India felt the strong need to adopt Global Accounting Standards (Ind AS converged with IFRS) due to rapid globalization and the limitations of its existing accounting framework.
Globalization of Economy
- Globalization led to massive growth in cross-border trade, foreign investments, and multinational operations by Indian companies.
- Indian firms raising funds overseas and expanding globally required a common accounting framework for smooth international business.
Problems with Multiple Standards (AS)
- Indian companies faced high compliance costs as they had to prepare multiple sets of financial statements under Indian AS, IFRS, and US GAAP.
- This created complexity, inconsistency, increased audit expenses, and operational burden for companies and investors.
Lack of Comparability
- Different national standards caused wide variations in reported results for the same transaction across countries.
- The same event could show profit under one standard and loss under another (e.g., cost vs fair value of investments), making comparisons difficult.
Investor Concerns
- International investors found Indian financial statements hard to understand and trust due to differing accounting practices.
- They demanded IFRS-based reporting or heavy reconciliations, which reduced confidence and raised the cost of capital for Indian companies.
Limitations of Indian Accounting Standards (AS)
- Existing Indian AS were rule-based, outdated, and lacked guidance on complex modern transactions like leases, financial instruments, and fair value.
- They failed to reflect economic substance properly and were not equipped for global business complexities.
Need for Convergence with IFRS
- Convergence with IFRS was essential to bring transparency, reliability, comparability, and global acceptance to Indian financial reporting.
- It aimed to reduce information asymmetry and help India integrate deeply with the international financial system.
Policy Commitment
- India formally committed to converge with IFRS at the G20 Summit in 2009.
- This policy decision led to the development and phased implementation of Ind AS starting from 2016 onwards.
The institutional framework for setting Accounting Standards in India is a well-organized multi-tier system comprising professional, technical, regulatory, and governmental bodies. The major Accounting Standard Setting Bodies are as follows:
1. ICAI (Institute of Chartered Accountants of India)
- Established under the Chartered Accountants Act, 1949, ICAI is the premier professional accounting body in India.
Role and Functions
- It is the main professional body responsible for the formulation of accounting standards.
- It issues Accounting Standards (AS) primarily for non-corporate entities.
- It plays a key role in maintaining quality and uniformity in accounting practices across the country.
2. ASB (Accounting Standards Board)
- Established in 1977 as a specialized body of ICAI.
Role and Functions
- It is responsible for drafting and developing accounting standards.
- It follows a comprehensive and consultative process, including issuance of exposure drafts and inviting public comments.
- It works towards making Indian standards comparable with global standards (IFRS convergence).
- It submits draft standards to higher authorities for approval and notification.
3. NFRA (National Financial Reporting Authority)
- Established as an independent regulatory body under Section 132 of the Companies Act, 2013.
Role and Functions
- It reviews and oversees the quality of accounting and auditing standards.
- It receives recommendations from the ASB before the final approval process.
4. MCA (Ministry of Corporate Affairs)
- Established as the nodal ministry of the Government of India for corporate affairs.
Role and Functions
- It is the final authority to notify and implement accounting standards in India.
- It issues both Accounting Standards (AS) and Indian Accounting Standards (Ind AS) for companies.
- It ensures legal enforcement of these standards under the Companies Act, 2013.
| Basis of Difference | Adoption of IFRS | Convergence with IFRS |
| Meaning | Adoption means accepting and implementing International Financial Reporting Standards (IFRS) exactly in the form issued by the International Accounting Standards Board (IASB). | Convergence means aligning national accounting standards with IFRS making suitable modifications to meet the legal, economic, and regulatory requirements of a country. |
| Objective | To achieve complete global uniformity and comparability in financial reporting. | To achieve substantial harmonisation with IFRS while protecting national interests and regulatory requirements. |
| Nature of Standards | IFRS are applied in their original form without alteration. | IFRS principles are incorporated into domestic standards with certain modifications where necessary. |
| Changes Permitted | No change is permitted in the language, format, recognition, measurement, or disclosure requirements prescribed by IASB. | Limited changes or modifications are permitted to suit local laws, taxation systems, economic conditions, and regulatory frameworks. |
| Role of National Standard-Setting Body | The national standard-setting body mainly implements IFRS as issued by IASB. | The national standard-setting body modifies and aligns domestic standards with IFRS while maintaining substantial consistency. |
| Flexibility | Very limited flexibility because standards must be followed exactly as issued. | Greater flexibility is available for adapting standards to local conditions. |
| Suitability | More suitable for countries willing to fully integrate with global financial reporting practices without modifications. | More suitable for countries having different legal, economic, taxation, or business environments requiring adjustments. |
| Example | European Union (EU) โ Full adoption for listed companies since 2005. | India uses Ind-AS (Converged with IFRS, not identical). |
