INTERNATIONAL FINANTIONAL REPORTING STANDARD: AN INVESTORS OVERVIEW
The emergence of multinational corporations has not only boosted India’s growth story but has boosted the demand for capital from all around the world. India is one of the world’s favorite investment destinations and is already witnessing huge capital inflows all around the world.
Its not always possible & feasible for multinationals to prepare different sets of financial statements abiding each countries laws and regulations. Hence their was need for a common reporting standards which will be same from all over the world. The answer to this is International Financial Reporting Standard (IFRS). IFRS will overcome cross border geographical boundaries and will have no impact as an investor whether from India or any where in the world.
History: Birth of IFRS has been a series of incidents. It all started in 1967 with International Accounting Standards formulated by International Accounting Standards Committee (IASC). In between 1984 -2005 IASC & various accounting regulators all around the globe issued new accounting standards & revised old ones. Norwalk’s Agreement between IASB & FASB in 2002 stressed on formation & implementation of IFRS. Finally in June 2003, Ist IFRS was published titled “IFRS-1 – First time adoption of International Financial Reporting Standards”. At least 100 countries and 30 others including India will adopt or converge with IFRS over next 2-3years.
Indian overview: In the era of globalization, India cannot insulate its economy from development taking place around the globe. High quality financial reporting is the fundamental for an effective integrated capital market.
In India, the Institute of Chartered Accountants of India (which issues & governs accounting standards in India) is on the way towards converging of its accounting standards with IFRS. The ICAI has already started the process of issuing IFRS equivalent accounting standards (AS) & revising the existing standards & guidance notes to bring them at par with IFRS.
Why this convergence?
Converging with IFRS will have multiple benefits for Indian entities especially those who aspire to go global. The new converged standards will serve the objectives like that of providing timely & useful financial information about companies for stakeholders to assist in decision making. According to Sir David Tweedie, chairman, IASB, “The goal is to create one single set of accounting standards that can be applied anywhere in the world, saving millions for firms with more than one listing and allowing investors to compare the performance of business across geographic boundaries for the first time”. Some of the benefits are mentioned below:
• IFRS provides more compatibility among sectors, countries & companies. Its universal appeal can improve & initiate new relationship with investors, customers & suppliers across the globe.
• IFRS provides momentum to cross border acquisitions, enables partnerships & alliances with foreign entities.
• IFRS gives better access to global capital markets & reduces the cost of capital.
• Converge with IFRS means adoption of global financial reporting language that enables your company to be understood in a global market place.
• IFRS allows companies to benchmark themselves against their peers worldwide & allows investors & others to compare the company’s performance with competitors globally.
• IFRS will improve the quality & consistency of information, avoid multiple reporting & reduce the cost of the finance function.
How IFRS will be implemented?
The IFRS Task Force formed by ICAI has proposed the adoption of IFRS in a phased manner for listing entities & public interest entities as well as for all other entities operating in India from accounting period commencing on or after April1, 2011. A press release was issued by the ministry of Corporate Affairs on 22nd January 2010 for setting out road map for convergence with IFRS. According to press release IFRS will be implemented in 3 phases starting from April1, 2011 as shown below.
Phase 1: The phase 1 companies will have to prepare their opening balance sheet as on April1, 2011 converging with IFRS. It includes companies which are part of NSE index (Nifty 50) & BSE Sensex (BSE 30). Companies whose shares or others are listed or not having net worth of more than Rs.1000/- Crores.
Phase II: Phase II companies will have to converge their opening balance sheet with IFRS as on April 01, 2013. It includes those which are not covered in phase I & net worth exceeding Rs.500/- Crores.
Phase III: Listed companies which are not covered in phase I or phase II are covered in this phase. These companies have to prepare converge balance sheet with IFRS as on April 01, 2014.
Note: If the financial year of a company commences at a date other than 01 April, then it shall prepare its opening balance sheet at the commencement of immediately following financial year.
Challenges in adopting IFRS
Every change brings along with it a degree of apprehension & therefore, it needs to be ensured that these apprehensions are addressed early to ensure effective & efficient transition. IFRS pose great challenge to drafters of financial statements & auditors. IFRS may have material impact on reported results, which could lead to stock price volatility. International standards setting may be hindered by stakeholder’s divergent interests. Other important challenges would be educating investors and analysts about impact of the IFRS.
Conclusion
The adoption of IFRS will not only reduce the barriers to both trade and the flow of capital but also the investors will have access to more reliable financial data to compare and analyze corporate performance in multiple jurisdiction.