International

Financial Reporting
Standards (IFRS)
Compiled by: Yogesh Bhanushali
Internal Guidance: Dr. Shama Shah
Introduction:
International Financial Reporting Standards (IFRS) was issued by International
Accounting Standards Board (IASB). The International Standard setting
process began long ago as an effort to Standardize and make easier to adopt
by the developing and smaller nations which feel difficult to set and establish
their own standards on Accounting and Reporting. The importance of having
one standard was felt by the regulators, investors, large entities and audit firms
as the business becomes more global. Convergence with IFRS issued by
IASB has recently gained momentum all over the world. So far 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. Due to the
complex nature of IFRS, Institute of Chartered Accountants of India (ICAI) in
its 2006 concept paper expressed its view that IFRS should be adopted from
01.04.2011. Implementation will be done in a phased manner. Adoption of
IFRS is mandatory for the following entities:
1. Public and Private Companies listed and in the process of listing.
2. Private Companies who have issued debt instruments in a public
market and.
3. Private companies which hold assets in fiduciary capacity (ex: Banks
and Insurance companies)
Overview of IFRS

What is IFRS?

IFRS stands for “International Financial Reporting

Standards” and includes International Accounting
Standards (IASs) until they are replaced by any IFRS and
interpretations originated by the IFRIC or its predecessor, the former
Standing Interpretations Committee (SIC).
IFRSs are developed and approved by IASB (International Accounting
Standard Board).
These are standards for reporting financial results and are applicable to
general purpose financial statements and other financial reporting of all
profit oriented entities. Profit-oriented entities includes those engaged in
commercial, industrial, financial and similar activities, whether organized in
corporate or in other forms also includes mutual insurance companies,
other mutual co-operative entities, etc.
Upon its inception the IASB adopted the body of International Accounting
Standards (IASs) issued by its predecessor and as such IFRS includes IAS
until they are replaced by any IFRSs.
One of the basic features of IFRS is that it is a principle-based standard
rather than rule based.
The IFRS for SME represents a simplified set of standards with disclosure
requirements reduced, methods for recognition and measurement
simplified and topics not relevant to SME's eliminated.

Why IFRS?

IFRS are increasingly being recognised as Global

Reporting Standards for financial statements.
'National GAAP' is becoming rare.
As global capital markets become increasingly
 integrated, many countries are moving to IFRS.
More than 100 countries such as European Union, Australia, New Zealand
and Russia currently permit the use of IFRS in their countries.
The SEC has allowed the use of IFRS without reconciliation to US GAAP in the
financial reports filed by foreign private issuers, thereby, giving foreign
private issuers a choice between IFRS and US GAAP. SEC is proposing that
the US issuers begin reporting under IFRS from 2014 (actually from 2012, if
requirements for three year comparable are considered), with full
conversion to occur by 2016 depending on size of the entity. This is a
milestone proposal that will bring almost the entire world on one single,
uniform accounting platform i.e. IFRS.

IFRS in India

At its 269 meeting the Council of ICAI has decided that public interest
entities such as listed companies, banks, insurance companies and large-
sized organizations to converge with IFRS for accounting period
commencing on or after 1 April, 2011.
For Small and Medium size Entities i.e. other than public interest entities,
ICAI had proposed that a separate standard may be formulated based on
the IFRS for Small and Medium-sized Enterprises issued by the IASB after
modifications, if necessary.
Even MCA had expressed the view that India should converge to IFRS w.e.f 1
April, 2011.
With an objective to ensure smooth transition to IFRS from 1 April, 2011,
ICAI is taking up the matter of convergence with IFRS with National Advisory
Committee on Accounting Standards (NACAS) established by the Ministry of
Corporate Affairs, Government of India and other regulators including
Reserve Bank of India (RBI), Insurance Regulatory and Development
Authority (IRDA) and the Securities and Exchange Board of India (SEBI).
 Recent news article highlights that Core Group for IFRS convergence formed
by MCA has recommended convergence to IFRS as under:

-Phase I (opening balance sheet as at 1 April, 2011)*:-

1. Companies which are part of BSE - Sensex 30 and NSE - Nifty 50;
2. Companies whose shares or other securities are listed outside India;
3. Companies whether listed or not, having net worth of more than Rs.
1,000 crores.

- Phase II (opening balance sheet as at 1 April, 2013)*:-

Companies not covered in Phase 1 and having net worth exceeding Rs. 500
crores.

- Phase III (opening balance sheet as at 1 April, 2014)*:

Listed companies not covered in earlier phases.

*If the financial year of a company commences at a date other than 1 April,
then it shall prepare its opening balance sheet at the commencement of
immediately following financial year.

- Separate Road Map would be prepared for banking and insurance

companies.

The issue of convergence with IFRS has gained significant momentum in

India recently.

Benefits of adopting IFRS

It would benefit the economy by increasing

growth of international business.
It would encourage international investing and
thereby lead to more foreign capital inflows
into the country.
 Investors want the information that is more
relevant, reliable, timely and comparable across
the jurisdictions.
IFRS would enhance the comparability between
financial statements of various companies across the globe.
Better understanding of financial statements would benefit investors who
wish to invest outside their own country.
The industry would be able to raise capital from foreign markets at lower
cost if it can create confidence in the minds of foreign investors that their
financial statements comply with globally accepted accounting standards.
It would reduce different accounting
requirements prevailing in various countries there by
enabling enterprises to reduce cost of compliances.

It would provide professional opportunities to serve

international clients.
It would increase their mobility to work in different
parts of the world either in industry or practice.

IFRS challenges

Increase in cost initially due to dual reporting

requirement which entity might have to meet till
full convergence is achieved.
Unlike several other countries, the accounting
framework in India is deeply affected by laws and
regulations. Changes may be required to various
regulatory requirements under The Companies
Act, 1956, Income Tax Act, 1961, SEBI, RBI, etc.
so that IFRS financial statements are accepted
generally.
 If IFRS has to be uniformly understood and consistently applied, all
stakeholders, employees, auditors, regulators, tax authorities, etc would
need to be trained.
Entity would need to incur additional cost for modifying their IT systems
and procedures to enable it to collate data necessary for meeting the new
disclosures and reporting requirements.
Differences between Indian GAAP and IFRS may impact business decision /
financial performance of an entity.
Limited pool of trained resource and persons having expert knowledge on
IFRSs.

Underlying assumptions

a) Accrual basis:
Under this basis, the effects of transactions and other events are recognised
when they occur (and not as cash or its equivalent is received or paid) and
they are recorded in the accounting records and reported in the financial
statements of the periods to which they relate.

b) Going concern:
The financial statements are normally prepared on the assumption that an
entity is a going concern and will continue in operation for the foreseeable
future. Hence, it is assumed that the entity has neither the intention nor the
need to liquidate or curtail materially the scale of its operations.
If such intention or need exists, the financial statements may have to be
prepared on a different basis and, if so, the basis used is disclosed.
Qualitative characteristics of IFRS financial statements

These are the attributes that make the information in financial statements
useful to their users. The four principal qualitative characteristics are:

a) Understandability:
An essential quality of the information provided in financial statements is
that it is readily understandable by users with reasonable knowledge of the
business and economic activities. However, information about complex
matters that should be included in the financial statements because of its
relevance to the economic decision-making needs of users should not be
excluded merely on the grounds that it may be too difficult for certain users
to understand.

b) Relevance:
The users should find the information contained in the financial statements
as a useful relevant tool in taking important economic decisions on the
basis of past evaluations and projecting future predictions on past basis.
Information about financial position and past performance is frequently
used as the basis for predicting future financial position and performance
and other matters in which users are directly interested.
The ability to make predictions from financial statements is enhanced,
however, by the manner in which information on past transactions and
events is displayed. For example, the predictive value of the income
statement is enhanced if unusual, abnormal and infrequent items of income
or expense are separately disclosed.
The relevance of information is affected by its nature and materiality.

c) Reliability:
Information in financial statements is reliable if it is free from material error
and bias and can be depended upon by users to represent events and
 transaction faithfully. Information is not reliable if it is purposely designed
to influence users' decision in a particular direction.
The reliability of information depends upon faithful representation,
substance over form, neutrality, prudence and completeness.

d) Comparability:
Users must be able to compare the financial statements of an enterprise
over time so that they can identify trends in its financial position and
performance. Users must also be able to compare the financial statements
of different enterprises. Disclosures of accounting policies are essential for
comparability.

Constraints on relevant and reliable information

Following are the constraints on relevant and reliable information:

i Timeliness:
To have the reporting information relevant it is important that the reporting
information should be on time, undue delay in the reporting information
may lose its relevance. Management may need to balance the relative merits
of timely reporting and the provision of reliable information. In achieving a
balance between relevance and reliability, the overriding consideration is
how best to satisfy the economic decision-making needs of users.

ii Balance between benefit and cost:

The benefits derived from information should exceed the cost of providing
it. The balance between benefit and cost is a pervasive constraint rather
than a qualitative characteristic. Furthermore, the costs do not necessarily
fall on those users who enjoy the benefits. Benefits may also be enjoyed by
users other than those for whom the information is prepared.
iii Balance between qualitative characteristics:
Generally the aim is to achieve an appropriate balance among the
characteristics in order to meet the objective of financial statements. The
relative importance of the characteristics in different cases is a matter of
professional judgement.

True and fair view/fair presentation

Application of the principal characteristics and of appropriate accounting
standards normally results in financial statements that convey a true and fair
view of, or as presenting fairly such information. Financial statements are
frequently described as showing a true and fair view of, or as presenting fairly,
the financial position, performance and changes in financial position of an
entity.

Contents of IFRS financial statements

Complete set of IFRS Financial Statements comprises of:

a) a statement of financial position as at the end of the period (generally

termed as “Balance Sheet”);
b) a statement of comprehensive income for the period (generally termed as
“Income Statement”);
c) a statement of changes in equity for the period;
d) a statement of cash flows for the period;
e) notes, comprising a summary of significant accounting policies, and other
explanatory information; and
f) a statement of financial position as at the beginning of the earliest
comparative period when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its financial
statements, or when it classifies items in its financial statements.
An entity may use titles for the statements other than those used in this
standard.

Statement of Financial Position (generally termed as “Balance Sheet”)

 No specific format prescribed for Statement of Financial Position.

 Minimum line of items to be presented in the statement of financial position
that are prescribed under IFRS are:
- Property, plant and equipment (PPE);
- Investment property;
- Intangible assets;
- Financial assets such as investments;
- Investments accounted for using the equity method;
- Biological assets;
- Inventories;
- Trade and other receivables;
- Cash and cash equivalents;
- The total of assets classified as held for sale and assets included in
disposal groups classified as held for sale in accordance with IFRS 5
Non-current Assets Held for Sale and Discontinued Operations;
- Trade and other payables;
- Provisions;
- Financial liabilities;
- Tax liabilities or advance tax (to be disclosed net of liabilities or advance
tax as the case may be);
- Deferred tax liabilities and assets (to be disclosed net of liabilities or
assets as the case may be);
- Non-controlling interest presented within equity; and
- Issued capital and reserves attributable to owners of the parent.
 An entity shall present additional line items, headings and subtotals in the
statement of financial position when such presentation is relevant to an
understanding of the entity's financial position.
 An entity shall present current and non-current assets and current and
noncurrent liabilities as separate classification in its statement of financial
position except when a presentation based on liquidity provides information
that is reliable and more relevant. When that exception applies, an entity
shall present all assets and liabilities in order of liquidity.
 An entity shall disclose the amount expected to be recovered or settled after
more than twelve months for each asset and liability line item that combines
amount expected to be recovered or settled:
- no more than twelve months after the reporting period, and - more than
twelve months after the reporting period.
 An entity shall classify an asset or a liability as current asset or current
liability when it expects to realise the asset, or intends to sell or consume
the asset or it expects to pay liability within twelve months after the
reporting period.
 An entity shall classify all other assets or liabilities as non-current.

Statement of comprehensive Income (generally termed as “Income Statement”)

 An entity shall present all items of income and expense recognised in a

period:
- in a single statement of comprehensive income, or
- in two statements: a statement displaying components of profit or loss
(separate income statement) and a second statement beginning with
profit or loss and displaying components of other comprehensive
income (statement of comprehensive income).
 No specific format prescribed for Statement of comprehensive income
statement
 Minimum line of items to be presented in the statement of financial
position is prescribed:
i Revenue
ii Finance costs
iii Share of profit or loss of associates and joint venture accounted for
using the equity method
iv Tax expenses
v A single amount comprising the total of:
- the post tax profit or loss of discontinued operations and
- the post-tax gain or loss recognised on the measurement to fair
value less costs to sell or on the disposal of the assets or disposal
group(s) constituting the discontinued operation
vi Profit or loss;
vii Each component of other comprehensive income classified by nature
viii Share of the other comprehensive income of associates and joint
ventures accounted for using the equity method; and
ix Total comprehensive income.
 An entity shall disclose the following items in the statement of
comprehensive income as allocations for the period:
- profit or loss for the period attributable to:
i non-controlling interests, and
ii owners of the parent
- total comprehensive income for the period attributable to:
i non-controlling interests, and
ii owners of the parent
 An entity shall present additional line items, headings and subtotals in
the statement of comprehensive income and the separate income
statement (if presented), when such presentation is relevant to an
understanding of the entity's financial performance.
 An entity shall not present any items of income or expense as
extraordinary items, in the statement of comprehensive income or the
separate income statement (if presented), or in the notes.
 An entity shall recognise all items of income and expense in a period in
profit or loss unless an IFRS requires or permits otherwise.
 As regards the other comprehensive income for the period an entity shall
disclose the amount of income tax relating to each component of other
comprehensive income, including reclassification adjustments, either in
the statement of comprehensive income or in the notes.
 Components of other comprehensive income can be presented either net
of related tax effects or before related tax effects with one amount shown
for the aggregate amount of income tax relating to those components.
 An entity shall disclose reclassification adjustments relating to
components of other comprehensive income.
 When items of income or expense are material, an entity shall disclose
their nature and amount separately e.g. write-downs of inventories to net
realisable value or of property, plant and equipment to recoverable
amount, as well as reversals of such write-downs, discontinued
operations, other reversals of provisions, etc.
 An entity shall present an analysis of expenses recognised in profit or
loss using a classification based on either their nature or their function
within the entity, whichever provides information that is reliable and
more relevant.
 If analyzed by nature of expense method an entity aggregates expenses
within profit or loss according to their nature e.g. depreciation, purchases
of materials, employee benefits, etc. An example of classification using
the nature of expense method is as follows:
 Revenue X

Other income X

Changes in inventories of finished goods and work in progress X

Raw materials and consumables used X

Employee benefits expense X

Depreciation and amortization expense X

Other expenses X

Total expenses (X)

Profit before tax X

 If analyzed by function of expenses or cost of sales method an entity

classifies expenses according to their function. An example of
classification using the function of expense method is as follows:

Revenue X

Cost of sales (X)

Gross profit X

Other income X

Distribution costs X

Administrative expenses (X)

Other expenses (X)

Profit before tax X

 If expenses are disclosed by function, disclose additional information on

the nature of expenses which should include depreciation and
amortization expense and employee benefit costs.
Statement of Changes in Equity

 An entity shall present a statement of changes in equity showing in the

statement:
i total comprehensive income for the period, showing separately the total
amounts attributable to owners of the parent and to non-controlling
interests;
ii for each component of equity, the effects of retrospective application or
retrospective restatement recognised in accordance with IAS 8; and
iii for each component of equity, a reconciliation between the carrying
amount at the beginning and the end of the period, separately disclosing
changes resulting from:
- Profit or loss;
- Each item of other comprehensive income and;
- Each item of income or expense directly recognized in equity such as
revaluation of non-current assets, fair value adjustment of hedging
instruments, currency translation reserves, revaluation of available for
sale investments;
- Effect of change in accounting policy directly recognized in equity and
other correcting errors as permitted under IAS 8;
- All movements in equity such as additional shares issued, buy back or
reduction of capital;
- Changes in ownership interests in subsidiaries that do not result in a
loss of control.
 An entity should disclose either in the statement of changes in equity or
in the notes, the amount of dividend recognised as distribution to the
owners during the period and related amount per share.
Statement of Cash Flows

The statement of cash flows shows how changes in statement of financial

position and income accounts affect cash and cash equivalents, and breaks the
analysis down to operating, investing, and financing activities.

All enterprises that prepare financial statements in conformity with IFRSs are
required to present a statement of cash flows. The statement of cash flows
analyses changes in cash and cash equivalents during a period.

An entity shall prepare a cash flow statement in accordance with the

requirements of IAS 7 “Statement of Cash Flows” and shall present it as an
integral part of its financial statements for each period for which financial
statements are presented. Information about the cash flows of an entity is
useful in providing users of financial statements with a basis to assess the
ability of the entity to generate and utilise cash and cash equivalents.

An entity shall report cash flows from operating activities using either:

a. the direct method, whereby major class of gross cash receipts and cash
payments are disclosed; or
b. the indirect method, whereby profit or loss is adjusted for the effects of
transactions of a non-cash nature, any deferrals or accruals of past or
future operating cash receipts and payments, and items of income or
expense associated with investing or financing cash flows.

Notes:

 Notes shall present information about the basis of preparation of the

financial statements and specific accounting policies used.
 Disclose the information required by IFRSs that is not presented elsewhere
in the financial statements and
 Provide information that is not presented elsewhere in the financial
statements but is relevant to understanding any of them.
 An entity shall present notes in the systematic manner. An entity shall
cross reference each item in the statement of financial position and of
comprehensive income and in the statements of changes in equity and of
cash flows to any related information in the notes.
 An entity shall disclose:
- the domicile and legal form of the entity, its country of incorporation
and the address of its registered office (or principal place of business,
if different from the registered office);
- a description of the nature of the entity's operations and its principal
activities;
- the name of the parent and the ultimate parent of the group; and
- if it is a limited life entity, information regarding the length of its life.
 An entity may present notes providing information about the basis of
preparation of the financial statements and specific accounting policies
as a separate section of the financial statements.
 An entity normally presents notes in following order:
- statement of compliance with IFRSs
- summary of significant accounting policies applied
- supporting information for items presented in the statements of
financial position and of comprehensive income, in the separate
income statement in the order (if presented), and in the statements of
changes in equity and of cash flows, in which each statement and
each line item is presented; and - other disclosures, including:
- contingent liabilities (see IAS 37) and unrecognised contractual
commitments, and
- non-financial disclosures e.g. the entity's financial risk management
objectives and policies.
 An entity shall disclose in the summary of significant accounting policies:
i the measurement basis (or bases) used in preparing the financial
statements, and
 ii the other accounting policies used that are relevant to the
understanding of the financial statements.
 An entity shall disclose the judgements that management has made in
the process of applying the entity's accounting policies and that have the
significant effect on the amounts recognized in the financial statements.
 An entity shall disclose information about the assumptions it makes
about the future and other major sources of estimation of uncertainty at
the end of the reporting period, that have a significant risk of resulting in
a material adjustments to the carrying amount of those assets and
liabilities. The notes shall include the details of:
- their nature;
- their carrying amount as at the end of the reporting period.
 The standard does not require an entity to disclose budget information or
forecasts in making the disclosure.
 An entity shall disclose in the notes:
- the amount of dividends proposed or declared before the financial
statements were authorized for issue but not recognized as a
distribution to owners during the period and the relevant amount per
share.
- the amount of any cumulative preference dividends not recognized.
Major differences in Indian GAAP and IFRS

The major focus of IFRS is on getting the balance sheet right. This can bring
significant volatility in the income statement. There are quite a lot of
differences between the Indian GAAP and IFRS with respect to the presentation
of financial statements, disclosure requirements, and accounting policies: it is
difficult to summarize all the differences here. However a few of the major
differences are presented here.

SUBJECT IFRS INDIAN GAAP

Components of Comprises of Comprises of

Financial • Statement of Financial Position • Balance sheet
Statements • Statement of Comprehensive • Profit and Loss A/c
Income
• Cash flow statement
• Statement of Cash flow
• Notes to Accounts
• Notes to Accounts
• Statement of Changes in Equity
Format of IAS 1 prescribes the format of income According to the format prescribed in
Income statement. Schedule VI to the Companies Act
Statement 1956, Banking Regulation Act for
Banks etc.

Statement of Mandatory for all entities Exempted for Level 3 entities as

Cash Flows prescribed by ICAI.

Indian GAAP requires extraordinary

items to be presented in the profit
IFRS prohibits the presentation of and loss statement of the entity
Presentation of
extraordinary items in the statement distinct from the ordinary income
extraordinary
of comprehensive income or in the and expenses for the period. As a
items
notes. result, extraordinary items are
considered to determine the profit /
loss for the period.

Dividends Dividends declared after the end of

proposed after the reporting period but before the Dividends declared after the end of
the reporting period but before the
the end of the financial statements are authorised financial statements are approved
reporting period for issue are not recorded as liability are recorded as liability in the
in the financial statements. financial statements.

Depreciation Allocated on a systematic basis to Depreciation is based on the higher

rates each accounting period during the estimate of useful life of the asset, or
useful life of the asset. the rates prescribed by Schedule VI
of The Companies Act 1956.

Change in the Treated as a change in the Treated as a change in the

depreciation accounting estimate and hence is accounting policy and is accounted
method accounted for prospectively. for all the relevant previous years.
Any excess/deficit in the case of this
kind of recalculation must be
adjusted in the period in which the
change is affected.

Entire class to be If an item of property, plant and An entire class of assets can be
re-valued equipment is re-valued, the entire revalued, or selection of assets for
class of assets to which that asset revaluation can be made on a
belongs should be re-valued. systematic basis.
Functional and Functional currency is the currency No concept of functional currency.
foreign currency of the primary economic
environment in which the entity
operates. Functional and
presentation currencies may be
different. The standard contains
detailed guidance on this.

Goodwill Goodwill is not amortised under IAS AS 14 provides that goodwill arising
38 but is subject to annual on amalgamation in the nature of
impairment test under IAS 36. purchase is amortised over a period
of 5 years.
Measurement of Are measured at cost only.
Can be measured at cost or revalued
intangible assets
amount.
CONCLUSION:

Irrespective of various challenges, adoption of IFRS in India has significantly

changed the contents of corporate financial statements as a result of:

More refined measurements of performance and state of affairs, and

Enhanced disclosures leading to greater transparency.

With the rapid liberalization process experienced in India over the past decade,
there is now a huge presence of multinational enterprises in the country.
Furthermore, Indian companies are also investing in foreign markets. This has
generated an interest in Indian GAAP by all concerned. In this context, the role
of Indian accounting standards, which are becoming closer to IFRS, has
assumed a great significance from the point of view of global financial
reporting.

Indian companies using the Indian accounting standards are experiencing fewer
difficulties accessing international financial markets, as Indian accounting
standards are becoming closer to IFRS. Indian standards are expected to
converge even further in the future, especially after the challenges mentioned in
study are addressed over the next few years.