International Financial Reporting Standards – In Indian Context- PART 1

Introduction

Over the past few years Indian corporate environment has been witnessing increasing number of cross border acquisitions and mergers. The average size and number of deals have increased at a phenomenal pace and this undoubtedly proves that the Indian corporate is functioning in a closely knit global economy. In this context the need for convergence of I-GAAP with IFRS can never be over-emphasized. IFRS is a set of accounting standards issued by IASB after thorough discussion with all stakeholders. IFRS is principle based and is adopted in more than 120 countries. In a dynamic business environment, where change is the order of day, the ability of IFRSs to capture the underlying economic reality of different transactions and arrangements has made it the most acceptable accounting standards to investor community and regulators across the world. India will join the growing list of countries that allow preparation of financial statements of various entities in accordance with IFRS. Ministry of Corporate Affairs has issued a roadmap for IFRS convergence. At the onset, public interest entities are required to comply with IFRS followed by other companies based on their net worth.

However the convergence with IFRS brings in a set of fresh challenges, major being, an increased use of fair value for measurement of assets and liabilities. The focus on IFRS is more towards getting balance sheet right and hence brings significant volatility in the income statement.

Benefits of Convergence with IFRS for Indian Companies

Incorporation of IFRS in to our financial reporting system and for that matter financial reporting system of any country brings with it a number of benefits. They are:

• Escape Multiple Reporting

Indian companies are listed on overseas stock exchange and have to prepare accounts with respect to GAAP followed in respective countries. Foreign companies having subsidiary in India have to prepare there accounts in order to meet overseas reporting. Convergence to IFRS by all Group entities will enable company’s managements to get all the components of the group on one financial reporting platform. This will eliminate the need for multiple reporting to different stock exchanges.

• Cost Of Capital

Convergence to IFRS will lower the cost of raising capital from the overseas market as many of the world's premier stock exchanges mandates financial reporting under IFRS. IFRS compliant financial statement invokes higher degree of trust and confidence among global investors and as a result expected rate of return (i.e. cost of funds from the viewpoint of companies raising funds in overseas markets) would not be high. Besides, the companies will no longer be required to convert their financial statements from local GAAP to IFRS.

• New Opportunities

Benefits of IFRS will not be restricted to Indian Corporates. In fact; it will open up a host of opportunities in the service sector. With a wide pool of accounting professionals, India can emerge as an accounting services hub for the global community. As IFRS is fair value focused, it will provide significant opportunities to professionals including accountants, valuer’s, actuaries, which in turn will boost the growth prospects for the KPO/BPO segment in India.

• Comparability

Financial statements of local entities can be easily and reliably compared with their global peers as it allows prospecting investors and stakeholders, in assessing the performance of entities accurately. It would be easy for the global / overseas investors to compare since financial reporting is done in a common language. FDI and FII’s are more comfortable with one global accounting language which can be understood globally and thus promote cross border investments.

• Benchmarking With Global Peers

It enables the companies to gain a broader and deeper understanding by facilitating the companies to set targets and milestones based on global environment, rather than merely local ones.