Introduction to International Financial Reporting Standards (IFRS)

Background of  International Financial Reporting Standards (IFRS)

Users of financial statements have always demanded transparency in financial reporting and disclosures. However, the willingness and need for better disclosure practices have intensified only in recent times. Globalization has helped Indian Companies raise funds from offshore capital markets. This has required Indian companies, desirous of raising funds, to follow the Generally Accepted Accounting Principles (GAAP) of the investing country. The different disclosure requirements for listing purposes have hindered the free flow of capital. This has also made comparison of financial statements across the globe impossible. An International body called International Organization of Securities Commissions (IOSCO), to harmonize diverse disclosure practices followed in different countries initiated a movement. The capital market regulators have now agreed to accept IFRS (International Financial Reporting Standards) compliant financial statements as admissible for raising capital. This would ease free flow of capital and reduce costs of raising capital in foreign currencies.

Most jurisdictions that report under IFRS, including the EU, mandate the use of IFRS only for the listed companies. However, in INDIA, IFRS would apply to a wider group of entities than their international counterparts. This is primarily because of a large number of private enterprises getting covered under the size criteria based on their turnover and/or their borrowing. Companies also may need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS, or if they have a foreign investor that must use International   Financial Reporting Standards (IFRS).

The policy makers in India have also realized the need to follow IFRS and it is expected that a large number of Indian companies would be required to follow IFRS from 2011. This poses a great challenge to the makers of financial statements and also to the auditors.

Meaning of  International Financial Reporting Standards (IFRS)

International Financial Reporting Standards (IFRS) is a set of accounting standards, developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements. IFRS is a principles-based accounting system, meaning it is objective-oriented allowing for more presentation freedom.

Objectives of  International Financial Reporting Standards (IFRS)

• to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world’s capital markets and other users make economic decisions;
• to promote the use and rigorous application of those standards; in fulfilling the objectives associated with (1) and (2),
• to take account of, as appropriate, the special needs of small and medium-sized entities and emerging economies.
• to bring about convergence of national accounting standards and International Accounting standards and International   Financial Reporting Standards (IFRS) to high quality solutions.

Scope of  International Financial Reporting Standards (IFRS)

• IASB Standards are known as International Financial Reporting Standards (IFRS’s).
• All International Accounting Standards (IAS’s) and Interpretations issued by the former IASC and SIC continue to be applicable unless and until they are amended or withdrawn.
• IFRS’s apply to the general-purpose financial statements and other financial reporting by profit-oriented entities — those engaged in commercial, industrial, financial, and similar activities, regardless of their legal form.
• Entities other than profit-oriented business entities may also find IFRSs appropriate.
• General-purpose financial statements are intended to meet the common needs of shareholders, creditors, employees, and the public at large for information about an entity’s financial position, performance, and cash flows.
• Other financial reporting includes information provided outside financial statements that assists in the interpretation of a complete set of financial statements or improves users’ ability to make efficient economic decisions.
• IFRS apply to individual company and consolidated financial statements.
• A complete set of financial statements includes a balance sheet, an income statement, a cash flow statement, a statement showing either all changes in equity or changes in equity other than those arising from investments by and distributions to owners, a summary of accounting policies, and explanatory notes.
• If an IFRS allows both a ‘benchmark’ and an ‘allowed alternative’ treatment, financial statements may be described as conforming to IFRS whichever treatment is followed.
• In developing Standards, IASB intends not to permit choices in accounting treatment. Further, IASB intends to reconsider the choices in existing IASs with a view to reducing the number of those choices.
• The provision of IAS 1 that conformity with IAS requires compliance with every applicable IAS and Interpretation requires compliance with all IFRSs as well.

Pronouncements of  International Financial Reporting Standards (IFRS)