“India must first aspire to uphold the purity of IFRS and be fully IFRS-compliant nation and second it should take a stand that it has full belief in the proposed deviations as being the best practices and then the confidence and conviction to influence the International Accounting Standards Board (IASB) through consensus about what it believes is right and the need to bring the required improvement/amendments in IFRS rather than remaining as a carved-out nation”.
Journey so far :
India started its journey towards IFRS way back in 2006 and in the last four years it has travelled many milestones and hurdles and finally at the start of 2010 and thereafter, we saw some roadmap being laid down.
In this context, some interesting news excerpts are as under:
“Let me make it very clear that India is a signatory to accept IFRS. By accept, I mean convergence to IFRS by April 2011 and not adoption. We stand by that. There is no reason to change that date or extend the time,” Mr. R. Bandyopadhyay, Secretary, Ministry of Corporate Affairs, said at ‘IFRS Summit 2009’ organised by the Confederation of Indian Industry (CII).
While pointing out that standard-setting was an evolutionary process even at the level of International Accounting Standards Board (IASB), Mr. Bandyopadhyay said that India will converge with those accounting standards which prevail at the time of transition. “If certain things are changing at IASB, it does not mean we will immediately jump into this. We are converging and doing that on our own suitability,” he said. The entire exercise of convergence ought to be in the interest of the country and also that of the growth of the corporate sector, the MCA official said.”
“On July 17, 2010, a section of the press has quoted Salman Khurshid, the Minister for Corporate Affairs saying “Convergence gives you the flexibility to stop where you want to stop, adjust where you want to adjust and make an exception where you want to make an exception.” He further said, “. . . There will be areas where ‘fair value’ will apply, there will be areas where it need not apply,” Mr. Khurshid was answering questions in the context of large Indian companies transiting to a new set of accounting standards to be issued by the Ministry of Corporate Affairs from April 1, 2011.”
As envisaged, India has finally chosen to converge with IFRS, as opposed to adopting IFRS on the pretext that Indian regulators and standard-setters will review the existing IFRS standards and their applicability in Indian context and will issue converged accounting standards called as Ind-AS. However, in this process we will face key challenges in the areas of managing the ‘carve-outs’ from IFRS and the quick response for incorporating the ongoing changes in Ind-AS in line with IFRS.
The Institute of Chartered Accountants of India (ICAI) has already issued Exposure Drafts (EDs) for substantially all Ind-AS and the same have been cleared by the Council of the ICAI (barring few exceptions). Most of the standards have also been cleared by the National Advisory Committee on Accounting Standards (NACAS). An analysis of these exposure drafts along with the recent decisions taken by the NACAS reveals the following carve-outs/deviations:
- Out of Ind-AS 30 (corresponding to IAS 39) or Ind-AS 40 (corresponding to IFRS 9), only Ind-AS 30 shall be applied.
- Not to include IFRIC 15 on accounting of agreements for the construction of real estates in Ind-AS 9, i.e., Revenue Recognition, and has included the same in the scope of Ind-AS 7, i.e., Construction Contracts. By the implication of which, the real estate developers will be able to follow percentage of completion method during the period of construction and hence, creating a big carve-out from the International Financial Reporting Standards (IFRS).
- The gain on bargain purchase in case of Business Combination will be recognised in the Statement of Other Comprehensive Income statement.
- The actuarial gains and losses arising on defined benefit obligation and related defined benefit plan, as per the present draft Ind-AS 15 (Revised 20XX), Employee Benefits, requires the same to be recognised immediately in profit or loss instead of options as available to charge the same to reserves as per IFRS. However, NACAS has suggested that the entire amount of actuarial gain or losses should be recognised immediately in other comprehensive income, keeping in view the suggestions of industry representatives on NACAS and principles given in this regard in the exposure draft on IAS 19 issued in April 2010 by the IASB.
- As per the draft Ind-AS 41 (corresponding to IFRS 1), first-time adoption of Indian Accounting Standards, there is mandatory provision to present the comparative figures as per previous GAAP with an option to give additional column for figures as per Ind-AS also. However, as per IFRS 1, there is a mandatory provision to present the comparatives as per IFRS only.
Apart from the above carve-outs, certain other deviations can also be expected e.g., different accounting treatment for Foreign Currency Convertible Bonds (FCCB), existing Indian GAAP carrying value of the fixed assets may be considered as ‘deemed cost’ as on the transition date, treatment of foreign exchange differences, etc.
The final journey has just begun and we are already seeing deviations in new standards and we don’t know how far or near we will be from IFRS.
Journey way forward:The decision to converge and not to adopt IFRS gives the flexibility to carve out and or deviate from the accounting principles and policies in IFRS. The important question is to what extent we should use this flexibility. If, we make significant changes in IFRS using the flexibility, the new accounting standards will not be fully convergent with IFRS and the purpose of convergence will be lost. Our accounting practices will fall short of globally accepted accounting practices. Inflow of foreign capital may be affected adversely. Indian companies, that are listed in stock exchanges in USA, Europe and other countries, using accounting standards fully convergent with IFRS, will have to prepare two sets of financial statements.
Moreover with tax authorities still holding the cards close to their chest, it appears that the converged accounting standards may not be acceptable for tax filings for next three to five years and till then the current Indian GAAP would be used for tax purposes. This will ultimately result into three sets of financial statements being pre-pared by Indian companies.
In any debate on convergence or adoption or carve-outs, India must first aspire to uphold the purity of IFRS and be fully IFRS-compliant nation and second it should take a stand that it has full belief in the proposed deviations as being the best practices and then the confidence and conviction to influence the International Accounting Standards Board (IASB) through consensus about what it believes is right and the need to bring the required improvement/amendments in IFRS rather than remaining as a carved-out nation. We cannot just take short-term nationalist and local view rather we need to take long-term global view on IFRS.
If carve-outs/deviations are managed with this objective and attitude, then India and Indian entities would benefit in the long term.
