Posts Tagged ‘International Financial Reporting Standards’

IFRS: THE IMPACT ON INDIAN CORPORATE

International Financial Reporting Standards (IFRS) has gained huge momentum in recent years across the world as it is used as a universal financial  reporting language. Almost 100 countries have adopted it while few other countries have declared their willingness to adopt or converge with IFRS over the next two-three years.

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In the world of globalization, world has become more dependent on each other, which forces more and more countries to open their doors for businesses expansion across borders and to foreign investment. A large number of multi-national companies are establishing their businesses in various countries especially in emerging countries; as a result the companies in emerging countries are increasingly accessing the global markets to fulfill their capital requirement by getting their securities listed on the stock exchanges outside their country. Few Indian companies are also being listed on overseas stock exchanges, but different countries follow their own accounting frameworks, which create a great confusion for users of financial statements, finally it leads to inefficiency in capital markets across the world.

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Therefore, there is a requirement for a single set of high quality accounting standards that should be spoken by all of them across the globe, to meet the increasing complexity of business transactions and globalisation of capital, which has prompted many countries to go for convergence of national accounting standards with IFRSs.

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In this changing scenario, India cannot cut off itself from the developments taking place worldwide. At present, the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) formulates Accounting Standards (ASs). Complex nature of IFRSs and the differences between the existing ASs and IFRSs, the ICAI is of the view that IFRSs should be adopted for the public interest entities such as listed entities, banks and insurance entities and largesized entities from the accounting periods beginning effect from April, 2011. Convergence to IFRS would mean India would join a league of more than 100 countries, which have converged with IFRS. Converging to IFRS by Indian companies will be very challenging and on the contrary it could also be rewarding too.

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Benefits to corporates in the Indian context World Class Peer Standards for Financial Reporting: IFRSs will surely enhance the comparability of financial information and financial performance with global peers and industry. This will result in more transparent financial reporting of a company’s activities which will benefit investors, customers and other key stakeholders in India and overseas. The adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements.

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Investors: It will be a great help for those investors who wish to invest outside their own country and looking for a Financial statements, which prepared by using a common set of accounting standards IFRS provides them better comprehensible investment opportunities as opposed to financial statements prepared using a different set of national accounting standards. For better understanding of financial statements, global investors have to incur more cost in terms of the time and efforts to convert the financial statements so that they can confidently compare opportunities. Investors’ confidence would be well-built if accounting standards used are globally accepted. Convergence with IFRSs contributes to investors’ understanding and confidence in high quality financial statements.

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The industry: It will be easier to raise capital from foreign markets at lower cost if the industry can create confidence in the minds of foreign investors that their financial statements comply with globally accepted accounting standards. The burden of financial reporting is lessened with convergence of accounting standards because it simplifies the process of preparing the individual and group financial statements and thereby reduces the costs of preparing the financial statements using different sets of accounting standards.

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The accounting professionals: Convergence with IFRSs also create more business opportunity to the accounting professionals in a great way that they are able to sell their services as experts in different parts of the world, it offers them more opportunities in any part of the world if same accounting practices prevail throughout the world. They are able to quote IFRSs to clients to give them backing for recommending certain ways of reporting.

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Challenges to Indian Corporate Laws and regulations: There is a need to bring a change in several laws and regulations governing financial accounting and reporting system in India. In addition to accounting standards, there are legal and regulatory requirements that determine the manner in which financial information is reported or presented in financial statements.

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Lack of adequate professionals: There is a lack of adequate professionals with practical IFRS conversion experience and therefore many companies will have to rely on external advisers and their auditors.

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Replacement and Up gradation in systems: Conversion to IFRS will require extensive upgrades or total replacement of major system. With sufficient planning, upgrades and replacements can occur as part of the overall strategic technology planning and procurement process.

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.Convert historical data: Historical data from recent prior periods will have to be recast for comparative purposes. This is necessary to permit accurate and comparative trend and ratio analysis. Record retention requirements should be reviewed to ensure that data currently being retained is detailed enough to permit proper restatement of prior-period financials.

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Coordination of Conversion System: For many organizations, the conversion to IFRS will be a multi-year exercise with numerous changes to technology infrastructure and systems. Development of new technology systems should be carefully examined so IFRS requirements can be incorporated.

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Conclusion

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Convergence to IFRS will greatly enhance the transparency of Indian companies which will surely help them to project themselves in global map, which will help Indian companies benchmark their performance with global counterparts. But companies will need to be proactive to build awareness and consensus amongst investors and analysts to explain the reasons for this volatility in order to improve understanding, and increase transparency and reliability of their financial statements. However, the responsibility for enforcement and providing guidance on implementation vests with local government and accounting and regulatory bodies, such as the ICAI in India will play a vital role. The ICAI will have to make adequate investments and build infrastructure for awareness and training program.

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Successful implementation of IFRS in India depends on the regulator’s immediate intention to convert to IFRS and make appropriate regulatory amendments.

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SEBI Proposes New Recommendations on “Audit & Accounting Standards”:)

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An expert panel of Securities and Exchange Board of India has proposed disclosure of audited balance sheet on a half-yearly basis by listed companies.

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At present, a listed company discloses audited accounts once a year at the annual general meeting.

This is among a slew of recommendations made by the Sebi committee on disclosure and accounting standards (Scoda).

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“The accounting irregularities at Satyam Computer Services reiterate the need for having greater internal checks and controls in an organisation,” the Sebi committee said in a discussion paper put out on Monday inviting public comments till September 25.

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Sebi will take a final decision on the new disclosure norms proposed by the committee after getting public comments.

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Pinning the responsibility of ensuring the independence of the external auditor and its partners on the audit committee of the company, Scoda has also proposed that the partner of the audit firm of a listed firm be rotated every five years to avoid management-auditor connivance.

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Citing scope for improvements in accounting norms, following the Satyam Computer scam, Sebi had asked Scoda to look into the possibility of carrying out internal checks and balances in firms by external auditors.

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Sebi panel proposals are expected to bring transparency in the corporate governance.

It is expected to lift the corporate governance standards in the country.

The need to upgrade standards was felt since the Satyam scam hit the market.

The guideline to rotate auditors after every five years is welcomed decision.

The decision to ask listed companies to report audited results twice a year may also lift investors’ confidence in the markets” said Jagannadham Thunuguntla, head of research at SMC Capital.

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Another issue, which Scoda felt may best remain unchanged is prescribing professional qualifications or financial literacy for chief executive officers and chief financial officers of companies.

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The committee suggested that the responsibility of selecting CFOs with adequate qualification be given to the audit committees of companies.

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The Scoda was of the view that the appointment of CFO should be approved by the audit committee, which while doing so shall be required to assess the qualifications, experience and background,” it said.

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Further, in order to prepare India Inc to adopt International Financial Reporting Standards (IFRS) that are expected to take effect from financial year 2011, Sebi had asked the committee to look into the possibility of allowing companies to voluntarily implement the practice.

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The committee has also proposed a uniform timeline for submission of financial results by listed entities.

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It has put forward that listed entities shall be required to submit their quarterly and year-to-date audited and standalone financial results or quarterly and year-to-date unaudited standalone results accompanied by limited review report of the auditor within 45 days from the end of the quarter.

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This is applicable to all quarters except the last one.

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Allot IDRs on proportionate basis: SEBI

Allot IDRs on proportionate basis: SEBI

Market regulator SEBI today said that the allotment of Indian Depository Receipts, a tool used by foreign companies to raise funds from Indian bourses, should be made on proportionate basis and not at the discretion of the issuer.

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“Allotment to all these categories shall be made on proportionate basis only,” SEBI said, amending its guidelines concerning general and disclosure requirements pertaining to IDR issues.

The market regulator further said that in case of underwritten issues, if the issuing company does not receive the minimum subscription of 90 per cent of the net offer, from the date of closure of the issue, the issuing company shall forthwith refund the entire subscription amount received.

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Underwriting refers to the process that a large financial service provider like a bank or investment house undertakes to assess the eligibility of a customer to receive their financial products and in case the product is not bought, the financial service provider takes them.

Commenting on it, SMC Capitals Equity Head Jagannadham Thunuguntla said, “It is a right step for creating a good IDR market in India. It will help in smooth execution of IDRs.”

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SEBI further said that the audited financial statements should be prepared in accordance with Indian GAAP, or with the International Financial Reporting Standards (IFRS) or US GAAP, for a period of three financial years immediately preceding the date of prospectus.

The report prepared by the statutory auditors of the issuing company should disclose financial statements in Indian rupees, while the issuing company would do it in Sterling Pound, Euro, Yen or US Dollar. 🙂