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IFRS

Kuldeep Sharma (Service) (48 Points)

13 April 2010

Hi All,

Just want to know the major benefits of switching over to the IFRS. Also, it would be great if some one could through some light on this topic.

Thanks in advance.

Regards,

Kuldeep Sharma

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Nagendra (Company Secretary) (46 Points)
Replied 19 April 2010

I got this from Hindu Business Line I hope It will help you to understand the Benefits of IFRS.. :)

Do we need a new-age definition of accounting?

I define accounting to be the systematic measurement and recording of quantitative information that is used for decision-making, coordination, or control in an organisation. I deliberately chose the words "quantitative information" rather than "financial information" since the measurement and use of "non-financial information" has emerged as a hot topic in the field of management accounting. Of course, the risk with this definition is that the recording and use of daily precipitation amounts would qualify under my definition as accounting. But I would rather define accounting more broadly than narrowly.

Where does `economics of incentive alignment' come into play?

I study how to align incentives in inter-organisational settings. ABP is one mechanism for aligning incentives of customers. Incentives of suppliers can also be aligned better by writing superior contracts and by using more variables in contracts with suppliers.

Currently, many firms have a highly adversarial relationship with their suppliers and are tightly focussed on how to extract for themselves a bigger slice of the proverbial pie. My research shows that with contracts that are designed better, firms can create a bigger pie that they can then share with their suppliers. Firms need to invest in good measurement systems, write innovative contracts, and share decision rights with their suppliers.

An example of such innovation is Bharti Televentures' outsourcing of their network management to Telecom equipment manufacturers. With an innovative contract based on Erlangs (a measure of capacity utilisation in the mobile phone industry), service level agreements that call for very high quality levels, and the transfer of several decision rights to key suppliers, Bharti has been able to create a "win-win" situation for itself and its suppliers. I had the privilege of writing a HBS case study on Bharti's outsourcing arrangements.

Have there been innovative situations where BSC has found application?

Conceptually, firms can use the Balanced Score Card (BSC) not just to implement strategy or as a tool for performance evaluation, but also as a tool to revise a firm's strategy. A balanced scorecard, if properly designed and implemented, can help diagnose a firm's performance. For instance, if things go badly for a firm that is using a well-designed balanced scorecard, it can quickly ascertain whether it is bad strategy or poor implementation that is causing the poor performance. Thus the ability to both learn and adapt is the key ability that a good implementation of BSC can engender for an organisation. BSC is used the world over by for profit corporations, non-profit entities, and governmental organisations.

What of accounting's role for non-profits?

Many non-profit organisations fail because of poor accounting systems. "Non-profit" does not imply "for-loss." A non-profit organisation, while not maximising profits should nevertheless be sustainable and financially viable. Without good accounting and control systems, it is hard for non-profits to be governed well. Non-financials are particularly important for non-profit entities, as financial performance does not indicate how efficient or effective a non-profit has been in the accomplishment of its mission.

Thus the need for good management accounting tools such as BSC and ABC is acute for non-profits. My Cambridge Hospitals case illustrates how a hospital can design and implement a simple but highly effective ABC accounting system.

Is there an overload of accounting standards, making compliance tough? Do newer financial products pose a challenge for accountants, when it comes to fuller disclosure?

We need superior accounting standards, because the transactions in the business world that have to be accounted for are getting increasingly more complicated. The proliferation of financial products does pose a challenge for accountants, but it can also provide an opportunity. The better the accountants get at measuring and reporting the value of these products, the more will be the value added by them and the more will be the use of these products. This, in turn, will fuel more demand for accounting services. However, the proliferation of the standards, which inevitably follows the proliferation of these financial products, does make compliance a greater challenge.

The key to facilitating compliance is to stop the practice of transaction structuring, whereby financial products are engineered to skirt accounting standards. It is common for airlines in the US to arrange most of their long-term leases as operating leases when, in fact, it can be argued that in substance they are capital leases. To stop such transaction structuring, we need to move away from `bright line' rules and closer to standards based on principles. We also need to align the incentives of auditors more closely with that of shareholders than with that of the management. For instance, perhaps stock exchanges can appoint auditors rather than the firms themselves.

How do you see accounting evolving in the Indian context?

Some of the finest implementations of ABC and BSC that I have seen have been in India. While there are such pockets of excellence, the average firm in India has management accounting systems that are about 10 or 20 years behind what is now state of the art. As competition intensifies, I expect that firms in India will implement better management accounting systems. There is a huge opportunity to dramatically improve profitability with better management accounting systems.

There is immense opportunity staring us in the face in the realm of financial accounting as well. India must adopt International Financial Reporting Standards (IFRS) right away. Already more than 200 companies in China have adopted IFRS. While China does not have as long a tradition with modern accounting as India does, it is progressing much faster than we are.

Indian accounting standards are fairly closely aligned with IFRS. So the switch to IFRS will be fairly easy. The potential benefits for us are immense. Academic research shows that foreign investors are more likely to invest in firms whose accounting is similar to accounting of the country of the investors. Thus we can attract more foreign capital and lower the cost of capital for our firms by adopting IFRS. It is time for corporate India to lobby for the early and quick adoption of IFRS. This will benefit not only Indian businesses and capital markets but also labour. Job opportunities for Indian accountants will jump once the world realises and recognises that accounting in India is identical to that in Western Europe, which adopted IFRS in 2005.

Besides, the eventual adoption of IFRS by all countries appears inevitable. If we adopt IFRS now, we will have an opportunity to shape it. If we are one of the last to join the bandwagon, we will not have any real opportunity to influence and shape how international accounting standards are set. Since this window of opportunity will pass fairly soon, we need the Indian industry, government, and the accounting profession to move quickly towards adopting IFRS.

ABC or activity-based costing has been much talked about. But what is activity-based pricing?

Activity-based pricing (ABP) occurs when a firm unbundles its product and service offerings and prices each service or product separately. It is related to activity-based costing (ABC), which is useful in determining the cost of different activities, products, and services in an organisation. A logical next step in the use of this information is in pricing.

Offering a bundled price based on ABC information has been the traditional approach. My research shows that pricing products and services in an unbundled manner is usually more efficient. Customers are then forced to internalise the consequences of their actions better. An example would probably be illustrative. A distributor might employ ABC to determine which customers are profitable and which ones are not.

They might identify a few customers as being unprofitable because they request too many emergency deliveries that have to be express shipped. The traditional approach to pricing might be to charge extra for these customers without disclosing to them why they are being charged a premium. A better approach would be to share this cost information with the customer in the form of a price list.

Customer desiring emergency deliveries can have them as long as they are willing to pay for the cost of express shipments. Charging them explicitly for express shipments helps align their incentives and change their behaviour. When express shipments are priced explicitly, only customers who truly want the shipments will opt for the same.

This change in customer behaviour happens for the same reason that there is more wastage of food and, perhaps, over eating in a restaurant by customers in an "All-you-can-eat" buffet lunch as compared to a situation where the customer orders individually priced items from a menu. Additionally, the "All-you-can-eat" buffet lunch probably attracts the heavy consumers (no pun intended). These two reasons are called moral hazard and adverse selection, respectively, in information economics. My research shows that ABP can mitigate both moral hazard and adverse selection problems using highly accurate cost information provided by ABC. Surprisingly, it can benefit customers as well. Since there is less wastage under ABP, customers can expect lower prices on average.