Presently Indian Bankss make commissariats on loans based on RBI guidelines. As such they do n’t hold to do any opinion. The procedure is really mechanical and requires small usage of opinion.
In IFRS the opinion of the Bankss is a high demand. There are no specific instructions the bank demand to follow. Every instance of important importance has to be assessed with mention to the facts and fortunes.
For case, if there is a really strong circumstance that suggests that future hard currency flows associating to a loan will non be recovered, merely so that loan history would be classified as impaired and would be assessed at present value utilizing effectual rate of exposure as the price reduction rate. No commissariats for expected losingss are allowed. Lone commissariats for specific losingss are allowed.
Similarly, for investings, in add-on to the recognition standing of the issuer, just value is considered.
The Bankss will hold to better to their information assemblage procedure to measure the recognition hazard direction map. In add-on to this they have to better and beef up their loss prediction mechanism.
Fiscal Instruments
Under Indian Standards, the lower of the cost or the net realisable value is the just cost is the measurement footing.
Fair value measuring which requires considerable personal opinion is the footing of measuring under IFRS. It is on the bank to warrant the just value they have taken. Furthermore unfulfilled additions may besides be required to be taken into consideration.
Derived functions and hedge accounting
Derived functions would be required to be measured on just value footing, the alteration being reflected in the P/L statement. This requires rigorous certification and compulsory effectiveness trial to find the just value
De acknowledgment of fiscal assets
Under IFRS, de-recognition of fiscal assets follows the rule of transportation of hazards and wagess. In the Indian context, this will chiefly hold an impact on the securitisation activity.
Securitisation minutess – where recognition collaterals are provided or warrant is provided to cover recognition losingss in surplus of the losingss inherent in the portfolio of assets securitised – may non run into the de-recognition rules given in IAS 39.
This will take to de acknowledgment of fiscal assets in the bank ‘s statements which will hold a considerable impact on rations such as capital adequateness ratio and return on assets.
Consolidation
IAS 27 specifies that if a company has power to command the entity, irrespective of anything, to obtain economic benefit, the entity will be considered as a subordinate. As a consequence IFRS may ensue in a consolidation of larger figure of companies in comparing to the Indian Standards which has really narrow set of trials ( more than 50 % of equity control or control over the bulk of board members )
In all the above instances, IFRS focuses on personal experience and opinion to warrant the action taken. IFRS requires revelations on assorted issues but gives adequate freedom to do opinions. Strategic determinations would hold to be made by the Bankss which will hold a considerable impact on the fiscal statements. The Bankss will hold to better their information direction system to take effectual and just determination. They will hold to pitch up with professionals who have considerable cognition to do a just opinion. In add-on to the aforementioned fiscal accounting impact, the execution will imply several alterations to the fiscal coverage systems ( including IT systems ) and procedures adopted by Bankss
Oil and Gas
Earlier IFRS 1 required full retrospective execution of IFRS. This posed a job for oil and gas industry which used cost based accounting method for valuing production. Retrospective application would necessitate information about historical cost and amortisation degrees to convey it in line with IFRS. This information may non be easy available particularly for older assets because alteration of modesty base over clip. But with amendment in IFRS applicable from January 1, 2010, the oil companies will acquire an freedom from using IFRS retrospectively.
Real property and Infrastructure
Under the Indian GAAP, there are no specific guidelines for investing in belongings. They are either treated as investings or portion of fixed assets. If they are treated as investings they are to be shown at cost or cyberspace realisable value. On the other manus if they are treated as fixed assets, reappraisal is allowed ( the addition taken to capital militias ) , but they have to be depreciated over their utile life. In either instance the existent estate company loses since the addition in monetary value is non reflected in the fiscal statements.
With the execution of IFRS, the existent estate companies will be able to demo their investing belongings at just value wherein the losingss or additions will be routed through P/L statement. In add-on to this the company need non deprecate because IFRS recognizes the fact that normally the market values of land appreciates over the long term.
IFRS will hold a major impact on the acknowledgment standards of gross revenues in the existent estate industry. In India gross revenues are by and large made before the completion of the undertaking typically every bit shortly as the undertaking is launched. Indian GAAP treats this as gross revenues and allows proportionate acknowledgment of net incomes over the period the undertaking takes to finish.
IFRS recognizes such transportations under three caputs:
Construction Contract – the purchaser has the control over the design of the belongings
Agreement of Service – the purchaser provides the stuff for building.
Gross saless – all other trades are considered gross revenues.
IFRS allows proportionate acknowledgment of net incomes merely in instance of building of contract. However if the sale of land can be separated from the sale of belongings, gross on sale of land can be recognized individually
In some instances the landholder gets a portion of the developed belongings in consideration of land belongings.
Indian AS does non acknowledge such swap. As such this dealing is non recorded in the books of histories.
IFRS recognizes such swap and provides specific instructions as to how the dealing is to be recorded. The purchase of land is accounted for at just value of development cost of landholder ‘s portion. The gross from for the building of landholders ‘ portion is recognized when the belongings is handed over to the landholder. Hence for residential undertakings, the swap will besides hold an impact on the net income and loss statement. It may go on the just value of land is higher than the value of building services. In such instance the net incomes would be higher.
Infrastructure companies will be affected by the IFRS proviso on “ service grant agreements ” . Under Indian GAAP, outgo incurred by the substructure supplier is capitalized as fixed or intangible plus, which is capable to depreciation normally over the term of the service grant understanding. This has two elements under IFRS. First, it will be treated as a building contract where grosss will be recorded at just value of such services ( i.e. cost plus net income ) . Second, the supplier will acknowledge an intangible plus in extinguishment of the receivables on completion of building. Thus the gross statement will hold considerable impact due to acknowledgment of grosss during the building period under IFRS.
Furthermore long-run payables and receivables, including keeping money, would be discounted taking in consideration the market involvement rates to reflect the current just value.
Telecom Industry
Information technologies Industry
This industry would be to the lowest degree affected due to convergence into IFRS. Most of the taking Indian IT companies are listed in US and have already filed fiscal statements in line with IFRS with Securities Exchange Commission of US ( a compulsory demand ) . They are more cognizant about the deductions of IFRS and hold more experience in utilizing them to their advantage. Due to the early acceptance by taking companies the passage would be smoother compared to that in other sectors.
Tax
There will hold to be important alterations made in the revenue enhancement regulative model in India so as to run into the assorted challenges brought by execution of IFRS.
The major issue would be how to cover with additions and losingss originating due to reappraisal of assorted assets. There can be many illustrations.
Under IFRS a steadfast trading in securities is allowed to demo its investings at just value. This reappraisal will ensue in net income or loss. Indian revenue enhancement jurisprudence revenue enhancements securities merely on sale. Therefore this will make a deferred revenue enhancement liability or plus in the books. There are no specific Torahs for this. The company may set its losingss against other incomes, though on the other manus it may make a deferred liability for the additions.
Income from agribusiness enjoys revenue enhancement freedom in India but tea and java plantations have to pay revenue enhancement on the premise that certain part of income is accrued from concern, therefore nonexempt. Under IFRS the plantations have to be revalued every twelvemonth to demo just value, loss or addition being routed through PL statement. The revenue enhancement governments need to stipulate how such addition or losingss be treated ( concern or agriculture income ) .
The revenue enhancement governments will hold to pitch up to run into these challenges. Since just value is mostly based on personal opinion, the governments will hold to be excess careful so that the companies do non take undue advantage of this just rating to manipulate revenue enhancements. Furthermore the alterations in Minimum Alternate Tax ( MAT ) in the new direct revenue enhancement codification ( to be besides implemented in 2011 ) which requires revenue enhancement on gross assets will hold a major clang with the execution of IFRS. Fair value of assets will go the footing of revenue enhancement. During utmost volatile conditions this will make jobs
Fair Value
The biggest contention that surrounds IFRS is its colored nature towards just value. IFRS over emphasizes on just value. The job is that the markets are ne’er perfect. When the markets are lifting the company would take market value as just value but what will go on when the markets fall. In this instance ideally the company should devaluate the assets, but they wo n’t make this and see the old value as just so as to keep net incomes. Furthermore since the additions or losingss are routed through PL statement, there may be high fluctuations in the net incomes from one describing period to another.
However if market values are needed to be taken as a just value as a regulation, there is no justification for this besides. In the current scenario when the universe is confronting fiscal crisis, it is hard to happen purchasers. So how can one state that the market values are just?
Corporate Administration
IFRS is a rule based unlike Indian criterions which is regulation based. Since personal opinion is required in taking assorted policies to be adopted for showing fiscal statements and future prognosiss, these factors will hold a important impact on the fiscal place and reported net incomes of the company. Management and the audit commission have to pitch up for the passage to IFRS. They must understand the assorted impacts of IFRS on their fiscal statements and the assorted options available under IFRS to do a sensible pick. IFRS has many complexnesss and this increases the opportunities of skip and mistakes. The direction have to be excess careful. Furthermore IFRS requires retrospective execution. This will take to registering of restatements. Normally restatements are looked down upon by the investors. Thus the direction has to turn to this issue efficaciously. One of the biggest challenges would be to pull off stockholder ‘s outlooks in footings of run intoing marks and cardinal public presentation indexs particularly in footings of dividends and explicating fluctuations and volatility in net incomes on a quarterly footing.
Other Concerns
Most of the single states have adopted IFRS with alterations. This truly overrules the major benefit of IFRS easing same criterions all over the universe to simplify comparing with planetary equals. India is besides expected to follow IFRS with some alterations to accommodate the Indian environment. Furthermore, ICAI and other regulative organic structures such as IRDA are responsible for supplying the guidelines for implementing IFRS. Differences in construing IFRS commissariats could farther cut down consistence in fiscal coverage and comparison. Furthermore
Will IFRS halt cookery of books?
IFRS execution is favoured fundamentally because they are international criterions and let comparing with companies all around the universe. But the large inquiry is that whether it will halt cookery of books? Will it better the quality of describing? Enron, WorldCom and Satyam instances prove that directors and hearers can cook books in their favor. Rigorous US GAAP could non forestall the ruin of Lehmann Brothers. IFRS being rule based involves personal opinion. Will this non give more freedom to directors to window dress their histories in the name of just value. Furthermore despite recent dirts US and UK have developed institutional substructure to take attention of fiscal coverage ordinances.
However, India lacks such institutional substructure. India is placed in every step that relates to carry oning concern, be it the quality of corporate administration, accounting norms, the quality of corporate administration, corruptness, or the regulation of jurisprudence. In all these steps, the US and UK rank in the top deciles. Furthermore the investors in India are non educated plenty to capture the mistakes in the fiscal studies unlike that in the developed state though this did n’t forestall the failure of Lehmann Brothers.
