Need to Converge from IGAAP to IFRS
Piron proudly takes the responsibility of creating IFRS awareness and providing end to end services in IFRS expertise with Piron – education, consulting and BPO to meet all possible requirements. PIRON presses the need to converge from IGAAP to IFRS as it holds significant business implications.
Consistent, comparable and understandable financial information is the lifeblood of commerce and investing. Presently, there are many sets of reporting standards applicable in different parts of the world. In search of a new financial order: one global standard for financial reporting makes sense. IFRS Converged Indian Accounting Standards in India will undergo significant change that are expected to come from 30th April 2010.
50% of Indian accounting standards are similar to IFRS, but does that mean that fifty percent of our problem is solved? Answer is definitely a No. A big difference between Indian GAAP and IFRS is that accounting in India is not only governed by accounting standards but also by various legislations and governing bodies like Income Tax Act, Companies Act, SEBI, etc. In case of divergence between accounting standards and these legislations, accountants usually prefer a way which is most beneficial to them, says Abhishek Asthana, an IFRS expert, Chartered Accountant and member of ICAI.
However, IFRS is not less than a law. All key areas and financial results may vary considerably on transition to IFRS, explains Ankur Aggarwal, CEO, Piron services. He further explains the key differences between IGAAP and IFRS:
Firstly, under IFRS, a company would be able to recognise revenue with reference to stage of completion, if and only if, the agreement transfers control to the buyer, as well as the significant risks and rewards of the ownership of the work.
But the guidance note and accounting standards issued under Indian GAAP considers it appropriate to recognise revenues once there is a legally enforceable agreement for sale and other conditions for recognition of revenue are met.
Secondly, under IFRS, if certain non-employee obligations are settled through ESOP, IFRS will require fair value accounting for such options and cost differential between grant price and fair value will have to be recognized. Moreover, subsidiaries will need to account for the ESOP costs for options granted to its employees by the parent company. This is likely to have a major impact in the case of multinational subsidiaries operating in India, since many of their senior executives are given stock options in the parent company listed in the US/global markets, and where such accounting was not required under Indian GAAP so far.
Thirdly, IFRS entails discounting of future receivables and payables to their current values using expected interest rates. The application of time value of money concept will have impact on the amounts recorded for long-term security deposits, payables falling due after one year and revenues earned in advance for long-term contracts/ arrangements.
Fourthly, Companies will also have to comply with IAS 39 on financial instruments, particularly with regard to accounting for derivatives. Under IFRS, hedge accounting is permitted for such transactions provided certain conditions are met.
Fifthly, IFRS requires use of fair value. Whereas Indian GAAP follows historical cost convention except for fixed assets-which could be revalued.
For tax purposes, the potential problem with fair value accounting is that it gives rise to the recognition of unrealized profits and losses. The question is whether these profits should form the starting point to calculate taxable profits where no specific tax rule currently exists to the contrary.
Sixthly, Entities in India prepare their financial statements in Indian rupees while under IFRS reporting is required under functional currency, i.e. the currency of the primary economic environment in which the entity operates, which may be different from the local currency.
For an Indian entity it is possible that a significant portion of revenues may be derived in foreign currencies, pricing is determined by global factors, assets are routinely acquired from outside India and borrowings may be in foreign currencies. All these factors need to be considered to determine whether the Indian rupee or foreign currency is indeed the functional currency.
Convergence to IFRS is not a mere accounting exercise but will have significant business implications. Hence, companies would augur well to start preparing early and not wait for the last moment to rush to converge.
Tags : ACCA, e-learning, Finance professionals, financial instruments, GAAP, IAS, IFRS, IFRS Convergence, IFRS reporting, Reliance, Video Conferencing
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