IFRS-9 And Its Impact On India

New to accounting and trying to figure out the nuances and intricacies of IFRS-9? You’ve come to the right place! In this article, we will explain everything you need to know about IFRS - 9 as a newbie accountant.

What Do You Mean by IFRS?

IFRS, which stands for International Financial Reporting Standards, refers to accounting guidelines developed by the International Accounting Standards Board (IASB). These standards provide a globally recognized framework for companies to prepare their financial statements and balance sheets. Know about IFRS 9 and its impact on India.

Key aspects of IFRS include:

1. Global Accounting Language: IFRS serves as a common language for financial reporting, allowing companies to present their financial information in a standardized manner. This is especially important in the context of increased globalization and cross-border business activities.
2. Enhanced Transparency: IFRS principles mandate extensive disclosures regarding a company’s management and internal financial transactions. This transparency holds companies accountable for any errors or poor judgments in their financial reporting, promoting a higher degree of accountability.
3. Facilitating Comparisons: As different countries traditionally operated with their own accounting standards, IFRS adoption facilitates easier comparisons of financial statements across international boundaries. This comparability is essential for investors and stakeholders to analyze and understand company accounts.
4. Public Investing and Trading: By adhering to IFRS principles, companies provide clear and transparent global market information. This transparency is conducive to attracting public investments and facilitating trading, as investors can make informed decisions based on standardized financial reporting.

In essence, IFRS plays a crucial role in standardizing financial reporting practices globally, fostering transparency, and enabling meaningful comparisons of financial information across diverse jurisdictions.

Purpose of IFRS:

The implementation of International Financial Reporting Standards (IFRS) introduces significant changes in accounting practices compared to Indian Generally Accepted Accounting Principles (I-GAAP). 

Some of the key purposes and impacts of adopting IFRS include:

1. Revenue Recognition: Under IFRS, revenues are calculated by adding excise duty, in contrast to I-GAAP where revenues are computed net of excise and duties. This change aims to provide a more comprehensive view of a company’s financial performance.
2. Valuation of Investments: IFRS mandates the valuation of current investments at fair value, whereas I-GAAP allows valuation at cost or market value. This shift is intended to reflect the true economic value of investments.
3. Cost of Capital: The primary goal of implementing IFRS is to lower the cost of capital for companies. By adhering to international accounting standards, companies can attract global investments more easily and create new opportunities for growth.
4. Brand Value and Benchmarking: Adopting IFRS can enhance a company’s brand value and enable benchmarking against global peers. Consistency in financial reporting facilitates comparisons, providing investors and stakeholders with a clearer understanding of a company’s performance on a global scale.
5. Fair Value Accounting: IFRS emphasizes fair value accounting, providing a true and fair representation of a company’s financial position. This approach goes beyond mere compliance with legal provisions, offering a more accurate reflection of economic realities.
6. Convergence with Global Standards: Indian authorities have taken steps to fully converge I-GAAP with IFRS, aiming for remarkable development and standardization. This convergence aligns India’s accounting practices with global standards, contributing to international financial harmonization.

Understanding IFRS 9

IFRS 9 impacts financial assets and liabilities accounted for at fair value through a Profit and Loss (P/L) Account, along with gains and losses in comprehensive income. This standard introduces modifications in the classification and measurement of financial assets, particularly for financial institutions.

Moreover, the influence of IFRS 9 extends significantly to financial institutions. Notably, it incorporates provisions for hedge accounting and management of risk activities. Additionally, IFRS 9 introduces a framework designed to mitigate expected losses, adding another layer of risk management to the financial landscape.

Need for IFRS 9

IFRS 9 plays a pivotal role in developing economies like India, as it aims to enhance the quality and timeliness of credit risk information. The key aspects highlighting the need for IFRS 9 in India include:

Expected Loss Model: IFRS 9 introduces an ‘expected loss’ model, a forward-looking approach to assess and measure anticipated losses on loans and receivables. This model enhances the ability to proactively manage credit risk and make informed decisions before losses occur.

Cross-Coordination: The standard promotes cross-coordination between various departments, including risk, finance, credit, and business units. This integrated approach ensures a comprehensive understanding and management of credit risk throughout the organization.

Impairment of Equity Instruments: IFRS 9 eliminates the impairment of assessments for equity instruments, streamlining the accounting treatment for these financial instruments.

Impact of IFRS on India  

While the adoption of IFRS in India brings numerous benefits, there are also challenges and areas of deviation. The impact of IFRS on India can be summarized as follows:

1. Deviation Areas: India has deviated from IFRS in certain areas such as leasing, classification of current vs non-current liabilities, revenue recognition, and treatment of foreign currency convertible bonds. Harmonizing these areas is essential for alignment with global standards.
2. Fair Value Determination: Determining a reliable fair value is challenging in the Indian market, primarily dominated by small and medium-sized companies. The complexities of fair value measurement pose difficulties in implementation.
3. Resource Constraints: As an emerging economy, India faces challenges related to a shortage of skilled resources and adequate training infrastructure to meet the demands of complex IFRS requirements.
4. Compliance Costs: The cost of compliance with IFRS provisions is relatively higher than the perceived benefits, posing financial challenges for businesses, especially smaller enterprises.
5. Complexity: Understanding IFRS is intricate, relying on models and analytics. The complexity of the standards requires extensive training and expertise, which may be lacking in some segments of the Indian business community.

Despite these challenges, the adoption of IFRS has led to significant liberalization and improvements in efficiency and transparency within Indian companies. In fact, the standards enable Indian businesses to present themselves more effectively in foreign markets, expanding opportunities beyond traditional accounting principles.

The Way Forward

To address transitional and operational challenges, most Indian banks are strategically planning for the potential implementation of Ind AS 109 during FY21-FY23. 

This is because the adoption of Ind AS 109 goes beyond enhancing transparency in India’s credit structure. For iaims to mitigate risks, simplify complexities, and elevate the country’s financial profile to align with global accounting standards like IFRS 9 or IAS. 

This proactive step reflects a commitment to international financial norms, positioning India on par with nations following global best practices.