India has committed itself at the G-20 to make its companies, IFRS compliant from April 1st,

2011. Though India has not adopted the IFRS in full but it converged its Accounting
Standards (AS) to get those in line with the international reporting standards. In this process
Indian government, till date has issued 35 accounting standards which are in line with
existing IAS and IFRS.

Impact of IFRS on Indian businesses can be studied in various contexts. We will do a cost
benefit analysis of the same.

Cost Associated With Implementation of IFRS.

1) The transition to IFRS will place a burden on company staff. Training of staff will be
deemed necessary. Further, companies have to employ staff on a permanent basis to take
responsibility for compliance with accounting standards and disclosure requirements. This
will increase the manpower cost for companies.

2) Information and communication technology (ICT) systems may not be able to supply
information in all instances to be required to achieve compliance with IFRS, which suggests
that more ICT system changes will be seen in the future. For example maintenance of
information relating to property, plant and equipment, such as updating of the fixed asset
register and recording and updating of the residual values and useful lives, in the transition to
to IAS 16 (property, plant and equipment) will be a burdensome task.

3) In a few cases, the adoption of IFRSs may cause hardship to the industry. To avoid the
hardship, some companies may go to the court to challenge the standard. Earlier, to avoid
hardship in some genuine cases, the ICAI has deviated from corresponding IFRS for a limited
period till the preparedness is achieved. But now such deviation will not be there as the new
accounting standards are in line with IFRS.

Benefits Associated with implementation of IFRS.

1) As the forces of globalization prompt more and more countries to open their doors to
foreign investment and as businesses expand across borders, both the public and private
sectors are increasingly recognizing the benefits of having a commonly understood financial
reporting framework, supported by strong globally accepted standards. The benefits of a
global financial reporting framework are numerous and include:
• Greater comparability of financial information for investors;

• Greater willingness on the part of investors to invest across borders;

• Lower cost of capital;

• More efficient allocation of resources; and

• Higher economic growth.

Challenges for Small and Medium-Sized Entities

In emerging economies like India, a significant part of the economic activities is carried on
by small- and medium-sized entities (SMEs). Such entities face problems in implementing
the accounting standards because of:

• Scarcity of resources and expertise with the SMEs; and the

• Cost of compliance is not commensurate with the expected benefits

Hence keeping in mind Government of India has decided that non-listed companies which
have a net worth of Rs. 5000 Millions or less and whose shares or other securities are not
listed on Stock Exchanges outside India and Small and Medium Companies (SMCs) will not
be required to follow the notified Accounting Standards which are converged with the IFRS
(though they may voluntarily opt to do so) but need to follow only the notified
Accounting Standards which are not converged with the IFRS.

Hence there will be two sets of accounting standard in India.

International Financial Reporting Standards (IFRS) has gained huge
momentum in recent years across the world as it is used as a
universal financial reporting language. Almost 100 countries have adopted it
while few other countries have declared their willingness to adopt or converge
with IFRS over the next two-three years.

In the world of globalization, world has become more dependent on each

other, which forces more and more countries to open their doors for
businesses expansion across borders and to foreign investment. A large
number of multi-national companies are establishing their businesses in
various countries especially in emerging countries; as a result the companies
in emerging countries are increasingly accessing the global markets to fulfill
their capital requirement by getting their securities listed on the stock
exchanges outside their country. Few Indian companies are also being listed
on overseas stock exchanges, but different countries follow their own
accounting frameworks, which create a great confusion for users of financial
statements, finally it leads to inefficiency in capital markets across the world.

Therefore, there is a requirement for a single set of high quality accounting

standards that should be spoken by all of them across the globe, to meet the
increasing complexity of business transactions and globalisation of capital,
which has prompted many countries to go for convergence of national
accounting standards with IFRSs.

In this changing scenario, India cannot cut off itself from the developments
taking place worldwide. At present, the Accounting Standards Board (ASB) of
the Institute of Chartered Accountants of India (ICAI) formulates Accounting
Standards (ASs). Complex nature of IFRSs and the differences between
the existing ASs and IFRSs, the ICAI is of the view that IFRSs should be
adopted for the public interest entities such as listed entities, banks and
insurance entities and largesized entities from the accounting periods
beginning effect from April, 2011. Convergence to IFRS would mean India
would join a league of more than 100 countries, which have converged with
IFRS. Converging to IFRS by Indian companies will be very challenging and
on the contrary it could also be rewarding too.

Benefits to corporates in the Indian context World Class Peer Standards for
Financial Reporting: IFRSs will surely enhance the comparability of financial
information and financial performance with global peers and industry. This
will result in more transparent financial reporting of a company’s activities
which will benefit investors, customers and other key stakeholders in India
and overseas. The adoption of IFRS is expected to result in better quality of
financial reporting due to consistent application of accounting principles
and improvement in reliability of financial statements.

Investors: It will be a great help for those investors who wish to invest outside
their own country and looking for a Financial statements, which prepared by
using a common set of accounting standards IFRS provides them better
comprehensible investment opportunities as opposed to financial statements
prepared using a different set of national accounting standards. For better
understanding of financial statements, global investors have to incur more
cost in terms of the time and efforts to convert the financial statements so that
they can confidently compare opportunities. Investors’ confidence would be
well-built if accounting standards used are globally accepted. Convergence
with IFRSs contributes to investors’ understanding and confidence in high
quality financial statements.

The industry: It will be easier to raise capital from foreign markets at lower
cost if the industry can create confidence in the minds of foreign investors that
their financial statements comply with globally accepted accounting
standards. The burden of financial reporting is lessened with convergence of
accounting standards because it simplifies the process of preparing the
individual and group financial statements and thereby reduces the costs of
preparing the financial statements using different sets of accounting
standards.

The accounting professionals: Convergence with IFRSs also create more

business opportunity to the accounting professionals in a great way that they
are able to sell their services as experts in different parts of the world, it offers
them more opportunities in any part of the world if same accounting practices
prevail throughout the world. They are able to quote IFRSs to clients to give
them backing for recommending certain ways of reporting.

Challenges to Indian Corporate Laws and regulations: There is a need to

bring a change in several laws and regulations governing financial accounting
and reporting system in India. In addition to accounting standards, there are
legal and regulatory requirements that determine the manner in which
financial information is reported or presented in financial statements.

.’

Lack of adequate professionals: There is a lack of adequate professionals with

practical IFRS conversion experience and therefore many companies will
have to rely on external advisers and their auditors.

Replacement and Up gradation in systems: Conversion to IFRS will require

extensive upgrades or total replacement of major system. With sufficient
planning, upgrades and replacements can occur as part of the overall strategic
technology planning and procurement process.

.Convert historical data: Historical data from recent prior periods will have to
be recast for comparative purposes. This is necessary to permit accurate
and comparative trend and ratio analysis. Record retention requirements
should be reviewed to ensure that data currently being retained is detailed
enough to permit proper restatement of prior-period financials.

Coordination of Conversion System: For many organizations, the conversion

to IFRS will be a multi-year exercise with numerous changes to
technology infrastructure and systems. Development of new technology
systems should be carefully examined so IFRS requirements can be
incorporated.

Conclusion

.
Convergence to IFRS will greatly enhance the transparency of Indian
companies which will surely help them to project themselves in global map,
which will help Indian companies benchmark their performance with global
counterparts. But companies will need to be proactive to build awareness and
consensus amongst investors and analysts to explain the reasons for this
volatility in order to improve understanding, and increase transparency and
reliability of their financial statements. However, the responsibility for
enforcement and providing guidance on implementation vests with local
government and accounting and regulatory bodies, such as the ICAI in India
will play a vital role. The ICAI will have to make adequate investments and
build infrastructure for awareness and training program.

Successful implementation of IFRS in India depends on the regulator’s

immediate intention to convert to IFRS and make appropriate regulatory
amendments.
The use of international financial reporting standards (IFRS) as a universal financial reporting language is
gaining momentum across the globe. Over a 100 countries in the European Union, Africa, West Asia and Asia-
Pacific regions either require or permit the use of IFRS. The Institute of Chartered Accountants of India (ICAI)
has recently released a concept paper on Convergence with IFRS in India, detailing the strategy for adoption of
IFRS in India with effect from April 1, 2011. This has been strengthened by a recent announcement from the
ministry of corporate affairs (MCA) confirming the agenda for convergence with IFRS in India by 2011. Even
in the US there is an ongoing debate regarding the adoption of IFRS replacing US GAAP.

Adopting IFRS by Indian corporates is going to be very challenging but at the same time could also be
rewarding. Indian corporates are likely to reap significant benefits from adopting IFRS. The European Union’s
experience highlights many perceived benefits as a result of adopting IFRS. Overall, most investors, financial
statement preparers and auditors were in agreement that IFRS improved the quality of financial statements and
that IFRS implementation was a positive development for EU financial reporting (2007 ICAEW Report on ‘EU
Implementation of IFRS and the Fair Value Directive’).

There are likely to be several benefits to corporates in the Indian context as well. These are:

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

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

Better access to and reduction in the cost of capital raised from global capital markets since IFRS are now
accepted as a financial reporting framework for companies seeking to raise funds from most capital markets
across the globe. A recent decision by the US Securities and Exchange Commission (SEC) permits foreign
companies listed in the US to present financial statements in accordance with IFRS. This means that such
companies will not be required to prepare separate financial statements under Generally Accepted Accounting
Principles in the US (US GAAP). Therefore, Indian companies listed in the US would benefit from having to
prepare only a single set of IFRS compliant financial statements, and the consequent saving in financial and
compliance costs.

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

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

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