
March 2011 as a comparative. This liabilities and embedded derivatives
comparative information also needs to need to be recognised in IFRS
be in compliance with IFRS. Therefore, opening balance sheet. If these are
the opening balance sheet of the not recorded under Indian GAAP,
comparative year, i.e., balance sheet entities need to bring them on the
as at 1 April 2010, needs to be in IFRS balance sheet
compliance with IFRS. This is referred •  IFRS require restructuring
as the opening balance sheet. In provisions to be recognised based
simple words, three balance sheets on constructive obligation. Indian
and two profit and loss accounts would GAAP permits recognising such
be required. Though IFRS will be provision only when legal obligation
mandatory from accounting periods arises. Therefore, if an entity had
commencing on or after 1 April 2011, constructive obligation on the
the requirement for an IFRS compliant opening balance sheet date, it
balance sheet as at 1 April 2010 needs to record the provision in the
and IFRS compliant interim financial IFRS balance sheet. If there was no
statements will mean that the legal obligation by that date, Indian
2011 date in practice would be GAAP balance sheet would not have
significantly advanced. recorded such provision
3.5. Transition from Indian GAAP •  IAS 12 is based on the balance sheet
to IFRS liability approach. AS 22 requires
Assets and liabilities in the opening deferred taxes to be recognised
balance sheet not meeting based on the income statement
IFRS definitions liability approach. Therefore,
temporary differences for which
Assets and liabilities recognised
deferred tax is not recognised under
under Indian GAAP that do not qualify
Indian GAAP need to be identified on
for recognition under IFRS need
the opening balance sheet date and
to be eliminated from the opening
deferred tax should be recognised
balance sheet. For example, deferred
accordingly under IFRS
revenue expenditure of share issue
expenses does not meet the definition IFRS classification of assets
of intangible asset under IAS 38. and liabilities
Therefore, it cannot be carried in the Asset and liability classifications under
IFRS opening balance sheet. Entities Indian GAAP balance sheet does not
also need to gather information conform to IFRS. Therefore, the assets
required to be disclosed in the IFRS and liabilities need to be classified
balance sheet that is not disclosed in to draw up the opening IFRS balance
Indian GAAP. For example, Indian GAAP sheet in accordance with
prohibits disclosure of contingent IFRS requirements

•  Indian GAAP balance sheet does • I AS 27 does not provide any
not have a separate class as equity. exemption from consolidating
Therefore, items which meet the subsidiaries. Therefore, if the entity
definition of equity under IFRS need has not prepared CFS under Indian
to be identified first and then to GAAP or has not consolidated any
be classified into this class in the subsidiary in its Indian GAAP CFS,
opening IFRS balance sheet opening IFRS balance sheet needs to
•  There may be acquired intangible be redrawn to ensure all subsidiaries
assets in the past business are recorded in the consolidated
combinations, which do not meet the opening balance sheet
definition of intangible assets under Carrying values of assets
IFRS. These need to be classified and liabilities
as goodwill and vice versa in the All assets and liabilities need to be
opening balance sheet measured using IFRS principles. IFRS 1
•  IFRS 1 provides exemption from split provides certain exemptions which the
accounting of compound financial entity can choose for measuring assets
instruments when certain conditions and liabilities. The difference between
are satisfied. When this exemption the carrying values under Indian GAAP
cannot be availed by the entity, and carrying values under IFRS will be
compound financial instruments accounted in the retained earnings in
need to be split into equity and the opening balance sheet.
liability portions for their appropriate
Entities have sufficient time in hand to
classification. Those items which
plan for their smooth transition. They
are liabilities but are classified as
should utilise this time wisely to avoid
equity under Indian GAAP, such as
last minute rush. Some of the IFRS
mandatory redeemable preference
provisions are very complex. Applying
shares, need to be reclassified as
them in the time crunch situations
liability in the opening balance sheet
carries the risk of misapplication of
these requirements.

4. Impact of key differences
4.1. Presentation of governing those entities does not
financial statements lay down any specific format of
Key differences financial statements.
•  IAS 1 Presentation of Financial •  IAS 1 recognises true and fair
Statements is significantly different override. True and fair override
from the corresponding AS 1 is generally not permitted under
Disclosure of Accounting Policies. Indian GAAP. Though Clause 49
While IAS 1 sets out overall of the Listing Agreement contains
requirements for the presentation provisions relating to the true and
of financial statements, guidelines fair override, no practical guidance
for their structure, and minimum is available.
requirements for their content,
•  IAS 1 requires SOCIE or SORIE to
Indian GAAP offers no standard
be presented separately as a part
outlining overall requirements for
of the financial statements. The
presentation of financial statements
concept of SOCIE or SORIE does not
In India, for various entities, the prevail under Indian GAAP, however,
statutes governing the respective information relating to appropriation
entities lay down formats of of profits, movement in capital and
financial statements. For example, reserves, etc., is presented on the
in the case of companies, format face of the profit and loss account
and disclosure requirements are and/or in the captions share capital
set out under Schedule VI to the and reserves and surplus in the
Companies Act, 1956. For entities balance sheet.
such as partnership firms, the statute

•  IAS 1 requires disclosure of statements, however, it would also
(i) critical judgments made by put an extra onus on entities to
management in applying accounting ensure that estimates and judgments
policies (ii) key sources of made are justifiable, since they are
estimation uncertainty that have a publicly accountable for them.
significant risk of causing a material •  Application of IAS 1 would require
adjustment to the carrying amounts entities to present total amount
of assets and liabilities within of recognised gain or loss for the
the next financial year, and (iii) period—comprising profit or loss for
information that enables users of the period and amounts recognised
its financial statements to evaluate directly in reserves—to be presented
the entity’s objectives, policies and in SORIE or as a separate item in
processes for managing capital. SOCIE. This amount is not available
There are no such disclosures separately in Indian GAAP
required under Indian GAAP. financial statements.
•  IAS 1 prohibits any item to be
2. Better presentation of
presented as an extraordinary item,
financial position
either on the face of the income
statement or in the notes. As •  Under IAS 1 each entity should
compared to this, AS 5 in Indian present its balance sheet using
GAAP specifically requires current and non-current assets and
disclosure of certain items as liabilities classifications on the face
extraordinary items. of the balance sheet, except when
a presentation based on liquidity
Impact on financial reporting
provides information that is reliable
IAS 1 essentially sets out overall
and more relevant. As per IAS 1,
requirements for presentation of
whichever method of presentation
financial statements. In case of balance
is adopted, for each asset and
sheets, it requires a clean segregation
liability item that combines amounts
of current and non-current items for
expected to be recovered or settled
assets and liabilities. In the profit
both, before and after twelve months
and loss account, both, the functional
from the balance sheet date, an
format and the format based on nature
entity shall disclose two amounts
of expenses are allowed. Therefore,
separately. For various items, there is
IAS 1 significantly impacts the
no similar requirement under Indian
presentation of financial statements.
GAAP. For example, under Schedule
These impacts are covered under the
VI, companies are not required to
following broad parameters:
disclose the amount payable
1. Enhanced transparency and within one year with respect to
accountability secured loans.
•  The disclosure of information 3. Legal implications

required by IAS 1, with reference Unless Indian laws are amended to
to critical judgments made by comply with IFRS, entities would
the management in applying not be able to make unreserved and
accounting policies and key sources explicit statement of compliance
of estimation uncertainty that have a with IFRS, as required to be made
significant risk of causing a material under IAS 1 in case of compliance
adjustment to the carrying amounts with IFRS.
of assets and liabilities within the
next financial year in the financial Impact on organisation and its
statements, would not only bring processes
greater transparency in the financial Till now, we have discussed the impact
of IFRS convergence on financial

reporting. However, the impact on the successful establishment of such a
an organisation implementing IFRS mechanism would require changes
may be very different, than what can in the accounting system and
be understood only by analysing the codification structure.
impact on financial reporting.
4.2. Business Combinations
Although IAS 1 would not have Key differences
any bottom line impact on entities, •  IFRS 3 Business Combinations
they would be required to review applies to most business
and modify, if necessary, their combinations, both amalgamation
organisation and processes to ensure (where acquiree loses its
that information to comply with all existence) and acquisition (where
disclosure requirements of IAS 1 acquiree continues its existence).
is collected. It may be noted that Under Indian GAAP, there is no
because of the current/non-current comprehensive standard dealing
classification, some of the gearing with all business combinations. AS
ratios may change or become 14 applies only to amalgamation,
more transparent. i.e., when acquiree loses its
existence and AS 10 applies when a
Many entities, particularly those not
business is acquired on a lump-sum
subject to any externally imposed
basis by another entity. AS-21,
capital requirements, may not have
AS-23, and AS-27 apply to
well documented and formally
subsidiaries, associates and joint
established objectives, policies and
ventures respectively.
processes for managing capital.
To comply with IAS 1 requirement •  IFRS 3 requires all business
for making disclosures regarding combinations (excludes common
capital, even such entities would control transactions) within its
need to formalise and document such scope to be accounted as per
objectives, policies, processes, etc. Purchase method and prohibits
This would involve personnel not only merger accounting. Indian GAAP
from the entity’s accounts department, permits both Purchase method and
but also from other functions, such Pooling of Interest method. Pooling
as finance and treasury. Similarly, of Interest method is allowed only if
disclosure of current and non-current the amalgamation satisfies certain
portion of assets and liabilities in the specified conditions.
balance sheet would also require •  IFRS 3 requires net assets taken over,
the involvement of finance and including contingent liabilities, to be
treasury functions. recorded at fair value unlike Indian
GAAP, which requires recording of
Though not prohibited, most entities
net assets, with a few exceptions, at
do not use functional classification to
carrying value. Contingent liabilities
present their expenses, as this would
are not recorded as liabilities under
result in extra efforts, since Schedule
Indian GAAP.
VI requires information to be given as
per the nature of expense. Apparently, • IFRS 3 prohibits amortisation
only some software companies and a of goodwill arising on business
few other entities provide information combinations and requires it to be
according to the function of expense tested for impairment. Indian GAAP
on the face of profit and loss account. requires amortisation of goodwill
They also present complete information in the case of amalgamations.
as per nature of the expense in the With reference to goodwill arising
notes to comply with the requirements on acquisition through equity, no
of Schedule VI. If entities want to follow guidance is provided in Indian GAAP.
functional classification under IFRS, •  IFRS 3 requires negative goodwill

to be credited to profit and loss 3. Significant impact on post
account, whereas the same is acquisition profits
credited to capital reserve under In Indian GAAP, net assets taken
Indian GAAP. over are normally recorded at book
•  In IFRS 3 acquisition accounting value and hence the charge to
is based on substance. Reverse profit and loss account on account
acquisition is accounted assuming of amortisation and depreciation is
the legal acquirer is the acquiree. In based on carrying value. However,
Indian GAAP, acquisition accounting net assets taken over will be
is based on form. Indian GAAP does recorded at fair value under IFRS
not deal with reverse acquisition. 3. This results in a charge to profit
The changes brought in by IFRS 3 and loss account on account of
are going to affect all stages of the amortisation and depreciation
acquisition process—from planning based on fair value, which is the
to the presentation of post deal true price paid by acquirer for those
results. The implications primarily assets. Goodwill is not required to
involve providing greater transparency be amortised but is required to be
and insight into what has been acquired tested for impairment under IFRS 3.
and allowing the market to evaluate Negative goodwill is required to be
the management’s explanations of the credited to profit and loss account
rationale behind a transaction. The key under IFRS 3. These items increase
impact of IFRS 3 is summarised below: volatility in the income statement.
4. Accounting for Business
1. True value of acquisition will Combination vis-à-vis High
be reflected Court order
Following an acquisition, financial In India, ‘law overrides Accounting
statements will look very different.  Standards’ is an accepted principle.
Assets and liabilities will be Hence, accounting is done based on
recognised at fair value. Contingent treatment prescribed by the High
liabilities and intangible assets Court in its approval, even though
which are not recorded in the it may not be in accordance with
acquiree’s balance sheet will be Accounting Standards. However,
appearing in the acquirer’s balance IFRS does not recognise the
sheet. This change in recognition of principle of legal override. Thus,
net assets will significantly change once IFRS is adopted, accounting
the value of goodwill recorded in will need to be done based on
the books of accounts. Goodwill principles prescribed in IFRS 3. To
reflected in the books will project achieve this, entities will need to
actual premium paid by an entity ensure that scheme filed with the
for the acquisition. High Court does not prescribe any
treatment or the treatment is in
2. Greater transparency accordance with IFRS.
Significant new disclosures are
Impact on organisation and
required regarding the cost of the
its processes
acquisition, the values of the main
classes of assets and liabilities, 1. Use of experts
and the justification for the The acquisition process should
amount allocated to goodwill.  All become more rigorous—from
stakeholders will be able to evaluate planning to execution.  More
actual worth of an acquisition and thorough evaluation of targets and
its impact on the future cash flow of structuring of deals will be required
the entity. in order to withstand greater

market scrutiny. Expert valuation •  Under IFRS the application of
assistance may be needed to equity method or proportionate
establish values for items such consolidation to associates/joint
as new intangible assets and ventures is mandatory subject to
contingent liabilities a few exceptions, even if an entity
does not have any subsidiary.
2. Purchase Price Allocation Under Indian GAAP, application of
Under Indian GAAP, no emphasis equity method or proportionate
was given to purchase price consolidation is required only when
allocation as net assets were the entity has subsidiaries and
generally recorded based on the prepares CFS.
carrying value in the acquiree’s
•  Under IFRS consolidation is required
balance sheet. IFRS 3 places
for all subsidiaries, whereas there are
significant importance to the
two exemptions from consolidation
purchase price allocation process.
provided under Indian GAAP.
All the identifiable assets of the
acquired business must be recorded •  Control definition is different under
at their fair values. Many intangible IFRS and Indian GAAP.
assets that would previously have •  Both, IFRS and Indian GAAP require
been subsumed within goodwill use of uniform accounting policies
must be separately identified for preparation of CFS. However,
and valued. Explicit guidance is Indian GAAP provides exemption on
provided for the recognition of grounds of impracticality.
such intangible assets. Contingent
•  IFRS allows a three-month time gap
liabilities are also required to be
between financial statements of
fair valued and recognised in the
parent or investor and subsidiary,
acquirer’s balance sheet. The
valuation of such assets and associate or jointly controlled entity.
liabilities is a complex process and Indian GAAP allows a six-month
would require specialist skills. time gap.
•  IFRS requires consolidation of SPEs,
3. Deal structures may change
whereas Indian GAAP does not
In Indian GAAP, entities were provide any specific guidance on
inclined to give consideration this subject.
in equity shares to satisfy
conditions of merger accounting. Impact on financial reporting
The end of merger accounting 1. Preparation of CFS
for all acquisitions, under the Indian GAAP does not require
scope of IFRS 3, removes this preparation of CFS for unlisted
constraint on the structure of entities. If IFRS is adopted by such
deal considerations. Presently, entities, they will have to prepare
it is possible for entities to buy their group accounts. Even for listed
companies which do not violate entities, under Indian GAAP, there
merger conditions so that pooling is no guidance on consolidation of
method can be applied. Under IFRS SPE and hence many are not being
3 those opportunities will no more consolidated. Under IFRS, many
be available. SPE, which satisfy certain criteria
4.3. Group accounts need to be consolidated. Unlike
Key differences Indian GAAP, consolidation of
•  Under IFRS preparation of group associates and joint venture will be
accounts is mandatory subject to few required even if the entity does not
exemptions, whereas preparation of have any subsidiary in the financial
CFS is required only for listed entities statements prepared under IFRS.
under Indian GAAP.

Adoption of IFRS does not always change the year-ends of their group
result in consolidation, but would entities to comply with
result in de-consolidation of certain this requirement.
subsidiaries in some cases. Under
Impact on organisation and
Indian GAAP, two groups can
its processes
consolidate the same entity, i.e.,
one group consolidates as it holds 1. Use of group accounts by
majority ownership stake, whereas various stakeholders
other group consolidates as it Under Indian GAAP preparation
controls the board of directors. of CFS is required only by listed
Under IFRS, control can be held entities. Once IFRS is adopted,
only by one entity and it is unlikely preparation of CFS will be required
that two entities would consolidate for all entities. Benchmarking by
the same company. analysts and other stakeholders will
move from entity centric to group
2. Uniform accounting policies centric information. Management of
Indian GAAP provides an the holding entity will be questioned
exemption from the use of not only for their own performance
uniform accounting policies for but also for the performance of all
consolidation of subsidiaries, group entities. Consolidation of
associates and joint ventures on previously unconsolidated entities
the grounds of impracticality. IFRS may adversely affect key ratios and
does not provide such exemption performance indicators such as
and mandates use of uniform risk-based capital ratios of a
accounting policies for subsidiaries, financial institution.
associates and joint ventures.
This is likely to pose significant 2. Coordination with management of
challenges, especially in the case associates and joint ventures
of associates where the entity Under IFRS there is no exemption
does not have a control over the from the requirement of uniform
associate. All entities will have accounting policies. Also, time
to gear their systems or develop gap between financial statements
systems like preparation of group of investor and of an associate
accounting manuals to ensure can be maximum three months.
compliance with this requirement. Hence, an entity needs to initiate
On adoption of IFRS, many group dialogue with the management of
entities will have to change their the associate and joint venture to
accounting policies to bring them in obtain information of the requisite
line with the parent entity. data as per the group accounting
policies for the purpose
3. Financial year-ends of all of consolidation.
components in the group
Indian GAAP allows a maximum 3. Updation of group structures
time gap of six months between Adoption of IFRS will result in
financial statements of parent consolidation of certain entities
and subsidiary. There is no time including SPE and de-consolidation
limit prescribed between financial of certain entities. The adoption
statements of investor and of IFRS will also require potential
associate. IFRS allows a maximum voting rights that are currently
time gap of three months for exercisable or convertible, including
subsidiaries, associates, and joint potential voting rights held by
ventures. On adoption of IFRS, another entity, to be considered
many entities may be compelled to when assessing whether another

entity is a subsidiary, associate or treated as a liability. Under Indian
joint venture of the entity. This will GAAP, classification is normally
require updation of the organisation based on form rather than substance.
structure maintained by the entity. •  IAS 32 requires compound financial
Many unlisted entities, who are not instruments, such as convertible
required to prepare CFS, might not bonds, to be split into liability
have prepared a comprehensive and equity components and each
group structure. They will have to component is recorded separately.
initiate this exercise for identifying Under Indian GAAP, no split
all components in the group. accounting is done and financial
4.4. Financial Instruments instruments are classified as either
Key differences liability or equity, depending on
IAS 32 Financial Instruments: their primary nature. For example, a
Presentation, IAS 39 Financial convertible debenture is treated
Instruments: Recognition and as liability.
Measurement, and IFRS 7 Financial •  Under IAS 39 all financial assets
Instruments: Disclosures deal are classified into four categories,
with presentation, recognition namely, FVPL, AFS, HTM, and L&R.
and measurement and disclosure Subsequent to initial recognition,
aspects of financial instruments, in FVPL assets are valued at fair value
a comprehensive manner. In India, with gain or loss being recognised
the Council of the ICAI has recently in profit or loss. AFS assets are
approved AS 30, Financial Instruments: valued at fair value with gain or loss
Recognition and Measurement, AS 31, being recognised in equity, which is
Financial Instruments: Presentation, recycled into profit or loss, either on
and AS 32 Financial Instruments: impairment or on derecognition of
Disclosures, which are based on IAS those assets. HTM and L&R assets
39, IAS 32 and IFRS 7, respectively. are valued at amortised cost using
However, the same has not yet the effective interest rate. Under
been adopted under the Companies Indian GAAP, long term investments
Accounting Standard Rules. Pending are recorded at cost less “other than
the application of these AS, the temporary” diminution in value of
pronouncements which deal with investments. Current investments are
certain types of financial instruments recorded at lower of cost or market
are AS 13, Accounting for Investments, price. L&R are carried at actual cost
Guidance Note on Accounting for Equity and interest thereon is recognised at
Index and Equity Stock Futures and contractual rate, if any.
Options, Guidance Note on Investments • IAS 39 defines derivative as financial
by Mutual Funds and Guidance Note on instruments or other contracts
Accounting for Securitisation. having all three characteristics,
•  IAS 32 requires the issuer of a namely (i) its value changes in
financial instrument to classify the response to the change in a specified
instrument as a liability or equity interest rate, financial instrument
on initial recognition, in accordance price, etc., (ii) it requires no or
with its substance and the definitions smaller initial net investment, and
of these terms. The application (iii) it is settled at a future date. As
of this principle requires certain per IAS 39, all derivatives, except
instruments which have the form of those used for hedge purposes,
equity to be classified as liability. For are measured at fair value and any
example, under IAS 32, mandatorily gains/losses are recognised in profit
redeemable preference shares on or loss. Under Indian GAAP, there
which fixed dividend is payable are is no specific standard dealing with
derivatives; though, ICAI has issued

an announcement which requres IAS 39 requires balance sheet
entities to provide for losses in recognition for all financial
respect of outstanding derivative instruments (including derivatives)
contract by marking them to market. and makes greater use of fair
•  IAS 39 deals with various values. All financial assets and
aspects of hedge accounting in a financial liabilities are initially
comprehensive manner. It defines recognised (in the balance sheet)
three types of hedging relationships at fair value. In case of FVPL assets,
comprising fair value hedge, cash liabilities and derivatives, (other
flow hedge and hedge of net than those used for hedging)
investments in a foreign operation. subsequent changes in fair value
It also lays down conditions which are recognised in profit or loss. The
need to be fulfilled to apply hedge use of fair values sometimes causes
accounting. In India, presently, only volatility in the income statement
AS 11 deals with forward exchange or equity. To comply with the IAS
contracts for hedging foreign 39 requirement to measure all
currency exposures. derivatives at fair value, entities
•  IAS 39 requirements on have to make use of
derecognition of financial assets valuation tools.
are different than those contained
2. Impairment
in the Guidance Note on
Accounting for Securitisation. IAS 39 requires a provision for
Further, under Indian GAAP there impairment to be recognised as
is no methodology for determining soon as there is a risk that the
impairment of financial assets. IAS initial value of an asset may not be
39 includes detailed provisions for recovered. The measurement of
determining impairment. impairment takes into account the
•  IFRS 7 requires entities to provide time value of money. Thus, under
comprehensive disclosures in their IFRS, other things being equal,
financial statements that enable even a change in the timing of cash
users to evaluate (a) significance of flows may cause impairment. Under
financial instruments for its financial the principles of IAS 39, change
position and performance and in timing of the cash flows may be
(b) the nature and extent of risks treated as an impairment, even
arising from financial instruments, if the entity does not expect any
and how the entity manages those default on restructured terms. IAS
risks. The disclosures required under 39 prohibits reversal of impairment
IFRS 7 include quantitative as well on AFS equity instruments and
as qualitative information. Under unquoted equity instruments
Indian GAAP, at present, there is carried at cost. Thus, under IFRS,
no AS corresponding to IFRS 7 an impairment of the above equity
which requires such disclosures. instruments would be final and the
However, ICAI has recently approved entity would never be allowed to
AS 32 Financial Instruments: reverse the same.
Disclosures. Also ICAI has issued
3. Debt
an announcement on ‘Disclosure
regarding Derivative Instruments’ Debt and equity classifications are
which requires certain minimum substantially changed as a result of
disclosures to be made concerning several provisions in IAS 32 and 39.
financial instruments. Some of the instruments, such as
redeemable preference shares, are
classified as equity, based on their
1. Recognition and measurement form under Indian GAAP. Similarly,
As compared to Indian GAAP, to convert to IFRS, the compound

instruments which are classified as •  Sales representatives in charge of
debt or equity depending on their negotiating contracts
primary nature need to be split into •  Purchasing personnel
debt and equity and each portion
•  Legal staff
treated separately.
For example, identifying derivatives
4. Derecognition would be an entity-wide process under
Because of the very strict criteria IAS 39. Embedded derivatives are also
for derecognising financial assets considered as derivatives and must be
in IAS 39, some financial asset recognised separately from their host
disposal transactions (particularly contracts (debts or sales contracts). In
the sale of trade receivables) addition, certain contracts, which were
may be reclassified as guaranteed up till now not classified as derivatives,
loans. This risk is greater since SPE may be qualified as such and measured
involved in such transactions must at fair value (with an impact on profit
generally be consolidated by the or loss).
vendor entity in accordance with Therefore, the first phase of IAS
strict criteria as per SIC 12 of IFRS. 39 implementation will include
The IFRS derecognition criteria identification of derivatives,
are based on the substance of the documentation of hedges, and requires
transaction, and are generally the involvement of:
more restrictive than the approach
applied under the Guidance Note on •  The treasury department: for
analysing all financial contracts,
Accounting for Securitisation.
particularly debt contracts
5. Comprehensive disclosures •  Sales representatives: for identifying
IFRS 7 requires very comprehensive any embedded derivatives in the
disclosures regarding financial form of indexation to a financial
instruments and financial risks to instrument price, interest rate or any
which an entity is exposed, as well other variable without a close link
as the policies for managing such with the host contract
risks. Comprehensive information •  Purchasing department personnel:
on the fair value of financial for performing similar analyses on
instruments would enhance the supply contracts, including
transparency and accountability of any indexing provisions in
financial statements. commodity contracts
•  Operational personnel: for
Impact on organisation and its
documenting hedges
processes
The implementation of IAS 39 and 4.5. Income Taxes
IAS 32 will have a significant impact
Key differences
on all banks and on many industrial
•  AS 22 ‘Accounting for Taxes on
and commercial entities. In particular,
Income’ is based on the income
entities with central treasury functions
statement liability method, which
will have to review their operational
focuses on timing differences,
processes and consider implications for
whereas IAS 12 ‘Income Taxes’ is
their current hedge accounting policies.
based on the balance sheet
In addition to accountants, operational
liability method which focuses on
personnel from various departments
temporary differences.
must be involved in implementing IAS
32 and IAS 39, including the following: •  IAS 12 requires recognition of
deferred taxes in case of business
•  Treasury teams (front office, back combination. Under IFRS, the cost of
office, and middle office) a business combination is allocated

to the identifiable assets acquired under Indian GAAP depending
and liabilities assumed by reference on the undistributed profits of
to their fair values. However, if no the subsidiaries, associates or
equivalent adjustment is allowed for joint ventures and the effect
tax purposes, it would give rise to a of elimination of profits and
temporary difference. Under Indian losses resulting from intra-group
GAAP, business combinations (other transactions. IFRS requires
than amalgamation) will not give rise deferred tax on revaluation of
to a deferred tax adjustment. assets. This, however, is not
•  Where an entity has a history of required under Indian GAAP.
tax losses, under IFRS the entity
2. Acquisitions
recognises a deferred tax asset
arising from unused tax losses or Deferred tax on acquired assets,
tax credits only to the extent that liabilities, and contingent liabilities
the entity has sufficient taxable is itself considered an acquired
temporary differences or there is asset or liability and is adjusted
convincing other evidence that against goodwill under IFRS. When
sufficient taxable profit will be it gives rise to deferred tax liability,
available. Under Indian GAAP, if the reversal of such liability in future
entity has carried forward tax losses years affects the tax expense or
or unabsorbed depreciation, all income of those years. Therefore,
deferred tax assets are recognised the effect of acquisition deferred
only to the extent that there is virtual taxes on future financial statements
certainty supported by convincing will differ significantly under IFRS
evidence that sufficient future and Indian GAAP.
taxable income will be available This factor will influence the
against which such deferred tax acquisition transaction.
assets can be realised. IAS 12 does
3. Entities in tax losses
not lay down any requirement for
consideration of virtual certainty Due to the strict principle under
in such cases. Indian GAAP of virtual certainty,
in very rare cases can entities
Impact on financial reporting recognise deferred tax assets when
1. Deferred tax accounting for they have carried forward losses
the Group and unabsorbed depreciation. The
Under IFRS temporary differences ‘convincing evidence’ principle
arise to the extent that the under IFRS, which is lenient
subsidiary, associate or joint compared to Indian GAAP ‘virtual
venture has not distributed its certainty’ principle, allows the
profits to the parent or investor, entity to recognise tax income
which is normally the case. on carried forward tax losses and
unabsorbed depreciation as well.
IAS 12 requires deferred tax to
Impact on Organisation and its
be recognised for this, except
Processes
in specified circumstances. IAS
IAS 12 implementation requires
12 also requires deferred tax
accounting personnel to work
to be recognised on temporary
effectively with the tax department to:
differences that arise from
the elimination of profits and •  Monitor and calculate tax bases of
losses resulting from intra-group assets and liabilities
transactions. As a result, deferred •  Monitor tax losses and tax credits of
tax for the group under IFRS can all components in the group
be significantly different than

•  Assess recoverability of deferred actuarial gains and losses to be
tax assets recognised immediately in the profit
•  Determine possible offsets between and loss account.
deferred tax assets and liabilities •  Under IFRS, the liability for
•  Monitor changes in tax rates and termination benefits has to be
collect applicable tax rates to recognised based on constructive
determine the amount of deferred obligation, Indian GAAP requires it to
tax in the event of asset disposal be recognised based on
legal obligation.
•  Understand implications of double
tax treaty, where there are • In IFRS there is no concept of
foreign operations deferral for termination benefits.
Under Indian GAAP, for VRS
•  Prepare more detailed disclosures—
expenditure incurred on or before 31
tax reconciliation
March 2009, the entity may choose
Tax teams should be involved, both to follow the accounting policy of
at the group and subsidiary level. If deferring such expenditure over
no tax specialists are available at the its pay-back period. However, the
subsidiary level, tools (e.g., accounting expenditure so deferred cannot be
and tax manuals, including checklists carried forward to accounting periods
that enable group entities to accurately commencing on or after 1 April
determine tax bases) and appropriate 2010 (sunset date).
training should be provided to ensure
•  Under IFRS, employee Share-based
quality reporting. The group needs to
Payment should be accounted for
do a thorough review of existing tax
using Fair Value Method, whereas
planning strategies to test alignment
Indian GAAP permits an option of
with any organisational changes
using either Intrinsic Value Method or
created by IFRS conversion.
Fair Value Method.
4.6. Employee Benefits and Share- •  IFRS provides detailed guidance
based Payments for accounting group and treasury
Key differences share transactions, whereas no such
•  IAS 19 provides options to guidance is provided in Indian GAAP.
recognise actuarial gains and losses
immediately in the income statement Impact on financial reporting
or in SORIE or apply the corridor 1. Reduce volatility in income
approach. Under the corridor statement on account of
approach, an entity recognises a actuarial differences
portion of its actuarial gains and Actuarial gains and losses arise
losses as income or expense if due to changes in actuarial
the net cumulative unrecognised assumptions, such as in respect to
actuarial gains and losses at the the discount rate, increase in salary,
end of the previous reporting period employee turnover, mortality rate,
exceeded the greater of: (a) 10% etc. Under the corridor approach
of the present value of the defined of IFRS, it is permissible to defer
benefit obligation at that date the actuarial gains or losses
(before deducting plan assets); under certain circumstances. This
and (b) 10% of the fair value of flexibility is not provided under
any plan assets at that date. Any Indian GAAP. This approach,
actuarial gains and losses above purely from a fair value and asset
the 10% corridor can be amortised or liability definition perspective,
over the remaining service period is superior to IFRS but puts
of employees or on an accelerated Indian entities at a disadvantage
basis. Indian GAAP requires all as compared to their global

counterparts. On adoption of partnership agreements with their
IFRS, an entity can choose to vendors so as to provide them with
reduce volatility in their income opportunities of sharing profits of
statement arising on account of a particular venture by offering
actuarial differences. them share-based payments. This
mode of payment is also considered
2. Timing of recognition of as an incentive tool intended for
termination benefits vendors doing efficient and quality
Under IFRS termination benefits work. Under Indian GAAP, AS 10
are required to be provided for requires a fixed asset acquired in
when the scheme is announced and exchange for shares to be recorded
the management is demonstrably at its fair market value or the
committed. Under Indian GAAP, fair market value of the shares
termination benefits are required issued, whichever is more clearly
to be provided for, based on evident. For other goods and
legal liability (when employee services, there is no guidance for
signs up for the VRS) rather recognising the cost of providing
than constructive liability. This such benefits to the vendors in
is a timing issue for creating a lieu of goods or services received.
provision. Under IFRS, an entity Different accounting policies are
cannot spread the impact of being followed by Indian entities
providing termination benefit to which ranges from no-charge to
more than one accounting period accounting as per principles of
as deferral is not permitted. Under IFRS 2. On adoption of IFRS, an
Indian GAAP, the VRS expenditure entity will have to account for such
prior to the sunset date could benefits as per Fair Value Method
be deferred. laid down in IFRS 2.
3. True value of ESOP 5. Accounting for Group ESOP Plans

Indian GAAP permits entities to In India, the practice is a subsidiary
account for ESOP either through normally does not account for
Fair Value Method or Intrinsic ESOP issued to its employees by
Value Method though disclosure is its parent entity, contending that
required to be made of the impact clear-cut guidance is not available
on profit or loss of applying the and it does not have any settlement
Fair Value Method. It is observed obligation. Under IFRS, such ESOP
that most Indian entities prefer to plans will have to be accounted as
adopt the Intrinsic Value Method. per principles laid down in IFRIC 11
The drawback of the Intrinsic ‘IFRS 2 Group and Treasury Share
Value Method is that it does not transactions’, i.e., either as equity
factor option and time value while settled or as cash settled plan,
determining compensation cost. depending on whether the parent
In IFRS, the accounting for ESOP or subsidiary is obligated to provide
will have to be done as per Fair stock options to the employees.
Value Method, which may result in As per IFRIC 11, all entities whose
increased charge for ESOP for many employees are being provided ESOP
entities and will have a significant benefits by its parent or other
impact on key indicators like EPS. group entities will have to account
for the charge in their income
4. Accounting for Share-based statement, which will reflect the
Payments to non-employees true compensation cost of receiving
In recent times, it is observed that employee benefits.
many entities are entering into

Impact on organisation and its •  Major repairs and overhaul
processes expenditure are capitalised under
IAS 19 and IFRS 2 are likely to have a IFRS as replacement, if they satisfy
major impact on many organisations. the recognition criteria, whereas in
Additional liabilities arising from most cases Indian GAAP requires
adoption of IFRS 2 will negatively them to be charged off to the profit
impact financial results and ratios. and loss account as incurred.
In some situations, the ability to •  IFRS requires estimates of useful lives
pay dividends may be affected and and residual values to be reviewed at
there may also be implications from least at each financial year-end. In
restrictive covenants in existing debt/ Indian GAAP, there is no need for an
equity agreements or lease contracts. annual review of estimates of useful
As a result, many entities should carry lives and residual values.
out a comprehensive review of their
•  Both IFRS and Indian GAAP
rewards and recognition mechanisms
permit the revaluation model for
in order to ensure that these continue
subsequent measurement. IFRS
to support business strategies in a
mandates revaluation to be done
cost effective manner. Not only cash
for entire class of property, plant
cost, but accounting cost also needs to
and equipment and to be reviewed
be considered, and the impact on key
periodically. In Indian GAAP,
stakeholders (senior management,
revaluation is not required for all
employees, potential recruits, trade
the assets of the given class, it is
unions, pension trustees, and rating
sufficient that the selection of the
agencies) needs to be understood.
asset to be revalued is made on
While IFRS 2 may have a negative
systematic basis, e.g., an entity may
effect, IAS 19 has the opposite effect,
revalue a class of assets of one unit
since actuarial losses are allowed to
and ignore the same class of assets
be deferred.
at other location. Also, there is no
Senior management, finance, need to update revaluation regularly
operational and human resource under Indian GAAP.
personnel will need to work closely •  Under IFRS depreciation on the
with each other, their actuaries and revaluation portion cannot be
their external advisors to ensure a recouped out of revaluation reserve
full understanding of the accounting and will have to be charged to the
and business impact of alternative income statement over the useful life
employee benefits and of emerging of the asset, whereas Indian GAAP
best practices in an IFRS environment. permits depreciation on revaluation
4.7. Fixed Assets, Intangibles, portion to be recouped out of
Investment Property and Leases revaluation reserve to the
Key differences income statement.
•  IAS 16 Property, Plant and •  IFRS provides detailed rules for
Equipment mandates component the classification of an asset as an
accounting, whereas AS 10 investment property and allows
Accounting for Fixed Assets subsequent measurement of
recommends, but does not force, investment property at cost or at
component accounting. fair value. Indian GAAP requires
•  IFRS requires depreciation to be investment property to be recognised
based on useful life. In Indian GAAP, only at cost less diminution in value
depreciation is based on higher of other than temporary.
useful life or Schedule XIV rates. •  Under IFRS intangible assets can
have indefinite useful life. Such

assets are required to be tested residual value is likely to change
for impairment only without any depreciation of many assets as
amortisation. Under Indian GAAP, Indian entities normally presume 5%
there is no concept of indefinite of value of assets as their residual
useful life. value without actually making any
•  Under IFRS the revaluation model estimate of the residual value.
is allowed for accounting of an
2. Revaluation of fixed assets
intangible asset provided an
active market exists, whereas Indian entities, which have done
Indian GAAP does not permit use selective revaluation of fixed
of the revaluation model for assets or intend to revalue the
intangible assets. fixed assets, will have to determine
whether they want to continue with
•  IFRS requires land leases to be
the revaluation model or not. This
normally classified as an operating
decision is crucial for an entity, as
lease unless title passes to the lessee
to continue with the revaluation
at the end of the lease term. Under
model, (i) they will have to adopt
Indian GAAP no Accounting Standard
revaluation model for entire class of
deals with land leases. As per a
assets which cannot be restricted to
recent EAC opinion, long-term lease
some selective location, (ii) update
of lands should be treated as
such revaluation on regular basis,
finance lease.
and (iii) take depreciation charge
• IFRS requires an entity to determine in the income statement based on
whether an arrangement, comprising revalued amounts.
a transaction or a series of related
transactions, that does not take the 3. Investment property
legal form of a lease but conveys a In IFRS Indian entities will have an
right to use an asset in return for additional option of reflecting their
a payment or series of payments, investment property at fair value
is a lease. As per IFRIC 4, such and recognising any resulting gain
determination shall be based on the or loss in the profit or loss for the
substance of the arrangement, e.g., period. If an entity decides to adopt
power purchase agreements and fair value model for its investment
outsourcing contracts may have the property, it is not required to
substance of lease. Indian GAAP does charge any depreciation on it.
not provide any guidance for Detailed guidance is provided in IAS
such arrangements. 40 for classification of an asset as
Impact on financial reporting an investment property, which may
result in some reclassifications
1. Fixed asset management
into or out of the investment
Under IAS 16 a part of item of property category.
property, plant and equipment with
a cost that is significant in relation 4. Intangible assets
to total cost of an item shall be Unlike Indian GAAP, amortisation
separately depreciated. Hence, will not be required under IFRS for
entities need to bifurcate the cost an intangible asset for which there
of an asset into significant parts is no foreseeable limit on the period
if their useful life is different and over which the asset is expected
depreciate them separately. This to generate net cash inflow for the
requirement will require entities to entity. However, annual impairment
restructure their fixed asset register testing will be required for such an
and recompute depreciation. asset. This can create volatility in
Also, requirement of estimating profit or loss. Also, the entity will

be able to reflect intangible assets exercise since this will now have to be
at their fair value, provided there more granular to include components
is an active market for them. This and major repairs that are capitalised.
will help the entity project the real It would be difficult, if not impossible,
value of their intangible assets in to maintain them manually and hence
the balance sheet, to appropriate ERP packages need to
their stakeholders. be implemented or the existing ones
modified to capture such information.
5. Service contracts
One of the methods permitted for
Under IFRS, services contracts, accounting of investment property is
such as power purchase contracts, the fair valuation method. If such a
waste management contracts, and method is followed by a company, then
outsourcing contracts may have to it needs to institute an appropriate
be accounted for as leases, if the mechanism of valuing such investment
use of the specific asset is essential properties on a regular basis as also an
to the operations and satisfies internal control mechanism to ensure
certain conditions. In such cases, that such a valuation is robust
lease is analysed in light of IAS and reliable.
17 to determine its classification. The Purchase department needs to
Such contracts are presently not be trained in order to identify leases
assessed for identifying lease under in a service contract. This would
Indian GAAP, though there is no ensure that service contracts which
such restriction. This can have a are in substance leases are properly
substantial impact as the service accounted for as leases in accordance
provider might be required to with IFRIC 4.
derecognise the asset from
4.8. Segment Reporting
its books if it satisfies finance
The IASB has recently issued IFRS
lease classification.
8 Operating Segments which would
Impact on organisation and its supersede IAS 14. IFRS 8 would be
processes applicable for accounting periods
Several provisions of IAS 16, IAS 40 on or after 1 January 2009. Early
and IAS 17 require entities to transfer application is permitted. The following
responsibilities—previously assumed discussion regarding segment reporting
by the finance function—to operational is based on IFRS 8.
personnel for the purpose of:
Key differences
•  Validating costs of parts of property, •  IFRS 8 adopts the management
plant and equipment items reporting approach to identifying
(including determining cost of operating segments. It is likely
directly attributable costs) that in many cases, the structure
•  Defining the relevant components of operating segments will be the
•  Identifying investment properties same under IFRS 8 as under AS 17.
•  Validating depreciation periods and This is because AS 17, like IFRS 8,
methods for items of property, plant considers reporting segments as
and equipment the organisational units for which
information is reported to key
•  Regularly reviewing the depreciation
management personnel for the
periods and methods, residual
values, and valuation of unused purpose of performance assessment
property, plant and equipment and future resource allocation. When
an entity’s internal structure and
•  Reviewing various arrangements to
management reporting system is not
identify lease arrangement
based either on product lines or on
The maintenance of a fixed asset
geography, AS 17 requires the entity
register would be a cumbersome
to choose one as its primary segment

reporting format. IFRS 8, however, of the total key segment
does not impose this requirement amounts to the corresponding
to report segment information on a entity amounts reported in
product or geographical basis and IFRS financial statements.
in some cases this may result in •  A measure of profit or loss and assets
different segments being reported for each segment must be disclosed.
under IFRS 8 as compared Additional line items, such as interest
with AS 17. revenue and interest expense, are
•  An entity is first required to identify required to be disclosed if they are
all operating segments that meet provided to the CODM (or included
the definition in IFRS 8. Once all in the measure of segment profit
operating segments have been or loss reviewed by the CODM). AS
identified, the entity must determine 17, in contrast, specifies the items
which of these operating segments that must be disclosed for each
are reportable. If a segment reportable segment.
is reportable, then it must be •  Under IFRS disclosures are required
separately disclosed. This approach when an entity receives more than
is the same as that required by AS 10% of its revenue from a single
17, except that it does not require customer. In such instances an entity
the entity to determine a ‘primary’ must disclose this fact, the total
and ‘secondary’ basis of amount of revenue earned from each
segment reporting. such customer, and the name of the
•  IFRS 8 requires that the amount of operating segment that reports the
each segment item reported, is the revenue. This is not required
measure reported to the CODM in by AS 17.
internal management reports-even Impact on financial reporting
if this information is not prepared in
1. Change in segment
accordance with the IFRS accounting
reporting Approach
policies of the entity. This may result
in differences between the amounts On adoption of IFRS 8, the
reported in segment information and identification of an entity’s
those reported in the entity’s primary segments will, in many cases,
financial statements. In contrast, AS change from the position under
17 requires the segment information AS 17. IFRS 8 requires operating
to be prepared in conformity with segments to be identified on
the entity’s accounting policies for the basis of internal reports
preparing its financial statements. on components of the entity
that are regularly reviewed by
•  Unlike AS 17, IFRS 8 does not define
the CODM in order to allocate
terms such as ‘Segment Revenue’,
resources to the segment and
‘Segment Profit or Loss’, ‘Segment
to assess its performance. AS
Assets’ and ‘Segment Liabilities’. As a
17 requires an entity to identify
result, diversity of reporting practices
two sets of segments, business
will increase.
and geographical, using a risk-
•  As IFRS 8 does not define segments and-reward-approach, with the
as either business or geographical entity’s ‘system of internal financial
segments and does not require reporting to key management
measurement of segment amounts personnel’ serving only as the
based on an entity’s IFRS accounting starting point for the identification
policies, an entity must disclose of such segments.
how it determined its reportable
operating segments, and the basis 2. Goodwill impairment
on which the disclosed amounts IAS 36 requires goodwill to be
have been measured. These allocated to each CGU or to groups
disclosures include reconciliations of CGUs. The relevant CGU or group

of CGUs must represent the lowest 2. Identification of CODM
level within the entity at which the
Reporting under IFRS 8 is based
goodwill is monitored for internal
on information furnished to CODM.
management purposes and may
The term CODM defines a function
not be larger than an operating
rather than an individual with a
segment. If different segments are
specific title. The function of the
reported under IFRS 8 than were
CODM is to allocate resources and
reported under AS 17, it follows
assess operating results of the
that there will be differences
segments of an entity. The CODM
between the CGUs that make up
could be an individual, such as the
an IFRS 8 segment and those
chief executive officer, or the chief
that made up an AS 17 segment.
operating officer, or it could be a
As a result, the CGUs supporting
group of executives like the board
goodwill may no longer be in the
of directors or a management
same segment under IFRS 8 as
committee. Entities should review
under AS 17. It may, therefore, be
their management structure to
necessary to reallocate goodwill
identify CODMs.
associated with CGUs that are
affected by the change from AS 4.9. Revenue recognition
17 to IFRS 8. It is possible that Key differences
this reallocation of goodwill could •  IAS 18 Revenue, unlike its Indian
‘expose’ CGUs for which the counterpart AS 9 Revenue
carrying amount, including the Recognition, requires revenue to be
allocated goodwill, exceeds the measured at the fair value of the
recoverable amount, thereby giving consideration received or receivable.
rise to an impairment loss. •  For recognition of revenue from sale
3. Customer concentration of goods, IAS 18 also prescribes the
condition that the costs incurred
On adoption of IFRS, entities will
or to be incurred in respect of the
be required to furnish a disclosure
transaction can be measured reliably.
of customer concentration, which
This condition is not there in AS 9.
will enable investors to assess risk
faced by a company. The company •  For recognition of revenue from
will have to compile information rendering of services, IAS 18
of revenue generated by each states that when the outcome of
customer to furnish disclosures a transaction can be estimated
required by IFRS 8. reliably, revenue associated with the
transaction shall be recognised by
Impact on organisation and reference to the stage of completion
its Processes of the transaction at the balance
1. Reconciliation of management sheet date. Under Indian GAAP, AS 9
information system with provides an option to use either the
financial statement proportionate completion method
IFRS 8 requires segment reporting or the completed service contract
to be made based on information method for recognising revenue from
furnished to the chief decision service transactions.
makers. If the policy followed •  IAS 18 requires interest to be
for computing information for recognised using the effective
management information system interest method as outlined in IAS 39
does not match with the financial Financial Instruments: Recognition
statements, an entity will need and Measurement. AS 9 requires
to furnish reconciliation. Hence, interest to be recognised on a time
entities need to devise or proportion basis, taking into account
upgrade systems to prepare the amount outstanding and the
reconciliation between the MIS and rate applicable.
accounting system.

Impact on financial reporting 3. Reduced volatility of revenue
1. Contracts with multiple elements recognition for rendering of
or barter—fair value concept services
AS 9 states that revenue is Since IFRS requires recognition
measured by the charge made to of revenue arising from rendering
customers or clients for goods of services only on the basis of
supplied and services rendered stage of completion, the entities
and by the charges and rewards who defer revenue based on the
arising from the use of resources by completed service contract method
them. In the absence of a fair value under Indian GAAP will have a
concept, it sometimes becomes significant impact on their income
difficult to determine the revenue statement. The volatility of income
in a contract that contains multiple statement of such entities will be
elements such as sale of goods and smoothened by the application of
rendering of services. For example, IFRS and the profit or loss for the
in case of franchise fees IAS 18 period will better represent the
states that for supply of equipment efforts put in by entities during
and other tangible assets, the the period.
amount based on fair value of the Impact on organisation and its
assets sold is recognised as revenue processes
when the items are delivered or the Though the revenue recognition
title passes. Under Indian GAAP, an principles under Indian GAAP and IFRS
EAC opinion deals with accounting may not be significantly different,
in the case of multiple element yet one has to take a close look at
contracts. Unlike IFRS, Indian GAAP practices that have emerged over
does not deal with barter sales. time. These practices may not be in
2. Management’s judgement to accordance with international norms.
determine revenue from sale A case in point is the accounting
of goods for real estate sales. IASB believes
that real estate sales by developers
IAS 18 prescribes five conditions,
should be recognised based on
all of which should be fulfilled for
product completion, whereas in
recognising revenue. Apart from
India the percentage of completion
transfer of significant risks and
method is followed. Such issues could
rewards of ownership as required
have a significant impact on how an
in Indian GAAP, IFRS also requires
organisation sells or how the contracts
fulfilment of the conditions relating
and payments are structured.
to seller not retaining continuing
managerial involvement and Unlike Indian GAAP, IFRS provides
effective control over the goods detailed guidance on identification
sold, reliability of measurement of of the transaction. Under IFRS, it is
the amount, probability that the necessary to apply the recognition
economic benefits associated with criteria to the separately identifiable
the transaction will flow to the components of a single transaction
seller and reliable measurement in order to reflect the substance
of costs incurred in respect of of the transaction. Therefore,
the transaction. As a result the strategies developed by the marketing
management has to use their department which combine various
own judgement to determine if, components in a single transaction
in substance, particular sales of would need to consider its impact on
goods are financing arrangements revenue recognition.
and therefore do not give rise to
revenue under IFRS.

List of abbreviations
AFS Available-for-Sale
ASB Accounting Standards Board
AS Indian Accounting Standards
CFS Consolidated Financial Statements
CGU Cash-Generating Unit
CODM Chief Operating Decision Maker
ESOP Employee Stock Option Plan
EPS Earning Per Share
FVPL Fair Value through Profit or Loss
GAAP Generally Accepted Accounting Principles
HTM Held-to-Maturity
IAS International Accounting Standards
IASB International Accounting Standards Board
IASC International Accounting Standard Committee
ICAI The Institute of Chartered Accountants of India
IFRIC International Financial Reporting Interpretations Committee
IFRS International Financial Reporting Standards
IRDA Insurance Regulatory and Development Authority
L&R Loans & Receivables
NACAS National Advisory Committee on Accounting Standards
RBI Reserve Bank of India
SEBI Securities and Exchange Board of India
SEC U. S. Securities and Exchange Commission
SIC Standing Interpretations Committee
SOCIE Statement of Changes in Equity
SORIE Statement of Recognised Income and Expenses
SOX Sarbanes-Oxley
SPE Special Purpose Entities

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Journey to IFRS

A guide on transition to IFRS

Confederation of Indian Industry

Journey to IFRS : A guide on transition to IFRS 3

I am happy to present this seminal work on transition to the International

4 Journey to IFRS : A guide on transition to IFRS

The International Financial Reporting Standards (IFRS) are rapidly emerging as

Journey to IFRS : A guide on transition to IFRS 5

Journey to IFRS : A guide on transition to IFRS 7

8 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 9

1.4. Benefits of adopting IFRS for Reflects true value of acquisitions

10 Journey to IFRS : A guide on transition to IFRS

this can be considered for

example, will government authorities

the purpose of computing

accounting required by the standards be debated, in order to ensure

review of existing tax planning reduction of share capital. business

as well as the risks involved will have to

be considered by the entities.

Journey to IFRS : A guide on transition to IFRS 11

12 Journey to IFRS : A guide on transition to IFRS

Diagnostic and design Solution development Implementation and

 Perform the accounting  Develop and document

Journey to IFRS : A guide on transition to IFRS 13

14 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 15

16 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 17

•  The disclosure of information 3. Legal implications

18 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 19

20 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 21

22 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 23

24 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 25

26 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 27

3. True value of ESOP 5. Accounting for Group ESOP Plans

28 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 29

30 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 31

32 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 33

34 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 35

The Confederation of Indian Industry (CII) works to create and sustain an

CII is a non-government, not-for-profit, industry led and industry managed

CII catalyses change by working closely with government on policy issues,

Complementing this vision, CII’s theme “India@75: The Emerging Agenda”,

With 63 offices in India, 8 overseas in Australia, Austria, China, France, Japan,

36 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 37

Headquarters Regional Offices

The Mantosh Sondhi Centre Eastern Region

Corporate Offices Block No.3, Dakshin Marg,

38 Journey to IFRS : A guide on transition to IFRS

Journey to IFRS : A guide on transition to IFRS 39

For more information, please visit

Ernst & Young Pvt. Ltd. is a company registered under the