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Challenges of IFRS Implementation in India

Raghvendra Sonker

| Updated: Jul 25, 2022 | Category: Finance & Accounting

Challenges of IFRS

To have greater transparency and uniformity, a company has to ensure high quality corporate financial reporting, maintain records, and report expenses and revenues. We need a common accounting language that can be easily understood by shareholders and investors worldwide. To fill the gap, IFRS comes into the picture for standard reporting of financial statements.The companies are opting for and framing accounting standards in the parlance of IFRS.The organisation’s senior management must ensure that the prepared financial statements comply with the IFRS.

What is IFRS?

IFRS stands for International Financial Reporting Standards. IFRS are a collection of accounting guidelines for reporting financial statements of organisations that are created to make reporting of financial statements uniform, transparent, and simple to compare globally. International Accounting Standard Board (IASB) frames and issues International Financial Reporting Standards. In 2001, the earlier International Accounting Standards were replaced by the IFRS.

What is Ind AS?

Ind AS stands For Indian Accounting Standards. Every company registered in India has to comply with the accounting standards for financial reporting.The convergence of IFRS with Indian Accounting Standards has brought a paradigm shift in the financial reporting and regulatory landscape for firms/companies in India.

Though many professionals advocate for the enforcement of IFRS, countries face many challenges in implementing IFRS. IFRS convergence with Indian accounting Standard will present certain challenges and problems such as a lack of infrastructure, lack of training, lack of experienced IFRS professionals, high shifting costs, modified rules and regulations etc.

Key Challenges of IFRS Implementation

In spite many benefits of IFRS, the challenges of IFRS implementation in India are reported, which are discussed below:

Taxation

The implementation of IFRS will change the structure and methods for preparing financial statements and are bound to change the tax liabilities. In India, there is no change in Indian tax laws with respect to the implementation of IFRS, as the tax authority uses Tax Accounting Standards for the purpose of taxation. Although enough changes are made to recognise the IFRS converged Indian Accounting Standards. A complete change in the tax structure will pose a serious challenges for Indian authorities.

Fair value Measurement

IFRS considers the fair value measurement for valuing the particulars in the financial statements. Indian companies have long been preparing financial statements per the Indian GAAP (Generally AcceptedAccounting Principles). The use of a fair value system of measurement would bring subjectivity and volatility to financial statements. The valuation professionals are to be hired to measure fair value, increasing the cost of financial reporting. 

IT Infrastructure

A complete overhaul of financial accounting tools and software used for financial reporting would result in substantial allocation ofinvestment in IT infrastructure for companies. Companies would be reluctant in changing the methods and financial reporting infrastructure as it involves more cost, time and efforts. Thus acts as constraints for small businesses and pose challenges of IFRS implementation.

Awareness and Training

International Financial Reporting Standards are new accounting principles for the Indian corporate sector. There is lack of training facilities and study courses on IFRS. It has recently been observed that India lacks fully trained professionals to implement IFRS. The regulators must carry out training programmes, and awareness drives to adopt IFRS smoothly. Awareness about financial reporting standards is required among the stakeholders such as investors, firms, stock exchanges, banks etc.

Small and Medium Scale Businesses

Due to their huge base in India compared to other countries, the Small and Medium Enterprise sector cannot be ignored as they are essential to economic development. The lack of resources and accounting knowledge in the MSE Sector adds to the challenges of IFRS implementation in India.

Regulatory Challenges

Indian Accounting Standards are majority governed by various regulators and provisions of the Companies Act 1956, SEBI Act, 1992[1], Income Tax Act, 1961, Foreign Exchange Management Act, 1999 and Indian GAAP. Some existing laws like SEBI Regulations and RBI regulations also provide guidelines for preparing and reporting financial statements. Under IFRS, there is no role in overriding laws in financial reporting, and a professional has to follow complete International Financial Reporting Standards in letter and spirit. The legislations as mentioned above have been proved to be the major hurdle in IFRS converged Indian Accounting Standards. To mitigate the challenges of IFRS implementation in India, respective changes are to be brought to existing laws in line with IFRS.

Conclusion

RBI and IRDAI are responsible for implementing the IFRS-converged Indian Accounting Standards (Ind AS). In a nutshell, the benefits of IFRS outweigh the challenges with advantages like timely financial information for decision making,  better comparison of financial statements, better access to the capital market, and consistent and transparent reporting. IRFS compliance will undoubtedly increase the credibility of the Indian businesses globally and their access to the international financial market to raise capital.

Read our Article: Need of convergence of IAS with IFRS

Raghvendra Sonker

Raghvendra Sonker has completed his Graduation from Gujarat National Law University. He has a keen interest in legal drafting, writing articles, and research papers. His core interest areas are Banking and Financial Issues.

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