Final Report SHANKAR

8/6/2019 Final Report SHANKAR

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IFRS AND ITS IMPACT ON INDIAN CORPORATES

In partial fulfillment of the Course: Dissertation

In Term VIII of the Post Graduate Program in Management

(Batch: Aug. 2009 2011)

Prepared by

SHANKAR RAO

Registration No: 09PG407

Bangalore


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IFRS AND ITS IMPACT ON INDIAN CORPORATES

In partial fulfillment of the Course: Dissertation

In Term VIII of the Post Graduate Program in Management

(Batch: Aug. 2009 2011)

Prepared by

SHANKAR RAO

Registration No: 09PG407

Bangalore


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Bangalore

Post Graduate Program in Management Aug. 2009 - 2011

Term VIII: Dissertation

Declaration

This is to declare that the report entitled IFRS AND ITS IMPACT ON INDIAN CORPORATES is

prepared for the partial fulfillment of the course: Dissertation in Term VIII (Batch: Aug.

2009-2011) of the Post Graduate Program in Management by me under the guidance of Prof.

Zohra Bi.

I confirm that this dissertation truly represents my work. This work is not a replication of

work done previously by any other person. I also confirm that the contents of the report and

the views contained therein have been discussed and deliberated with the Faculty Guide.

Signature of the Student :

Name of the Student (in Capital Letters) : SHANKAR RAO

Registration No : 09PG407


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Post Graduate Program in Management

Certificate

This is to certify that Ms. Shankar Rao Regn. No. 09PG407 has completed the dissertation

entitled IFRS AND ITS IMPACT ON INDIAN CORPORATES under my guidance for the partial

fulfillment of the Course: Dissertation in Term VIII of the Post Graduate Program in

Management (Batch: Aug. 2009 2011).

Signature of Faculty Guide:

Name of the Faculty Guide: ZOHRA BI


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ACKNOWLE E ENT

I woul li to t t i opportunit to express my sincere gratitude to all t ose who have

extended their help during my dissertation and have made this study possi le. Their constant

guidance, support and encouragement resulted in the realization ofthis research.

I would li e to thank my faculty guide for her excellent support and guidance during the

tenure ofthe dissertation programme.

I am thankful to my family and friends for their consistent guidance, support and

encouragementthroughout my work.

I would also take the opportunity to thank my institute Alli B i U iv i ,

Bangalore, for having created a stimulating atmosphere of academic excellence, the basic

element of any long lasting endeavour.Lastly I would like to thank the almighty God for providing me strength, skills and

intelligence which helped me to complete my journey of PGPM with ease and grace.


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TABLE OF CONTENT

C TENTS PAGENO.

EXECUTIVE SUMMARY 08

INTRODUCTION 10

OBJECTIVES OF THE STUDY 19

LITERATURE REVIEW 22

ANALYSIS 27

FINDINGS 98

CONCLUSION 100

RECOMMENDATIONS 102

REFERENCES 104


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LIST OF TABLE AND CHARTS

CONTENT PAGE NO

FINANCIAL STATE ENT 18

IFRS CONVERSION

PROGRAMME

33

IFRS FINANCIAL STATEMENT 33

APPLICABILITY OF IFRS 34

BENEFICIARIES OF

CONVERGENCE WIT IFRS

59

DIFFERENT STANDARD OF

IFRS AND IAS

77

COMPARATIVE STATEMENT

OF IFRS & IAS

95


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EXECUTIVE SUMMARY


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EXECUTIVE SUMMARY

IFRS (International Financial Reporting Standards) is a set of accounting standards

developed by the International Accounting Standards Board (IASB) an independent, not for-

profit organization. Todays financiallandscape with its dynamic markers evolving marketconditions, and fierce competition among corporations- is filled with challenges forthe risk-

averse investor. Perhaps the greatest challenge is to access an organisations current and

expected economic performance. An essential part of this task is to scrutinize financial

statement for compliance with regulatory accounting standards which has given rise to a

strong need for IFRS. Thus, IFRS have become the backbone of financial reporting, capturing

best practices throughoutthe world. These standards are used by most capital providers that

expect financial information to be presented in a comprehensive, transparent and easily

understood reporting framework which was previously known as the International

Accounting Standard (IAS).IFRS rapidly are becoming a lens through which providers of

debt and equity capital examine theirinvestment choices.

IFRS are used in many parts of the world. Countries like European Union, Hong Kong,

Australia, Malaysia, and Pakistan, GCC countries, Russia, South Africa, Singapore, Turkey

and many more countries have already started following IFRS reporting. In addition, the US

is also gearing towards IFRS as the SECin the US is slowly but progressively shifting from

requiring only US GAAP to accepting IFRS in the long-term.

In India the Institute ofChartered Accountants of India (ICAI) had announced that IFRS will

be mandatory in India for financial statements for the periods beginning on or after 1 April

2013. Even Reserve Bank of India has stated that financial statements of banks need to be

IFRS compliant for periods beginning on or after 1 April 2013. Adoption of IFRS is

mandatory forthe following entities: a) Public and private companies, listed as well as those

which are in the process of getting listed, b) Private companies who have issued debt

instruments in a public market; and c) Private companies which hold assets in a fiduciary

capacity (e.g., banks, insurance companies).

The report work focuses on the effects of implementation of IFRS in Indian companies for

which the main issues is to know aboutthe convergence of IAS with IFRS and allthe issues

related to this convergence with Indian perspectives. Starting with an introduction to IFRS

will then explain its benefits on all levels. Furtherthe major differences between IFRS and

Indian Accounting Standards is also highlighted in the report.


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INTRODUCTION


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INTRODUCTION

Basically IFRS is developed to provide a single set of high quality global standards and a

global framework for how public companies prepare and disclose their financial statements.

It provides general guidance forthe preparation of financial statements. Currently, over 100

countries permit or require IFRS for public companies, with more countries expected to

transition to IFRS by 2015. Having an international standard is especially important forlarge

companies that have subsidiaries in different countries. Adopting a single set of world-wide

standards will simplify accounting procedures by allowing a company to use one reporting

language throughout. A single standard will also provide investors and auditors with a

cohesive view of finances. IFRS has replaced the older standards IAS (International

Accounting Standards).

In todays complex economic environment, the measurement and presentation of financial

information is critical as far as allocation of economic resources is concerned. Accounting

was created as a mean of measuring and reporting upon such economic activity. Throughout

the world, various accounting bodies are engaged in the task of formulating and

implementing accounting policies and practices to show true and fair view of the financial

statements, which are the basis of decision making forthe stakeholders ofthe company.

Accounting as a business language communicates the financial results of an enterprise to

various interested parties by means of financial statements exhibiting true and fair view ofits

state of affairs as also ofthe working results. Various accounting bodies have been developed

to set rules for accounting. The rules set by them are also called Accounting Standards.

Accounting Standards (ASs) are written policy documents issued by expert accounting body

or by Government or other regulatory body covering the aspects of recognition,

measurement, presentation and disclosure of accounting transactions in the financial

statements. The main purpose of the standard setting bodies is to promote the dissemination

of timely and useful financial information to investors and certain other parties having aninterestin the companys economic performance.

The Accounting Standards are basically setto deal with the issues of (I) recognition of events

and transactions in the financial statements, (II) measurement of these transactions and

events, (III) presentation of these transactions and events in the financial statements in a

manner that is meaningful and understandable to the reader, and (IV) the disclosure


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requirements which should be there to enable the public atlarge and the stakeholders and the

potential investors in particular, to get an insight into what these financial statements are

trying to reflect and thereby facilitating them to take prudent and informed business

decisions.

The emergence of transnational corporations in search of money, not only for fuelling

growth, but to sustain ongoing activities has necessitated raising of capital from all parts of

the world. Each country has its own set of rules and regulations for accounting and financial

reporting. Therefore, when an enterprise decides to raise capital from the markets otherthan

the country in which it is located, the rules and regulations of that other country will apply

and this in turn will require that the enterprise is in a position to understand the differences

between the rules governing financial reporting in the foreign country as compared to its own

country of origin. Therefore translation and re-instatements are of utmost importance in aworld thatis rapidly globalizing in all ways. The accounting standards and principle need to

be robust so thatthe larger society develops degree of confidence in the financial statements,

which are put forward by organizations.

A financial reporting system supported by strong governance, high quality standards, and

firm regulatory framework is the key to economic development. Sound financial reporting

standards underline the trust that investors place in financial reporting information and thus

play an important role in contributing to the economic development of a country.

In India, The Institute ofChartered Accountants of India (ICAI) as the accounting standards

formulating body has always made efforts to formulate high quality Accounting Standards

and has been successful in doing so. As the world continues to globalize, discussion on

convergence of national accounting standards with International Financial Reporting

Standards (IFRSs) has increased significantly. In this scenario of globalisation, India cannot

insulate itself from the developments taking place worldwide. In India, so far as the ICAI and

the Governmental authorities such as the National Advisory Committee on Accounting

Standards established under the Companies Act, 1956, and various regulators such as

Securities and Exchange Board of India and RBI are concerned, the aim has always been to

comply with the IFRSs to the extent possible with the objective to formulate sound financial

reporting standards. It has also become imperative for India to make a formal strategy for

convergence with IFRSs with the objective to harmonize with globally accepted accounting

standards.


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India has committed itself atthe G-20 to make its companies, IFRS compliant from April 1st,

2011. Though India has not adopted the IFRS in full butit converged its Accounting

Standards (AS) to getthose in line with the international reporting standards. In this process

Indian government, till date has issued 35 accounting standards which are in line with

existing IAS and IFRS.

Impact of IFRS on Indian businesses can be studied in various contexts. We will do a cost

benefit analysis ofthe same.

Cost Associ ted With Implementation of IFRS.

1) The transition to IFRS will place a burden on company staff. Training of staff will be

deemed necessary. Further, companies have to employ staff on a permanent basis to take

responsibility for compliance with accounting standards and disclosure requirements. This

willincrease the manpower cost for companies.

2) Information and communication technology (ICT) systems may not be able to supply

information in allinstances to be required to achieve compliance with IFRS, which suggests

that more ICT system changes will be seen in the future. For example maintenance of

information relating to property, plant and equipment, such as updating ofthe fixed asset

register and recording and updating ofthe residual values and usefullives, in the transition to

to IAS 16 (property, plant and equipment) will be a burdensome task.

3) In a few cases, the adoption of IFRSs may cause hardship to the industry. To avoid the

hardship, some companies may go to the courtto challenge the standard. Earlier, to avoid

hardship in some genuine cases, the ICAI has deviated from corresponding IFRS for a limited

period tillthe preparedness is achieved. But now such deviation will not be there as the new

accounting standards are in line with IFRS.

Benefits Associated with implementation of IFRS.

1) As the forces of globalization prompt more and more countries to open their doors to

foreign investment and as businesses expand across borders, both the public and private

sectors are increasingly recognizing the benefits of having a commonly understood financial

reporting framework, supported by strong globally accepted standards. The benefits of a

global financial reporting framework are numerous and include:


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Greater comparability of financialinformation forinvestors;

Greater willingness on the part ofinvestors to invest across borders;

Lower cost of capital;

More efficient allocation of resources; and

Higher economic growth.

Challenges for Small and Medium-Sized Entities

In emerging economies like India, a significant part ofthe economic activities is carried on

by small- and medium-sized entities (SMEs). Such entities face problems in implementing

the accounting standards because of:

Scarcity of resources and expertise with the SMEs; and the

Cost of compliance is not commensurate with the expected benefits

Hence keeping in mind Government of India has decided that non-listed companies which

have a net worth ofRs. 5000 Millions orless and whose shares or other securities are not

listed on Stock Exchanges outside India and Small and Medium Companies (SMCs) will not

be required to follow the notified Accounting Standards which are converged with the IFRS

(though they may voluntarily optto do so) but need to follow only the notified

Accounting Standards which are not converged with the IFRS.

In this changing scenario, India cannot cut offitself from the developments taking place

worldwide. At present, the Accounting Standards Board (ASB) ofthe Institute ofChartered

Accountants of India (ICAI) formulates Accounting Standards (ASs). Complex nature of

IFRSs and the differences between the existing ASs and IFRSs, the ICAI is ofthe view that

IFRSs should be adopted forthe public interest entities such as listed entities, banks and

insurance entities and largesized entities from the accounting periods beginning effect from

April, 2011. Convergence to IFRS would mean India would join a league of more than 100

countries, which have converged with IFRS. Converging to IFRS by Indian companies will

be very challenging and on the contrary it could also be rewarding too.


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Benefits to corporates in the Indian context World Class Peer Standards for Financial

Reporting: IFRSs will surely enhance the comparability of financialinformation and financial

performance with global peers and industry. This will resultin more transparent financial

reporting of a companys activities which will benefitinvestors, customers and other key

stakeholders in India and overseas. The adoption of IFRS is expected to resultin better

quality of financial reporting due to consistent application of accounting principles

and improvementin reliability of financial statements.

Investors: It will be a great help forthose investors who wish to invest outside their own

country and looking for a Financial statements, which prepared by using a common set of

accounting standards IFRS provides them better comprehensible investment opportunities as

opposed to financial statements prepared using a different set of national accounting

standards. For better understanding of financial statements, globalinvestors have to incurmore costin terms ofthe time and efforts to convertthe financial statements so thatthey can

confidently compare opportunities. Investors confidence would be well-builtif accounting

standards used are globally accepted. Convergence with IFRSs contributes to investors

understanding and confidence in high quality financial statements.

The industry: It will be easierto raise capital from foreign markets atlower costifthe

industry can create confidence in the minds of foreign investors thattheir financial statements

comply with globally accepted accounting standards. The burden of financial reporting is

lessened with convergence of accounting standards because it simplifies the process of

preparing the individual and group financial statements and thereby reduces the costs of

preparing the financial statements using different sets of accounting standards.

The accounting professionals:Convergence with IFRSs also create more business

opportunity to the accounting professionals in a great way thatthey are able to selltheir

services as experts in different parts ofthe world, it offers them more opportunities in any

part ofthe world if same accounting practices prevailthroughoutthe world. They are able to

quote IFRSs to clients to give them backing for recommending certain ways of reporting.

Challenges to Indian Corporate Laws and regulations: There is a need to bring a change in

severallaws and regulations governing financial accounting and reporting system in India. In

addition to accounting standards, there are legal and regulatory requirements that determine

the mannerin which financialinformation is reported or presented in financialstatements.


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Lack of adequate professionals: There is a lack of adequate professionals with practical IFRS

conversion experience and therefore many companies will have to rely on external advisers

and their auditors.

Replacement and Up gradation in systems:Conversion to IFRS will require extensiveupgrades ortotal replacement of major system. With sufficient planning, upgrades and

replacements can occur as part ofthe overall strategic technology planning and procurement

process.

Convert historical data: Historical data from recent prior periods will have to be recast for

comparative purposes. This is necessary to permit accurate and comparative trend and ratio

analysis. Record retention requirements should be reviewed to ensure that data currently

being retained is detailed enough to permit proper restatement of prior-period financials.

Coordination ofConversion System: For many organizations, the conversion to IFRS will be

a multi-year exercise with numerous changes to technology infrastructure and systems.

Development of new technology systems should be carefully examined so IFRS requirements

can be incorporated.

Hence there will be two sets of accounting standard in India.

Adopting IFRS by Indian corporates is going to be very challenging but atthe same time

could also be rewarding. Indian corporates are likely to reap significant benefits from

adopting IFRS. The European Unions experience highlights many perceived benefits as a

result of adopting IFRS. Overall, mostinvestors, financial statement preparers and auditors

were in agreementthat IFRS improved the quality of financial statements and that IFRS

implementation was a positive development for EU financial reporting (2007 ICAEW Report

on EU Implementation of IFRS and the Fair Value Directive).

There are likely to be several benefits to corporates in the Indian context as well. These are:

Improvementin comparability of financialinformation and financial performance with global

peers and industry standards. This will resultin more transparent financial reporting of a

companys activities which will benefitinvestors, customers and other key stakeholders in

India and overseas;the adoption of IFRS is expected to resultin better quality of financial


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TABLE 1


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OBJECTIVE

OF

STUDY


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NEED AND SCOPE OF T E STUDY

As a student of Finance and Accounts it is very necessary to know and study about the

journey of our country towards the adoption of International FinancialReporting Standards

and how is it different from the present Indian General Accepted Accounting Principles.

There is so much to discuss aboutthe upcoming topic IFRS which is suppose to supportthe

growing international synergy. Thus it has generated curiosity in me to know something

aboutthe way the cross borderinvestment demands.

The scope of IFRS lies in the fact that it is eventually inevitable for any country to fully

converge to IFRS because ofits wider applicability and various other reasons. Scope of study

on this topic as such is thus very wide because full conversion of the accounting standards

would need thorough study and interpretation of these standards. The IASB itself is still inthe process of developing new standards and amendments in the existing standards so thatit

would be easier and quicker for allthe countries to adopt IFRS and need furtherillustration.

OBJECTIVES OF T E STUDY

The present conceptual paper has been prepared keeping in view the following objectives:

. To study the convergence of Indian GAAP with IFRS2. To know aboutthe benefits of convergence of Indian GAAP with IFRS3. To study the challenges, risks and overall impact specific to Indian Industry in

adoption of IFRS.

4. To know the different standards in both IAS and IFRS.5. To give suggestions towards successfulimplementation of IFRS.

RESEARCH METHODOLOGY

The main goal behind the preparation ofthis reportis to do a rigorous study ofthe

perceived impact ofthe International FinancialReporting Standards on the Indian

Companies and the economy as well.


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SOURCE OF DATA COLLECTION

The data collected forthe study is from the secondary sources. This includes internet,

research papers, reports, magazines & newspapers, text books and various journals

and publications pertaining to the subject matter.

LIMITATIONS OF THE STUDY

The main limitations ofthis research process are:

y The findings of these studies mainly represent the influences of the IFRSimplementation on external level and not a detailed study on its real impact on the

internallevel.

y Nor has the research revealed an empirical study covering the influence of adoptingan external financial reporting system on the business management within

organizations.

y A particularly interesting research gap is the linkage between financial accounting andmanagerial accounting relating to the IFRS which is again not covered in the study.

y As IFRS has not been practically introduced in full fledge, the implications weredifficultto understand.

y The research is based on secondary resources only so any wrong information in thedata collected would lead to wrong understanding aboutthe concept.

y Lack oftime to do the research was anotherimportantlimitation.


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LITERATURE

REVIEW


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LITERATURE REVIEW

1. Topic-Convergence with IFRS in an expanding Europe: progress and obstacles identified

by large accounting firms survey

Author: Robert K. Larson and Donna L. Street.

Department of Accounting, School of Business Administration, University of Dayton, 300

College Park, Dayton, OH

Published Year: 2004

The International Accounting Standards Board (IASB) acquired greater legitimacy and

stature when the European Union (EU) decided to require all listed companies to prepare

consolidated accounts based on International Financial Reporting Standards (IFRS)

beginning in 2005. This study examined the progress and perceived impediments to

convergence in 17 European countries directly affected by the EU's decision. These include:

(1) the 10 new EU member countries, (2) EU candidate countries, (3) European Economic

Area (EEA) countries, and (4) Switzerland. We utilize data collected by the six largest

international accounting firms during their 2002 convergence survey. Additionally, they

analyzed subsequent events and studies.

While all surveyed countries will either require or effectively allow listed companies to

prepare consolidated financial statements in accordance with IFRS by 2005, few were

expected to require IFRS for non-listed companies. This suggests the development of a two-

standard system. The two most significant impediments to convergence identified by the

survey appear to be the complicated nature of particular IFRS (including financial

instruments) and the tax-orientation of many national accounting systems. Other barriers to

convergence include underdeveloped national capital markets, insufficient guidance on first-

time application of IFRS, and limited experience with certain types of transactions (e.g.

pensions).


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2. Topic-Factors Influencing the Extent ofCorporate Compliance with IFRS - The Case of

Hungarian Listed Companies

Authors: Szilveszter Fekete, Dumitru Matis & Janos Lukacs


Since 2005 European listed companies report their financial figures based on IFRSs. This

paper investigates whether Hungarian listed companies comply with IFRS disclosure

requirements, identifying some factors associated with the level of compliance. Although the

issue of consolidation is not a new topic for Hungarian specialists, the analysis focuses on the

disclosure aspects of consolidation because publishing consolidated accounts is considered

still a problematic field.

Findings of this research report suggests that corporate size and industry type (more

specifically being in the IT&C sector) are statistically associated with the extent of

compliance with IFRS disclosure requirements. This suggest that big, high tech companies

comply bestto IRFS rules, possibly because they can benefitthe most from them.

3. Topic-First time adoption of IFRS, Fair value option, Conservatism: Evidences from

French listed companies

Author: Samira Demaria and Dominique Dufour

The European Commission set 2005 as the date forthe move to IFRS for all companies listed

on European stock exchanges. The paper studied the first adoption of IFRS within the

perspective of the accounting options concerning the fair value method. The optional

standards included in the study were: fair value exemption of IFRS 1, IAS 16, 38 and 40. The

sample was composed of the firms of the SBF 120 index. IFRS choices were linked to the

characteristics of the firm such as: size, leverage, CEOs compensation, and ownership

structure, cross-listing and financial sector.

The statistical analysis used a logistic regression method to attempt to identify systematic

differences between firms adopting fair value and others. This study considered the choice of

conservatism as an identified criterion for explaining fair value choices.

Results suggest that for this French sample of firms fair value adoption is not linked with

size, financial leverage, CEOs compensation, institutional ownershi p and cross-listing.

Findings show that the majority of French companies maintained historical cost for the


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valuation of assets, which is the conservative option. So despite introduction of IAS/IFRS

standards, which cheer an economic view highlights by the substance over form principle, the

traditional conservatism approach stays embedded in French practices.

Many factors could encourage groups to keep on using historical costs:

y Resistance to changey Implementation complexityy Uncertainty about fair value effects

This industry is trained to buy and to sell investment properties. This fact could have

encouraged herto adopt fair value.

4. Topic-Are IFRS and US-GAAP already comparable?

Author: Chunhui Liu


As per this research paper, SEC (the U.S. Securities and Exchange Commission) release no.

33-8879 eliminated the need for US listed foreign companies that prepare financial

statements in accordance with IFRS (International FinancialReporting Standards) as issued

by the International Accounting Standards Board (IASB) to reconcile their financial

statements to USGAAP (U.S. generally accepted accounting principles). This study updated

the literature on changes in the difference between IFRS and US-GAAP and their value

relevance. The evidence showed that net income reported per IFRS as endorsed by EU

(European Union) had significantly increased in comparability to that perUS-GAAP from

2004 to 2006. However, reconciliation from IFRS to US-GAAP for reported netincome was

still found to be value relevant. In addition, the comparability between net asset per IFRS and

that perUS-GAAP was yetto be enhanced. Significant difference was found between IASB-

IFRS (IFRS as issued by International Accounting Standards Board) and EUIFRS (IFRS as

endorsed by European Union) reported net income in their comparability to US-GAAP

reported netincome.


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5. Topic-Implementing IFRS: A Case Study of the Czech Republic

Author: Pat Sucher and Irena Jindrichovska


This empirical paper presented a study of the implementation process for International

FinancialReporting Standards (IFRS) in one ofthe accession countries, the Czech Republic.

Based upon a review of the legislation, institutional framework and context, and drawing

upon recent interviews with Czech companies required to prepare IFRS accounts, auditors

and institutional players in the Czech Republic, the paper highlighted some ofthe key issues

that were arising with the move to the implementation of IFRS reporting for listed group

companies and other enterprises in the Czech Republic. The paper considered the issues that

rose while implementing new accounting regulations, some of which were not new and had

been well covered in the literature, but others of which were particularto the implementation

of IFRS reporting. The method of implementation, the scope of IFRS, particularissues with

local accounting practice and IFRS, the issue of enforcement of compliance with IFRS and its

relationship with audit, the link between IFRS reporting and taxation and the provision of

education and training were all considered. There was also a review of the state of

preparedness oflocal group listed entities with respect to the implementation of IFRS

reporting. There were many potentially rich areas for accounting research where the work

could also inform the practice of IFRS accounting. The paper provides a contribution by

highlighting how one country has moved to implement the requirement for group listedenterprises to prepare IFRS accounts and the issues that then arise for legislators, preparers

and users.

6. Topic-An Experimental Analysis of Accounting Judgments between US GAAP and IFRS

Accountants

Author: Anne M. Wilkins, CPA, MACC Kennesaw State University


European and U.S. based accountants were given a case experiment requiring an accounting

judgment. The U.S. accountants were more conservative than their European counterparts in

applying judgments under uncertainty. As the U.S. moved towards the adoption of

international accounting standards, which were more principle than rule based, the

importance of judgments in decision-making and their financial statement impact was

increased.


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ANALYSIS


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ANALYSIS

OBJECTIVE 1: to study the convergence of Indian GAAP with IFRS

STRUCTURE OF IFRS

IFRS are as principles based set of standards that establish broad rules and also dictate

specific treatments. International FinancialReporting Standards comprises of

y International FinancialReporting Standards (IFRS) - standards issued after 2001y International Accounting Standards (IAS) - standards issued before 2001y Interpretations originated from the International Financial Reporting Interpretations

Committee (IFRIC) - issued after 2001

y Standing Interpretations Committee (SIC) - issued before 2001

Meaning of Convergence with IFRS

The two terms though used interchangeably butthere is an important difference. Adoption is

process of adopting IFRS as issued by IASB, with or without modifications i.e.,

modifications in the nature of additional disclosures requirement or elimination of alternative

treatment. It involves an endorsement of IFRS by legislative or regulatory with minor

modifications done by standard setting authority of a country. WhereasConvergence

- is

harmonization of national GAAP with IFRS through design and maintenance of accounting

standards in a way that financial statements prepared with national accounting standards are

in compliance with IFRS.

Convergence with IFRS thus implies to achieve harmony with IFRSs and to design and

maintain national accounting standards in a way that they comply with the International

Accounting Standards. The transition would enable Indian entities to be fully IFRS compliant

and give an unreserved and explicit statement of compliance with IFRS in their financial

statements. This would also lead to underpin the trust investors place in financial and non-

financial information. In the new format core accounting principles will still apply and is

simply an additional piece of accounting equation. Many of the standards forming part of

IFRS are known by the older name of International Accounting Standards (IAS). IAS was

issued between 1973 and 2001 by the Board of the International Accounting Standards


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In the coming years, critical decisions will need to be made regarding the use of global

accounting standards in India. Market participants will be called upon to determine whether

achieving a uniform set of high-quality global accounting standards is feasible, what sort of

investments would be required to achieve that outcome, and whetheritis a desirable goalin

the first place. This dialogue will be critical to the future of financial reporting and of

fundamentalimportance to the long-term strength and stability of the global capital markets.

Performance measures, based on Indian GAAP may need revisiting as it may change in IFRS

adoption by fair amount on account of valuation aspect. Expectation of investor and market

will also be required to be of paramountimportance to manage in the adoption of process.

The IFRS process in India

The Indian GAAP is influenced by several standard setters and influenced by Statute, namely

Companies Act, Income Tax Act, Banking Regulation Act, Insurance Act etc and directions

from regulatory bodies like RBI, SEBI, and IRDA. The legal or regulatory requirement will

prevail over the IFRS requirement, in case of conflicts. Therefore, pre-conditions for IFRS

adoption by India to be effective need amendments in required legislation and clarity on

impact of IFRS adoption on Direct and Indirecttaxes, especially transactions recorded at fair

values.

Institute ofChartered Accountants of India is actively promoting the IASB's pronouncements

in the country with a view to facilitating global harmonization of Accounting Standards and

ICAI has pronounced that Indian GAAP will converge into IFRS with effect from April 1,

2013.

Underthe statutory mandate provided by the Companies Act, 1956 the Central Government

of India prescribes accounting standards in consultation with National Advisory Committee

on Accounting Standards (NACS) established under the Companies Act, 1956. The Central

Government notified 28 Accounting Standards (AS 1 to 7 and AS 9 to 29) in December 2006

in the Form of Companies (Accounting Standard Rules) 2006. While doing so the Central

Government had adopted a policy of enabling disclosure of company accountin a manner at

par with accepted international practices, through a process of convergence with the IFRS.

The NACS has taken up initiative for harmonization of accounting standards with IFRS

would be continued with an intention of achieving convergence with IFRS by 2013.


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Ministry of Corporate Affairs has also set up a high powered group comprising of various

stakeholders under the Chairmanship of Mr. Anurag Goel, Secretary to discuss and resolve

implementation challenges with regard to convergence of Indian Accounting Standards with

IFRS from 2013.

In November 2009 SEBI decided to provide an option to all listed entities with subsidiaries to

submit their consolidated financial statements as per IFRS to be in line with objective of

convergence to IFRS by 2013.

On anuary 22, 2010, the Ministry of Corporate Affairs issued a press release which laid out a

phased plan by which IFRS convergence will be achieved in India for companies other than

Banking and Insurance Companies. This important announcement had cleared all clouds of

IFRS convergence and provided the road map in phase manner for achieving convergence in

India effective April 1, 2013.

According to the above press release, there will be two separate sets of Accounting Standards

under Section 211(3C) of the Companies Act, 1956. The two sets would be as described

below:

First set would comprise of the Indian Accounting Standards which are converged with the

IFRS (IFRS converged standards). It shall be applicable to specified class of companies;

Second set would comprise of the existing Indian Accounting Standards (Existing

Accounting Standards) and would be applicable to other companies including small and

medium companies (SMCs). The table below set out the applicability of First set of standards

to specified class of companies in phase manner:


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The above enlisted specified class of companies will prepare an opening balance sheet in

accordance with IFRS converged standards as of effective date and will follow the IFRS

converged standards from the respective effective date as mentioned in above table.

On March 31, 2010, the Ministry of Corporate Affairs issued the final road map ofConvergence with IFRS for Banking and Insurance Companies also, which were excluded

from the earlier notification issued on 22nd January 2010. In brief:

Allinsurance companies will converge with Converged Indian accounting standards effective

April 1, 2012.

All scheduled commercial banks will converge effective April 1, 2013. A phased approach of

convergence is prescribed for urban co-operative Banks.

NBFC which are part of Nifty - 50, Sensex 30 and NBFCs (listed or unlisted), having net

worth of more than 1,000crores will converge effectively before April 1, 2013. All other

listed NBFC's and other NBFCs having a net worth in excess of Rs 500crores would

converge effective April 1, 2014. Unlisted NBFCs having a net worth of less than Rs

500crores are not mandatorily required to converge but may voluntarily decide to converge.

There by, now the entire road map forConvergence with IFRS is conclusively defined for all

categories of companies in India. Thus, going by aforesaid directives if, corporate India needs

to publish IFRS financial statements for 2011-2012, this would require comparatives for

2010-11, i.e., an opening balance sheet is required April 1, 2010. In a nutshell, this means

thatthe real work for corporate India starts now.


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IFRS CONVERSION PROGRAMME

TABLE NO 2

Framework for the Preparation and Presentation of Financial Statements

There is also a Framework for the Preparation and Presentation of Financial Statements

which describes of the principles underlying IFRS. A framework is nothing but the

foundation of accounting standards. The framework states that the objectives of financial

statements is to provide information about the financial position, performance and changes in

the financial position of an entity that is useful to a wide range of users in making economic

decisions, and to provide the current financial status of the entity to its shareholders and

public in general.

IFRS financial statements consist of (IAS1.8)

TABLE 3


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APPLICABILIT OF IFRS

TABLE 4

STRATEG FOR CONVERGENCE WITH IFRSs

Formulation of convergence strategy for departure of Indian Accounting Standards from the

corresponding IFRSs as well as the complexity of the recognition and measurement

requirements and the extent of disclosures required in the IFRSs with a view to enforce these

on various types of entities, vi ., public interest entities and other than public interest entities

(otherwise known as small and medium-si ed entities) are discussed as follows by Institute

of Chartered Accountants of India:

Public Interest Entities

It is noted that those countries which have already adopted IFRSs, have done so primarily for

public interest entities including listed and large-si ed entities. It is also noted that the

International Accounting Standards Board also considers that the IFRSs are applicable to

public interest entities in view of the fact that it has recently issued an Exposure Draft of a

proposed IFRS for Small and Medium-si ed Entities3. The ICAI, therefore, is of the view

that India should also become IFRS compliant only for public interest entities.

With a view to determine which entities should be considered as public interest entities for

the purpose of application of IFRSs, the criteria forLe el I enterprises as laid down by the

Institute of Chartered Accountants of India and the definition of small and medium si ed

company as per Clause 2(f) of the Companies (Accounting Standards) Rules, 2006, as

notified by the Ministry of Company Affairs (now Ministry of Corporate Affairs) in the


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Official Gazette dated December 7, 2006, were considered. Butthe ICAI is ofthe view that

about four years have elapsed since the ICAI laid down the criteria for Level I enterprises so

as far as the size is concerned, it needs a revision. So finally the ICAI is ofthe view that a

public interest entity should be an entity:

(i) Whose equity or debt securities are listed or are in the process of listing on any stock

exchange, whetherin India or outside India; or

(ii) Which is a bank (including a cooperative bank), financialinstitution, a mutual fund, or an

insurance entity; or

(iii) Whose turnover (excluding other income) exceeds rupees one hundred crores in the

immediately preceding accounting year; or

(iv)Which has public deposits and/or borrowings from banks and financial institutions in

excess of rupees twenty five crores at any time during the immediately preceding

accounting year; or

(v) Which is a holding or a subsidiary of an entity which is covered in (i) to (iv) above.

The ICAI is of the view that once an entity gets listed on a stock exchange it assumes the

character of a public interest entity and, therefore, it would not be appropriate to exempt such

entities from the application of IFRSs. Similarly, a bank, a financial institution, a mutual

fund, an insurance entity and holding or subsidiary of a public interest entity also assumes the

character of a public interest entity.

Now the next question is whetherthe IFRSs should be adopted for Public Interest Entities

stage-wise or all at once from a specified future date. Forthis the ICAI examined the IFRSs

and the existing Accounting Standards with a view to determine the extent to which they

differ from the IFRSs and the reasons therefore to identify which IFRSs can be adopted in

near future, which IFRSs can be adopted after resolving conceptual differences with the

IASB, which IFRSs can be adopted afterthe industry and the profession is ready in terms of

the technical skills required, and which IFRSs can be adopted after the relevant laws and

regulations are amended. On the basis of this examination, the ICAI has classified various

IFRSs into the following five categories:

Category I - IFRSs do not involve any legal or regulatory issues or have any issues with

regard to their suitability in the existing economic environment, preparedness ofindustry and

any conceptual differences from the Indian Accounting Standards. This category has further

been classified into two parts as follows:


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Category I A - IFRSs can be adopted immediately as these do not have any differences with

the corresponding Indian Accounting Standards. The following IFRSs have been identified in

this category:

y IAS 11, Construction Contractsy IAS 23, Borrowing Costs

Category I B - IFRSs which can be adopted in near future as there are certain minor

differences with the corresponding Indian Accounting Standards. The following IFRSs have

been identified in this category:

y IAS 2 Inventoriesy IAS 7, Cash Flow Statementsy IAS20, Accounting for Government Grants and Disclosure of Government Assistancey IAS 33, Earnings per Sharey IAS 36, Impairment of Assetsy IAS 38, Intangible Assets

Category II - IFRSs may require some time to reach a level oftechnical preparedness by the

industry and professionals keeping in view the existing economic environment and other

factors.This category also includes those IFRSs corresponding to which Indian Accounting

Standards are under preparation/revision. The following IFRSs have been identified in this

category:

y IAS 18, Revenuey IAS 21, the Effects ofChanges in Foreign Exchange Ratesy IAS 26, Accounting and Reporting by RetirementBenefit Plansy IAS 40, Investment Property (Corresponding Indian Accounting Standard is under

preparation)

y IFRS 2, Share-based Payment (Corresponding Indian Accounting Standard is underpreparation)

y IFRS 5, Non-current Assets Held for Sale and Discontinued Operations(Corresponding Indian Accounting Standard is under preparation)

Category III - IFRSs which have conceptual differences with the corresponding Indian

Accounting Standards.This category has further been divided into two parts as follows:


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Category III A - IFRSs having conceptual differences with the corresponding Indian

Accounting Standards that should be taken up with the IASB. The following IFRSs have

been identified in this Category:

y IAS 17, Leasesy IAS 19, Employee Benefitsy IAS 27, Consolidated and Separate Financial Statementsy IAS 28, Investments in Associatesy IAS 31, Interests in Joint Venturesy IAS 37, Provisions, Contingent Liabilities and Contingent Assets

Category III B - IFRSs having conceptual differences with the corresponding Indian

Accounting Standards that need to be examined to determine whetherthese should be taken

up with the IASB or should be removed by the ICAI itself. The following IFRSs have been

identified in this Category:

y IAS 12, Income Taxesy IAS 24, Related Party Disclosuresy IAS 41, Agriculture (Corresponding Indian Accounting Standard is under preparation)y IFRS 3, Business Combinationsy IFRS 6, Exploration for and Evaluation ofMineralResourcesy IFRS 8, Operating Segments

Category IV - IFRSs, the adoption of which would require changes in laws/regulations

because compliance with such IFRSs is not possible untilthe regulations/laws are amended.

The following IFRSs have been identified in this Category:

y IAS 1, Presentation of Financial Statementsy IAS 8, Accounting Policies, Changes in Accounting Estimates and Errorsy IAS 10, Events afterthe Balance Sheet Datey IAS 16, Property, Plant and Equipmenty IAS 32, Financial Instruments: Presentation (Exposure Draft of the Corresponding

Indian Accounting Standard has been issued)

y IAS 34, Interim FinancialReportingy IAS 39, Financial Instruments:Recognition and Measurement (Exposure Draft ofthe

Corresponding Indian Accounting Standard has been issued)

y IFRS 1, First-time Adoption of International FinancialReporting Standards


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y IFRS 4, Insurance Contractsy IFRS 7, Financial Instruments: Disclosures

Category V - IFRSs corresponding to which no Indian Accounting Standard is required for

the time being. However, the relevant IFRSs, when adopted upon full convergence, can be

used as the fallback option where needed.

y IAS 29, FinancialReporting in Hyper-inflationary Economies

For Small and Medium-sized Entities:

For the Small and Medium-sized Entities (SMEs), the following three alternatives were

considered:

(i) The IFRSs should be modified to provide exemptions/relaxations as has been done in the

existing Accounting Standards issued by the ICAI/notified by the Government of India;

(ii) The existing Accounting Standards with exemptions/relaxations as at present should

continue to apply;

(iii) Apply the IFRS for SMEs (the Exposure Draft of which has been issued recently) with or

without modifications to suit Indian conditions.

The ICAI is of the view that since the IASBitself recognises thatthe IFRSs are too difficult

and time consuming for small and medium-sized entities, it would not be appropriate to apply

the IFRSs with exemptions/relaxations to SMEs. The ICAI is also ofthe view thatto continue

to apply the existing Accounting Standards in India to SMEs with the existing

exemptions/relaxations would not be appropriate as it would mean that the ICAI/the

Government would have to keep on modifying the existing Accounting Standards as soon as

a change is made in the corresponding IFRSs after considering the appropriateness thereofin

the context of Indian SME conditions. The ICAI is, therefore, of the view that it may be

appropriate to have a separate standard for SMEs. It was noted that the proposed IFRS for

SMEs was still atthe Exposure Draft stage and it may undergo changes when finally issued.

Accordingly, whether the IFRS for SMEs should be adopted in toto or with modifications

should be examined when the said IFRS is finally issued. The ICAI is of the view that a

separate standard for SMEs would be more useful from the following perspectives also:

(i) The small and medium-sized entities would not have to consider allthe IFRSs which are

too voluminous; and


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(ii) It would ensure convergence, to the extent possible, with the proposed IFRS for Small

and Medium-sized Entities being issued by IASB, even forthis class of entities.

Thus in this context, it is noted that in order to be an IFRS-compliant country, it is not

necessary to adoptthe IFRS for Small and Medium-sized Entities to be issued by IASB.

Convergence with IFRS Stage-wise Approach

The ICAI examined whether convergence with IFRSs can be achieved stage wise as below:

Stage I:Convergence with IFRSs falling in Category I immediately

Stage II:Convergence with IFRSs classified in Category II and Category III after a certain

period of time, say, 2 years after various stakeholders have achieved the level of technical

preparedness and after conceptual differences are resolved with the IASB.

Stage III: Convergence with IFRSs classified in Category IV only after necessary

amendments are made in the relevantlaws and regulations.

Stage IV: Convergence with IFRSs classified in Category V by way of adoption on full

convergence.

The ICAI considered in-depth the stage-wise adoption approach and its views thereon are as

below:

(i) If some IFRSs are adopted in the initial stages and the other IFRSs are adopted later, this

may resultin mismatch between the requirements ofthe adopted IFRSs in the first stage and

the accounting standards issued by ICAI/notified, corresponding to those IFRSs which are

not adopted. This is because many accounting standards are inter-related.

(ii) Another problem can be that IFRSs adopted in one stage may not be possible to be

implemented fully untilthe adoption ofthe IFRSs to be adopted atthe later stage in view of

theirinter-relationship.

(iii) Even, at present, it is found that when one IFRS is adopted, it results in a number of

changes in the corresponding Indian Accounting Standards. For example, the issuance of ED

of AS 30, Financial Instruments: Recognition andMeasurement, corresponding to IAS 39,

Financial Instruments: Recognition &Measurement, has resulted in proposed limitedrevisions to many other accounting standards such as AS 2, AS 11, AS 13, AS 21, AS 23, AS

27, AS 28 and AS 29. Such an approach is fraught with the danger of missing out certain

minute aspects in other standards which may also require revision.

(iv) Further changes in IFRSs will also make the process more complex as with every

revision in IFRS, revisions may be required in the existing Accounting Standards apart from


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the changes in the adopted IFRSs. Though IASB has decided notto issue any revised IFRS or

new IFRS effective tillJanuary 1, 2009, but afterthat date this problem will become acute.

Convergence with IFRS All-at-once Approach

In view ofthe above difficulties, the ICAI is ofthe view thatit would be more appropriate to

adopt all IFRSs from a specified future date as has been done in many other countries. After

considering the current economic environment, expected time to reach the satisfactory level

oftechnical preparedness and the expected time to resolve the conceptual differences with the

IASB, the ICAI has decided that IFRSs should be adopted for public interest entities

from the accounting periods commencing on or after 1st April, 2011. This will give

enough time to all the participants in the financial reporting process to help in building the

environment supporting the adoption of IFRSs. Insofar as the legal and regulatory aspects are

concerned, the ICAI is of the view that, on adoption of those IFRSs, having certain

requirements in conflict with the laws/regulations, the latter will prevail. The ICAI is further

of the view that this approach is appropriate because to wait for full convergence until the

relevantlaws/regulations are amended would not be practicable as such amendments may not

take place for many years.

The ICAI also examined whether an entity should have a choice to become fully IFRS

compliant before 1st April, 2011. The ICAI is of the view that an early adoption of IFRSs

should be encouraged. However, such an adoption should be for all IFRSs and thatit cannot

be on selective basis.

Format of converged Accounting Standards

The ICAI considered whetherthe existing Accounting Standards should be revised to make

them fully compliant with IFRSs by the specified date or on the specified date the IFRSs

themselves should be adopted. In either case, Indian-specific regulatory/legal aspects may be

included in a separate section, where appropriate. The ICAI is ofthe view that it would be

more cumbersome to follow the first approach, i.e., revising the Accounting Standards.

Therefore, the second approach should be, i.e., IFRSs, including the IFRS numbers, should be

adopted from the specified date of 1st April, 2011. The IFRSs should be issued as Indian

ASs, which would be considered IFRS-equivalent. In order to facilitate reference to the

existing Indian Accounting Standards, along with the IFRS number, in the brackets, the

existing Accounting Standard number may also be given.


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IFRS A BIRDS EYE VIEW

IFRS 1 First-time Adoption of International Financial Reporting Standards

The objective ofthis IFRS is to ensure that an entitys first IFRS financial statements, and itsinterim financial reports for part ofthe period covered by those financial statements, contain

high quality information that:

(a) is transparent for users and comparable over all periods presented;

(b) Provides a suitable starting point for accounting under International FinancialReporting

Standards (IFRSs); and

(c) Can be generated at a costthat does not exceed the benefits to users.

An entitys first IFRS financial statements are the first annual financial statements in which

the entity adopts IFRSs, by an explicit and unreserved statementin those financial statements

of compliance with IFRSs.

An entity shall prepare an opening IFRS balance sheet atthe date oftransition to IFRSs. This

is the starting point for its accounting under IFRSs. An entity need not present its opening

IFRS balance sheetin its first IFRS financial statements.

In general, the IFRS requires an entity to comply with each IFRS effective at the reporting

date forits first IFRS financial statements. In particular, the IFRS requires an entity to do the

following in the opening IFRS balance sheet that it prepares as a starting point for its

accounting under IFRSs:

(a) Recognise all assets and liabilities whose recognition is required by IFRSs;

(b) Not recognise items as assets orliabilities if IFRSs do not permit such recognition;

(c) reclassify items that it recognised under previous GAAP as one type of asset, liability or

component of equity, but are a different type of asset, liability or component of equity

under IFRSs; and

(d) Apply IFRSs in measuring all recognised assets and liabilities.

The IFRS grants limited exemptions from these requirements in specified areas where the

cost of complying with them would be likely to exceed the benefits to users of financial

statements. The IFRS also prohibits retrospective application of IFRSs in some areas;

particularly where retrospective application would require judgements by management about

past conditions afterthe outcome of a particulartransaction is already known.


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The IFRS requires disclosures that explain how the transition from previous GAAP to IFRSs

affected the entities reported financial position, financial performance and cash flows.

IFRS 2 Share-based Payment

The objective ofthis IFRS is to specify the financial reporting by an entity when it undertakes

a share-based paymenttransaction. In particular, it requires an entity to reflectin its profit or

loss and financial position the effects of share-based payment transactions, including

expenses associated with transactions in which share options are granted to employees.

The IFRS requires an entity to recognise share-based payment transactions in its financial

statements, including transactions with employees or other parties to be settled in cash, other

assets, or equity instruments ofthe entity. There are no exceptions to the IFRS, otherthan for

transactions to which other Standards apply.This also applies to transfers of equity instruments of the entitys parent, or equity

instruments of another entity in the same group as the entity, to parties that have supplied

goods or services to the entity.

The IFRS sets out measurement principles and specific requirements forthree types of share-

based paymenttransactions:

(a) equity-settled share-based payment transactions, in which the entity receives goods or

services as consideration for equity instruments of the entity (including shares or share

options);

(b) cash-settled share-based payment transactions, in which the entity acquires goods or

services by incurring liabilities to the supplier ofthose goods or services for amounts that

are based on the price (or value) ofthe entitys shares or other equity instruments ofthe

entity; and

(c) Transactions in which the entity receives or acquires goods or services and the terms of

the arrangement provide eitherthe entity orthe supplier ofthose goods or services with a

choice of whether the entity settles the transaction in cash or by issuing equity

instruments.

For equity-settled share-based payment transactions, the IFRS requires an entity to measure

the goods or services received, and the corresponding increase in equity, directly, atthe fair

value ofthe goods or services received, unless that fair value cannot be estimated reliably. If

the entity cannot estimate reliably the fair value ofthe goods or services received, the entity


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is required to measure their value, and the corresponding increase in equity, indirectly, by

reference to the fair value ofthe equity instruments granted. Furthermore:

(a) For transactions with employees and others providing similar services, the entity is

required to measure the fair value ofthe equity instruments granted, because itis typically

not possible to estimate reliably the fair value of employee services received. The fair

value ofthe equity instruments granted is measured at grant date.

(b) Fortransactions with parties otherthan employees (and those providing similar services),

there is a rebuttable presumption thatthe fair value ofthe goods or services received can

be estimated reliably. That fair value is measured atthe date the entity obtains the goods

or the counterparty renders service. In rare cases, if the presumption is rebutted, the

transaction is measured by reference to the fair value of the equity instruments granted,

measured atthe date the entity obtains the goods orthe counterparty renders service.

(c) for goods or services measured by reference to the fair value of the equity instruments

granted, the IFRS specifies that vesting conditions, otherthan market conditions, are not

taken into account when estimating the fair value ofthe shares or options atthe relevant

measurement date (as specified above). Instead, vesting conditions are taken into account

by adjusting the number of equity instruments included in the measurement of the

transaction amount so that, ultimately, the amount recognised for goods or services

received as consideration for the equity instruments granted is based on the number of

equity instruments that eventually vest. Hence, on a cumulative basis, no amount is

recognised for goods or services received if the equity instruments granted do not vest

because of failure to satisfy a vesting condition (otherthan a market condition).

(d) the IFRS requires the fair value of equity instruments granted to be based on market

prices, if available, and to take into account the terms and conditions upon which those

equity instruments were granted. In the absence of market prices, fair value is estimated,

using a valuation technique to estimate whatthe price ofthose equity instruments would

have been on the measurement date in an arms length transaction between

knowledgeable, willing parties.

(e) The IFRS also sets out requirements ifthe terms and conditions of an option or share

grant are modified (e.g. an option is reprised) or if a grant is cancelled, repurchased or

replaced with another grant of equity instruments. For example, irrespective of any

modification, cancellation or settlement of a grant of equity instruments to employees, the

IFRS generally requires the entity to recognise, as a minimum, the services received

measured atthe grant date fair value ofthe equity instruments granted.


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For cash-settled share-based paymenttransactions, the IFRS requires an entity to measure the

goods or services acquired and the liability incurred atthe fair value ofthe liability. Untilthe

liability is settled, the entity is required to premeasure the fair value of the liability at each

reporting date and atthe date of settlement, with any changes in value recognised in profit or

loss forthe period.

For share-based payment transactions in which the terms of the arrangement provide either

the entity orthe supplier of goods or services with a choice of whetherthe entity settles the

transaction in cash or by issuing equity instruments, the entity is required to account forthat

transaction, or the components of that transaction, as a cash-settled share-based payment

transaction if, and to the extent that, the entity has incurred a liability to settle in cash (or

other assets), or as an equity-settled share-based paymenttransaction if, and to the extentthat,

no such liability has been incurred.

The IFRS prescri bes various disclosure requirements to enable users of financial statements

to understand:

(a) The nature and extent of share-based payment arrangements that existed during the

period;

(b) How the fair value of the goods or services received, or the fair value of the equity

instruments granted, during the period was determined; and

(c) The effect of share-based paymenttransactions on the entitys profit orloss forthe period

and on its financial position.

IFRS 3Business Combinations

The objective ofthis IFRS is to specify the financial reporting by an entity when it undertakes

a business combination.

A business combination is the bringing together of separate entities or businesses into one

reporting entity. The result of nearly all business combinations is that one entity, the acquirer,

obtains control of one or more other businesses, the acquiree. If an entity obtains control of

one or more other entities that are not businesses, the bringing together ofthose entities is not

a business combination.

This IFRS:

(a) Requires all business combinations within its scope to be accounted for by applying the

purchase method.


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accordance with (d) above exceeds the cost ofthe combination. Any excess remaining after

that reassessment must be recognised by the acquirerimmediately in profit orloss.

(i) Requires disclosure ofinformation that enables users of an entitys financial statements to

evaluate the nature and financial effect of:

(i) Business combinations that were effected during the period;

(ii) Business combinations that were effected after the balance sheet date but before the

financial statements are authorised forissue; and

(Iii) Some business combinations that were effected in previous periods.

(j) Requires disclosure ofinformation that enables users of an entitys financial statements to

evaluate changes in the carrying amount of goodwill during the period.

A business combination may involve more than one exchange transaction, for example when

it occurs in stages by successive share purchases. If so, each exchange transaction shall be

treated separately by the acquirer, using the cost ofthe transaction and fair value information

atthe date of each exchange transaction, to determine the amount of any goodwill associated

with that transaction. This results in a step-by-step comparison of the cost ofthe individual

investments with the acquirers interestin the fair values ofthe acquirees identifiable assets,

liabilities and contingentliabilities at each step.

Ifthe initial accounting for a business combination can be determined only provisionally by

the end ofthe period in which the combination is affected because eitherthe fair values to be

assigned to the acquirees identifiable assets, liabilities or contingentliabilities orthe cost of

the combination can be determined only provisionally, the acquirer shall account for the

combination using those provisional values. The acquirer shall recognise any adjustments to

those provisional values as a result of completing the initial accounting:

(a) Within twelve months ofthe acquisition date; and

(b) From the acquisition date.

IFRS 4 Insurance Contracts

The objective ofthis IFRS is to specify the financial reporting forinsurance contracts by any

entity that issues such contracts (described in this IFRS as an insurer) until the Board

completes the second phase of its project on insurance contracts. In particular, this IFRS

requires:


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(a) Limited improvements to accounting by insurers forinsurance contracts.

(b) Disclosure that identifies and explains the amounts in an insurers financial statements

arising from insurance contracts and helps users ofthose financial statements understand

the amount, timing and uncertainty of future cash flows from insurance contracts.

An insurance contract is a contract under which one party (the insurer) accepts significant

insurance risk from another party (the policyholder) by agreeing to compensate the

policyholder if a specified uncertain future event (the insured event) adversely affects the

policyholder.

The IFRS applies to all insurance contracts (including reinsurance contracts) that an entity

issues and to reinsurance contracts that it holds, except for specified contracts covered by

other IFRSs. It does not apply to other assets and liabilities of an insurer, such as financial

assets and financialliabilities within the scope of IAS 39 Financial Instruments:Recognition

and Measurement. Furthermore, it does not address accounting by policyholders.

The IFRS exempts an insurertemporarily from some requirements of other IFRSs, including

the requirementto considerthe Frameworkin selecting accounting policies for insurance

contracts. However, the IFRS:

(a) Prohibits provisions for possible claims under contracts that are not in existence at the

reporting date (such as catastrophe and equalisation provisions).

(b) Requires a test forthe adequacy of recognised insurance liabilities and an impairmenttest

for reinsurance assets.

(c) Requires an insurer to keep insurance liabilities in its balance sheet until they are

discharged or cancelled, or expire, and to present insurance liabilities without offsetting

them against related reinsurance assets.

The IFRS permits an insurerto change its accounting policies forinsurance contracts only if,

as a result, its financial statements present information that is more relevant and no less

reliable, or more reliable and no less relevant. In particular, an insurer cannot introduce any

of the following practices, although it may continue using accounting policies that involve

them:

(a) Measuring insurance liabilities on an undiscounted basis.

(b) Measuring contractual rights to future investment management fees at an amount that

exceeds their fair value as implied by a comparison with current fees charged by other

market participants for similar services.

(c) Using non-uniform accounting policies forthe insurance liabilities of subsidiaries.


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The IFRS permits the introduction of an accounting policy that involves remeasuring

designated insurance liabilities consistently in each period to reflect current market

interest rates (and, if the insurer so elects, other current estimates and assumptions).

Without this permission, an insurer would have been required to apply the change in

accounting policies consistently to all similarliabilities.

The IFRS requires disclosure to help users understand:

(a)The amounts in the insurers financial statements that arise from insurance contracts.(b)The amount, timing and uncertainty of future cash flows from insurance contracts.

IFRS 5 Non-current Assets Held for Sale and Discontinues Operations

The objective of this IFRS is to specify the accounting for assets held for sale, and the

presentation and disclosure of discontinued operations. In particular, the IFRS requires:

(a) Assets that meetthe criteria to be classified as held for sale to be measured atthe lower of

carrying amount and fair value less costs to sell, and depreciation on such assets to cease;

and

(b) Assets that meetthe criteria to be classified as held for sale to be presented separately on

the face of the balance sheet and the results of discontinued operations to be presented

separately in the income statement.

The IFRS:

(a) Adopts the classification held for sale.

(b) Introduces the concept of a disposal group, being a group of assets to be disposed of, by

sale or otherwise, together as a group in a single transaction, and liabilities directly

associated with those assets that will be transferred in the transaction.

(c) Classifies an operation as discontinued at the date the operation meets the criteria to be

classified as held for sale or when the entity has disposed ofthe operation.

An entity shall classify a non-current asset (or disposal group) as held for sale ifits carrying

amount will be recovered principally through a sale transaction rather than through

continuing use.

Forthis to be the case the asset (or disposal group) must be available forimmediate sale in its

present condition subject only to terms that are usual and customary for sales of such assets

(or disposal groups) and its sale must be highly probable.

Forthe sale to be highly probable, the appropriate level of management must be committed to

a plan to sell the asset (or disposal group), and an active programme to locate a buyer and


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complete the plan must have been initiated. Further, the asset (or disposal group) must be

actively marketed for sale at a price that is reasonable in relation to its current fair value. In

addition, the sale should be expected to qualify for recognition as a completed sale within one

year from the date of classification, except as permitted by paragraph 9, and actions required

to complete the plan should indicate thatitis unlikely that significant changes to the plan will

be made orthatthe plan will be withdrawn.

A discontinued operation is a component of an entity that either has been disposed of, or is

classified as held for sale, and

(a) Represents a separate majorline of business or geographical area of operations,

(b) Is part of a single co-ordinated plan to dispose of a separate major line of business or

geographical area of operations or

(c) Is a subsidiary acquired exclusively with a view to resale.

A component of an entity comprises operations and cash flows that can be clearly

distinguished, operationally and for financial reporting purposes, from the rest ofthe entity.

In other words, a component of an entity will have been a cash-generating unit or a group of

cash-generating units while being held for use.

An entity shall not classify as held for sale a non-current asset (or disposal group) thatis to be

abandoned. This is because its carrying amount will be recovered principally through

continuing use.

IFRS 6 Explorations for and Evaluation of Mineral Resources

The objective of this IFRS is to specify the financial reporting for the exploration for and

evaluation of mineral resources.

Exploration and evaluation expenditures are expenditures incurred by an entity in connection

with the exploration for and evaluation of mineral resources before the technical feasibility

and commercial viability of extracting a mineral resource are demonstrable. Exploration for

and evaluation of mineral resources is the search for mineral resources, including minerals,

oil, natural gas and similar non-regenerative resources after the entity has obtained legal

rights to explore in a specific area, as well as the determination ofthe technical feasibility and

commercial viability of extracting the mineral resource.


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Exploration and evaluation assets are exploration and evaluation expenditures recognised as

assets in accordance with the entitys accounting policy.

The IFRS:

(a) Permits an entity to develop an accounting policy for exploration and evaluation assets

without specifically considering the requirements of paragraphs 11 and 12 of IAS 8.

Thus, an entity adopting IFRS 6 may continue to use the accounting policies applied

immediately before adopting the IFRS. This includes continuing to use recognition and

measurement practices that are part ofthose accounting policies.

(b) Requires entities recognising exploration and evaluation assets to perform an impairment

test on those assets when facts and circumstances suggestthatthe carrying amount ofthe

assets may exceed their recoverable amount.

(c) Varies the recognition ofimpairment from thatin IAS 36 but measures the impairmentin

accordance with that Standard once the impairmentis identified.

An entity shall determine an accounting policy for allocating exploration and evaluation

assets to cash-generating units or groups of cash-generating units forthe purpose of assessing

such assets for impairment. Each cash-generating unit or group of units to which an

exploration and evaluation asset is allocated shall not be larger than an operating segment

determined in accordance with IFRS 8 Operating Segments.

Exploration and evaluation assets shall be assessed for impairment when facts and

circumstances suggest that the carrying amount of an exploration and evaluation asset may

exceed its recoverable amount. When facts and circumstances suggest that the carrying

amount exceeds the recoverable amount, an entity shall measure, present and disclose any

resulting impairmentloss in accordance with IAS 36.

One or more of the following facts and circumstances indicate that an entity should test

exploration and evaluation assets forimpairment (the listis not exhaustive):

(a) The period for which the entity has the right to explore in the specific area has expired

during the period or will expire in the near future, and is not expected to be renewed.

(b) Substantive expenditure on further exploration for and evaluation of mineral resources in

the specific area is neither budgeted nor planned.

(c) Exploration for and evaluation of mineral resources in the specific area have notled to the

discovery of commercially viable quantities of mineral resources and the entity has decided

to discontinue such activities in the specific area.


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(d) Sufficient data existto indicate that, although a developmentin the specific area is likely

to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be

recovered in full from successful development or by sale.

An entity shall disclose information thatidentifies and explains the amounts recognised in its

financial statements arising from the exploration for and evaluation of mineral resources.

IFRS 7: Financial Instruments: Disclosures

The objective of this IFRS is to require entities to provide disclosures in their financial

statements that enable users to evaluate:

(a) The significance of financial instruments for the entitys financial position and

performance; and

(b) The nature and extent of risks arising from financial instruments to which the entity is

exposed during the period and atthe reporting date, and how the entity manages those risks.

The qualitative disclosures descri be managements objectives, policies and processes for

managing those risks. The quantitative disclosures provide information about the extent to

which the entity is exposed to risk, based on information provided internally to the entity's

key management personnel. Together, these disclosures provide an overview of the entity's

use of financialinstruments and the exposures to risks they create.

The IFRS applies to all entities, including entities that have few financialinstruments (e.g. a

manufacturer whose only financialinstruments are accounts receivable and accounts payable)

and those that have many financial instruments (e.g. a financial institution most of whose

assets and liabilities are financialinstruments).

When this IFRS requires disclosures by class of financial instrument, an entity shall group

financial instruments into classes that are appropriate to the nature of the information

disclosed and that take into account the characteristics of those financial instruments. An

entity shall provide sufficientinformation to permit reconciliation to the line items presented

in the balance sheet.

The principles in this IFRS complement the principles for recognising, measuring and

presenting financial assets and financial liabilities in IAS 32 Financial Instruments:

Presentation and IAS 39 Financial Instruments:Recognition and Measurement.


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IFRS 8: Operating Segments

In November 2006 the IASB issued IFRS 8, Operating Segments. The issue of this

international financial reporting standard (IFRS) is as a result of ongoing dialogue between

the International Accounting Standards Board (IASB) and the US Financial AccountingStandards Board (FASB). IFRS8 is very close to SFAS 131 - the equivalentUS standard. It

would appearthat one ofthe reasons for the changed standard was a goodwill gesture to the

US authorities in orderto facilitate a speedy removal ofthe 'reconciliation requirement'thatis

currently in place for entities seeking a listing on the US capital markets.

The scope of the standard: IFRS 8 applies to the financial statements of any entity whose

debt or equity instruments are traded in a public market or who is seeking to issue any class

ofinstruments in a public market. Other entities that choose to disclose segmentinformation

should make the disclosures in line with IFRS 8 ifthey describe such disclosures as 'segment

information'.

Identification of operating segments: IFRS 8 defines an operating segment as a component

of an entity:

y that engages in revenue earning business activitiesy Whose operating results are regularly reviewed by the chief operating decision maker.

The term 'chief operating decision maker'is not as such defined in IFRS8 as it refers

to a function ratherthan a title. In some entities the function could be fulfilled by a

group of directors ratherthan an individual and

y For which discrete financialinformation is available.

This definition means that not every part of an entity is neces

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