CHAPTER 1

INTRODUCTION

1.1: PROLOGUE

As we need a language to communicate with others, likewise, business requires

a language to communicate with its owners, managers and other stakeholders.
This is called accounting language. Accounting is a "business language" which
helps in informing the financial results of an enterprise to owners, managers and
other stakeholders by financial statements prepared by enterprises. Accounting
is also held as the soul of a business as it is utterly difficult to carry on any
business without proper accomplishment of its affairs (Praveen, 2009).
The accounting process requires proper attention and regulation because if it is
not properly regulated then it can mislead the owners, managers and
stakeholders. It can also present the distorted picture of business rather than a
true and fair view of business if it is not properly done.

In order to maintain transparency, reliability, consistency, adequacy and

comparability of financial reporting, it is necessary to know about some
accounting principles and [Link] have to follow certain principles
or rules as their statutory duty and the same are known as Accounting Standards
(AS). These standards are written policies or rules which are issued by expert
bodies or regulatory bodies to comply with the various aspects of recognition,
measurement, presentation and disclosure of accounting transactions in the
financial statements. Auditors check the conformity of these rules and examine
the financial results in a way that financial statements provide a "true and fair
view" of actual transactions (Indapurkar et al., 2009).
It is the primary responsibility of the management to maintain strong internal
control to safeguard the recording of all financial operations of the business.
The ostensible objective of these accounting standards is to promote the
dissemination of timely and useful financial information to investors and certain
other parties having an interest in the company's economic performance. The
accounting standards reduce the accounting alternative in the preparation of
financial statements within the bounds of rationality, thereby ensuring
comparability of financial statements of different enterprises (Bragg, 2011).

The London based group, namely, the International Accounting Standards

Committee (IASC), responsible for developing International Accounting
Standards (IAS), was established in June 1973. Between 1973 and 2001, the
IASC released International Accounting Standards. Subsequently, the
International Accounting Standard Board (IASB) came into being in India in
place of IASC from April 2001. Now IASB has announced its standards in a
series of pronouncements called International Financial Reporting Standards
(IFRS).

The Institute is looking to IFRS to fulfill local financial reporting obligations

related to financing or licensing (ICAI, 2009). Chartered Accountant of India
(ICAI) as the accounting standards formulating body in the country is known to
have made efforts to formulate high quality accounting standards and has been
successful in doing so. Indian Accounting Standards have been changing in the
course of time. In India, so far as the ICAI and the governmental authorities
such as the National Advisory Committee (NAC) on accounting standards
established under the Companies Act, 1956 and various regulators such as SEBI
and RBI are concerned, the aim has always been to comply with the IFRS to the
extent possible with the objective to formulate sound financial reporting
standards (Singhal and Tulshan, 2009).
The ICAI, being a part of the International Federation of Accountants (IFAC),
considers the IFRS and tries to integrate them, to the possible extent, in the light
of the laws, customs, practices and business environment prevailing in India.
Accordingly, the accounting standards issued by the ICAI are based on the
IFRS. However, where departure from IFRS is warranted keeping in view the
Indian conditions, the Indian Accounting Standards have been modified to that
extent (ICAI, 2009). Convergence with IFRS by the Indian corporate sector is
going to be very challenging, but at the same time, could also be rewarding.
There are many beneficiaries of convergence with IFRS such as the economy,
investors, industries and accounting professionals.

1.2: FINANCIAL REPORTING

Basically, financial reporting is the process of preparing, presenting and

circulating the financial information in various forms to the users which helps in
making vigilant planning and decision making by users. The core objective of
financial reporting is to present financial information of the business entity
which will help in decision making about the resources provided to the
reporting entity and t and the governing board of that entity have in assessing
whether the management made efficient and effective use of the resources
provided.

1.3: EVOLUTION OF ACCOUNTING STANDARDS

The American Institute of Chartered Accountants (now it is known as American

Institute of Certified Public Accountants) can be considered as the primary
founder of the accounting standards.
During the year 1932-34, the institute collaborated with the New York Stock
Exchange to frame five "rules or principles" of accounting to reduce the
deviation in accounting policies, recommend some disclosures for significant
items of financial statements, and give some valuable suggestions to enhance
the reliability or credibility of financial results. A revolution came in the
accounting world in 1959, when American Institute of Certified Public
Accountants (AICPA) established the Accounting Principles Board (APB) with
the crucial objective to provide a solid base for accounting.

Accounting Standards Committee (ASC) with the purpose to frame accounting

standards which comply with accounting objectives.
Prior to the year 1970, accounting standards were not fascinating and very few
academicians or professionals paid their attention in its processing. But
nowadays, the setting board of standards or committee plays a vital role in a
number of countries such as New Zealand, India, United Kingdom, Canada, and
the United States. Australia etc. In the same way, the International Accounting
Standards Committee. (IASC) was set up in 1973, to frame International
Accounting Standards (IASs)

1.4: NEED OF CONVERGENCE WITH GLOBAL

STANDARDS

Each country has its own sets of rules and principles for accounting purposes as
now the International Accounting Standard Board has come in place of IASC.
The IASC or IASB comprises the accounting professional bodies of various
countries including the Indian Institute of Chartered Accountants (ICAI, 2009).
India has Indian Accounting Standards discussed above.
Gradually businesses were crossing their national boundaries for trade and it
was felt that there should be some international standards for accounting so that
business can run smoothly without any hurdle of accounting. International
analysts and investors would like to compare the financial statements of
companies while taking the investment decisions (Ahmad and Khan, 2010).

The main purpose of this committee was to build International Accounting

Standards so that cross border businesses can maintain their accounts properly
and will lead to globalization in a peaceful environment. This committee is
presently known as the International Accounting Standards Board (Ankarath et
al., 2010). The list of International

Accounting Standards developed by IASC is as follows:

IAS Title Of The Standards

IAS1 Presentation Of Financial Statements
IAS2 Inventories
IAS7 Cash Flow Statements
IAS8 Policies, Changes In Accounting Estimates And Errors
IAS10 Events After The Balance Sheet Date
IAS11 Construction Contracts
IAS12 Income Tax
IAS14 Segment Reporting
JAS16 Property, Plant And Equipment
IAS17 Leases
IAS18 Revenue
IAS19 Employee Benefits
IAS20 Accounting For Government Grants And Disclosure Of Government
Assistant
IAS21 The Effects Of Changes In Foreign Exchange Rates
IAS22 Business Communication
IAS23 Borrowing Costs
IAS24 Related Party Disclosure
IAS26 Accounting And Reporting For Defined Benefit Plans
IAS27 Consolidated Financial Statements
IAS28 Accounting For Investments In Associates
IAS29 Financial Reporting In Hyperinflationary Economies
IAS30 Disclosures In Financial Statements Of Banks And Similar Institutions
IAS31 Financial Reporting Of Interests In Joint Venture
IAS32 Financial Instruments - Disclosure And Presentations
IAS33 Earnings Per Share
IAS34 Interim Financial Reporting
IAS35 Discontinuing Operation
IAS36 Impairment of Assets
IAS37 Provisions, Contingent Liabilities And Contingent Assets
IAS38 Intangible Assets
IAS39 Financial Instruments - Recognition And Measurement
IAS40 Investment Property
IAS41 Agriculture
Source: Singhal and Tulshan, 2009

1.5 EVOLUTION OF INDIAN ACCOUNTING

STANDARDS

The council of the ICAI has issued thirty two Indian Accounting Standards. But
now there are only thirty one because accounting standard (AS) 8 relating to
"accounting for research and development" has been withdrawn.
The accounting standards established by the Accounting Standard Board (ASB)
set the standards which have to be complied by the business entities so that the
financial statements are prepared in harmony with generally accepted
accounting principles (GAAPs) (Singhal and Tulshan, 2009). The Indian

Accounting Standards are following as:

AS 1 Disclosure of accounting policies 1/4/1993
AS 2 Valuation of Inventories 1/4/1999
AS 3 Cash flow statement 1/4/2001
AS 4 Contingencies and events occurring after the B/S date 1/4/1998
AS 5 Net profit or loss for the period, prior period items and changes in
accounting policies 1/4/1996
AS 6 Depreciation accounting 1/4/1995
AS 7 Construction contracts 1/4/2002
AS 8 Research & Development
AS 9 Revenue recognition 1/4/1993
AS 10 Accounting for fixed assets 1/4/1993
AS 11 The effect of changes in foreign exchange rates 1/4/2004
AS 12 Accounting for government grants 1/4/1994
AS 13 Accounting for investments 1/4/1995
AS 14 Accounting for amalgamations 1/4/1995
AS 15 Employee benefits 1/4/2006
AS 16 Borrowing costs 1/4/2000
AS 17 Segment reporting 1/4/2001
AS 18 Related party disclosures 1/4/2001
AS 19 Lease 1/4/2001
AS 20 Earning per shares 1/4/2001
AS 21 Consolidated financial statement 1/4/2001
AS 22 Accounting for taxes on income 1/4/2001
AS 23 Accounting for investment in associates in consolidated financial
statements 1/4/2002
AS 24 Discontinuing operations 1/4/2004
AS 25 Interim financial statements 1/4/2002
AS 26 Intangible assets 1/4/2003
AS 27 Financial reporting of interests in joint ventures 1/4/2002
AS 28 Impairment of assets 1/4/2004
AS 29 Provisions, contingent liabilities and contingent assets 1/4/2004
AS 30 Financial instruments: Recognition and measurement 1/4/2011
AS 31 Financial instruments: Presentation 1/4/2011
AS 32 Financial Instruments: Disclosures 1/4/2011
Source: Singhal and Tulshan, 2009

1.6: EVOLUTION OF INTERNATIONAL FINANCIAL

REPORTING

STANDARDS

The IASC issued International Accounting Standards during the year 1973-
2001. IASC restructured their organization during the year 1993-1997 and came
with a new name and fame as International Accounting Standards Board (IASB)
which came into effect on 1st April, 2001. IASB announced its standards in a
series of pronouncements which came to be titled as International Financial
Reporting Standards (IFRS). However, IASB does not discard the standards
developed by IASC. Those standards continue to be designated as "International
Accounting Standards" (ICAI, 2009).
Therefore, we can state that IFRS means the standards issued by IASB and IAS
means the standards issued by IASC. Similarly, the Standards Interpretation
Committee (SIC) interpretation of standards is issued by the International
Financial Reporting Interpretations Committee (IFRIC) of the IASB. Few
nations have adopted it and some are going to adopt IFRS in future.
European Union countries have made it mandatory from the year 2005 and
India planned to converge with IFRS from the year 2011 (Singhal and Tulshan,
2009). IASB issued only thirteen (13) IFRS which are as follows:

IFRS 1 - First-time adoption of International Financial Reporting Standards

IFRS 2 - Share-based payment
IFRS 3 - Business combinations
IFRS 4 - Insurance contracts
IFRS 5 - Non-current assets held for sale and discontinued operations
IFRS 6 - Exploration for and evaluation of mineral resources
IFRS 7 - Financial instruments: disclosures
IFRS 8 - Operating segments
IFRS 9 - Financial instruments
IFRS 10 - Consolidated financial statements
IFRS 11- Joint arrangements
IFRS 12- Disclosure of interests in other entities
IFRS 13- Fair Value measurement

1.7: NEED OF CONVERGENCE WITH IFRS

Convergence with IFRS means to design and maintain national accounting

standards in such a way that they are in harmony with International Accounting
Standards.
The converged standards would enable the Indian corporate sector to be fully
IFRS compliant and give an "unreserved and explicit statement of compliance
with IFRS" in their financial statements. Due to this convergence, India would
be a part of that group who has already adopted IFRS. Convergence does not
mean adoption. There is a difference in the adoption and convergence process.
Adoption means using IFRS word by word but convergence means modifying
one's own country's existing accounting standards in such a way that they
comply with these IFRS. In India we have converged our existing Indian
Accounting Standards with IFRS and are not adopting IFRS fully.

Every country has its national accounting standards and has also an
International Accounting Standards of reporting. Therefore, a big question
arises as to why we need IFRS and if it is required, why should we converge
national accounting standards with IFRS. This globalization process prompts
the business world to make a single accepted accounting standard so that they
can compare with each other.

Nowadays, a business has to adopt different accounting standards of different

countries to present their financial statement for the users of financial statement.
While presenting the financial statements, they may face complexity and
inefficiency. Therefore, the business world calls for a single generally accepted
accounting standard (IFRS) to remove these problems. Due to this, IFRS comes
into the reporting world. European countries such as Australia, Russia and New
Zealand etc. have already adopted IFRS for listed companies for presenting
their financial statements. Canada has decided to converge its accounting
standards with IFRS from the year 2011 (Indapurkar et al., 2009). Every nation
wants to grow and if we want to grow then it is required to follow those
rules/principles which are followed by developed countries.
1.8: INDIA AND IFRS

At present, the ASB of the ICAI formulates IFRS based Accounting Standards.
Hence, the Accounting Standards issued by the ICAI depart from the
corresponding IFRS in order to ensure consistency with the legal, regulatory
and economic environment of India. At a meeting held. The Council of ICAI in
its meeting held in May 2006 viewed that full IFRS may be adopted at a future
date, at least for listed and large entities.

The Accounting Standards Board (ASB) in its meeting held in August 2006,
endorsed the Council's view that there would be several advantages of adopting
IFRS. Keeping in view the degree of difference between IFRS and Indian
Accounting Standards, as well as the fact that convergence with IFRS would be
an important policy decision, the ASB formed an IFRS task force.

The objectives of the task force were to explore the approach for achieving
convergence with IFRS, and laying down a road for achieving convergence with
IFRS with a view to make India IFRS compliant (ICAI, 2009).
It was decided that IFRS would be adopted by Indian entities from 1st April
2011. For the first IFRS compliant financial statements, it is necessary that the
comparative financial statements should also comply with IFRS. As a result,
impacted Indian entities required to start preparing IFRS compliant accounts
from 1st April 2010 and preferably much earlier. With an objective to ensure a
smooth convergence with IFRS, the ICAI took up the matter of convergence
with IFRS with the national advisory committee on accounting standards
(NACAS).
1.9: DIFFERENCES BETWEEN INDIAN GAAP and
IFRS

i. Presentation and disclosure of financial statements:

IFRS requires five statements such as statement of financial position, a
statement of comprehensive Income/profit or loss account, statement of change
in Equity, cash flow statement (SOCIE) and notes including summary of
accounting policies and explanatory notes. But as per IGAAP, no separate
standard for disclosure is required. For companies, format and disclosure
requirements are set out under Schedule VI of the Companies Act, 1956.
Similarly, IRDA and SEBI set the format and disclosure requirements for
banking and insurance entities.

IAS 1 requires disclosure of critical judgments made by management in

applying accounting policies and key sources of estimation uncertainty that
have a significant risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next financial year. IAS 1 also requires the
disclosure of information that enables the users of its financial statements to
evaluate the objectives, policies and processes of the companies for managing
the capital but there is no such requirement under Indian GAAP.

ii. True and fair presentation of financial statements:

True and fair presentation requires the faithful representation of the effect of the
transactions in accordance with the criteria set out in the framework of assets,
liabilities, income and expenses. In extremely rare circumstances if management
thinks that compliance with a particular standard is so misleading then they can
leave this standard and should disclose all the reasons for doing this in the notes.
Under IGAAP, true and fair override is not permitted. However, in terms of
hierarchy, local regulations are superior to accounting standards. Accounting
standards by their very nature cannot and do not override the local regulations
which govern the preparation and presentation of financial statements in the
country. Departure from accounting standards and compliances are prohibited
by the Company Act 1956, unless it is permitted under other framework of local
regulations. However, ICAI requires the disclosure of such departure to be made
in the financial statements (Deloitte, 2012).

iii. Presentation: IAS 1 provides guidelines and does not prescribe a particular
format. But as per AS 1 (Disclosure of Accounting Policies) does not define any
standard requirements for disclosure of financial statements. As per IFRS,
certain minimum items are to be presented on the face of the Balance Sheet
such as presentation of current/non-current assets and liabilities.

iv. Inventory valuation technique: IAS 2 specifically deals with the costs of
inventories of an enterprise, providing services but inventories arising in the
ordinary course of business of service providers are excluded from the preview
of AS 2. The LIFO method is allowed in determining cost under IAS-2 but it is
prohibited under AS 2 (Deloitte, 2012).

v. Cash flow statements: Under IFRS, bank overdrafts which are repayable on
demand is to be treated as a component of cash/cash equivalents but there is no
stipulation in AS 3 for classification of bank overdrafts. As per IFRS. disclosure
of dividend and interest paid can be classified under operating activities or
financial activities. But under IGAAP, disclosure of dividend and interest paid is
classified under financing activity (Standard Chartered, 2012).
vi. Events occurred after balance sheet date: In IFRS, it is not required to adjust
financial statements if an event occurred after balance sheet date but under
IGAAP, events occurred after the Balance Sheet date is to be adjusted (Study
Café. In, 2013).

vii. Proposed dividends: IAS 10 provides that proposed dividend should not be
shown as a liability when proposed or declared after the balance sheet date but
as per IGAAP, the companies are required to make provision for proposed
dividend, even-though the same is declared after the balance sheet date (PWC,
2006).

viii. Prior period items: Under IGAAP, we cover only income and expenses in
the definition of prior period items. The concept of extra ordinary items does
not exist under IFRS as all items are considered as ordinary items. A separate
disclosure of extra ordinary items is required under GAAP but it is not required
under IFRS (Standard Chartered, 2012).

ix. Fixed assets: Under IFRS, an item of property, plant and equipment (PPE)
should be documented as the asset when it is probable that the future economic
benefits associated with the asset will flow to the enterprise and cost can be
measured reliably. On the other hand, the definition of the term fixed asset is
less elaborate in AS 10.

x. Depreciation: IAS 16 Property, Plant and Equipments, allows management to

charge depreciation based on useful life of the asset but Schedule XIV of the
Companies Act prescribes minimum rates of depreciation to be charged under
IGAAP. Change in the method of depreciation is treated as change in accounting
estimate under IAS 16 but AS 6 considers change in method of depreciation as
change in accounting policy (Standard Chartered, 2012).
xii. Revenue recognition: In case of revenue from rendering of services, IAS 18
permits only percentage of completion method but AS 9 allows the completed
service contract method or proportionate completion method (Deloitte, 2012).
Accounting for amalgamation and business combinations: IFRS 3 allows only
the purchase method for accounting of amalgamation and business combination.

xiii. Employee benefits: As per IAS 19 actuarial gains and losses may be
recognized immediately under profit or loss, in other comprehensive income.
And the deferred up to a maximum with any excess of 10% of the greater of the
defined benefit obligation or the fair value of the plan assets at the end of the
previous financial period being amortized over the expected remaining working
lives of the active employee.

xiv. Segment reporting: Under IFRS, the reportable segments of the previous
year are reported in the current year if the management considers that segment
to be of continuing significance. As per IGAAP, any segment that was a
reportable segment in the previous year because of the 10% criteria would
continue to be recognized as a reportable segment even in the current year.
If there is any change in identification of segments IFRS requires restatement of
prior period segment information.

ix. Related party: The definition of related party includes post employment
benefit plans (e.g. gratuity fund, pension fund) of the enterprise or of any other
entity, which is a related party of the enterprise. Under IGAAP, parties are
considered to be related if at any time during the reporting period one party has
the ability to control the other party, or exercise significant influence over the
other party in making financial and or operating decisions and non executive
directors are not included as key managerial personnel (WIRC, Reference
Manual, 2011-12).
x. Interim financial reporting:
SEBI requires all listed companies to publish their interim financial results on
quarterly basis but IAS 34 does not mandate the period or the frequency of
published interim financial reports (Study Café. In, 2013).

xi. Impairment of assets:

Under IFRS, once impairment loss is recognized on Goodwill, reversal is not
permitted and only a bottom up approach is suggested. Under IGAAP, in certain
conditions, reversal is permitted and in assessing cash generating units for
impairment, bottom up and top down approaches are recommended for
allocation of goodwill. IAS 36 does not apply to investment property and
biological assets but Impairment would apply to investment property under
IGAAP (PWC, 2006).

1.10 EPILOGUE

The foregoing discussions and explanations reveal that adoption of IFRS is

deemed to help the investors, professionals, industry and the economy at large.
The convergence is also expected to bring a lot of opportunities for Indian
companies to easily access foreign capital markets at lower cost and generate
capital formation. The convergence has also thrown up some challenges for
Indian companies as they will have to conduct training programs for accounting
professionals resulting into increased expenditure and bring about major
changes in their financial statements in the light of the adoption of the fair value
principle. The journey of this convergence requires vigilant planning for its
successful implementation.