Pros and Cons of Adopting IFRS as Indian Standards
The use of international financial reporting standards (IFRS) as a universal financial reporting language is gaining momentum across the globe. ICAI has released a concept paper on Convergence with IFRS in India, detailing the strategy for adoption of IFRS in India with effect from April 1, 2011. This has been strengthened by a recent announcement from the ministry of corporate affairs (MCA) confirming the agenda for convergence with IFRS in India by 2011.
Even in the US there is an ongoing debate regarding the adoption of IFRS replacing US-GAAP.
Adopting IFRS by Indian corporates is going to be very challenging but at the same time could also be rewarding.
There are likely to be several benefits to corporates:
Improvement in comparability of financial information and financial performance with global peers and industry standards.
The adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements.
This will lead to increased trust and reliance placed by investors, analysts and other stakeholders in a company’s financial statements.
Better access to and reduction in the cost of capital raised from global capital markets since IFRS are now accepted as a financial reporting framework.
A recent decision by the US Securities and Exchange Commission (SEC) permits foreign companies listed in the US to present financial statements in accordance with IFRS. This means that such companies will not be required to prepare separate financial statements under Generally Accepted Accounting Principles in the US (US GAAP).
Therefore, Indian companies listed in the US would benefit from having to prepare only a single set of IFRS compliant financial statements, and the consequent saving in financial and compliance costs.
The use of international financial reporting standards (IFRS) as a universal financial reporting language is gaining momentum across the globe. ICAI has released a concept paper on Convergence with IFRS in India, detailing the strategy for adoption of IFRS in India with effect from April 1, 2011. This has been strengthened by a recent announcement from the ministry of corporate affairs (MCA) confirming the agenda for convergence with IFRS in India by 2011.
Even in the US there is an ongoing debate regarding the adoption of IFRS replacing US-GAAP.
Adopting IFRS by Indian corporates is going to be very challenging but at the same time could also be rewarding.
There are likely to be several benefits to corporates:
Improvement in comparability of financial information and financial performance with global peers and industry standards.
The adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements.
This will lead to increased trust and reliance placed by investors, analysts and other stakeholders in a company’s financial statements.
Better access to and reduction in the cost of capital raised from global capital markets since IFRS are now accepted as a financial reporting framework.
A recent decision by the US Securities and Exchange Commission (SEC) permits foreign companies listed in the US to present financial statements in accordance with IFRS. This means that such companies will not be required to prepare separate financial statements under Generally Accepted Accounting Principles in the US (US GAAP).
Therefore, Indian companies listed in the US would benefit from having to prepare only a single set of IFRS compliant financial statements, and the consequent saving in financial and compliance costs.
disadvantages:-However, the perceived benefits from IFRS adoption are based on the experience of IFRS compliant countries in a period of mild economic conditions. The current decline in market confidence in India and overseas coupled with tougher economic conditions may present significant challenges to Indian companies.
IFRS requires application of fair value principles in certain situations and this would result in significant differences from financial information currently presented, especially relating to financial instruments and business combinations.
Given the current economic scenario, this could result in significant volatility in reported earnings and key performance measures like EPS and P/E ratios.
Indian companies will have to build awareness amongst investors and analysts to explain the reasons for this volatility in order to improve understanding, and increase transparency and reliability of their financial statements.
This situation is worsened by the lack of availability of professionals with adequate valuation skills, to assist Indian corporates in arriving at reliable fair value estimates. This will render some of the benefits of IFRS adoption ineffective.
Please Visit the Blog : International Financial Reporting Standards
IFRS requires application of fair value principles in certain situations and this would result in significant differences from financial information currently presented, especially relating to financial instruments and business combinations.
Given the current economic scenario, this could result in significant volatility in reported earnings and key performance measures like EPS and P/E ratios.
Indian companies will have to build awareness amongst investors and analysts to explain the reasons for this volatility in order to improve understanding, and increase transparency and reliability of their financial statements.
This situation is worsened by the lack of availability of professionals with adequate valuation skills, to assist Indian corporates in arriving at reliable fair value estimates. This will render some of the benefits of IFRS adoption ineffective.
Please Visit the Blog : International Financial Reporting Standards
