Harmonization of Generally Accepted Accounting Principles (GAAP)
GAAP and accounting standards differ from country to country since they are
affected by political, legal, economic and cultural systems in which they are
developed. Accounting reports lose credibility when the reports are prepared
according to different standards in different countries. Globalization resulted in
cross-border producing, marketing and financing. To bring harmony in financial
reporting worldwide, there arose the need for development and acceptance of global
accounting standards. For this purpose, International Accounting Standards
Committee (LASC) was established in 1973. IASC was
replaced by International
Accounting Standards Board (IASB) in the year 2001 which now issues International
Financial Reporting Standards (IFRS). IASB initially
adopted the International
Accounting Standards issued by IASC to be gradually replaced by IFRS
upon their
A.S. AND INTERNATIONAL FINANCIAL REPORTING
STANDARDS 5.5
issuance. The number of International
41 out Accounting Standards issued by IASB so far is
of which 12 have been withdrawn or
replaced.
International Financial Reporting Standards (IFRS) :
The term IFRS refers to the
'International Financial Reporting Standards' issued
by International Accounting Standard
Board (IASB). IFRS also cover a wide
International Accounting Standards (1AS) issued by the
range of
Standard Committee (TASC). International International Accounting
financial statements to comply with all Accounting Standards (IAS) I require
issued so far is 13. requirements of IFRS. The number of IFRS
Thus, GAAP is being replaced
by the use of International Financial
Standards (IFRS)'. IFRS is being used Reporting
world. The exntent and manner of this variesincreasingly by companies throughout the
from country to country. In some
parts
Caribbean, IFRS has fully replaced GAAP.of
the world, such as parts of Africa and the
European Union (EU) regulation requires listed
financial statements using IFRS rather than national GAAP companies to prepare their
for periods commencing
on or after 1st January, 2005. Within
the EU, in the UK and Ireland, national
converging to IFRS so that it may in due course become the same as IFRS. TheGAAP U.S.A.
is
is engaged in a significant
programme of converging US GAAP into IFRS.
IFRS or a local variant have been
adopted in countries as diverse as Australia,
Hongkong, Central and Eastern Europe
including Russia, parts of the Middle East,
Africa and Caribbean. The next wave is likely to include
Japan, South Korea, China,
Canada and much of South America. These territories are likely to adopt IFRS in the
period 2010-12. Currently, about 130 countries permit or require compliance of IFRS
while preparing financial statements.
L
IFRS Issued by the IASB
S. No
Title Corresponding
converged Ind-AS
1. IFRS 1 First-time Adoption of International Financial Ind-AS 101
Reporting Standards
Ind-AS 102
2. IFRS 2 Share-BasedPayment
Ind-AS 103
3. IFRS 3 Business Combinations
4. IFRS 4 Insurance Contracts Ind-AS 104
Ind-AS 105
5. IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations
Ind-AS 106
6..IFRS6Exploration for and Evaluation of Mineral
Resources
Ind-AS 107
Financial Instruments:Disclosures
7.IFRS7 Ind-AS 108
8. IFRS 8 Operating Segments
Exposure Draft Issued
9. IFRS 9 Financial Instruments
Exposure Draft Issued
0.IFRS 10 Consolidated Financial Statements Exposure Draft Issued
11.IFRS 11 Joint Arrangement
A.S, AND
5.6
12. IFRS 12 Disclosure of Interest in Other
Entities Exposure Draft ssued
Fair Value Measurement Exposure Draft Sued
13.IFRS 13
Assumptions in IFRS
: It is assumed
that the life of the busin.
(i) Going Concern Assumptioncontinue to exist for an od inin
indefinite period the
infinite, i.e., the entity will
future.
(i) Accrual Assumption: As per this assumption
transactions are
recorded on
occur and the date of settlement is
accrual basis, i.e., as and when they
immaterial.
current purchasing power
(ii) Measuring Unit Assumption : Measuring unit is the
It means that the assets are not shown in the Balance Sheet at historical costhut
In other words, assets are shown at the
they are shown at current or fair value.
amount that would have been paidifthe same asset has been acquired currently.
Similarly, liabilities are shown at the amount that would be required to setle
them.
(iv) Constant Purchasing Power Assumption: This assumption requires that the
value of capital be adjusted to inflation at the end of the financial year.
Need for IFRS
Each country has its own set of rules and regulations for accounting and financial
reporting. Hence, when an enterprise decides to raise capital from abroad, the rules and
regulations of that country will apply and there will be differences in the ftinancial
reporting in the foreign country as compared to its own country. Hence, a strong need
was felt for adoption of IFRS' as it would bring uniformity, comparability,
transparency and adaptability in financial statements. The need for IFRS arises from
the following reasons
) Easy Access to Global Capital Markets: Capital markets have now become
global and companies are now in a position to access the funds globally. But
investors all over the world rely on financial statements prepared on the basis of
IFRS. Hence, IFRS based financial statements are now a pre-requisite for the
enterprises seeking to raise overseas funds.
(i) Easy to Make Comparisons International investors would like to compare
financial statements based on internationally accepted set of accounting
standards. It improves the ability of investors to
compare their investments on
global basis and thus lowers their risk of errors of judgement. Financla
statements based on IFRS will facilitate the investors to compare financial
statements without making adjustments for national accounting differences.
(ii) Uniformity in Financial Reporting: The adoption of IFRS brings uniformiy
comparability and transparency in financial statements. It improves tne
standard and quality of financial reporting.
(iv) Lower Cost of Capital Raised Abroad: At present, companies that operate l
global environment have to prepare two sets of financial statementsOnc
based on home country's accounting standards and another set based on
In case of adoption of IFRS it will have to
IF
prepare only one set of financia
statements and thus the cost of raising funds from abroad will be minimized
A.S AND INTERNATIONAL FINANCIAL REPORTING
(True and Fair Valuation of STANDARDS - -
5.7
Indian Accounting Standards and Assets : There is wide
assets are valued on historical IFRS. As per Indian gap betvween existing
fair value i.e.; the cost whereas as
per IFRS
Accounting Standards,
estimated value at which assets are reported at
Adoption of IFRS would
provide
the asset could be
sold in the market.
fair value of assets. a uniform basis for the
reporting
of true and
(vi Difficult to Commit Fraud
manipulate the accounts andandcommitManipulate the Accounts : It is easy to
accounting. There are tough and rigid fraud in the traditional system of
of financial statements rules for
under IFRS and it is the preparation and presentation
the aecounts. extremely difficult to manipulate
Benefits of IFRS:
IFRS are very useful for business
addition to the enterprises operating enterprises carrying on business worldwide. In
globally,
accounting professionals in the following wayIFRS is helpful to investors, industry and
)Helpful to Enterprises Operating
perations in different Globally Entities having :
countries will face
statements if they prepare their problems of consolidation of business
financial
financial
prevailing in diferent countries. IFRSstatements the according to the standards
worldwide as a result of which the unify accounting practices
problem of consolidation is
avoided.
b Helpful
Helpful to Investors: Investors
require high quality, relevant, reliable,
bo transparent and comparable information in financial statements in
make economic decisions. The order to
use of common set of
standards i.e., IFRS would be high quality accounting
statements
helpful to investors in comparison to financial
prepared under different
accounting standards adopted by different
countries.
(ii) Helpful to Industry : Obtaining funds
if the financial statements from outside the country becomes easier
comply with Globally accepted accounting
standards. Now a days most of the stock
exchanges require information as per
IFRS and Convergence to IFRS would enable Indian
international capital market easily. Companies access to
iv) Lower Cost of Raising Funds Abroad : Cost of
raising funds abroad can be
minimized under IFRS as there will be no need to prepare two sets of
financial
statements- one set on the basis of IFRS and another on the basis of
Accounting Standards.
)Helpful to Accounting Professionals: Accounting professionals will be able
To provide better services in countries adopting IFRS.
7 True and Fair View: In IFRS based financial statements assets are valued on
the concept of true and fair value i.e., on the basis of their market value. Indian
Accounting Standards ignore this concept.
erence between IFRS and Indian GAAP or Accounting Standards:
F R S are based on Principles whereas Indian GAAP or Accounting Standards
are based on Rules. For example, under the Indian laws, Balance Sheet and
5.8
A.S. AND INTERNATIONAL FINANCIAL REPORTING STANDA.
-
**--ROS
Statement of Profit & Loss are prepared according to Schedule II
of
the
s
Companies Act 2013, whereas IFRS do not prescribe any format for these. IFRo
prescribe that items should be shown in the Balance Sheet as per the principles
associated with each item. For example, under Schedule Ill
Preterence Shares are shown under the head 'Share Capital' but IFRS
Redeemahta
to be shown under
requiteeit
the head 'Loans' since, in the real
sense, Frererence Share
Capital is not a Capital but loan because it carries a fixed rate of dividend and
also has to be redeemed as per the terms of issue but not later than 20 years
the date of their issue. from
(ii) FRS are based on 'Fair Value'
concept whereas Indian GAAP or Accounting
Standards are based on 'Historical Cost'
concept. As per Indian GAAP or
Accounting Standards assets are shown in the Balance Sheet at Historical
Cost
and as such
depreciation is also charged on such historical cost but IFRS require
that the assets and liabilities should be
shown at current or fair value as at the
date of Balance sheet.
Thus, under IFRS depreciation is not charged on the cost
of the asset but the asset is
valued on the date of Balance Sheet
difference in the opening and and the
Profit and Loss Account.
closing value of the asset is debited or credited to
(ii) Under IFRS the useful life of the assets has to be
reassessed again and
until the asset is
fully depreciated whereas as per Indian GAAP the useful again
life is
estimated only at the beginning.
(iv Under IFRS depreciation is not caleulated on the
the cost of significant total cost of the asset but on
components of the asset. For example in the case of a
Truck, the depreciation may be calculated
main body of the Truck separately for its wheels and the
separately. However, as per Indian Accounting
Standards, depreciation is calculated on the total value
(v) IFRS of the asset.
provide a wide framework in which clear
financial reporting. Under the framework guidelines are given for
and Equity are clearly defined. But no provided by IFRS, Assets, Liabilities
such framework exists
Standards. under Accounting
Procedure for Implementation of IFRS
There are two alternative procedures
available to a country for
implementation of lFRS, namely (9 Adoption or (i) Convergence compliance or
( Adoption Adoption means acceptance of IFRS in
:
its original form.
adoption no change is allowed in the In case of
IASB. language or format of IFRS framed by
(i#n Convergence Convergence with IFRS means
:
modifications where necessary. implementation of IFRS with
dia has decided to
India converge the existing Indian
RS. n India, converged accounting
the Accounting Standards according
standards are
cedure
Proce to issue Ind-AS is the called Ind-AS.
same as is
ing standards. The Accounting Standard being followed in case of existing
accounting standards,
she drafte Board (ASB) of India has
the exposure drafts on all the already
exposure
issued
ese standards are first
converged standards i.e., Ind-AS
approved by the Council of equivalent to
Indian Institute of
