International Financial Reporting Standards

-By Sanjoy Banka, FCA, FCS

e-Mail : Sanjoy.banka @ relianceinfo.com

International Financial Reporting Standards (IFRS) the new avatar of International Accounting Standards (IAS) are issued by International Accounting Standards Board (IASB). This role was earlier discharged by International Accounting Standards Committee (IASC) f rom 1973 to 2000 . The International Accounting Standards Committee (IASC) Foundation, based in London, is the oversight body of the IASB and is governed by 22 trustees, chaired by former US Federal Reserve chairman Paul A Volcker. The IASC Foundation is funded by contributions from the major accounting firms, private financial Institutions and industrial companies throughout the world, central and development banks, and other International and professional organisations.

U pon its birth in 2001, IASB adopted all the existing IAS (numbered 1 to 41) issued by its predecessor and decided that all future standards issued by it will be called IRFS. IASB is reviewing the extant IASs and has amended as well as replaced some of them with new IFRS. Several interpretations of Standards have also been issued. Broadly, IFRSs refers to the entire body of IASB and IASC pronouncements.

Till sometime back, IFRS had no statutory binding and were used more as the benchmark for development of national accounting standards as well as being used directly by a number of organizations and corporations. It is to be noted that IASB also as no statutory authority to require compliance with IFRS. As of date, over 70 Countries have either approved or mandated application of IFRS for their domestic listed companies including Austria, Finland, France, Russia, Sweden, Germany, UK, Australia, Singapore, Taiwan, and Mauritius etc. With the symbolical disintegration of political boundaries and emergence of global financial markets, IFRS is increasingly becoming relevant and overshadowing regional accounting standards. Globalisation of IFRS is also necessitated as global financial markets are integrating and investors are looking for more consistency in the financial reporting of multinational corporations.

European Union (having 25 member countries) which is the second largest economic power after USA has recently adopted a proposal that all companies domiciled in the EU with publicly traded shares on a European exchange(s) must use IFRS for their financial reporting by December 31, 2005. This will affect some 7,000 European companies, including Non-European multinationals listed on EU exchanges. Non-compliance of IFRS may lead to delisting of shares from the stock exchange. Now that Europe is moving toward a common accounting standard, other countries which still are glued to their local accounting standards will find it difficult in coming days to deal with EU countries for non-adoption of IFRS.

In April 2005 top officials of the EU Commission and the US Securities & Exchange Commission (SEC), met for preparing a "roadmap" toward equivalence between IFRS and US Generally Accepted Accounting Principles (GAAP). It was agreed that SEC will take steps to eliminate the need for companies using IFRS to reconcile to US GAAP standards possibly as soon as 2007, but no later than 2009.

On this occasion, Mr. Charlie McCreevy, EU Commissioner responsible for Internal Market and Services stated “ We will work closely together to promote the closer alignment of IFRS and US GAAP and towards the elimination of US GAAP reconciliation requirements for foreign private issuers. These are major steps towards high-quality global accounting standards, which the European Union strongly supports. ”He also said “Clearly there is much to do all round, but the bandwagon has now started. International accounting standard setters, preparers, issuers, auditors and regulators must now accelerate their efforts to seize this unique opportunity. They must set clear goals and deliver the necessary convergence, consistency and enforcement required. I will be pressing all concerned in Europe to play their part.” His statements summarize the importance attached by EU to IFRS.

The Transition to IFRS is required to be made as per IFRS 1 effective from 1st January, 2005. This essentially means that the opening balance as on 1st Jan, 2005 will also have to be IFRS complaint, thus making the effective date of transaction as 1st Jan, 2004. Moreover, since this will be the first year of IFRS implementation, the Companies will also be required to prepare a reconciliation of IFRS Accounts with National Standards to provide explanation for any major difference.

Some of the implications arising out of mandatory implementation of IFRS are as follows:

Financial statements of different countries prepared under common standards are likely to bring in higher comparability and objectivity.
IAS or IFRS which have generally been free of criticism will be subjected to criticism once they become mandatory and subject to strict reviews of CFO.
The issues of national sovereignty may be raised by National Accounting standard setters in case any difficulty is faced in implementation.
Country specific interpretations may be issued to take care of views of National Accounting standard setters, regulatory authorities, trade Bodies and so on, thus jeopardizing the whole effort of harmonization.
Domestic reporting which may have been divorced from International Trends will be aligned with global practices may open up Pandora box and unearth many creative accounting under the guise of National Accounting,
There is also need to avoid temptation for interpreting IFRS in own way which will frustrate the very purpose of universal GAAP.
The regulatory or taxation authorities may not be fully prepared to take appropriate views in cases of deviation of profitability, under or over reporting of revenue on account of Transition.
Analysts, investors, Bankers, Auditors need to update themselves with the IFRS and the deviations with National Standards well in advance to take timely decisions on the Companies observed by them.
Non IFRS Companies are likely to be discriminated in EU Countries, which will force them for voluntary compliance.

Multinational Corporations operating in several countries across Globe are likely to face difficulties for preparing their financial Statement under yet another Accounting pronouncement which hitherto was not mandatory. Even example, an Indian Company listed in US Exchange and also an EU Exchange will have to prepare it financial statements under Indian Accounting Standards, US GAAP and also as per IFRS. Preparation of financial statements under multiple accounting standards is likely to cause headaches to CFO and also involve exorbitant cost .

The vision of having a common global accounting language may not be achieved so soon. It requires efforts by standard setting bodies across the globe and work in tandem with IASB to achieve the dream of a Global GAAP. One possibility for early achievement of this goal is for all countries to prepare a statement of divergence statement from IFRS and require companies to follow IFRS and include reconciliation with Divergence Statements. This way the Accounts will comply with Global GAAP and will also show results under National GAAP. The effort for Cohesive Global GAAP need to be complemented with stricter enforcement.

Annexure 1 : IAS

Sl	LIST OF INTERNATIONAL ACCOUNTING STANDARDS	Issued/last revised
1	IAS 1: Presentation of Financial Statements	Dec 03
2	IAS 2: Inventories	Dec 03
3	IAS 7: Cash Flow Statements	1992
4	IAS 8: Accounting Policy, Change in Accounting Estimates, Errors	Dec 03
5	IAS 10: Events After the Balance Sheet Date	1999
6	IAS 11: Construction Contracts	1993
7	IAS 12: Income Taxes	2000
8	IAS 14: Segment Reporting	1997
9	IAS 16: Property, Plant and Equipment	Dec 03
10	IAS 17: Leases	Dec 03
11	IIAS 18: Revenue	1994
12	IAS 19: Employee Benefits	Dec 03
13	IAS 20: Accounting for Government Grants and Disclosure of Government Assistance	1983
14	IAS 21: The Effects of Changes in Foreign Exchange Rates	Dec 03
15	IAS 23: Borrowing Costs	1993
16	IAS 24: Related Party Disclosures	Dec 03
17	IAS 26: Accounting and Reporting by Retirement Benefit Plans	1987
18	IAS 27: Consolidated Financial Statements	Dec 03
19	IAS 28: Investments in Associates	Dec 03
20	IAS 29: Financial Reporting in Hyperinflationary Economies	1989
21	IAS 30: Disclosures in the Financial Statements of Banks .	1990
22	IAS 31: Financial Reporting of Interests in Joint Ventures	Dec 03
23	IAS 32: Financial Instruments: Disclosure and Presentation	Dec 03
24	IAS 33: Earnings per Share	Dec 03
25	IAS 34: Interim Financial Reporting	1998
26	IAS 36: Impairment of Assets	Mar 04
27	IAS 37: Provisions, Contingent Liabilities and Contingent Assets	1998
28	AS 38: Intangible Assets	Mar ,04
29	IAS 39: Financial Instruments: Recognition and Measurement	July ,05
30	IAS 40: Investment Property	Mar ,04
31	IAS 41: Agriculture	2001

Annexure 2 :

Sl	IFRS	Last revised
1	IFRS 1 : First-time Adoption of International Financial Reporting Standards	June , 05
2	IFRS 2 : Share-based Payment	February,04
3	IFRS 3 : Business Combinations	March ,04
4	IFRS 4 : Insurance Contracts	Mar 04
5	IFRS 5 : Non-current Assets Held for Sale and Discontinued Operations	Mar 04