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Accounting Standards and IFRS

Meaning of Accounting Standards: In order to ensure transparency consistency, comparability, adequacy

and reliability of financial reporting, it is essential to standardize the accounting principles and policies,
Accounting Standards provide framework and standard accounting polices so that the financial
statements of different enterprises become comparable.

Accounting Standards are selected set of accounting policies or broad guidelines regarding the principles
and methods to be chosen out of several alternatives. The Accounting Standards Board (ASB) of the
Institute of Chartered Accountants of India (ICAI) formulas Accounting Standards to be established by
the Council of the ICAI.

Objective of Accounting Standards: Objective of Accounting Standards is to standarize the diverse

accounting policies and practices with a view to eliminate to the extent possible the non-comparability
of financial statements and the reliability to the financial statements.

The institute of Chartered Accountants of India, recognizing the need to harmonize the diverse
accounting policies and practices, constituted at Accounting Standard Board (ASB) on 21st April, 1977.

IFRS:

IFRS is a set of international accounting standards stating how particular types of transactions and other
events should be reported in financial statements.

IFRS are generally principles-based standards and seek to avoid a rule-book mentality. Application of
IFRS requires exercise of judgment by the preparer and the auditor in applying principles of accounting
on the basis of the economic substance of transactions.
IFRS are issued by the International Accounting Standards Board (IASB).

The term IFRS comprises IFRS issued by IASB; IAS issued by IASC; and Interpretations issued by the
Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations
Committee (IFRIC) of the IASB.

“FOR THE EFFECTIVE STUDY OF ACCOUNTING STANDARDS AND IFRS THERE IS A STRONG NEED TO
STUDY THE LINKAGE BETWEEN THESE TWO TERMS THAT MEANS CONVERGENCE.”

MEANING of convergence: The convergence of accounting standards refers to the goal of establishing a
single set of accounting standards that will be used internationally, and in particular the effort to reduce
the differences between the US generally accepted accounting principles (USGAAP) and the
International financial reporting standards (IFRS)

Convergence of Indian accounting standards with International financial reporting standards (IFRS):

Meaning of convergence with IFRS: Convergence means to achieve harmony with IFRSs; in precise terms
convergence can be considered “to design and maintain national accounting standards in a way that
financial statements prepared in accordance with national accounting standards draw unreserved
statement of compliance with IFRSs”, i.e., when the national accounting standards will comply with all
the requirements of IFRS.

But convergence doesn’t mean that IFRS should be adopted word by word, e.g., replacing the term ‘true
& fair’ for ‘present fairly’, in IAS 1, ‘Presentation of Financial Statements’. Such changes do not lead to
non-convergence with IFRS.

The reason behind convergence is:

As, Availability of essential financial information about a company to its shareholders and other
stakeholders in accordance with internationally accepted financial norms is considered as an integral
and important part of good corporate governance. To ensure this and to implement the G-20
commitment to achieve a single set of high quality global accounting standards, the Government has
taken decision to achieve convergence of Indian accounting standards with International financial
reporting standards (IFRS) in a phased manner in accordance with the roadmap suggested by the
Government.

Convergence in Indian Scenario:

With regard to India, the Ministry of Corporate Affairs (MCA) has committed to converge the Indian
Accounting Standards with the IFRS effective 1st April 2011. The convergence process is picking up
momentum with the credit going to the Ministry of Corporate Affairs. The Ministry has extended its
unstinted support and guidance to the various regulatory and legal bodies that are spearheading a
smooth transition process. Laudably, the highest authorities of the Indian Government have concluded
that convergence of Indian Accounting Standards with IFRS is very vital for the country to take a lead
role in the global foray.

Entities covered under convergence;

Keeping in view the complex nature of IFRSs and the extent of differences between the existing ASs and
the corresponding IFRSs and the reasons therefore, the ICAI is of the view that IFRSs should be adopted
for the public interest entities from the accounting periods beginning on or after 1st April, 2011.

Public interest entities:

With a view to determine which entities should be considered as public interest entities for the purpose
of application of IFRSs, the criteria for Level I enterprises as laid down by the Institute of Chartered
Accountants of India and the definition of ‘small and mediumsized company’ as per Clause 2(f) of the
Companies (Accounting Standards) Rules, 2006, as notified by the Ministry of Company Affairs (now
Ministry of Corporate Affairs) in the Official Gazette dated December 7, 2006, were considered. The ICAI
is of the view that in view of the complexity of recognition and measurement principles and the extent
of disclosures required in various IFRSs, and the fact that about four years have elapsed since the ICAI
laid down the criteria for Level I enterprises, as far as the size is concerned, it needs a revision.
Accordingly, the ICAI is of the view that a public interest entity should be an entity:
(i) Whose equity or debt securities are listed or are in the process of listing on any stock exchange,
whether in India or outside India; or

(ii) Which is a bank (including a cooperative bank), financial institution, a mutual fund, or an insurance
entity; or

(iii) Whose turnover (excluding other income) exceeds rupees one hundred crore in the immediately
preceding accounting year; or

(iv) Which has public deposits and/or borrowings from banks and financial institutions in excess of
rupees twenty five crore at any time during the immediately preceding accounting year; or

(v) which is a holding or a subsidiary of an entity which is covered in (i) to (iv) above.

International Accounting Principles and Standards

International Accounting Principles and Standards are designed to harmonize accounting practices
across different countries, ensuring consistency, transparency, and comparability of financial statements
on a global scale. The most widely recognized set of international accounting standards are the
International Financial Reporting Standards (IFRS), developed and maintained by the International
Accounting Standards Board (IASB).

International Financial Reporting Standards (IFRS):

Key Objectives of IFRS:

Consistency:
Provide a consistent accounting framework that can be used globally.

Transparency:

Enhance the transparency of financial statements, enabling stakeholders to make informed decisions.

Comparability:

Allow for the comparability of financial information across different countries and industries.

Structure of IFRS:

IFRS Standards:

Specific standards that address various aspects of financial reporting.

IAS (International Accounting Standards):

Predecessors to IFRS, many of which are still in use today.

IFRIC (International Financial Reporting Interpretations Committee) and SIC (Standing Interpretations
Committee):

Provide interpretations and guidance on specific accounting issues.

 Key IFRS Standards:

IFRS 1: First-time Adoption of IFRS

Provides guidance for entities adopting IFRS for the first time. Ensures that the financial statements are
prepared using consistent and comparable principles.

IFRS 2: Share-based Payment

Addresses accounting for share-based payment transactions, including transactions with employees and
other parties.

IFRS 3: Business Combinations

Provides guidelines for accounting for business combinations, including the identification and
measurement of acquired assets and liabilities.

IFRS 7: Financial Instruments: Disclosures

Requires disclosures about the significance of financial instruments for an entity’s financial position and
performance.

IFRS 9: Financial Instruments

Sets out requirements for recognizing and measuring financial assets and liabilities.

IFRS 10: Consolidated Financial Statements

Provides guidelines for the preparation and presentation of consolidated financial statements.

IFRS 15: Revenue from Contracts with Customers

Establishes principles for recognizing revenue from contracts with customers.

IFRS 16: Leases

Provides guidance on accounting for lease contracts, including recognition, measurement, presentation,
and disclosure.

Key International Accounting Standards (IAS):

IAS 1: Presentation of Financial Statements

Sets out the overall requirements for financial statements, including their structure and minimum
content.

IAS 2: Inventories

Provides guidelines on the determination of inventory costs and their subsequent recognition as an
expense.

IAS 16: Property, Plant, and Equipment

Prescribes the accounting treatment for property, plant, and equipment.

 IAS 18: Revenue

Provides guidelines for recognizing revenue from the sale of goods, rendering of services, and the use of
assets.

IAS 19: Employee Benefits

Sets out the accounting requirements for employee benefits, including short-term benefits, post-
employment benefits, and other long-term benefits.

IAS 36: Impairment of Assets

Provides guidelines for testing and recognizing the impairment of assets.

IAS 37: Provisions, Contingent Liabilities, and Contingent Assets

Addresses the recognition and measurement of provisions, contingent liabilities, and contingent assets.

IAS 38: Intangible Assets

Prescribes the accounting treatment for intangible assets that are not dealt with specifically in another
standard.

Conceptual Framework for Financial Reporting:

The Conceptual Framework sets out the fundamental principles and concepts that underpin financial
reporting. It serves as a guide for the IASB in developing future standards and for preparers of financial
statements in applying existing standards. Key components of the Conceptual Framework:

Objective of Financial Reporting:

Provide financial information that is useful to existing and potential investors, lenders, and other
creditors in making decisions about providing resources to the entity.

Qualitative Characteristics of Useful Financial Information:

Relevance, faithful representation, comparability, verifiability, timeliness, and understandability.

Elements of Financial Statements:

Assets, liabilities, equity, income, and expenses.

Recognition and Measurement:

Criteria for recognizing and measuring elements in financial statements.

Benefits of International Accounting Standards:

Global Consistency:

Facilitates consistency in financial reporting across different jurisdictions, making it easier for global
investors and stakeholders to compare financial statements.
 Improved Transparency:

Enhances the transparency of financial statements, enabling better decision-making by stakeholders.

Reduced Costs:

Reduces the cost of preparing multiple sets of financial statements for multinational companies.

Increased Investment:

Attracts foreign investment by providing reliable and comparable financial information.

Challenges in Implementing IFRS:

Complexity:

Some IFRS standards are complex and require significant judgment in their application.

Training and Education:

Adequate training and education are necessary for accountants and auditors to effectively apply IFRS.

Regulatory Differences:
Differences in local regulations and laws can pose challenges in fully adopting IFRS.

Cost of Transition:

The cost of transitioning to IFRS can be significant for some companies.

Matching of Indian Accounting Standards with International Accounting Standards

Matching Indian Accounting Standards (Ind AS) with International Accounting Standards (IAS/IFRS) is a
process aimed at aligning India’s accounting standards with globally recognized principles.

Background

India started the convergence process to harmonize its accounting standards with IAS/IFRS to enhance
transparency, comparability, and credibility of financial reporting. The Ministry of Corporate Affairs
(MCA) mandated the adoption of Ind AS for certain classes of companies to achieve these objectives.

Convergence Process:

Adoption of Ind AS:

The convergence process began with the adoption of Ind AS, which are based on IFRS issued by the IASB.
Ind AS are formulated and regulated by the Accounting Standards Board (ASB) of the Institute of
Chartered Accountants of India (ICAI), under the oversight of the National Financial Reporting Authority
(NFRA).
 Differences with IFRS:

Initially, there were some differences between Ind AS and IFRS due to specific regulatory requirements
and local business practices in India. However, efforts have been made to minimize these differences
over time to achieve greater alignment.

Roadmap for Convergence:

The Ministry of Corporate Affairs has established a roadmap for the phased adoption of Ind AS:

Phase I: Listed companies and their subsidiaries with net worth above specified thresholds (beginning
from April 2016).

Phase II: Scheduled commercial banks and insurance companies (beginning from April 2018).

Phase III: All other companies (voluntary adoption from April 2018 and mandatory from April 2022).

Alignment with IFRS:

The ASB of ICAI continuously reviews and updates Ind AS to align them with the corresponding IFRS
issued by the IASB. This process involves:

Monitoring new and revised IFRS issued by the IASB.

Issuing corresponding updates to Ind AS to maintain alignment.

Key Areas of Convergence:

Recognition and Measurement:

Ind AS aim to adopt the recognition and measurement principles of IFRS, including concepts like fair
value measurement, impairment of assets, and revenue recognition.

Disclosure Requirements:

Ind AS emphasize comprehensive and transparent disclosures, similar to those required under IFRS. This
ensures that users of financial statements have access to relevant information for decision-making.

Impact on Financial Statements:

The convergence with IFRS has impacted the presentation and structure of financial statements in India,
making them more comparable globally.

Challenges and Considerations:

Implementation Challenges:

Companies and auditors have faced challenges in interpreting and applying Ind AS due to their
complexity and the need for judgment in certain areas.

Training and Awareness:

Adequate training and awareness programs are essential to ensure that stakeholders, including
preparers, auditors, and users of financial statements, understand and effectively implement Ind AS.

Regulatory Environment:
The regulatory environment in India continues to evolve, and changes in legislation and enforcement
practices can affect the implementation and adoption of Ind AS.

Benefits of Convergence:

Global Comparability:

Convergence enhances the comparability of financial statements prepared by Indian companies with
their international counterparts, facilitating global investment and analysis.

Enhanced Transparency:

Improved transparency and disclosure requirements under Ind AS increase investor confidence and trust
in financial reporting.

Reduced Compliance Costs:

Streamlining accounting standards reduces compliance costs for multinational companies operating in
India, as they can use similar accounting practices globally.

 Human Resource Accounting

The American Association of Accountants (AAA) defines HRA as follows: ‘HRA is a process of identifying
and measuring data about human resources and communicating this information to interested parties’.
Flamhoitz defines HRA as ‘accounting for people as an organizational resource. It involves measuring the
costs incurred by organizations to recruit, select, hire, train, and develop human assets. It also involves
measuring the economic value of people to the organization’.

According to Stephen Knauf, ‘ HRA is the measurement and quantification of human organizational
inputs such as recruiting, training, experience and commitment’.

Objectives of Human Resource Accounting (HRA)

Providing cost value information about acquiring, developing, allocating and maintaining human
resources.

Enabling management to monitor the use of human resources.

Finding depreciation or appreciation among human resources.

Assisting in developing effective management practices.

Increasing managerial awareness of the value of human resources.

For better human resource planning.

For better decisions about people, based on improved information system.

Assisting in effective utilization of manpower.

Need for Human Resource Accounting (HRA)

The need for human asset valuation arose as a result of growing concern for human relations manage-
ment in the industry.

Behavioural scientists concerned with management of organizations pointed out the following reasons
for HRA:

Under conventional accounting, no information is made available about the human resources
employed in an organization, and without people the financial and physical resources cannot be
operationally effective.
 The expenses related to the human organization are charged to current revenue instead of being
treated as investments, to be amortized over a period of time, with the result that magnitude of net
income is significantly distorted. This makes the assessment of firm and inter-firm comparison difficult.

The productivity and profitability of a firm largely depends on the contribution of human assets. Two
firms having identical physical assets and operating in the same market may have different returns due
to differences in human assets. If the value of human assets is ignored, the total valuation of the firm
becomes difficult.

If the value of human resources is not duly reported in profit and loss account and balance sheet, the
important act of management on human assets cannot be perceived.

Expenses on recruitment, training, etc. are treated as expenses and written off against revenue under
conventional accounting. All expenses on human resources are to be treated as investments, since the
benefits are accrued over a period of time.

Limitations of Human Resource Accounting (HRA)

HRA is yet to gain momentum in India due to certain difficulties:

The valuation methods have certain disadvantages as well as advantages; therefore, there is always a
bone of contention among the firms that which method is an ideal one.

There are no standardized procedures developed so far. So, firms are providing only as additional
information.

Under conventional accounting, certain standards are accepted commonly, which is not possible
under this method.

All the methods of accounting for human assets are based on certain assumptions, which can go
wrong at any time. For example, it is assumed that all workers continue to work with the same
organization till retirement, which is far from possible.

It is believed that human resources do not suffer depreciation, and in fact they always appreciate,
which can also prove otherwise in certain firms.

The lifespan of human resources cannot be estimated. So, the valuation seems to be unrealistic.

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  Forensic Accounting

Forensic accounting utilizes accounting, auditing and investigative skills to conduct an examination into
the finances of an individual or business. Forensic accounting provides an accounting analysis suitable to
be used in legal proceedings. Forensic accountants are trained to look beyond the numbers and deal
with the business reality of a situation. Forensic accounting is frequently used in fraud and
embezzlement cases to explain the nature of a financial crime in court.

Understanding Forensic Accounting

Forensic accountants analyze, interpret and summarize complex financial and business matters. They
may be employed by insurance companies, banks, police forces, government agencies or public
accounting firms. Forensic accountants compile financial evidence, develop computer applications to
manage the information collected and communicate their findings in the form of reports or
presentations.

Along with testifying in court, a forensic accountant may be asked to prepare visual aids to support trial
evidence. For business investigations, forensic accounting entails the use of tracing funds, asset
identification, asset recovery and due diligence reviews. Forensic accountants may seek out additional
training in alternative dispute resolution (ADR) due to their high level of involvement in legal issues and
familiarity with the judicial system.

TAKEAWAYS

Forensic accounting is a combination accounting and investigative techniques used to discover

financial crimes.

One of the key functions of forensic accounting is to explain the nature of a financial crime to the
courts.

Forensic accounting is used by the insurance industry to establish damages from claims.
Forensic Accounting for Litigation Support

Forensic accounting is utilized in litigation when quantification of damages is needed. Parties involved in
legal disputes use the quantifications to assist in resolving disputes via settlements or court decisions.
For example, this may arise due to compensation and benefit disputes. The forensic accountant may be
utilized as an expert witness if the dispute escalates to a court decision.

Forensic Accounting in the Insurance Industry

Forensic accounting is routinely used by the insurance industry. In this capacity, a forensic accountant
may be asked to quantify the economic damages arising from a vehicle accident, a case of medical
malpractice or some other claim. One of the concerns about taking a forensic accounting approach to
insurance claims as opposed to an adjuster approach is that forensic accounting is mainly concerned
with historical data and may miss relevant current information that changes the assumptions around the
claim.

Forensic Accounting for Criminal Investigation

Forensic accounting is also used to discover whether a crime occurred and assess the likelihood of
criminal intent. Such crimes may include employee theft, securities fraud, falsification of financial
statement information, identify theft or insurance fraud. Forensic accounting is often brought to bear in
complex and high profile financial crimes. The reason we understand the nature of Bernie Madoff’s
Ponzi scheme today is because forensic accountants dissected the scheme and made it understandable
for the court case.

Forensic accountants may also assist in searching for hidden assets in divorce cases or provide their
services for other civil matters such as breach of contracts, tort, disagreements relating to company
acquisitions, breaches of warranty or business valuation disputes. Forensic accounting assignments can
include investigating construction claims, expropriations, product liability claims or trademark or patent
infringements. And, if all that wasn’t enough, forensic accounting may also be used to determine the
economic results of the breach of a nondisclosure or noncompete agreement.

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