Every country has there own accounting policies and accounting standards. But in the past few decades, the global economic scenario has changed dramatically. Now there are transnational companies that operate in multiple nations. So now there is a requirement for a standard global standard. This is where the IFRS comes in. Let us learn more about it and the need of its convergence with Indian Accounting Standards.
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International Financial Reporting Standards (IFRS)
With the aim of forming one uniform accounting standard, a London based board known as the International Accounting Standards Board (IASB) issued International Financial Reporting Standards (IFRS). They are principle-based standards that outline the broad rules and regulations for financial reporting.
Currently, our global economy is extremely integrated. Companies raise capital from across the globe. They also market and sell their products in various countries. This results in them having tax liabilities in various countries as well. And so this has lead to a demand for a global standard for accounting.
The ultimate goal of the IFRS is to provide a common global language for global business via standardized accounting. So if a company has dealings in several countries it only publishes one set of financial statements that fulfill the statutory requirements of all the countries it operates in. Also if there is a global standard then it becomes much easier for users of these financial statements to compare them.
Broadly the IFRS consist of the following:
- 13 IFRS
- 28 International Accounting Standards (which were issued before the IFRS)
- 15 Interpretations of the IFRIC
- 9 Interpretations of the Standard Interpretation Committee (SIC)
With time these global standards are also being updated by the IASB to keep up with the modern practices. The ultimate goal is a global convergence but they have started by focusing on Europe. Today there are approximately 120 countries that have accepted the IFRS as their accounting standards. 90 of these countries are fully conformed with the IFRS, i.e. completely integrated. Among these 120 countries are the UK, Australia, Canada, Japan etc.
Convergence of IFRS and Indian AS
Indian Accounting Standards are formulated by the Accounting Standard Board (ASB) of the ICAI as notified by the Ministry of Corporate Affair. These standards are framed keeping in mind the economic environment and practices of India. They are made to suit the Indian companies and the disclosure requirements of the Indian government.
The IFRS, on the other hand, are made keeping global standards and environment in mind. Convergence would mean bridging the gap between the two, i.e the IFRS and the India AS. Convergence will involve alignment of the two sets of standards. The compromise is done by adopting the policies of the IFRS either fully or at least partially.
Following are the few benefits of Convergence.
Benefits of Convergence
1] Beneficial to the Economy
If the accounting standards are converged it will promote international business and increase the influx of capital into the country. This will help India’s economy grow and expand. International investing will also mean more capital for domestic companies as well.
2] Beneficial to Investors
Convergence is a boon for investors who wish to invest in foreign markets or economies. It makes it much easier for them to study and compare the financial statements of foreign companies. Since the financial statements are made using the same set of standards it is also easier for the investors to understand and analyze them.
3] Beneficial to the Industry
With globally accepted standards the industry can also surge ahead. So convergence is important for the industry as well. It will allow the industry to lower the cost of foreign capital. If companies are not burned by adopting two different sets of standards it will allow them easier entry into the market.
4] More TransparencyÂ
Convergence will benefit the users of the financial statements as well. It will make it easier for them to understand the financial statements. And this will generate better transparency and raise the confidence of the investors to invest funds.
5] Cost Saving
Firstly it will exempt companies from maintaining separate accounting books according to separate standards. This will save a lot of work hours and money for the finance department. And also planning and executing auditing will also become easier.
It will be especially helpful for those companies that have subsidiaries in many countries. And the cost of capital will also reduce since capital would be more accessible and easily available.
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Solved Question for You
Q: What are some of the difficulties of convergence with the IFRS?
Ans: There are some significant challenges of converging the IFRS and the Indian AS. Some of them are as follows,
- Other than the Accounting Standards, India has many rules and regulations to implement them. These rules will have to be updated as well.
- Accounting is done via software these days, like Tally, Oracle, etc. Convergence with IFRS means this software will have to be updated at great costs.
- Also, there is a lack of trained and efficient personnel. The accountants, auditors, etc will have to undergo training and learning programmes for the updated standards.
Is their any similarities between IFRS and Ind AS ?