Financial Reporting

Need of convergence of IAS with IFRS

Every country has its own set of accounting laws and regulations. However, due to globalisation in the previous few decades, as businesses began to go global and the global financial system became integrated, the need for a set of global accounting standards that could be recognised globally developed. So, as a broad framework for global application, international accounting standards known as International Financial Reporting Standards (IFRS) were established. This led the world to converge its accounting standards to that of IFRS, and India is no exception.

Such convergence aims to establish universally recognised standards that may be followed to guarantee the transparency and usefulness of financial data. The need for convergence of Indian Accounting Standards is discussed in this blog.

What Are IFRS?

International Financial Reporting rules (IFRS) are consistent accounting rules developed by the London-based IASB (International Accounting Standards Board) for use globally. The standards and rules for financial reporting are primarily guidelines based.

Convergence of IAS with IFRS

The Institute of Chartered Accountants of India (ICAI) created the accounting standards for India. India took the official decision to converge IAS with IFRS in 2007. Instead of adopting IFRS entirely, the ICAI and IASB worked together to create high-quality and equivalent accounting standards for India. For the following types of companies, new requirements will be required starting on April 1st, 2016, according to the Ministry of Corporate Affairs:

• Banks, insurance companies, and financial service companies.
• As well as listed companies with an annual turnover of over 250 crores.

Need for Convergence of IAS with IFRS

The following factors led to the perception that IAS and IFRS needed to converge:

• To guarantee that everyone is aware of the ideal international accounting standards
• To ensure that the financial statements are comparable, transparent, and trustworthy
• To encourage international investment and accelerate industrial growth
• For the global standardised application of financial reporting and accounting 
• For the removal of informational obstacles for users of financial information

Aim of convergence

• There would be a single set of accounting standards applied globally, which would also be advantageous for regulators because it would make it simpler for them to comprehend multiple reporting systems.
• Because they did not need to prepare a different set of financial statements to comply with laws of other jurisdictions, the corporations will have less compliance load.

Benefits of Convergence of IAS with IFRS

The following are some advantages of IAS and IFRS convergence:

Financial capital markets accessibility: The global financial capital markets will become more accessible to Indian businesses due to convergence, and they will be able to easily attract investments from abroad at more affordable rates, aiding in their overall growth and expansion.

Attractive Investment and Cross-border Trade Options: Indian businesses would be able to list themselves on international stock exchanges, which will encourage cross-border commerce and investment, particularly in underserved geographic areas.

Eliminate the duplicity of efforts: Convergence will further minimise dual reporting because Indian companies won’t have to generate separate financial statements, which reduces and eliminates duplication of effort in financial reporting and extra accounting.

Increases comparability and reliability: Since all international tax and accounting jurisdictions accept IFRS, the convergence of this standard with IAS would improve the comparability and credibility of Indian company financial statements. This will boost the confidence of international investors in Indian companies and persuade them to make more significant investments.

Increased acceptance of Indian professionals in international markets: This convergence will provide Indian accountants access to global opportunities and emphasise their skills and abilities overseas, turning India into a machine that generates foreign cash.

Challenges Associated With the Convergence Of IAS With IFRS

Below are some of the challenges associated with the convergence of IAS with IFRS: 

Increased Training Costs: Since most professionals aren’t trained in IFRS, it puts a significant financial strain on businesses to educate and train these workers. This makes it challenging for their companies to implement IFRS.

Indian regulatory changes: Since IFRS varies from the current regulations, a thorough revision of the current rules would be necessary to apply IFRS standards. To make them compliant with IFRS, changes must be made to the Companies Act of 2013, the SEBI Act of 1992¹, the Income Tax Act of 1961, etc. These are the legal obstacles to IFRS adoption in India.

System differences: The IFRS uses the fair value system to measure assets, while the Indian GAAP recognises the historical system. These variations give financial statements subjectivity and volatility, affecting how the company performs and makes money.

Changes to IT systems: Adherence to IFRS would necessitate new financial accounting software for reporting and the need to change the existing reporting infrastructure, which requires significant investment from the company and which Indian businesses are hesitant to make.

For the SME sector: The costs of such convergence outweigh the advantages of implementing them. Small and medium-sized businesses (SMEs) do not have sufficient resources or financial competence, which furthers the divergence between IAS and IFRS. However, because it is so crucial to the Indian economy, a sector like this cannot be disregarded.

Amendments to existing Indian laws: A variety of changes to existing Indian legislation could emerge from implementing IFRS, including changes to the Companies Act of 1956, SEBI rules, banking laws and laws governing financial institutions, and insurance laws and legislation. Various Indian regulators oversee the reporting obligations, and their rules precede any other laws. IFRS does not recognise such overriding laws. The regulatory organisations must make sure that laws are changed promptly to allow for easy adoption.

Creating awareness about international accounting practices: Increasing public understanding of international accounting standards (IFRS) requires a significant overhaul of the complete set of financial statements. They differ in several ways, requiring much work to educate users on the fundamental IFRS principles, practises, and new vocabulary to understand these IFRS-compliant financial statements.

Difference between IFRS and IAS

IAS stipulates specific guidelines that must be followed, which may make it harder for businesses to adjust to unusual situations. Contrarily, IFRS offers broader principles that permit more discretion and interpretation, providing businesses more freedom to tailor the standards to their particular situations. The table below lists the distinctions between IAS and IFRS:

IAS	IFRS
The International Accounting Standards Committee (IASC) developed IAS between 1973 and 2003.	The International Accounting Standards Board created IFRS in 2001.
IAS covers a range of financial reporting-related issues.	All IAS standards, as well as other industry-specific standards, are covered under IFRS.
IAS concentrates on basic accounting principles.	IFRS covers both broad principles and specific criteria for various businesses and transactions.
IAS is less flexible in application requirements and regulations.	IFRS is more flexible since it allows for judgment and interpretation depending on specific situations.
Several nations use IAS. However, it is less commonly recognised than IFRS.	Over 140 nations utilise IFRS, a generally accepted international standard for financial reporting.
Due to variations in the interpretation and application of particular regulations, IAS might cause variances in the reported financial information.	Due to the broader principles-based guidance provided by IFRS, reported financial information is typically more consistent and comparable.

Conclusion

IAS and IFRS convergence is undoubtedly a difficult task. It is necessary for all parties involved to agree that this convergence will benefit Indian businesses and boost their credibility in the global financial markets. Indian businesses risk falling behind if they become complacent about convergence. The process of IAS and IFRS convergence has been prolonged, and it will take aggressive actions from both the government and the industry itself to start the process. The government may establish a task group to modify the current legal system that will facilitate the seamless integration of IFRS. I would appreciate assistance from countries that have effectively implemented these standards successfully.

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1. https://www.indiacode.nic.in/handle/123456789/1890?sam_handle=123456789/1362