Changing over from GAAP to IFRS-1: Are we ready yet?

Last updated: 28 May 2021

Sub Heading : A single implementation date for the new regime would be desirable

Author : Kaushik Dutta & Shrenik Baid/DNA

Content :

The Institute of Chartered Accountants of India (ICAI) and the Government of India have affirmed that the country will converge with International Financial Reporting Standards (IFRS) on April 1, 2011. This would mean that over a very short period of time, Indian GAAP as we know now will transition into IFRS and IFRS will be the GAAP of India.
What it all really means?
Many countries including the EU have made modifications to IFRS as issued by the International Accounting Standards Board (IASB) — the degree of modification varies greatly. The hybrid 'IFRS’ is not considered as comprehensive by the SEC and for US listings, needs to be upgraded to IASB’s version of IFRS. It is quite easy to fall into the temptation of editing IFRS requirements to suit the needs of a section of shareholders, but the effect of that in a global scenario is immense as the country GAAP does not converge with IFRS.
From the stakeholders’ perspective, transitional provision is one of the most important aspects. On introduction of new accounting standards, the regulators have two options, either to provide a single implementation date (say, April 1, 2011 for all new standards) or provide multiple implementation dates for different standards based on difficulty in implementation (say, 2009, 2010 and the remaining by 2011).
'The single implementation date approach would help in achieving consistency and comparability of the financial statements in a planned manner and the companies can also take the advantage of IFRS 1 exemptions at the time of implementation. On the other hand, if the multiple-dates approach is used, the financials would remain inconsistent throughout the implementation period and this would significantly affect the usefulness of the financials.’ However, the multiple-dates approach provides some breathing time between implementing numerous standards.
If we continue to have different dates of adoption of certain standards until the date all the new standards are introduced, the usefulness and the basic objective in preparation of the financial statements (consistency and comparability) would be compromised. Consistency is one of the fundamental accounting assumptions in preparation of the financial statement as per AS 1 and comparability is one of the qualitative characteristics of financial statements - Framework of Preparation and Presentation of the financial statements. These are not only for an Indian context; in using IFRS, there is a fundamental assumption that the numbers would be comparable across industries and countries worldwide.
In Europe, the IFRS implementation date was December 31, 2005 with an opening balance sheet as at January 1, 2004. To bring in standardisation among the financial statements, IASB came out with its last improvement standard by the end of December 2003 and thereafter, it stopped providing new implementation dates for any new standard until December 31, 2005.
Canada, which adopts IFRS in 2011, has decided not to adopt any change to GAAP that would involve major system changes as all that would become redundant after 2011.
IFRS 1 is an accounting standard for the first-time adopters of IFRS, which has been written in a way to address the fact that countries around the world would transition from their national GAAP to IFRS and the disruption due to such transition need to be minimised. The key principle of IFRS 1 is full retrospective application of all IFRS in force at the closing balance sheet date for the first IFRS financial statements. This means more than 3,000 pages of IFRS needs to be applied retrospectively. Since comparative financial information is imperative for full IFRS financial statements, these standards need to be applied for two financial years.
In the context of India, a company needs to provide a comparative financial statement of 2010-2011 with that of 2011-2012. This would mean that the starting point is April 1, 2010, which is two years ahead of the date of convergence.
IFRS 1 provides 14 optional exemptions that reduce the burden of retrospective application and four mandatory exceptions where retrospective application is not required.
If an Indian company adopts all the new standards and amendments as introduced by the Institute using a single implementation date, the financial statements may still not be fully compliant with IFRS as issued by IASB, unless IFRS 1 is also introduced by the Institute and adopted by the company. In the absence of IFRS 1, the difference between financial statements prepared under future Indian GAAP and IFRS as issued by IASB would not be bridged for a considerable timeframe as the basis of preparation will be divergent. The transition date is key as the exemptions under IFRS 1 can be availed only once.
We should learn from the challenges and successes of our peers who have already adopted IFRS in their countries. We should adopt IFRS as prescribed by IASB, including IFRS 1, using a single implementation date, as there are significant benefits of this approach.
In South Africa, SA GAAP started converging with IFRS. However, quickly realising that unless IFRS is fully adopted, including IFRS 1, there would be a gap between SA GAAP and IFRS, steps were taken and IFRS was adopted in for all listed companies. Canada will adopt IFRS in 2011 and they are adopting IFRS as issued by IASB. If a similar approach is used, it would not be inconsistent with the view expressed by the Institute in
its concept paper and all stakeholders need to work jointly to help India transition to IFRS. We still have time to meet the deadline, if we all act
together.