A Research Paper on IFRS and Its Implications

A Research composing on IFRS and Its Implications internationalist Financial Reporting Standards (IFRS) is a door-to-door, world(prenominal)ly authoritative set of write up system standards utilizing a principles-based approach with a greater accent on interpretation and application of those principles, aiming at best reflecting the economical contentedness of transactions. It is a less extensive body of literature than U.S. GAAP with extra industry guidance and lesser detailed application guidance. IFRS requires a lots greater exercise of judgement, supported by detailed analysis and documentation. In other words, U.S. GAAP gives us a detailed instruction to the placement where we would like to go where us IFRS go out just guide us to the destination by showing us the direction.Today, much than 40% of the spherical Fortune 500 atomic number 18 victimization IFRS. Stock ex intensifys in the 85 countries that require IFRS comprise 35% of the spheric market not bad(p )ization, comp bed to 25% of the spherical market capitalization held by U.S. ex compounds1. IFRS is most likely to get authorization by beginning of 2014.Why IFRS?The question facing companies is not If to start out IFRS, it is of when and how to adopt IFRS. With so m individually companies foc purposed on managing through the economic downturn, few clearership teams are eager for whizz more largish thing to do. Especi on the wholey when that thing involves something as pervasive as International Financial Reporting Standards (IFRS). But IFRS continues to be adopted by jurisdictions most the world.Taking the organization to IFRS giveing require managing change in quintuple areas technical accounting and evaluate, internal controls and operationes, management and statutory describe, technology infrastructure, and organizational issues. Theyre all interconnected, which makes things a bit more complicated than imagined.IFRS relies more on general principles than de tailed regularises and bright lines. This means that the finance people give end up working much(prenominal) more closely with others in the organization to make archetypes virtually accounting based on the be economics of transactions.A flurry of operational changes could be triggered by IFRS as well. Companies may keep up to re-examine contracts and debt agreements, treasury policies, employee benefits, education and training, and conversations. Opportunities to centralize statutory accounting functions into shared service centers mightiness similarly bugger off to be looked at. A revisit of the offshoring, outsourcing, and tax planning decisions might too be required.Principle or Rule Based?At a pla give the axeary symposium held in the month of January where the Peter Wyman, a partner of PwC noticed a sea change in the debate surrounding the adoption of a uniform international accounting standard. The feeling was that IFRS will be adopted across the globe, the issue s which were present were only of how it was to be done.There have been primarily been two study approaches to accounting namely rule based and header based. UK and Europe have a principal based accounting system of rules which allows greater discretion and use of professional judgement. On the other hand, US has been following rule based accounting system which was further streng consequentlyed after seeing the light of scandals such as Enron, etc. The major argufy for International Accounting Standards panel (IASB) is to adapt IFRS so that it is sweet to all the parties involved.ACCAs head of pecuniary reporting believes that the use of principles-based approach should be the focussing forward as principles is a more practical(a) way of pushing standards across the globe. The six accountancy firms which used the symposium to showcase their whitepapers explicit that principle based will limit the size and complexness of the rule book.View from the USAccording to the dir ector of Financial Accounting Standards Board (FASB), collect to the scandals it has become necessary to ensure that regulators dont apply unfair ram on the people who prepare the accounts. This has led to the development of a cultivation of Second Guessing which the rule based approach tries to rectify, making it an extended rulebook. The enforcement is in addition talked of as a problem because Securities and Exchange Commission (SEC) does not hesitate to criticize, but empirical data shows that out of the restatement of accounts which were ordered by SEC, very few companies share price showed any movement.View of the UsersWhat the users pauperization is principles based approach because the aim of the financial reports and statements is to give a fetch stare of the way the conjunction is run and its future prospects for success. Investors are stressed that US may influence the new IFRS regime too much and create principles having unending exceptions, clarifications and rules.IASB is consulting all the stakeholders and hearing out the point of place of each one of them. They assure the investors that no party will be able to influence any decision and that they would like to hear to all sides of suck up before taking any decision.All of the following points towards the plastered adoption of IFRS. The greatest danger will be that of to please all the stakeholders. It would be interesting to note what pith US wants to put in the rulebook as US has agreed to adopt IFRS.BenefitsFrom a macroeconomic perspective, the benefits of development one global financial reporting language are ap put forward change magnitude comparability across global investment options, fewer barriers of main course to non-US markets, and potentially, a lower cost of capital. Moving to a single global accounting and reporting language will also pore complexity a welcome improvement for the companies that prepare financial reports and for the investors and other stakeh olders who depone on them.From a capital markets perspective, many multinational companies believe that IFRS offers an chance to lower their cost of capital. Widespread acceptance of IFRS financial statements allows companies to seek capital across a broad base of global funding without having to find out additional-financial reporting costs based on the source of funding. Anticipating increased aspiration among global investors and financers for runive investments, strong companies expect their cost of capital to falloff. Because of diversity of major capital markets to IFRS is relatively young, it is too soon to tell whether the decrease in anticipated cost of capital will prove out. that due to the sheer size of most capital raising efforts and vast term nature of the payoff, even slight improvements in transaction terms such as interest rates can translate into unsounded dollar savings.Within individual companies, the ability to centralize and streamline accounting f unctions and move financial personnel freely around the world will lower costs and strength internal controls. Today multinational corporations with many statutory filing requirements around the world motif to employ lag with expertise in each national GAAP to prepare filings and then translate financial statements from National GAAP to the bring up-company GAAP. Use of IFRS will reduce these reporting efforts and related costs and decrease the risk of errors.IFRS executionThe change of financial reporting standard is just not of moving from one standard to another, rather it will influence the way in which financial information is shared throughout the organisation. Thus it tells that it will take not just a few weeks before the deadline, it would require significant m and commitment from the management to make the change.Collection of data to prepare the financial reports needed for IFRS will be a very big challenge as the data which will need to be collected has to be relia ble and has to be subject to sufficient level of control to be taken as a reportable data. This article talks about two separate but related approaches which needs to operate so as to make the process an effective oneA take place down definition of the IFRS reporting requirement where in a careful understanding of the accounting policies and associated data requirements required to achieve IFRS-compliant financial reporting. This will help develop financial reports early in the conversion process and would help identify the gaps in the available data.A bottom up review at the condescension unit level of the precise carry on of IFRS requirements on individual business processes and financial systems. This would make sure if the reporting requirements could be possible with the right level and quality of information deep down an acceptable time period.Implementation2Phase 1 Preliminary study-During this anatomy, companies complete a broad-based assessment of the touch on of I FRS on financial reporting, long-term contracts, backup business processes, systems and controls, and income tax compliance, planning and reporting. They also determine a dodging for the road ahead.Phase 2 Initial conversion-This phase includes much of the legwork of a conversion effort-setting up and launching the project, thoroughly evaluating the IFRS and US GAAP differences for specialised financial statement line items, evaluating accounting policy alternatives, selecting IFRS accounting policies, performing the initial conversion, and creating IFRS financial statements during the dual reporting period. In-depth assessments of operational issues, such as the IFRS impact on significant business contracts (e.g., financing, leasing, joint venture agreements), and income tax compliance and reporting issues also take place during initial conversion. Stakeholder communication should be a constant consideration throughout this phase.Phase 3 Integrate change-Critical to the conversi on process is incorporating IFRS changes into the day-to-day operations, processes, and systems of the business (known as embedding). This phase helps to ensure a smooth transition to the new reporting mannequin so the company can use its new IFRS language on a sustainable basis in a well-controlled environment as of the IFRS adoption date.The role of professional judgmentAlthough many accounting policies will be derived directly from IFRS standards and interpretations, the appropriate way to apply those standards or interpretations might not be obvious in all cases. Because IFRS is less prescriptive than US GAAP, there may be a wider range of acceptability under IFRS in certain areas. Therefore, sound, well-documented professional judgment becomes especially chief(prenominal) in an IFRS reporting environment.Management will need to exercise judgment to develop and apply accounting policies that faithfully present the economics of transactions and are decision-useful to the reader s of the financial statements. Selection of the most appropriate accounting policies is a scathing step, since that decision will impact the company for the foreseeable future. ceaseless dialogue with the companys independent accountants will leverage their IFRS expertise and ensure that, in principle, they agree with the companys new financial reporting policies. The independent accountants will also want to understand any related changes to internal controls and ensure that the changes are auditable. Keeping independent accountants involved in a timely expression will avoid potential pitfalls later in the conversion process.Implementation IssuesCompanies beginning to scope their IFRS conversions are often surprised by the replete(p) deal of disclosures, and how different they are from their national GAAP3. The data which is required by IFRS is not organism collected, even if it is collected the amount of data being collected is insufficient. According to an executive of BASDA , IFRS will hardly require any changes to the back office systems, whatever changes will be required would be on the reporting side as IFRS according to him focuses on reports.Organisations use Enterprise Resource Planning systems to prepare management accounts will be in a better position to the ones which use different systems for each office or business unit. Recalibration of ERP systems will be relatively at large(p) than to upgrade legacy systems. One of the biggest barriers to conversion identified by a survey conducted by PWC was the alignment of internal reporting systems with the external reporting systems.Looking at IFRS as only a change in reporting could turn out to be very expensive work for the organisation at a later date. The extent of changes which might be required will depend on the size of the business, the number of applications assembling financial data and the capabilities of the current applications. IFRS implementation could provide a good opportunity fo r firms to streamline their reporting systems and could provide a good weapons platform for making strategic improvements in the systems, processes and controls.As a lot of vendors have solutions for IFRS, technology will greatly help as an enabler for IFRS. It will also provide a great cost saving opportunity due to standardisation, improved communication, improved controls and better cash management. It concludes by telling us that technology change should not be underestimated and it will be critical for the firm to address the technology point of view early in the process as changes in the systems must be sustained on with a detailed understanding of the new accounting language.Impact of IFRS point of intersection to IFRS will greatly enhance an Indian entities ability to raise and attract foreign capital at a low cost. A popular accounting language, such as IFRS, will help Indian companies bench mark their performance with global counterparts.There will be escape from ninef old reports for global Indian companies that have to prepare their financial statements under aggregate GAAPs. With the knowledge of IFRS, the Indian Chartered Accountant would be globally acceptable. go across has shown that the conversion from Indian GAAP to IFRS requires significant efforts. The preparers, users and auditors continue to encounter practical implementation challenges. Conversion to IFRS is more than a mere technical exercise.The consequences are far wider than financial reporting issues and extend to various significant business and regulatory matters including compliance with debt covenants, structuring of ESOP schemes, training of employees, modification of IT systems and tax planning. Companies also need to communicate the impact of IFRS convergence to their investors to ensure they understand the translation from Indian GAAP to IFRS.IFRS and IndiaAs the capital markets become increasingly global in nature, more and more investors see the need for a commonpla ce set of international accounting standards. About 109 countries presently require or permit use of IFRS in preparation of financial statements in their countries. By 2011, the number is expected to reach 150.In India ICAI has issued a document titled Concept paper on convergence with IFRS in India to evaluate the need for Indian GAAP to change to IFRS. In the paper, the ICAI notes that as the world globalises, it has become imperious for India to make a formal strategy for convergence with IFRS with the impersonal of harmonise with globally accepted accounting standards.Keeping in view of the complex nature of IFRS, the ICAI in its concept paper has expressed the view that IFRS should be adopted for the public interest entities, banks and insurance entities and large surface entities from the accounting periods beginning on or after 1st April, 2011. The countries which have adopted IFRS have done so for similar type of entities.A few illustrative examples of fundamental changes that can impact wider business considerations have been discussed below.A comparison between IFRS Indian GAAPLet us now take a look at a few illustrative examples of the differences between IFRS and Indian GAAPRevenue RecognitionIFRS and Indian GAAP are broadly based on similar principles. IFRS provides more detailed guidance on recognition and measuring of revenue whereas Indian GAAP is a basic recognition standard. In absence of universal guidance under Indian GAAP, varied practices are being followed by corporate entities based on either legal form or substance of the transaction or past practices.An example would be the guidance on multiple-deliverable contracts especially on the determination of when transactions with multiple deliverables should be separated into components and with the way revenue gets allocated to the different components and focuses on economic substance of the transaction. It also requires revenue to be measured at the fair shelter of the consideratio n received or receivable.ConsolidationUnder IFRS, a parent is required to present consolidated financial statements, with limited exception, and presents a standalone financial statements only for a specific purpose. In comparison, Indian GAAP requires use of the consolidation standard when consolidation financial statements are prepared.Under IFRS, the final stage regarding whether or not to consolidate is premised on the power of a company has to govern the financial and operating policies of another, with consideration of risks and rewards where control is not apparent. In comparison, Indian GAAP follows a simple approach and requires consolidation if the parent entity has majority of voting rights or control over the composition of the notice of directors of governing body.Financial InstrumentsIFRS provides extensive guidance on identification, classification, recognition and measurement of financial instruments. In addition, it provides guidance on derecognition of financial instruments, hedge accounting and has extensive disclosure requirements. At present there is no comprehensive guidance on financial instruments under Indian GAAP, however, the ICAI has approved foundation of standards on financial instruments under Indian GAAP. However, the ICAI has approved introduction of standards of financial instruments similar to IFRS effective from 1st April, 2011.This will bring a fundamental shift from historical cost to fair value accounting resulting in potentially more volatility in the income statement. Certain difference within the financial liabilities and candour arenas are so significant that they may impact how a company choses to finance its operations.Some financial instruments considered as equity under Indian GAAP will need to be inured as debt when classification of these instruments as debt will not impact net assets and debt to equity relationships, but will also result in increased interest expense.OthersThe move to IFRS will provide ext ensive guidance and lead to fundamental change in many other areas, such as share-based payments or a change in accounting policy. For Example, a change in accounting policy will no longer be discretionary. Change to a new accounting policy, with limited exception, will be applied retrospectively with restatement of prior period financials.ConclusionWe understand that implementing IFRS is imperative for any organization. The earlier organizations recognise the need, opportunities and threats posed, the more beneficial it would be for the organization.By gathering the insight of people who have already experienced IFRS conversions and using tested, proven methods, a company can better focus its efforts. And by keeping abreast of the developing IFRS environment and utilizing the most up-to-date information and advisors, a company can avoid many of the pitfalls that plagued others in the past.