In the present era of globalization and liberalization the world has become an economic village. Accounting plays a very important role in the economic growth of a country as it is the financial language in which transactions and their effects are expressed. Various nations across the globe are pursuing convergence of their national accounting standards with International Financial Reporting Standards (IFRS). It is very imperative to have a single globally accepted financial reporting system since a number of multinationals companies are engaging in cross-border business transactions. They are getting themselves listed on stock exchanges of different countries. Capital markets are thus becoming integrated.
The use of different accounting frameworks in different countries which require different treatments and disclosures for same transactions shall create confusion amongst users of financial statements. So this calls for the need to adopt unified standards such as IFRS that can help economy, industry and accounting professionals. Adoption of IFRS will encourage in transparent and reliable preparation and presentation of financial statements. These standards would enable comparability of financial information which will boost investor confidence. It will provide easy access to global capital markets and at low cost. These will provide impetus to cross border mergers and acquisitions, affiliate partnerships and ventures with foreign establishments.
Having regard to this and the gaining momentum of IFRS, the convergence roadmap has been issued by the ICAI. The adoption of IFRS will benefit the accounting profession in a way that they are able to render their expert services in different countries.
Opportunities from IFRS’s convergence
- International Opportunity: Indian CAs can take their professional abilities and deep knowledge anywhere around the world.
- Potential Demand of Valuation Experts: As per the IFRSs assets and liabilities are to be recognized at fair values. This fair valuation will require valuers.This is one new area that can be explored by CAs.
- Appointment in Companies as IFRS specialist:Companies would be working along the teams of experts and consultants. CAs would be required for interpreting the various complex issues and preparing financial statements according to the standards.The banking industry in India which is most affected by the implementation of IFRSs will also require these professionals as this industry will have to prepare its financial statements as per the new standards.
The persons with expertise in international accounting standards will also have an edge over others in educational institutes which are running certificate diplomas and training programmes in this area.
- Continuing Professional Education: Intensive IFRS training needs to be imparted to key management personnel of companies. ICAI has taken steps in this regard.
Challenges for CA’s due to Transitional Phase
- First time Reporting of Financial Statements as per IFRS will be a critical factor. IND-AS 101 has been issued by ICAI in this regard that requires preparation of opening Balance Sheet which requires recognition and reclassification of certain items of assets and liabilities.First time adoption has its own challenges. Quite a few new policies need to adopted and previous policies may need a change. The entity is required to evaluate the impact of all these on its financial in the long term.
- Regrouping / Reclassification: Current items shall have to be regrouped or reclassified to conform to the new method of preparation. Under IND-AS if any reclassification needs to be done the same shall have to be disclosed separately.
- Planning for Effective Transition Audit: The changeover to IFRS poses a fundamental shift in financial reporting. Changes in the application of new policies, the configuration of systems and maintenance of internal controls will all have an effect on audit risk, significantly increasing the risk of misstatements and fraud. In turn, this will have a considerable impact on how audits are conducted. That’s why it’s important to properly plan the engagement — a step that everyone agrees is the key to a successful transition.Planning should focus on two major areas: assessing and updating the knowledge of professionals; and participating in the company’s conversion process.
- Users Concerns and Professional Risks: One thing is certain, the first IFRS financial statements will be closely scrutinized by the various stakeholders, including financial backers, investors, market analysts and regulators. All the stakeholders will be concerned about the impact, the changes will have and how it will affect them.This issue and its impact on audit engagements will naturally need to be addressed.
- High Risks: In their risk assessment, auditors should also consider the possibility of figures being manipulated by management. The changeover is a convenient opportunity to embellish the results and financial position or to conceal previously undetected errors in the opening balance adjustment.Early in the planning process, auditors should identify the files that present the greatest risk, either because of their complexity, major differences between GAAP and IFRS. This will enable them to take the necessary precautions to ensure the audit is properly performed.Obviously, vigilance and professional skepticism should be the key objectives of the auditor.
- Managements’s Transition Plans: The active involvement of auditors in all stages of the planning, development and implementation of the company’s conversion process is critical to the engagement and essential to their work and conclusions, given the extent of the change, the high level of professional risk and the potential adverse effects inherent in the process.
- Remaining Independent: Auditor should be free from any bias and prejudice as a matter of his moral code of conduct. To enforce the rules of professional conduct respecting independence and to avoid placing the auditor in a real or perceived conflict of interest situation, both the company and the audit committee will need to put processes in place to define the extent of the auditor’s involvement and collaboration with the management team.
The switching over to IFRS is a major challenge, but it is also an opportunity for audit firms to review their programs, procedures and practices to make them more effective and efficient. Like any major shift, the changeover will not be easy and will require considerable resources and time. Good planning will be crucial to cope with the obvious increase in workload and to maintain the quality of services offered. It is our job as auditors to be acquire all the necessary knowledge and skills and be prepared.