Global Accounting:An IntroductionInternationalFinancial Reporting Standards (IFRS) development main objective is to makecommon the financial statements reporting. For example, U.S GAAP is differentfrom Indian GAAP likewise same with the other countries accounting standards. Internationalaccounting community is trying to integrate the accounting standards sameacross the globe and that is the current ongoing process.
This IFRS will hehelp the companies the to make similar financial information all over theworld, transparency in accounting information is improved, ensures thatinvestors receive the accurate information. International Accounting StandardBoard (IASB) has adopted IFRS first iteration in the year 2001 to serve thefeasible pathway to make accounting standards uniform globally. IFRS has beenadopted and accepted in over 100 countries.Need for the studyIntoday’s scenario more than one third of the financial transactions happensoccurs over the border and it is expected to grow. Even in recent days we cansee more FDI, FII’s etc.
, has increasing in India. Investors wants to diversify their portfolioand wants to make use of profitable investments opportunities available allover the world. Companies raise capitals, undergo transactions or runninginternational operations and maintaining subsidiaries in various countries. It hasbeen complicated to do transactions in capital markets in past years becauseeach countries follow their own national accounting standards. Companiespreparing separate financial statements for their international clients istedious work and it costs more them and decisions cannot be made accurately.Each country maintains different accounting standards when they apply each onewill be calculated in each basis. Even minor change in the financial reportswill have greater impact for decision making-for example, a company may reportsprofits under one set of standard and losses in another set which might bedifferent from others. Hence a common accounting standard in order to promotequality financial standard and overcome the all issues.
. This paper presentsthe difference between the IFRS and IGAAP.Importance of theStudy:Thecompanies which are listed in Bombay stock Exchange (BSE), India are usingIGAPP accounting rules to report their companies financial report to regulatorsand investors for Indian capital markets. Whereas the same companies are usingIFRS accounting standards by maintaining independent set of book s of accountsfor international investors, by submitting the financial reports form 20F to USregulators i.e.
Securities Exchange Commission (SEC). Companies like Infosysltd, Dr.Reddy’s ltd, Reliance Industries Limited (RIL),GAIL (India ltd), BPCLetc.
, are few companies which are using IFRS accounting standards in India. Theremaining big companies in the BSE 50 list as well as from other indices arealso started implementing IFRS. This study explains the difference in IGAAPaccounting rules and IFRS accounting rules by conducting a research study onGAIL India Ltd., financial report in order to analyses the difference betweenthem and its impact on the financial statements such as income statement andbalance sheet.
This study also focused on mentioning the impact on ratios,while adopting different accounting systems and their final results onvaluation of the firm and equity in global capital markets.Objectives of thestudy:· To study the importance of the globalaccounting standards.· To understand different accountingstandards by using financial reports. · To examine the global accounting standardsadopted in GAIL (India) Limited. Implications of different accounting standards on GAIL(India) Ltd. Financials: In acceptance of the foreign movementof capital, many companies have adopted or going to adopt a version of IFRSissued by IASB. Usually companies present their financial reports according thenorms of the respective country financial standard.
As a result, individualswho has invested in the companies which are listed in different markets have toadjust with the local financial statements based on different financiallanguage. This kind of country specific reporting creates confusion in theminds of stakeholders especially when an investment is in the form of ForeignDirect Investment (FDI), Foreign Institutional Investor (FII), ForeignPortfolio Investor (FPI), Merger & Acquisitions (M) etc., To give anexample to report compensation in the area Property Plant Equipment (PPE) infinancial statements, USGAAP generally does not require the component ofdepreciation whereas in IFRS separate component of PPE with different usefullives to be recorded and its depreciation values has to be recorded separately.For example if a building cost $10,00,000 in total and it has life of 40 yrs.In USGAAP depreciation value will be calculated as ($10,00,000)/40 = $2,50,000.
Where as in IFRS the value is recognized as Components Cost Useful Lives Building 8,00000 40 Roof 50,000 15 Cooling System 1,50,000 15 Total 10,00,000 Depreciation value is calculated forindividual component.Comparable Profitability Accounting Analysis of GAIL(India) Ltd for 2015-2016:GAIL reported the revenue from operationsas Rs. 55,563.85 crores in the year 2016 where as it is reported as Rs.61,617.96 crores.
There is a considerable decrease in the value this is becauseunder IFRS revenue recognition is done based on the specific criteria like saleof goods, rendering services, interest, royalties etc., revenue from renderingthe services is reported at the time of completion of transaction at thebalance sheet date, interest revenue is recognized at the time asset’seffective yield, royalties are recognized on accrual basis etc., likewise each classificationrecognized on each time which considerably reduced the amount in revenue fromoperations in the year 2016 where as in the year 2015 it is recognized at the timeof completion of completion of service. Similarly inventoryrecognition is also having significant difference in IFRS method. Since LIFO isnot allowed under IFRS, LIFO firms have to convert their inventory into FIFOterms in the footnotes of the financials. This difference is known as the LIFOreserve, and is calculated between the COGS under LIFO and FIFO. The benefit indoing this is an increase in the comparability of LIFO and FIFO firms.
However,since everything is moving towards IFRS, FIFO will be the standard moving forward.This has an effect on the financials of a firm. In particular, during periodsof high inflation, a firm that uses LIFO will report higher COGS and lowerinventory as compared to a firm that uses FIFO. Higher cost of goods soldresults in lower profitability and lower profits results in lower income tax.Lower profits will also result in lower equity for the firm, which affectsretained earnings in a negative way. In contrast, in a low inflationaryperiod, the effects mentioned are reversed. Something to keep in mind foranalysts converting LIFO firms to FIFO.Comparable BalanceSheet Accounting Analysis of GAIL (India) Ltd.
2015-2016:Balancesheet is a financial statement which gives the snapshot of the capitalstructure of the firm for the particular point in time; the sources andapplications of funds of the company. On comparing the balance sheet of GAIL(India) Ltd on the whole we can see there is considerable increase in assetside. IGAAP mentions balance sheet has to be started with reporting sharecapital as a starting point and non-current assets are reported first underasset side.InIGAAP noncurrent assets reported Rs, 57,281.62 crores and under IFRS it isreported as Rs.
58,154.30. There is difference of reporting in non-currentassets due to the accounting treatment of non-current investments under both ofthe standards due to which, resulted in reporting of high non-current assetsbalances in IFRS in comparison to IGAAP. And added to this good will onconsolidation is newly included in IFRS which is also a reason for showing highnon-current assets.IFRSclassifies financial instruments as liabilities or equities in accordance withthe substance.
The preference shares which are mandatorily redeemable areconsidered as liability where as preference dividend is considered as interestcost. In IGAAP it is classified based on the form rather than substance. Becauseof this reporting method IFRS shows companies as more geared and profits areshown very less as result of treating the preferred dividends as interest cost.Summary of balancesheet analysis: The IFRS balance sheet in contrast with IGAAP reportinghigher amount in most the heads. IFRS accounting rules are aggressive inreporting balance sheet transactions, where the same was conservative in preparingthe income statement. Hence balance sheet also reporting different accountingnumbers for various line items. These differences will impact on ratiosrelating to balance sheet especially turnover ratios, leverage ratios and alsoreturns on assets and returns on equity.Comparable Cash FlowStatement Analysis of GAIL (India) Ltd, 2015-2016:The mostimportant statements among the three financial statement is cash flow statementat least from the valuations perspective.
As the name suggests it is used totrack the cash flow of the company. There is slight change in accounting treatmentof the 3 heads in cash flow. Net income has to be reconciled in indirect methodonly for IFRS whereas in IGAAP either direct or indirect can be used. And inboth the method cash flow statement has not affected that much only negligibleamount of changes.A brief Analysis ofOther Companies across sectors in India:The othermajor companies across different sectors in India, are sing both IFRS and IGAAPto report their financial statements differently for their investors. The listof accounting difference is quite exhaustive and it influences on various accountingratios. There are numerous qualitative difference between IGAAP and IFRS i.
e.level of details and specificity in the standards. This difference manifests ina number of ways, including more standards, more implementation guidance andmore bright line rules under IGAAP than under IFRS. Finally it results in tothe confusion in the minds of investors in understanding financial statementsby adopting different accounting standard by the companies.Conclusion: Hence, we require “a single global accounting”,which can help to the investors in understanding financial statements better.
IFRS brings the efficiency to the market by internationally recognized set ofaccounting standards which bring transparency, accountability and efficiency.Though in initial stages of implementation has some problem it can berectified. Finally, Foreign Institutional Investors re playing a crucial roleon Indian Capital Markets. Hence this accounting standards play significantrole.
It will be leading to attract more global capital from global investorsby educating the investors better by following IFRS as “a single globalaccounting”.References:1. GAIL(India) Ltd annual reports for the year 2014-2015 and 2015-2016.
2. IndianGAAP, IFRS and Ind AS a comparison by Deloitte.3. A Comparisonbetween IGAAP, IFRS and US GAAP by Price Waterhouse Cooper.4.