The financial statements tell us about the financial position of the company or business. The stakeholders of a business mainly use the financial statements to get an idea about the financial performance of the company. The key stakeholders of a business are: shareholders & creditors, customers, employees, suppliers, state and the community.
The major financial statements prepared by a business are: profit & loss account, balance sheet, cash flow statement and statement of changes in equity. Financial statements are prepared according to Generally Accepted Accounting Principles (GAAP). One reason why financial statements are prepared according to a common set of accounting standards is to enable comparison of financial performance of two different businesses or companies. If financial statements are not prepared according to a common set of accounting standards then it will become difficult for end users to understand them. International Financial Reporting Standards (IFRS) are now being used by major international corporations to prepare their financial statements. It is mandatory for listed public limited companies to come out with their financial statements at the end of every financial quarter. A listed public limited company is one that has raised money from the public and is listed on a stock exchange.
The profit & loss statement (also known as income statement) gives the financial performance of a company in a given financial period. It gives the revenues, costs and profit (or loss) of a company in the period. The profit & loss statement begins with the amount of revenue or sales of the company during the period. Below the sales are costs of goods or services produced by the company.
The costs of goods and services are deducted from revenue to get the gross profit in the period. The operating expenses are deducted from the gross profit to get the operating profit of the company. Operating expenses include selling expenses, general & administrative expenses and depreciation. Other income is added to operating profit to get the profit before interest and taxes. The interest expense is deducted to get the profit before tax. Tax expenses are deducted to get profit after tax.
Many small and medium sized businesses – especially those based in smaller towns andcities – still do not use modern accounting system software. They still stick to the old, manualpaper-based accounting system. These businesses are not realizing that accounting software notonly does the accounting work more efficiently but may actually improve business performance.
Contemporary accounting system software has many analytical capabilities. These analytical capabilities enable this software to make more accurate demand forecasts. Moreaccurate demand forecasts mean that a business can plan utilization of its resources moreefficiently. It can raise the resources required for meeting the forecasted demand beforehand andat lower costs. It can avoid situations of shortage and customer dissatisfaction.The company can analyze large amount of data of past years using a more sophisticatedaccounting system. This is not possible in case of manual accounting process.
The analysis oflarge amount of data of past years enables the business to get information and insight on itsperformance over the years. Which of its products have been making consistently highcontribution to its revenues and which of them have been making less contribution? In whatproportion its costs have grown in correspondence to growth in revenues? Which are the areaswhere costs can be controlled? These are some questions whose answers can be gotten by the useof accounting software.
Almost every large business today uses accounting system software. This system alsoreduces the probability of accounting errors. If the inputs in the system are accurate, the systemgives accurate results. Accurate accounting information coupled with continuous analysis offinancial data helps a business achieve continuous improvement in performance. This continuousperformance is then reflected in the form of higher sales and higher profitability.
Many small businesses hesitate in incurring the costs required for buying and implementing accounting system software. These businesses should treat the cost of installing accounting system software as an investment. This investment can be easily recovered by the increase in profitability that a business is able to achieve due to better performance because of better analysis of accounting data and information.
It is easy for employees, working in the accounts department, to learn to operate accounting system software. There are many training consultancies in India that provide accounting system software training to individuals and employees at very reasonable and affordable costs. Knowledge of operating accounting software is quite a valuable skill nowadays.
If you have a startup business or you are in the process of setting up a new business then it is important that you integrate accounting in your processes from the first day. This helps your business maintain accounts of your everyday financial activity. Keeping your accounts on a day-to-day business helps you monitor your new business more closely and more effectively.
Many entrepreneurs make the folly of thinking about accounting only at the end of a financial quarter or year. It is advisable that the services of a competent accountant who maintains the books of your business should be taken right from the beginning of your business. Hiring a person who knows accounting is not very expensive. It is also advisable that the business should make use of accounting software or a cloud based accounting software for managing its accounting.If you are an entrepreneur (or intend to be one) it is necessary that you understand the basics of accounting. It will help you in understanding the financial aspect of your business. You should be able to understand the three basic financial statements that are absolutely necessary for any business worth its salt. These financial statements are: profit & loss statement, balance sheet and cash flow statement. There are many training consultancies in India that conduct very short duration accounting courses for entrepreneurs.
A few other things that an entrepreneur needs to keep in mind. Firstly, the accounts of the business should be kept separate from the personal accounts of the owner or entrepreneur. Secondly, while raising financing for the business, the entrepreneur should tap the entire gamut of financing sources available. With the advent of new financing avenues like crowd-funding, the financing sources available for an entrepreneur have increased substantially. By exploring all the available financing options, an entrepreneur can raise financing for the business at the lowest costs possible and on more favorable terms.
An entrepreneur should understand the difference between profit and cash flows. A company can be profitable on paper but may suffer from poor cash flows. It is therefore necessary that an entrepreneur manages the business in such a way so that it generates enough cash flows to be able to meet its expenditure needs. Better negotiation with customers and suppliers can considerably reduce the cash flow problems of a new business. Negotiation skills are very important if you are an entrepreneur or owner of a new, budding business. Of course understanding of the basics of accounting is equally important!
International Accounting Standards are globally accepted accounting standards which are issued by International Accounting Standards Board (IASB). The International Accounting Standards Committee (IASC) has regularly issued international accounting standards on various aspects of financial reporting and accounting.From 2000 onwards the international accounting standards have been renamed as International Financial Reporting Standards (IFRS).
The IASB publishes its accounting standards every year in the form of three books: red book, blue book and green book. The red book contains all the IFRS standards that have been published till 1st January of the year to which the particular red book refers to. It omits those IFRS standards that are being withdrawn or are being replaced by a new standard.The blue book issued in a particular year contains only those standards which have become effective by 1st January of that year. So, for instance the blue book of the year 2015 will contain only those IFRS standards that have become effective by 1st January 2015. If a newly issued accounting standard is to become effective by 1st April, 2015 then the blue book of 2015 will not contain that standard.
The green book of a particular year contains those standards which have been issued by 1st July of that year. For instance the green book of the year 2015 will contain all the standards that have been issued till 1st July 2015. It will also include those standards which have been issued by 1st July 2015 but will become effective after it. The IASB started publishing green book, from the year 2007 onwards.The aim of publishing these three books annually is to keep the accounting and financial world informed about the latest IFRS standards.
The world is converging towards adoption of one set of accounting standards, represented by IFRS. A common accounting standard globally is one of the needs of the globalized world. Many countries have already merged their national Generally Accepted Accounting Principles (GAAP) with IFRS. India too is moving towards adoption of IFRS. IFRS makes financial reporting easier, transparent and more relevant for all the stakeholders who use the accounting information given in financial statements.Knowledge of IFRS is therefore important for those working in the area of accounting and finance. There are many training consultancies in India today that provide IFRS training and certification.
When we talk of convergence of accounting standards in India, it means convergence of Indian Accounting Standards with International Financial Reporting Standards (IFRS).
IFRS are the accounting standards of International Accounting Standards Board (IASB). One of the major commitments of G-20 is to implement common IFRS standards across the globe. G-20 is the group of 20 biggest economies in the world.Globalization has resulted in increased economic integration between countries. This integration demands a common accounting standard across the world. Convergence of local accounting standards with IFRS is a step in this direction.
The government of India and Institute of Chartered Accountants of India (ICAI) support the convergence of Indian Accounting Standards with IFRS. The IFRS converged Indian accounting standards are known as Ind AS.According to ICAI the following entities should prepare their financial statements according to IFRS-converged standards from April 1st 2016 onwards:
- All companies whose stock or debt is listed at a stock exchange. The exchange of listing can be Indian or foreign.
- All banking companies, insurance companies, mutual fund companies and financial institutions.
- All unlisted companies having net worth of more than Rs. 500 crore.
- All businesses whose borrowing from banks, financial institutions or through deposits from public exceeds Rs. 20 crore at any point in the immediately preceding financial year.
- Every business or joint venture of a company that is a subsidiary of an entity that is required to prepare financial statements according to IFRS-converged standards.
The original plan was to implement IFRS-converged standards by April, 2011 but that plan had been delayed mainly because of lobbying from various industry bodies.The convergence with IFRS in India may marginally bring down the cost of capital for Indian businesses that try to raise capital from abroad. Foreign investors and lenders consider it an additional risk when a company is not following IFRS for preparing its financial statements. The convergence of IFRS with Indian accounting standards will improve the quality of corporate governance in Indian companies because the quality of financial reporting will improve.
Attracting foreign direct investment (FDI) in the country is a priority of the new Indian government that took charge in May last year. Therefore it is likely that unlike in the past, the implementation of IFRS-converged standards will not be delayed this time.
India is looking to adopt International Financial Reporting Standards (IFRS) by April 2015.The Institute of Chartered Accountants of India has prepared the roadmap for complete adoption of IFRS by Indian companies.
In the first phase of implementation, which will begin from April this year, companies with net worth of more than 1000 crore will adopt IFRS. Adoption of IFRS means that these companies will have to prepare their accounts and financial statements as per IFRS.The second phase of implementation will begin from April 2016. In this phase listed and unlisted companies with net worth between 500 crore and 1000 crore will have to adopt IFRS in the preparation of their accounts and financial statements. Once the second phase is over, complete adoption of IFRS will be rolled out for all companies.
The IFRS standards have already been adopted by more than 135 countries. Adoption of IFRS in India will make accounting more transparent. The IFRS’ disclosure norms are more stringent than Indian Accounting Standards (Ind ASs) norms. One area in which IFRS and Ind ASs differ considerably is mark-to-market valuation of financial assets. The IFRS requires that all financial assets should be valued at their existing market value (IFRS Code 13). Another area is that of recognition of revenue by real estate companies. Under Ind ASs real estate companies recognize revenue as soon as the buyer signs the purchase contract. Under IFRS real estate companies can only recognize revenue after the buyer gets possession of the property.
The objective of IFRS is to improve the quality of accounting and to create a seamless global accounting framework that can cater to the needs of globalization. Indian companies, like Infosys, which are also listed at foreign stock exchanges like Nasdaq, already prepare their financial statements as per IFRS.The quality of financial reporting by Indian companies will improve significantly after the adoption of IFRS. This will improve corporate governance and will be beneficial for all the stakeholders. IFRS requires companies to prepare balance sheet (statement of financial position), profit & loss statement (statement of income), cash flow statement and statement of changes in equity.
For those working in the area of Accounting, knowledge of IFRS standards is much needed so that they do not become irrelevant once India adopts IFRS standards completely. Training in the application of IFRS standards will enhance their employability considerably.
International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB).
The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry-specific reporting.
Having an international standard is especially important for large companies that have subsidiaries in different countries. Adopting a single set of world-wide standards will simplify accounting procedures by allowing a company to use one reporting language throughout. A single standard will also provide investors and auditors with a cohesive view of finances.
Currently, over 100 countries permit or require IFRS for public companies, with more countries expected to transition to IFRS by 2015. Proponents of IFRS as an international standard maintain that the cost of implementing IFRS could be offset by the potential for compliance to improve credit ratings.
IFRS is sometimes confused with IAS (International Accounting Standards), which are older standards that IFRS has replaced.