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What is Convergence of Accounting Standards?
What is IFRS?
Convergence of Indian accounting standards with IFRS
Role of ICAI in IND AS
Role of SEBI in IND AS
Role of Industry Associations
Advantages and Challenges after implementing IND AS
For better understanding of our topic. First of all, there is a need to introduce a a new word that is CONVERGENCE
MEANING of convergence: The
convergence of accounting standards refers to the goal of establishing a
single set of accounting standards that will be used internationally,
and in particular the effort to reduce the differences between the US
generally accepted accounting principles (USGAAP) and the International
financial reporting standards (IFRS)
Convergence of Indian accounting standards with International financial reporting standards (IFRS):
IFRS:
IFRS is a set of international
accounting standards stating how particular types of transactions and
other events should be reported in financial statements.
IFRS are generally principles-based standards and seek to avoid a rule-book mentality. Application of IFRS requires
exercise of judgment by the preparer and the auditor in applying
principles of accounting on the basis of the economic substance of
transactions.
IFRS are issued by the International Accounting Standards Board (IASB).
The term IFRS comprises IFRS issued by
IASB; IAS issued by IASC; and Interpretations issued by the Standing
Interpretations Committee (SIC) and the International Financial
Reporting Interpretations Committee (IFRIC) of the IASB.
Meaning of convergence with IFRS:
Convergence means to achieve harmony
with IFRSs; in precise terms convergence can be considered “to design
and maintain national accounting standards in a way that financial
statements prepared in accordance with national accounting standards
draw unreserved statement of compliance with IFRSs”, i.e., when the
national accounting standards will comply with all the requirements of
IFRS.
But convergence doesn’t mean that IFRS
should be adopted word by word, e.g., replacing the term ‘true &
fair’ for ‘present fairly’, in IAS 1, ‘Presentation of Financial
Statements’. Such changes do not lead to non-convergence with IFRS.
The reason behind convergence is:
As, Availability of essential financial
information about a company to its shareholders and other stakeholders
in accordance with internationally accepted financial norms is
considered as an integral and important part of good corporate
governance. To ensure this and to implement the G-20 commitment to
achieve a single set of high quality global accounting standards, the
Government has taken decision to achieve convergence of Indian
accounting standards with International financial reporting standards
(IFRS) in a phased manner in accordance with the roadmap suggested by
the Government.
Convergence in Indian Scenario:
With regard to India, the Ministry of
Corporate Affairs has committed to converge the Indian Accounting
Standards with the IFRS effective 1st April 2011. The convergence
process is picking up momentum with the credit going to the Ministry of
Corporate Affairs. The Ministry has extended its unstinted support and
guidance to the various regulatory and legal bodies that are
spearheading a smooth transition process. Laudably, the highest
authorities of the Indian Government have concluded that convergence of
Indian Accounting Standards with IFRS is very vital for the country to
take a lead role in the global foray.
Entities covered under convergence;
Keeping in view the complex nature of
IFRSs and the extent of differences between the existing ASs and the
corresponding IFRSs and the reasons therefore, the ICAI is of the view
that IFRSs should be adopted for the public interest entities from the
accounting periods beginning on or after 1st April, 2011.
Public interest entities:
With a view to determine which entities
should be considered as public interest entities for the purpose of
application of IFRSs, the criteria for Level I enterprises as laid down
by the Institute of Chartered Accountants of India4 and the definition
of ‘small and mediumsized company’ as per Clause 2(f) of the Companies
(Accounting Standards) Rules, 2006, as notified by the Ministry of
Company Affairs (now Ministry of Corporate Affairs) in the Official
Gazette dated December 7, 2006, were considered. The ICAI is of the view
that in view of the complexity of recognition and measurement
principles and the extent of disclosures required in various IFRSs, and
the fact that about four years have elapsed since the ICAI laid down the
criteria for Level I enterprises, as far as the size is concerned, it
needs a revision. Accordingly, the ICAI is of the view that a public
interest entity should be an entity:
(i) Whose equity or debt securities are
listed or are in the process of listing on any stock exchange, whether
in India or outside India; or
(ii) Which is a bank (including a cooperative bank), financial institution, a mutual fund, or an insurance entity; or
(iii) Whose turnover (excluding other income) exceeds rupees one hundred crore in the immediately preceding accounting year; or
(iv) which has public deposits and/or
borrowings from banks and financial institutions in excess of rupees
twenty five crore at any time during the immediately preceding
accounting year; or
(v) which is a holding or a subsidiary of an entity which is covered in (i) to (iv) above.
Role of ICAI in convergence:
India, though being an important emerging economy in the world, is yet to adopt the IFRS. Internationally, in so
Far as cross-border investments are concerned, a non-IFRS compliant country is perceived as an additional risk factor.
After a series of discussion with
various legal and regulatory authorities, the Ministry of Corporate
Affairs has committed itself for convergence of Indian entities with
IFRS from April 2011. ICAI was given the responsibility of formulating
the convergence process and ensure smooth convergence. For this purpose, the Accounting Standard Board (ASB) of ICAI constituted a Task
Force in the year 2006 to explore the approach for convergence with IFRS and lay down the road map for convergence with IFRS. Since then, ICAI has been relentlessly making extensive analysis of various phases the convergence process would go through.
It has identified the legal and regulatory requirements arising out of
convergence with IFRS. ICAI has also recommended changes in the
respective Acts, guidelines and other regulatory provision related to
RBI, SEBI, NACAS and IRDA and has submitted its recommendations to the
respective authorities. This would eventually pave the way to a smooth
transition process.
In addition, the ICAI Accounting Board has pointed out several national issues requiring debates and conclusions that would enable the convergence process to meet the deadline.
Role Of SEBI:
SEBI has been pro-actively involved in the process of convergence of Indian Accounting Standards with IFRS.
As a step towards encouraging
convergence with IFRS, listed entities having subsidiaries have been
allowed an option to submit consolidated accounts as per IFRS.
SEBI has also been facilitating interaction with the IASB through meetings, periodically.
SEBI has set up a group under the
chairmanship of Shri Y.H. Malegam with representation from RBI, ICAI,
accounting and auditing firms, and industry to discuss and submit
comments on the exposure drafts issued by the IASB in an objective and
streamlined manner. Since formation in February 2010, the group has had
four meetings and has provided comments to
IASB on the following exposure drafts:
a. Management Commentary (proposed new IFRS)
b. Financial Instruments: Amortised Cost and Impairment (IFRS9)
c. Conceptual Framework for Financial Reporting
d. Fair Value Option for Financial Liabilities (proposed new IFRS replacing IAS 39)
Role of Industry Associations:
Industry associations such as Federation
of Indian Chambers of Commerce and Industry (FICCI), Associated
Chambers of Commerce (Assocham) and Confederation of Indian Industries
(CII) can also play an important role in preparing their constituents for the adoption of the IFRSs in the following ways:
(i) Holding round-tables on the Exposure Drafts of the IFRSs so that the views of the Association can be sent to the IASB/ICAI.
(ii) Conducting seminars/workshops on IFRSs for the industry participants to provide them appropriate training.
(iii) Provide industry-specific forums to their constituents to discuss the industry specific issues in implementation of IFRSs.
Advantages of convergence:
a. Improves investor confidence across the world with transparency and comparability
b. Improves inter-unit/ inter-firm/inter-industry comparison
c. Group consolidation made easy with same standard by all companies in group wherever located
d. Acceptability of financial statements
across all stock exchanges, which facilitates entry of any Indian
company to any stock exchange across the globe.
e. A business can present its financial statements on the same basis as its foreign competitors.
Challenges envisaged in convergence:
Change to regulatory environment:For the success of convergence in India, certain regulatory amendment is required.
For example, The Companies Act (Schedule
VI) prescribes the format for presentation of financial statements for
Indian companies, whereas the presentation requirements are
significantly different under IFRS. So, the companies act needs to be
amended in line with IFRS.
Lack of Preparedness
Corporate India and accounting
professionals need to be trained for effective migration to IFRS.
Additionally auditors would need to train their staff to audit under
IFRS environment
Significant cost
Significant one-time costs of converting
to IFRS (including costs of adapting IT systems, training personnel and
educating investors)
Impact on financial performance:
Due to the significant differences
between Indian GAAP and IFRS, adoption of IFRS is likely to have a
significant impact on the financial position and financial performance
of most Indian companies
Communication of Impact of IFRS to investors:
Companies also need to communicate the
impact of IFRS convergence to their investors to ensure they understand
the shift from Indian GAAP to IFRS.
Implementation Phase in India:
The applicability of International
Financial Reporting Standards for convergence of Indian entities would
be in several phases as the issues involved in one-shot adoption are
complex.
Hence, in the first phase, ICAI has
submitted a suggested list of companies that come under different
parameters for adoptionn of IFRS standards. These entities include
companies listed with BSE / NSE Sensex, insurance companies, mutual
funds, entities with a capital base of over 50 million dollars outside
India, companies that are publicly accountable with an aggregate
borrowing of over Rs. 1,000 crores and such others.
Accounting Standards after convergence:
A set of accounting standards notified by the Ministry of Corporate Affairs which are converged with International Financial Reporting Standards (IFRS) which are now termed as IND AS’s.
These accounting standards are formulated by Accounting Standards Board of Institute of Chartered Accountants of India.
Now India will have two sets of accounting standards viz. existing
accounting standards under Companies (Accounting Standard) Rules, 2006
and IFRS converged Indian Accounting Standards(Ind AS). The Ind AS are named and numbered in the same way as the corresponding IFRS.
Thirty five Indian
Accounting Standards converged with International Financial Reporting
Standards (henceforth called IND AS) are being notified by the Ministry
and placed on the website. Students can check that out at MCA website
i.e. www.mca.gov.in
Role of ICAI as an educator/trainer:
With a view to prepare its existing and
prospective members for the impending adoption of the IFRSs from 1st
April, 2011, the ICAI should formulate strategies with regard to the
following:
(i) To revise the syllabi of the pre-qualification Chartered Accountancy Course to include IFRSs as a part of its curriculum;
(ii) The Continuing Professional Education (CPE) Committee and the Committee for Members
in Industry should hold intensive workshops on IFRSs to train the
members in practice as well as in industry. In order to encourage
members to partiacipate in the IFRS-specific workshops, the ICAI may
consider laying down minimum CPE hours requirements in this regard.
(iii) Preparation of educational
material to guide its members on various intricacies involved in the
implementation of IFRS. The educational material may focus on those
areas which are new compared to the existing Accounting Standards.
Conclusion:
Herby, it is concluded that for better
accounting practices and to make Indian chartered accountancy more
global and better, Convergence of accounting standards is important
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