Finance & Accounting

Challenges of IFRS Implementation in India

Challenges of IFRS

A business must ensure excellent corporate financial reporting, maintain records, and disclose expenses and revenues in order to have more transparency and uniformity. A universal accounting language is required to be understood by shareholders and investors. IFRS enters the picture for the purpose of standard reporting of financial statements to close the gap. The businesses are selecting and establishing accounting standards using IFRS terminology. Let us discuss the challenges of IFRS Implementation in India.

India is not an exception to the global trend towards IFRS (International Financial Reporting Standards) convergence. Convergence is even more necessary as the world becomes more and more globalized. The necessity for universally recognized standards has been acknowledged. The ultimate goal of convergence is to establish universally accepted standards that guarantee the utility and transparency of financial data. But implementing the IFRS is a challenge for Indian authorities.

Understanding IFRS

International Financial Reporting Standards are referred to as IFRS. In order to make financial statement reporting consistent, clear, and easy to compare on a worldwide scale, a group of accounting standards known as IFRS was developed. International Financial Reporting Standards are developed and published by the International Accounting Standard Board (IASB). The IFRS took the place of the older International Accounting Standards in 2001.

All nations can now follow a single set of accounting rules because of globalization. Global financial reporting has seen significant changes in recent years, the most notable of which is the continued adoption of IFRS globally. The IASB adopted IFRS, which are widely recognized accounting rules and interpretations. India, a developing nation on the global economic map, also made the decision to adopt International Financial Reporting Standards (IFRS). 

IFRS Adoption Timeline in India

India’s adoption of IFRS was initially announced by the Securities and Exchange Board of India (SEBI) in 2010. Indian ICAI (The Institute of Chartered Accountants of India) has made the decision to implement IFRS by April 2011. The adoption, however, was optional and only applied to a few companies voluntarily. 

The Ministry of Corporate Affairs (MCA)1 announced in 2015 that certain corporations must begin using Indian Accounting Standards (Ind AS), which are based on IFRS, as of April 2016. All listed firms in India were required to use Ind AS beginning in April 2018 after a phased rollout.

Ind AS differs from IFRS and incorporates some IFRS variances to suit the Indian business environment better. The treatment of specific taxes, depreciation, and the recording of revenue from real estate transactions are among the differences. However, the acceptance of Ind AS represents a significant step in the direction of the IFRS and Indian accounting standards.

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What is Ind AS?

Indian Accounting Standards are referred to as Ind AS. Every firm with an Indian registration must follow the accounting rules for financial reporting. The environment of financial reporting and regulation for businesses and corporations in India has changed dramatically as a result of the convergence of IFRS and Indian Accounting Standards.

Despite the fact that many experts support the application of IFRS, governments have numerous difficulties while doing so. There would be a number of difficulties associated with IFRS convergence with Indian accounting Standards, including a lack of infrastructure, a lack of training, a shortage of people with knowledge of IFRS, high shifting costs, altered norms, and regulations, etc.

India’s adoption process for IFRS 

In order to provide unity among India’s many accounting practices and policies, the ICAI established the Indian Accounting Standards. For Implementing IFRS, Indian accounting professionals established a three-step procedure, which may be summed up as follows: 

Step 1 – IFRS Impact Assessment

This is the initial action. In this step, the company will evaluate how adopting IFRS will affect the entities’ main businesses, methods, and systems, as well as Accounting and Reporting concerns. The company will then discover the crucial conversion dates as specified in the IFRS training plan. The company will need to identify the crucial financial reporting standards that will apply to it as well as any differences between the current financial reporting standards it is currently adhering to and IFRS as soon as the training plan is in place. 

Step 2 – Preparations for the Implementation of IFRS

This second stage of the process will carry out the tasks necessary for the implementation of IFRS. The company will then overhaul its internal reporting procedures. Adopting and implementing the first-time adoption process is the first topic IFRS covers. 

Step 3: Put into Practice

The process that deals with the actual implementation of IFRS comes to a close at this stage. The preparation of an opening balance sheet on the date of the switch to IFRS is the first stage of this step. It is necessary to have an understanding of the actual effects of the switch from Indian accounting standards to IFRS. That will happen after IFRS is fully applied as and when necessary.

Challenges in the Adoption and Implementation of IFRS in India

The International Accounting Standard Board develops IFRS. However, the local government, as well as accounting and regulatory authorities, such as the ICAI in India, are responsible for convergence with IFRS. Therefore, ICAI must make infrastructural investments to guarantee IFRS compliance. India faces a number of limitations and practical difficulties in adopting and adhering to IFRS. Therefore, the laws and rules regulating financial accounting and reporting in India must be changed. As a result, there will be a number of obstacles on the road to IFRS convergence. Which are: 

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Regulatory framework – The Indian Accounting Standards, which are essentially convergent with IFRS, are India’s own accounting standards framework. Full convergence can be difficult because Ind AS and IFRS still differ from one another. In order to guarantee consistent application and compliance, the regulatory framework needs to be revised and brought into line with IFRS. 

Cost and Complexity – IFRS is an expensive set of accounting standards that requires a lot of time and money to apply properly. The implementation of IFRS calls for extensive training programmes for finance experts as well as large investments in infrastructure, systems, and processes, all of which can be expensive for businesses, especially smaller ones. 

Taxation effect: The structure and procedures for compiling financial statements will change as a result of the adoption of IFRS, which will, therefore, inevitably alter the tax liability. Since the tax authorities employ Accounting Standards for taxation purposes, there has been no change in the Indian tax legislation as a result of the implementation of IFRS, despite the fact that the converged Indian Accounting Standards with IFRS have undergone sufficient adjustments. For Indian officials, a full overhaul of the tax system will present significant difficulties.

Lack of Knowledge awareness: Indian corporate sector now uses new accounting concepts called International Financial Reporting Standards. There aren’t enough IFRS study courses or training facilities. According to recent observations, India now lacks qualified personnel who can adopt IFRS. The regulators must conduct training courses and awareness campaigns to ensure the smooth adoption of IFRS. Investors, businesses, stock exchanges, banks, and other stakeholders must be aware of financial reporting standards. 

Reporting and Disclosure Requirements – The companies making the switch to IFRS must create solid systems and processes to accurately and promptly collect and submit the required information. It can be challenging to ensure compliance with the higher disclosure obligations, especially for businesses with constrained resources or intricate processes.

Small and Medium Scale Businesses – The small and medium enterprises sector cannot be disregarded because of their significant presence in India relative to other nations and because they are crucial to economic growth. The implementing of IFRS difficulty in India is exacerbated by the lack of resources and accounting expertise in the MSE sector.

Investor and Stakeholder Education – As a result of the implementation of IFRS, Investors, Analysts, and other stakeholders may need to be informed about the changes in financial reporting practices. To ensure accurate interpretation and understanding of the financial statements issued under IFRS, clear communication and awareness-building initiatives are required.

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Regulatory Coordination – Coordination between several regulatory organizations, such as the Ministry of Corporate Affairs (MCA), the Institute of Chartered Accountants of India, and the Securities and Exchange Board of India, is necessary to adopt IFRS in India effectively. Coordinating their efforts and guaranteeing the consistent implementation of IFRS across the regulatory landscape can be difficult.

Conclusion

Despite these difficulties, there are many advantages to IFRS adoption in India, including improved comparability, transparency, and credibility of financial statements. Ind-AS’s implementation in India, which offers the potential for better financial reporting and higher competitiveness in the global market, marks a significant advancement for the Indian business sector. However, moving to Ind-AS also presents a number of hurdles for businesses, and the implementation’s success will depend on their capacity to manage the changeover successfully and get beyond the challenges presented by the new standards. 

FAQ

What is IFRS?

International Financial Reporting Standards are referred to as IFRS. In order to make financial statement reporting consistent, clear, and easy to compare on a worldwide scale, a group of accounting standards known as IFRS was developed. International Financial Reporting Standards are developed and published by the International Accounting Standard Board (IASB). The IFRS took the place of the older International Accounting Standards in 2001.

What is Ind AS?

Indian Accounting Standards are referred to as Ind AS. Every firm with an Indian registration must follow the accounting rules for financial reporting. The environment of financial reporting and regulation for businesses and corporations in India has changed dramatically as a result of the convergence of IFRS and Indian Accounting Standards.

What is the main challenge in the regulatory framework for implementing IFRS?

The Indian Accounting Standards, which are essentially convergent with IFRS, are India’s own accounting standards framework. Full convergence can be difficult because Ind AS and IFRS still differ from one another. In order to guarantee consistent application and compliance, the regulatory framework needs to be revised and brought into line with IFRS.

What are the main objectives of IFRS?

The main objectives of IFRS are: Creating the financial reporting infrastructure globally. To create sensible business thinking among the beneficiaries. To provide the dimensions for a fair financial statement presentation.

Read our Article: Need of Convergence of IAS with IFRS

References

  1. https://www.mca.gov.in/mcafoportal/viewCompanyMasterData.do

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