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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, you will be able to learn everything you need to know about IFRS - 9 as a newbie accountant.

IFRS-9 And Its Impact On India

The Board issued Interest Rate Benchmark ReformPhase 2 in August 2020, which amended requirements in IFRS 9, IAS 39, IFRS 7, IFRS 4, and IFRS 16 relating to:

• modifications to the basis for calculating the contractual cash flows of financial assets, financial liabilities, and lease liabilities;

• risk management accounting; and

• the disclosure of information

The Phase 2 amendments only apply to changes to financial instruments and hedging relationships required by the interest rate benchmark reform.

What Do You Mean by IFRS?

The International Accounting Standards Board develops accounting guidelines known as International Financial Reporting Standards (IFRS) (IASB). It provides a global accounting language that companies can use to prepare balance sheets and financial statements. Because of increased globalisation and cross-border business relations, financial reports from different countries must communicate in a similar language. As of now, it is already applicable in approximately 120 countries.

To better understand its impact and role in the accounting world, take a look at the following pointers – 

  • IFRS principles would open more doors for public investing and trading as the companies would be clear and transparent about their global market information. 
  • IFRS accounting demands extensive disclosures about the company’s management and internal financial transactions. So that the companies would be held accountable for any errors or poor judgement made on their part.
  • As each country has its own set of accounting standards, IFRS reporting makes it easy to compare and understand the company accounts across international boundaries.

Thus, the IFRS system ensures a greater degree of responsibility introduced in the financial reporting and disclosure system.  

Purpose of IFRS:

Revenues are computed net of excise and duties under Indian Generally Accepted Accounting Principles (I-GAAP), and current investments are valued at cost or market value.

However, according to IFRS, revenues are calculated by adding excise duty, and investments are valued at fair value.

The main goal of implementing IFRS is to lower the cost of capital and create new opportunities. It will also increase brand value and allow for benchmarking against global peers. When the cost is feasible for FV, the IFRS accounting network projects when it should not be used for FV.

Computing financial statements at Fair Value gives a true and fair picture of the company’s financial position rather than just complying with the legal provisions. Steps have been taken by Indian authorities to fully converge I-GAAP with IFRS for remarkable development and upgradation of standards.

Understanding IFRS 9

As per the needs of IFRS 9, only those financial assets and liabilities will be influenced that are provided at fair value through a P/L Account or those gains and losses in income that are comprehensive. This is also because it introduced changes across the classification and measurement of financial assets for financial institutions.

What’s more, is that IFRS 9 will have a significant effect on financial institutions and the financial stability of the economy. It has even made provisions for hedge accounting to manage risk activities better as well as Initiated a framework to curtail the expected losses.

Need for IFRS 9

IFRS 9 is a game changer in developing economies like India. The primary objective of IFRS 9 is to get quality-approved, timely information about the credit risk that affects the economic conditions of India.  

IFRS 9 establishes an ‘expected loss’ model, which is a new method to recover loans and receivables and eliminates the impairment of assessments for equity instruments. Simply, a method to look forward and measure the anticipated losses before they occur.

It provides a model that will bring cross-coordination between risk, finance, credit and business units. 

Although, there are some of the areas where India has deviated from IFRS and needs to polish them out are Leasing, current vs non-current liabilities, revenue recognition and foreign currency convertible bonds.

Impact of IFRS on India  

  • In an Indian market economy where activities are mostly carried out by small and medium-sized companies, determining a reliable Fair Value is difficult.
  • India is an emerging economy. Thus, it does not have adequate skilled resources to meet the demands of complex technology and proper trainers which are required for the successful implementation of IFRS.
  • The cost of complying with the provisions of IFRS is comparatively higher than the benefits received by it.
  • Understanding IFRS is complicated as it is mostly based on models and analytics.

Regardless, of the challenges faced in the adoption of IFRS, Indian companies have experienced a huge liberalization over the past few years since the new standards came into force. Greater efficiency and transparency with more refined performance in the state of affairs.

With IFRS, companies in India can present themselves in foreign markets as well which could not have been possible with the traditional methods of accounting principles.

Conclusion

IFRS is a global accounting language which will have international acceptance and will provide a common accounting platform in each and every part of the world. In this era, where the world is converging internationally there is a need for accounting standards which have universal acceptance. Accounting in accordance with IFRS will mean that transactions of similar nature will be recorded in a similar manner everywhere leading to the same set of financial statements. Thus, the implication of IFRS will ultimately benefit the performance of the global economy thereby befitting the public at large.

The Way Forward

To minimise transitional and operational challenges, most Indian banks are planning for a likely Ind AS 109 implementation in FY21-FY23. The adoption of Ind AS 109 aims to do more than only increase the openness of India’s current murky credit structure, minimise risks, and reduce complications. It will boost the country’s profile, putting it on par with countries that adhere to global accounting standards such as IFRS 9 or IAS.

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