Ifrs and sustainable financial reporting

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IFRS and Sustainable Financial Reporting By

Executive Summary The report evaluates the applicability of IFRS as a global financial language. It discusses the current purview of IFRS adoption and its contribution to the achievement of sustainable financial reporting. The current nature of IFRS integration across the globe is characterised by many variations and flexibility that is subjected to management interpretation of IFRS. However, the potential use of IFRS intends to achieve holistic sustainability along with the application of GRI guidelines. This will lead to not only economic but also social and environmental value creation.

The sustainable financial reporting would increase the confidence of different stakeholder groups.

Further the report discusses the use of accounting standards in India for attaining sustainable reporting. It discusses the current standards and their use in sustainable reporting within India for publicly listed companies. Moving ahead to full integration with IFRS, Indian companies will be better placed globally in terms of sustainable reporting – enabling transparency, uniformity, objectivity, verifiability, lowered risk and comparability.

Contents Executive Summary.........................................................................................................................2 Introduction......................................................................................................................................4 Part A...............................................................................................................................................4 IFRS.................................................................................................................................................4 Use of IFRS for sustainable reporting.............................................................................................5 Part B...............................................................................................................................................7 IFRS in India....................................................................................................................................7

2 Current or Potential Use of Accounting Standards for Sustainable Reporting in India..................8 Conclusion.....................................................................................................................................11 References List..............................................................................................................................12

Introduction The remarkable acceptance of IFRS by 140+ countries across the globe indicates that it will become a 'de facto' language for financial reporting globally [ CITATION Pac14 \l 1033 ]. A global, uniform standard in financial reporting is much required to achieve definite reporting structure, sustainable reporting of the business affairs, reduce redundancy, enhance comprehensiveness and comparability. However, while talking about global harmonisation in financial reporting, it should be noted that the disparities in accounting standards are not just inter- economy but intra- economy as well. Within a country, gradation in the standards exists.

Thus, it is important to evaluate whether sustainable reporting by adopting a common global standard like IFRS will ensure holistic sustainability in financial reporting. Also, the current and potential usefulness of such reporting should be evaluated. Further, the current and potential usefulness of sustainable reporting standard is evaluated for the chosen country India.

Part A IFRS The adoption of IFRS by different countries is either in the form of integration of the international standards with the existing accounting standards or in the form of replacing the existing one [ CITATION Nel08 \l 1033 ]. The latter is not opted for because it is a sudden change and may impact the entire economy. Therefore, the former alternate opts for to transit to the IFRS system. Thus, the economies are in preparatory phase, transition phase or incorporated phase. IFRS is a principle- based standard and is based on the IAS framework. It can, therefore, be interpreted in different ways based on the interpretation of the management. Despite the variations, the theoretical advantages of using IFRS as a universal financial language exhibit evidence academically [ CITATION ICA12 \p "2 - 6" \l 1033 ]. Use of IFRS is supported by businesses, investors and other stakeholders in need of high quality and global accounting standard that renders transparency and reflects economic reality in the reporting. The standard

3 setting process is not biased to any legal or national constraints which lead to more neutrality and thus sustainability. IFRS is intended for unifying the standards for financial reporting.

Sustainable reporting ensures that the companies' performance reporting is triple- bottom line reporting which includes financial and non- financial reporting like social, environmental and corporate governance perspective. Thus, IFRS does not solely achieve sustainable reporting, but jointly with GRI it achieves the motive.

Use of IFRS for sustainable reporting Current Usefulness Countries are adopting the IFRS as a step towards sustainable reporting. However, the extent of adoption of the standards in their current accounting systems varies. This results in variations while presenting the financial data in the reports [ CITATION AIC101 \l 1033 ]. Currently, the usefulness of IFRS may not be uniform across all the countries due to the disparity in the interpretation of the standard. Yet, the IFRS provides a common referral point. It has specified standards that cover the various line items used in the reporting. Most of the reporting items are quantified and well- defined. The framework provides the basis of using the right means to report the figures in the financial reports. If these standards are used completely, then there is a sustainable double- bottom line (i.e. financial) reporting. Being a principle- based approach; it provides flexibility to account for unknown eventualities or changes [ CITATION ICA12 \p 7 \l 1033 ]. It also offers professional judgment basis. But this is possible only if the priority of financial reporting is the true and fair reporting of the performance of given company.

Potential Usefulness The framework details the requirements of financial reports and provides standards for identifying the parties to the financial reports, increasing the usefulness of the data for such entities, establishing the accounting context, ensuring elaborations and disclosures [ CITATION Cle11 \l 1033 ]. It is simple, precise yet elaborated and comprehensible. Therefore, integrating the current accounting standard of the economy with IFRS is important. Only complete adoption of IFRS will lead to sustainable reporting. However, the cost of integration is high and so some economies are reluctant to adopt the same. If not all economies adopt IFRS, sustainable reporting objective is not achieved completely.

The GRI issues reporting guidelines in order to make the financial reports of the organisation more sustainable. These guidelines are dominant in ensuring sustainable reporting.

4 It tries to cover not only the financial performance but also the social, environmental, economic and corporate governance performance [ CITATION Del16 \p 1 \l 1033 ]. It is important to cover all these aspects in reporting the performance of the company and have standards for the same. There is a global push to control the carbon emissions, efficient use of water and other resources, use clean technology and increase the energy efficiency of the operations of organisations. These aspects were not covered entirely in the earlier reporting standards. Also, there was no mandate to ensure the sustainability of the company's reports. But, IFRS and GRI cover these aspects of the organisation. Empirical studies show that sustainable reporting increases the credibility of the organisation and the confidence and trust of the various stakeholders [ CITATION Bal06 \p 1 \l 1033 ]. It is in the interest of the internal and external stakeholders who want to know the long- term social and environmental value creation apart from economic value creation of the firm. IFRS and CSR (based on GRI guidelines) project the various non- financial objectives of the organisation that are essential to be known by different stakeholder groups. Organisations realise the importance and relevance of providing these details. Among the many potential benefits of sustainable reporting through IFRS include actionable by all organisations from any industry, easy to verify in terms of measurability and objectivity. They are quantifiable, auditable, replicable and comparable. The sustainability achieves completeness of information, integrated report, unbiased utility, applicability, relevance and cost- effectiveness. It drives the long-term risk- mitigation in the performance reporting of organisations along with holistic value creation [ CITATION Gil12 \p 3 \l 1033 ].

Studies reveal that the environmental disclosures are followed by firms with larger sizes and domiciled in economies with constraining regulations related to environment [ CITATION Bar141 \l 1033 ]. This implies that the sustainability is currently subjected to the application of IFRS and the economic regulations related to the IFRS standards. Potentially, complete and global integration of IFRS will ensure that the sustainability reporting is improved and followed strictly as a part of financial reporting. There are economies that have given free hand to the organisations to opt for IFRS reporting. Organisations also realise the potential benefits of using IFRS which definitely precipitate the costs of implementing it. Many organisations with transnational operations have already volunteered for IFRS and CSR reporting.

5 Although the suite of IFRS may not have progressed as planned, the inherent advantages and affirmation to sustainability support the widespread adoption of IFRS [ CITATION ICA12 \p 7 \l 1033 ].

Part B IFRS in India India is trying to converge with the IFRS standard like many other developing countries while ensuring minimal modifications in the domestic reporting standards used for financial reporting [ CITATION ICA12 \p 9 \l 1033 ]. In wake of this, ICAI, the Accounting Standards setting body in India, has identified the immediate requirement of convergence with IFRS to achieve global financial reporting sustainability. However, the ICAI has not adopted the IFRS standards but integrated them with the current accounting standards in India to the best extent possible, leading to the formation of new Indian Accounting Standards alias Ind AS [ CITATION IFR16 \l 1033 ]. The substantial convergence of Ind AS with IFRS takes into effect the explanation of any major difference (if any) between the two accounting standards. This ensures sustainability in financial reporting of the companies while disclosing appropriately the variations that are important for the stakeholders.

All the publicly listed companies are required to follow the SEBI guidelines of preparing the financial reports in India. SEBI has given a free hand to the companies of using even IFRS standards for reporting as they are in conformity with the IASB guidelines. This helped the internationally listed companies to prepare an only single report following IFRS. However, ICAI has not adopted the IFRS but has integrated with the accounting standards to form Ind AS. It has in accordance revised the Companies Act that requires all the companies (public and large) to conform to the Ind AS accounting standards for reporting purpose. The authority has not allowed SEBI to approve IFRS-based financial reports – consequently, all the publicly listed companies are mandatorily required to prepare financial reports in compliance with Ind AS [ CITATION IFR16 \p 2 \l 1033 ]. The companies may also prepare financial reports using IFRS but for India, the report necessarily has to follow Ind AS. The rule exempts compulsion for SMEs, banking sector and insurance and non- banking financial companies.

Many companies domiciled in India have their Global Directory Receipts across the globe. Over 350 organisations are reported to have GDRs only in European nations. The companies belong to varying sectors like banking, retailing, steel, telecom, etc. However, not all

6 have adopted IFRS. EU has mandated the companies to apply IFRS [ CITATION Sin12 \l 1033 ].

The shift to IFRS sooner will benefit the Indian economy by and large. The MCA has notified the adoption of Ind AS effectively from April 1, 2015 [ CITATION IFR16 \p 5 \l 1033 ]. It has proposed a shift to IFRS based Ind AS in phases based on the net worth of the companies.

The transition will result in an initial disturbance in the real value of the companies.

Currently, only the companies with international presence follow international standards for reporting. The usefulness of such shift in sustainable reporting should be taken into account. The change is not merely a shift in the accounting technique but it tries to achieve a broader objective of sustainable reporting. The companies are required to report both stand- alone and consolidated reports using Ind AS. There is no option to use IFRS for reporting now. If there is conflict, the law per the ICAI prevails [ CITATION PWC15 \l 1033 ]. This enforcement is to ensure sustainable financial reporting to be achieved in India for publicly listed companies.

Current or Potential Use of Accounting Standards for Sustainable Reporting in India Currently, the laws and regulations of the accounting standard in India delimit the usefulness of sustainable reporting. While adopting IFRS would potentially lead to sustainable reporting by meeting the global standards, the costs would be high to implement the change. The IFRS adoption as is would not only require changes in the accounting standards of India but also a change in the related law, rules and regulations [ CITATION IFR16 \p "2- 3" \l 1033 ]. The shift to Ind AS is in phases. The phase-wise roadmap to implement IFRS is progressing slowly. The figure 1 shows that by April 1, 2018, Ind AS should be effectively rolled out and applicable to all the listed companies in India. This implies that by 2018, all the listed companies in India would meet the sustainable financial reporting norms per Ind AS. At least at the national level, sustainability of reports will be achieved in terms of financial performance.

The SMEs are exempted from adopting the Ind AS [ CITATION PWC10 \p 1 \l 1033 ] as per the roadmap. However, their contribution to the GsDP is high and therefore, MCA should reconsider their inclusion in the adoption of Ind AS down the line. Besides, the banking and nonbanking financial sector are exempted to apply Ind AS either voluntarily or mandatorily unless they have a subsidiary or joint venture with a company that is listed and meets the criteria per the roadmap. This sector is influential and investment option for many stakeholders. Therefore, it is

7 important that this sector should as well be included in the purview of Ind AS application. The authority should take into consideration the failure of non- banking financial companies like Lehman Brothers that has led to a global economic breakdown in 2008 [ CITATION Bri10 \p 2-3 \l 1033 ]. This was due to lack of sustainable reporting and corporate governance per the bankruptcy reports. Thus, while ICAI prescribes Ind AS for the publicly listed companies with an objective of sustainable, uniform, cost- effective and verifiable reporting, it should also prescribe norms that ensure sustainability of banking, insurance and non- banking financial companies in India. Only then the sustainability objective of financial reporting can be achieved holistically.

The Ind AS has been able to address many ambiguities and confusions in the earlier standards. It has addressed the two most important standards of revenue recognition and that of financial instruments and notified their strict application effectively from April 1, 2015 [ CITATION PWC15 \l 1033 ].This makes India globally, one of the first movers in adopting the accounting standards for these two aspects. Other countries intend to follow suit from 2017.

These two standards significantly impact business and catalyse organisational changes. This further influences the double-bottom line of the financial reports. With the adoption of these standards, Indian accounting standards have taken a step ahead in conforming to the international standards of revenue recognition and financial instruments. This will also increase the sustainability of the financial reports.

Having a unanimously chosen accounting standard is very important to provide a common base for decision making. It is useful for both the internal and external stakeholders. In the absence of a unified accounting standard, the choice of accounting standard and presentation of financial information is at the discretion of the management. It is important that the controlling authorities take care that there is no ambiguity or variations present in the adoption of accounting standard within a given economy. By doing so, if not globally, sustainability of financial reports is at least attainable at the national level. India had its own GAAP for financial reporting which was a rule- based approach. But, there was biases, ambiguities and confusion in presenting certain financial information. Besides, the lack of sustainability in financial reporting has lowered the attraction of India as an investment centre. In such cases, the ICAI saw the immediate adoption of sustainable reporting framework to be the solution [ CITATION IFR16 \l 1033 ]. Therefore Ind AS was notified covering 35 accounting standards. This is derived from the IFRS and follows a principle- based approach in setting accounting standard.

8 In India, per the report by GIZ [ CITATION GIZ12 \p 2 \l 1033 ], more than 80 companies belonging to private and public sector have voluntarily opted for the sustainability reporting of CSR along with the financial reporting. The structure for CSR is derived from the GRI guidelines. Extending the financial reporting to also include CSR report strengthens the sustainability of the corporation. The companies adopting this holistic approach realise that including the sustainability report adds value to the company while mitigating the risks.

Therefore, companies readily dedicate resources to comply with the CSR reporting. The importance of grading the firm's performance on the basis of non- financial parameters has increasingly gained momentum in the country. The stakeholders are therefore interested to know both the financial and non- financial performance of the company.

In wake of this, more companies in India are opting to disclose their non- financial performance in their annual reports. There is an increase in the number of companies opting for sustainability reporting. In fact, sustainable reporting has become a key performance indicator of the company [ CITATION GIZ12 \p 29 \l 1033 ]. Often the decision-making takes into account the social and environmental impacts of the organisations. Therefore, companies are working hard to enhance their non- financial performance too. This has benefitted both the society and the environment. Thus, if more firms in India opt for GRI compliance for CSR reporting, then with Ind AS being compulsory for financial reporting, the companies will become sustainable holistically.

Potentially, complete integration of IFRS in India will enhance the opportunities of partnering globally. As mentioned in the earlier section, IFRS along with CSR compliance per GRI guidelines will fully equip the financial reports' sustainability. This will enable the sustainability of Indian firms at par with that of the other firms across different countries. It will lower the borrowing costs for the economy thereby. IFRS will make the reports more universal, transparent and sustainable than the Ind AS. It will enhance the objectivity of the reports. The investors are realising the importance of sustenance in reporting the failure cases of organisations are increasing [ CITATION Ghe11 \p "34 - 41" \l 1033 ][ CITATION Hot15 \l 1033 ]. Thus, IFRS would better the disclosure norms, the scope of financial reports, refine processes by targeting sustainability and improve metrics used for evaluating the financial reports and the skills of the people to deploy their responsibilities appropriately. It will mitigate the risks in following the financial reports at their face value for

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Conclusion The current and potential uses of IFRS are evident in the different theoretical studies as well as in practice. IFRS along with GRI will help in achieving holistic sustainability of financial reporting of the companies across the globe. This is possible if more nations actively adopt IFRS considering it to the universal financial language. However, this will take time and therefore, despite the universal language, there are many dialects that reduce the sustainability objective of adopting IFRS. Therefore, countries should compulsorily apply IFRS or at least move towards the IASB standard framework while taking into account its effectiveness in progressing towards sustainability.

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