IFRS and Indian Business Environment

What kind of impact IFRS is going to create in Indian business environment?

Indian business environment will face sea of changes when Indian corporates will adopt IFRS in 2011. IFRS conversion requires fundamental change on multiple levels, can take up to several years, and affects virtually every function within an organization. Adopting IFRS is going to be very challenging but at the same time could also be rewarding.

Indian corporates are likely to reap significant benefits from adopting IFRS.

• Improvement in comparability of financial information and financial performance with global peers and industry standards. This will result in more transparent financial reporting of a company’s activities which will benefit investors, customers and other key stakeholders in India and overseas;
• The adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements. This, in turn, will lead to increased trust and reliance placed by investors, analysts and other stakeholders in a company’s financial statements; and
• Better access to and reduction in the cost of capital raised from global capital markets since IFRS are now accepted as a financial reporting framework for companies seeking to raise funds from most capital markets across the globe. In addition to the above, there are several impediments and practical challenges to adoption of and full compliance with IFRS in India.
• The need for a change in several laws and regulations governing financial accounting and reporting in India. In addition to accounting standards, there are legal and regulatory requirements that determine the manner in which financial information is reported or presented in financial statements.
• There is a lack of adequate professionals with practical IFRS conversion experience and therefore many companies will have to rely on external advisers and their auditors. This is magnified by a lack of preparedness amongst Indian corporates as this project may be viewed simply as a project management or an accounting issue which can be left to the finance function and auditors .
• Another potential pitfall is viewing IFRS accounting rules as “similar” to Generally Accepted Accounting Principles in India (Indian GAAP), since Indian accounting standards have been formulated on the basis of principles in IFRS However, this view disregards significant differences between Indian GAAP and IFRS as well as differences in practical implementation and interpretation of similar standards.

Given the current market conditions, any restatement of results due to errors in the conversion process would be detrimental to the company involved and would severely damage investor confidence in the financial system.