Bridging the IFRS GAAP

There are significant differences, both in terms of accounting principles as well as additional disclosure requirements, between IFRS and the Indian GAAP. The disclosures are expected to improve the quality of financial information. Although there are a host of disclosure requirements under IFRS, the focus is on key disclosures relating to financial instruments as envisaged under IFRS 7. IFRS 7 requires an entity to disclose information—market and liquidity risk—that enables the users to evaluate the nature and extent of risk, given the firm’s current exposure to financial instruments.

Most enterprises in India are exposed to foreign currency risk and interest rate risk, which fluctuate over time. Such entities are required to disclose the effect of a reasonable expected variation in the foreign exchange rate or interest rates for domestic/foreign currency borrowings. Internal preparation to put into place a system for obtaining the desired data to facilitate the disclosure is required. This may become quite critical for large entities that are highly geared or have significant exposures to foreign currencies and active treasury operations. Generally, entities hedge their foreign currency and interest rate risks through derivative products. This poses an additional challenge as the entity will have to ask the dealer, with whom the derivative is contracted, for the impact of the sensitivity test on these products.

In addition, an entity is also required to disclose how it manages its significant risks, e.g. credit, liquidity or capital. Therefore, it is imperative for an entity to have an approved risk management policy that deals with monitoring debt-equity, managing liquidity risk to overcome impediments in meeting short-term and long-term obligations.

Furthermore, IFRS 7 also requires the disclosure of fair value of each financial instrument beside its carrying value, hence providing better information on financial instruments to their users. This entails determination of fair value of each component at every balance sheet date. There is no doubt that IFRS would catapult India, Indian entities and its finance and accounting professionals to much greater heights. Given that it is a new subject with a host of new requirements that corporate India was ignorant of, only proper planning, laying down a detailed conversion plan and putting the required systems in place, will ensure a smooth convergence with IFRS.