Applicability of IFRS

12/04/2021 2 By indiafreenotes

Different Countries employ different Accounting Standards while computing the Profits of a Company. It may happen that if the Profits are computed as per US Accounting Laws the Profits are $ 100 Billion but when the same Profits are computed using the UK Accounting Laws, the Profits may turn out to be say $ 50 Billion and when computed as per the Indian Accounting Laws, it may turn out to be $200 Billion (Hypothetical).

Profits computed as per different accounting laws of different countries always yield different figures. So as to remove this discrepancy in Accounting across the Globe, Countries world over decided to apply uniform standards of accounting so as to arrive at uniform profits across the Globe.

It is expected that the adoption of the International Financial Reporting Standards will be beneficial to investors and other users of financial statements, by Reducing the Costs of Comparing alternative Investments and Increasing the Quality of Information. The Companies are also expected to benefit, as investors will be more willing to provide financing.

IFRS are principal based set of standards in the sense that they establish broad rules as well as dictating specific treatments. IFRS comprise of the following:

  • International Financial Reporting Standards (IFRS) issued after 2001
  • International Accounting Standards (IAS) issued before 2001
  • Standards Interpretation Committee (SIC) – issued before 2001
  • Conceptual Framework for Financial Reporting (2010)

1) Investors: Investors from abroad who are willing to invest in India want information which is more relevant, timely, reliable and comparable across different jurisdictions. Financial statements prepared using a common set of accounting standards help investors in better understanding the investment opportunities as opposed to financial statements prepared using a different set of national accounting standards. For better understanding of financial statements, global investors have to incur more costs in terms of time, effort and money to convert them so that they can better understand global opportunities. Investor’s confidence would be stronger if accounting standards used are globally accepted.

2) Economy: As the market expands globally, the need for a global standard also increases. Implementation of IFRS will benefit the economy by increasing the growth of its international business. It facilities the maintenance of orderly and efficient capital markets and also helps in increasing the capital growth and thereby economic growth.

3) Industry: A major push towards implementing IFRS has been coming from the industry. The reason being that the industry would be able to raise capital from foreign markets at a lower cost if it can create confidence in the minds of foreign investors that its financial statements comply with globally accepted accounting standards. Moreover, with diversity in accounting standards from one country to another, enterprises which operate in different countries face a multitude of accounting requirements in different countries. 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 cost of financial reporting.

There are many benefits of implementing IFRS in India. These can be divided in three benefits to:

1) Investors: Investors from abroad who are willing to invest in India want information which is more relevant, timely, reliable and comparable across different jurisdictions. Financial statements prepared using a common set of accounting standards help investors in better understanding the investment opportunities as opposed to financial statements prepared using a different set of national accounting standards. For better understanding of financial statements, global investors have to incur more costs in terms of time, effort and money to convert them so that they can better understand global opportunities. Investor’s confidence would be stronger if accounting standards used are globally accepted.

2) Economy: As the market expands globally, the need for a global standard also increases. Implementation of IFRS will benefit the economy by increasing the growth of its international business. It facilities the maintenance of orderly and efficient capital markets and also helps in increasing the capital growth and thereby economic growth.

3) Industry: A major push towards implementing IFRS has been coming from the industry. The reason being that the industry would be able to raise capital from foreign markets at a lower cost if it can create confidence in the minds of foreign investors that its financial statements comply with globally accepted accounting standards. Moreover, with diversity in accounting standards from one country to another, enterprises which operate in different countries face a multitude of accounting requirements in different countries. 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 cost of financial reporting.