Convergence of Accounting Standards Full topic Mcom | Commerce Study Notes

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Convergence of Accounting Standards Full topic Mcom

Meaning Of Convergence of Accounting Standards

Definition and concept In a financial reporting context, convergence is the process of harmonizing accounting standards issued by different regulatory bodies.
One example might be the convergence of International Accounting Standards (IAS) and US Standards.
The objective is to produce a common set of high quality accounting standards to enhance the consistency, comparability and efficiency of financial statements.

Benefits of Convergence of Accounting Standred 

Single Reporting :- Convergence with IFRS eliminates multiple reporting such as Indian GAAP, IFRS, US GAAP

Increased Comparability :-  •IFRS will give more comparability among sectors, countries and
•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

 Access to Global Capital Markets :- Convergence with IFRS will enable Indian entities to have
easier access to global capital markets and eliminates barriers to cross-border listings.
• It encourages international investing and thereby leads to more foreign capital flows to the country.

Benefits for Investors :- •Financial statements prepared using a common setof accounting standards help investors better understand investment opportunities as opposed to financial statements prepared using a different set of national accounting standards

IFRS balance sheet will be closer to economic value :-   •Historical cost will be substituted by fair values for several balance sheet items, which will enable a corporate to know its true worth.

Benefits to the accounting professional :-  •Convergence to IFRS will increase the opportunities for Indian professionals in abroad as they will be able to sell their services as experts in different parts of the world

Benefits for the Industry :-  •Currently companies need to prepare additional financial statements based on multiple reporting formats to arise capital in global market.
•Convergence with IFRS will eliminate the requirement for dual set of financials statements and thereby reduces the cost of raising funds by the companies

Improvement in financial reporting :- •Better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements.
•This, in turn, will lead toincreased trust and reliance placed by investors, analysts and other stakeholders in a company’s financial statements

Challange  of Convergence  

Change to regulatory environment  For the success of convergence in India, certain regulatory amendment is required.
•For example, The Companies Act (Schedule VI) prescribes the format for presentation of financial statements for Indian companies, whereas the presentation requirements are\ significantly different under IFRS. So, the companies act needs to be amended in line with IFRS.

Lack of Preparedness•Adoption of IFRS byapproximately 5000 listedcompanies by 2011 would resultin a significant demand for IFRSresources. Corporate India andaccounting professionals need to
be trained for effective migrationto IFRS. Additionally auditorswould need to train their staff to
audit under IFRS environment

Educating Stakeholders Educating Stakeholders comprising of investors,lenders, employees,
auditors, audit committeeand etc would be a bigchallenge as this wouldrequire a considerable time
and effort

Significant one-time costs of converting to IFRS (including costs of internal personnel time, adapting IT systems, implementing revised reporting policies and processes, training personnel and educating investors, analysts and members of the board)

Complexity in the financial reporting process :- •Under IFRS, companies would need to increasingly use fair value measures in the preparation of financial statements. Companies,auditors, users and regulators would need to get familiar with fair value measurement techniques

Impact on financial performance •Due to the significant differences between Indian GAAP and IFRS, adoption of IFRS is likely to have a significant impact on the financial position and financial performance of most Indian companies.

Communication of Impact of IFRS to investors ;- •Companies also need to communicate the impact of IFRS convergence to their investors to ensure they understand the shift from Indian GAAP to IFRS.

Conceptual differences ;- •For example, the Indian standard on intangibles is based on the concept that all intangible assets have a definite life, which cannot generally exceed 10 years; while IFRS acknowledge thatcertain intangible assets mayhave indefinite lives and usefullives in excess of 10 years are not unusual

Project Management for IFRS Convergence Project

Complex tasks are easier when divided into manage able pieces and it is true for IFRS convergence project also. Project can be broken down into three key phases.

1 Assess

1. Identify the key dates and the date of transition to IFRS
2 Develop an IFRS training plan for accounting and finance
3 Identify differences in therelevant accounting policies.
4 Identify gaps in systems andprocesses to gatherinformation needed underIFRS and the currentlyavailable information.

2 Design

5 Redevelop reporting manual i.e.,develop IFRS accounting manual modifying chart of accounts and containing detailed instructions.
6 Measure the impact of the differences identified on the latest financial prepared under
Indian GAAP.
7 Apply latest version of IFRS consistently
8 Apply IFRS 1 which deals with first-time adoption of IFRS.
9 Identify permitted exemptions from specified IFRS as per IFRS 1.

3 Implement

10. Prepare an opening IFRS balance sheet at the date of transition to IFRS
11 Explain the impact of transition from previous GAAP to IFRS as required by IFRS 1
12 Apply IFRS as business as usual.

Note :- This is the full fledge Topic of Convergence of accounting stranded . Just Focus on Challenges  .of accounting stranded 

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