Need of convergence of IAS with IFRS

Introduction

Every nation follows its own set of policies and standards for accounting. However, because of globalization in the previous few decades when the companies started going global and the global monetary market becoming integrated, a necessity arose for a set of accounting standards which could be acceptable worldwide. So international accounting standards were laid down called International Financial Reporting Standards (IFRS) as a broad framework for worldwide application. This led the world to converge their accounting standards to that of IFRS and India is no exception to this. The purpose of such convergence is to have common acceptable standards to be practiced world over to ensure transparency and utility of financial information. This piece of writing discusses the need of convergence of Indian Accounting Standards (IAS) with IFRS.     

What are IFRS?

IASB (International Accounting Standards Board), a London based body formed uniform accounting standards for worldwide application called International Financial Reporting Standards (IFRS)^[1]. They are mainly guideline based standards that draw the standards and guidelines for financial reporting.   

Convergence of IAS with IFRS

The Institute of Chartered Accountants of India (ICAI) develops the accounting standards for India. The official decision of convergence of IAS with IFRS was taken by India in 2007. Both ICAI and IASB collaborated to develop quality and comparable accounting standards for the accounting in India instead of completely adopting IFRS. The Ministry of Corporate Affairs has announces that new standards will be mandatory from 1^st April 2016 onwards for the following categories of companies:

• Listed companies with turnover more than 250 crores and
• Banks, Insurance companies and financial service companies  

Need for convergence of IAS with IFRS

The need for convergence of IAS with IFRS was felt for the following reasons:

• To ensure general understanding of the best global accounting practices
• To make the financial statements comparable, transparent and reliable
• For promoting foreign investment and boost industrial growth
• For standardising financial reporting and accounting across world
• For elimination of information barriers for users of financial information

Benefits of convergence of IAS with IFRS

Following are some of the benefits of convergence of IAS with IFRS:

1. Access to global financial capital markets: Convergence will help the Indian companies gain access to the global financial capital markets where they can easily attract investments from abroad on cheaper rates which helps in their overall growth and expansion.
2. Attract investment and boost cross border trade: Indian companies following IFRS will be able to list themselves on the foreign stock markets and this would facilitate cross border trade and investment especially in unrepresented geographies.
3. Reduce and eliminate duplicity of efforts: Convergence will further reduce the dual reporting as the Indian companies would no longer need to prepare separate financial statements thus eliminating duplicity of efforts in financial reporting and unnecessary accounting.
4. Increases reliability and comparability: Since the global tax and accounting jurisdictions accept IFRS, convergence of the same with IAS will increase reliability and comparability of the accounts of Indian companies. This will instil confidence of the foreign investors in the Indian companies and encourage them to invest more in the Indian companies.
5. Increase acceptability of Indian professionals in foreign markets: Such convergence will open the doors for global opportunities for the Indian accounting professionals and highlight their expertise and talents abroad thus becoming a forex generating machine for India.

Challenges associated with convergence  of IAS with IFRS

1. Increases training costs: Since most of the professionals have not been trained in IFRS, it becomes a huge cost burden on the companies on training and awareness of such employees. This makes it difficult in the implementation of the IFRS in their companies.
2. Amendments in Indian regulations: Since IFRS are different from the existing regulations, therefore, a complete overhaul of the existing regulations would be required for the implementation of IFRS standards. Amendments have to be made in Companies Act, 2013, SEBI Act, 1992, Income Tax Act, 1961 etc. to bring them in consonance with the IFRS. These are the legal hurdles in the implementation of IFRS in India.
3. Differences in the systems of measurement: The IFRS follows the fair value system of asset measurement whereas Indian GAAP recognises the historical system. Such differences create subjectivity and volatility in the financial statements and lead to different results of performance and earnings of the company.
4. Changes in the IT systems: convergence with IFRS would require new financial accounting softwares for reporting and the existing reporting infrastructure needs to be changed which require substantial investment by the company and the companies in India are reluctant to make investments which involve a lot of time, money and efforts.
5. For SME industry: The cost of such convergence far outweighs the benefits that will accrue from implementing it. The small and medium enterprises (SME) do not have adequate resources and skills in financial knowledge which further contributes to the non-convergence of IAS with IFRS. But, such a sector cannot be ignored since it plays a major role in the Indian economy.  

Conclusion

Convergence of IAS with IFRS is certainly an uphill task. It requires that all the stakeholders form the consensus that such convergence will increase the credibility of the Indian companies in the International financial markets and bring gains to them. Indian companies cannot afford to be complacent in the convergence or these companies will lag behind. The process of convergence of IAS with IFRS has been very slow and it requires proactive efforts from the government and also from the industry itself to initiate the process of convergence. The government can set up a task force for recommending changes in the existing legal framework for the smooth assimilation of IFRS. If possible, help can also be sought from those nations who have successfully implemented these standards.  

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