The world has become and global village today and the economies are dependent on the foreign investments as well to progress and thrive. With the increase in this globalisation and the lack of sufficient guidelines to keep a track of bad loans and duly report them, there was a need for bringing standardisation in the accounting policies that are accepted and understood globally. This is where IFRS comes into the picture and directs the corporates to maintain the financial statements in the most optimum manner that provide adequate transparency and its true picture.
What are (International Financial Reporting Standards) IFRS?
International Financial Reporting Standards (IFRS) are a set of accounting standards developed and maintained by the International Accounting Standards Board (IASB). These standards are used globally to provide consistency and transparency in financial reporting. IFRS standards provide a common platform or a common language for companies and investors across countries which enables them to compare financial statements across countries. These standards ensure that financial statements are prepared with basic principles like consistency, accuracy, and transparency, making it easier for investors to make informed investment decisions. IFRS covers a wide range of topics like the presentation of financial statements, revenue recognition, impairment of assets, etc., and is mandated in various countries across the globe.
What is IFRS 9?
IFRS 9 is a set of accounting standards that is part of the International Financial Reporting Standards (IFRS) framework. It deals with the classification and measurement of financial assets and liabilities and the recognition and measurement of impairment losses on those assets.
IFRS 9 was issued by the International Accounting Standards Board (IASB) in 2014, and it replaces the previous IAS 39 standard. The aim of IFRS 9 is to provide a more robust framework for financial reporting that reflects the current economic environment and financial markets.
The standard introduces a new approach to the classification of financial assets. This approach is based on their contractual cash flow characteristics and the business model in which they are held. Under IFRS 9, financial assets are classified as either measured at amortized cost, fair value through other comprehensive income, or fair value through profit or loss.
IFRS 9 also introduces a new approach to the recognition and measurement of impairment losses on financial assets. This new approach is based on expected credit losses, which requires entities to recognize expected credit losses on all financial instruments, including those that have yet to experience a significant increase in credit risk.
What is the need for IFRS 9?
There are several factors that led to the development of IFRS 9 and its need in today’s world.
With increasing globalization and cross-border transactions, there was a need for a common set of accounting standards to ensure consistency and comparability of financial statements across countries and industries.
- Financial crisis
The 2008 financial crisis highlighted the limitations of the existing accounting standards, particularly with respect to the recognition and measurement of impairment losses on financial assets. IFRS 9 provides a more forward-looking approach to impairment assessment that takes into account expected credit losses.
- Complexity of financial instruments
Financial instruments have become increasingly complex, making it difficult for investors and analysts to understand and compare financial statements. IFRS 9 simplifies the classification and measurement of financial instruments, providing a more principles-based approach that reflects the nature of the assets and the business model in which they are held.
- Convergence with US GAAP
The development of IFRS 9 was also driven by the desire to converge with US Generally Accepted Accounting Principles (GAAP), which had already adopted a principles-based approach to impairment assessment.
What is the impact of IFRS on India?
The impact of IFRS on India has been significant, particularly for companies that operate globally or have listed securities in international markets. Some of the key impacts of IFRS on India are as follows.
- In 2015, the Securities and Exchange Board of India (SEBI) mandated that all listed companies with a net worth of more than Rs. 500 crores must prepare their consolidated financial statements in accordance with Ind AS (Indian Accounting Standards) which are converged with IFRS.
- The adoption of IFRS has led to improved transparency and comparability of financial statements, making it easier for investors to understand the financial performance and position of Indian companies.
- The adoption of IFRS has increased the complexity of financial reporting for Indian companies, particularly for those with global operations. Companies have had to invest in new systems, processes, and training to ensure compliance with the new standards.
- The adoption of IFRS has also had an impact on taxation in India. Companies have had to adjust their tax calculations to reflect the changes in financial reporting under IFRS, which has led to additional compliance costs.
- The adoption of IFRS has brought India’s accounting standards in line with global standards, making it easier for Indian companies to compete in international markets.
The adoption of IFRS has had a positive impact on India’s financial reporting framework, improving transparency and comparability of financial statements and bringing the country’s accounting standards in line with global standards. However, the adoption of IFRS has also increased the complexity of financial reporting, which has led to additional compliance costs for Indian companies.
IFRS (International Financial Reporting Standards) was first introduced in India in 2011 when the Ministry of Corporate Affairs (MCA) notified the converged Indian Accounting Standards (Ind AS) with IFRS and became mandatory in January 2018.
The key changes brought by IFRS 9 include a more principles-based approach to the classification and measurement of financial instruments, improvements to hedge accounting, and enhanced disclosure requirements.
The components of financial statements under IFRS include
-Statement of financial position (balance sheet)
-Statement of profit or loss and other comprehensive income (income statement)
-Statement of changes in equity
-Statement of cash flows
-Notes to the financial statements
The four core principles of IFRS are the revenue recognition principle, matching principle, materiality principle, and consistency principle