IA - IFRS

MODULE - 1

Key Divergence in GAAP and IFRS Systems�

Implementation of IFRS all of a sudden will ask for a drastic change in the whole financial statement process.

The two systems are different extensively in policies and process.

This is a challenging issue as to bring in awareness about the new system in a fast paced process is impractical.

Hence the India is going in for a phased out process of IFRS adoption from April 2012.

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1. Guidance and Training on the IFRS�

• At present India has a serious drawback; first is that IFRS training is not widespread in India and also it's not a part of the Business curriculum in colleges.
• In order to facilitate a smooth transition the accounting professionals are to be trained in IFRS and its application.
• ICAI and international business houses are trying to overcome this challenge by conducting awareness workshops, seminars and training classes.

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2. Statutory and Regulatory Concerns�

• At present various legal and other regulators are controlling the reporting requirements in India and their requirements make other laws ineffective.
• IFRS does not acknowledge such interference in its course.
• This is a challenging aspect which are currently looked into and addressed by the respective regulators.

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3. Tax Assessments�

• IFRS implementation will affect goods that are traded in the financial statements and therefore the assessment of tax levied on each item will also has to undergo adjustments. Thus the taxation regulations should tackle the handling of tax accountability while shifting from Indian GAAP to IFRS.

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4. Fair Value Measurement�

• IFRS uses fair value as a base measurement while valuing many items in the financial statements.
• This will bring a lot of unpredictability and subjectivity to the financial reports while it involves a lot of sweat and sound judgment to determine and ascertain the fair value which calls for the use of valuation experts.

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5. Contract Renewals or Re negotiations�

• Many corporate agreements will have to be either quashed altogether or a need to sit down and re negotiate on clauses will be a certainty if a country has to go for IFRS as its clauses are very different.
• But if the country's trade volume is as big as that of US or India this issue can become a irritation.

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• Indian policy makers, ICAI and regulatory bodies are taking various positive steps to assure a smooth convergence process
• if the country is positive towards - will be a systematic and smooth transition

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CONCLUSION�

• As the world gears up for embracing IFRS there is an urgent need to incorporate it in the business curriculum as creating awareness is the best way to win the confidence of investors, creditors and market players.
• Transparent and comparable financial statements will allow investor confidence and helps in positive decision making also.

CONCLUSION

• Countries and business will benefit too as this will ensure free flow of funds and direct investments in other economies.
• Liberalized and open economies are becoming the need of the hour as the concept of one world one economy is gaining strength to overcome economic slowdown.
• IFRS is undoubtedly a tough yet right step in this direction.

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Transnational Reporting

• Definition of Term Transnational:

Extending or operating across national boundaries

• Transnational Company:

A commercial enterprise that operates substantial facilities, does business in more than one country and does not consider any particular country its national home. They are able to maintain a greater degree of responsiveness to local markets.

• E.g, GOOGLE�

Transnational Reporting

• In financial reporting, which uses transnational means, the report is for the purpose of regulatory decisions, investment and lending.
• The various jurisdictions have certain requirements, which have to be met, in order to become valid. This includes restatements, reconciliations and adjustments.
• There is a need to ensure that international convergence and consistency exists in the many standards of accounting.
• The information obtained is necessary for providing management with information, which is useful in making effective and efficient decisions.
• There are various parties, which benefit from financial reports including; creditors, lenders and investors.

Need for Transnational Reporting�

• The expanding horizon of business activity in recent years particulars as a consequences of opening up of economies has resulted in expansion in world trade.
• Rapid growth in international capital market
• Increase of cross border merger and acquisition

CONT….

Need for Transnational Reporting

• Predominance of MNC
• Reporting to existing and new investors spread world wide
• Companies entering into foreign capital to list their securities in to foreign stock exchanges
• Submission of reports as per requirements of foreign securities exchanges

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Transnational Reporting - Complexities�

1. Language and currency
2. Accounting principles
3. Disclosure requirement
4. Audit requirement

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Language and currency

• An enterprise would generally prepare its financial reporting in the language that its local investors would understand,
• Similarly a company listed on stock exchange which has different language than the companies reporting have to send translated version of their financial statements reports.
• In the same way reporting companies also find difficulties since very companies has unique currency.

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Accounting Principles

• The most serious problem the reporting company faces is in contemplating the accounting principles of another country.
• For eg Indian company would prepare its financial statement in accordance with Indian Companies Act 1956 and in accordance with Indian GAAP. Therefore, US investors would find difficult to understand further certain information would be lacking as required by USGAAP.

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Disclosure requirement

• Disclosure requirement is essential for proper functioning of capital market.
• Therefore, it is utmost requirement of the company to disclose all required information in the financial statement to enable the investors to take appropriate decision.
• However the problem is that every nation has different disclosure requirement and so reporting company finds it difficult to cope with different disclosure requirement.

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Audit requirement

• The function of audit is to lend credibility to financial statement.
• In order to do so auditing professionals itself need a set of well defined audit standards. This is particular so when financial statements are prepared in one country and used by users in another country. A great deal of diversity prevails in the international audit environment.
• However as we move towards harmonization and as international standard acquires authority, auditors will have to conform the requirements of international standards of auditing.

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Thank You