Many centuries ago, Indian
saint and philosopher Dnyaneshwar said ‘Hey Vishwachi Maazhe Ghar’ i.e., this
entire world is my home. Today, in the era of globalisation the world has, in
fact, become an economic village. Free flow of capital between various political
and economic jurisdictions has become a reality. On this background, a set of
robust accounting standards that results in transparent and informative
financial statements which are applicable across various jurisdictions, will
bring about comparability of financial statements reducing attendant risks and
costs to the investors and others. The Financial Accounting Standards Board (FASB)
of USA and the International Accounting Standards Board (IASB) have committed to
bring about convergence between International Financial Reporting Standards (IFRS)
and US GAAP. The European Union has adopted IFRS through the process of
endorsement.
India started opening its
economy over a decade ago. Consequentially, there is a substantial increase in
inbound and outbound investments. Considering these developments, India has no
alternative but to align itself with the developments in the field of accounting
in the rest of the world.
Towards this objective, the
Institute of Chartered Accountants of India (ICAI), in 2007, published a Concept
Paper on Convergence with IFRS in India. It decided to adopt IFRS
for public interest entities i.e., listed companies, banks, insurance companies and other large-sized
entities from accounting periods beginning on or after 1st April, 2011. It
proposed :
The ICAI, in the Concept Paper
also proposed to formulate a separate standard for Small and Medium-sized
Entities (SMEs) based on standards that may be issued by the IASB for the SMEs.
Although, the present Indian
Accounting Standards are based on IFRS and are fairly consistent with them,
there are significant differences between Indian GAAP and IFRS. For example,
most Indian companies provide for depreciation at the rates prescribed in
Schedule XIV of the Companies Act. Under IFRS, depreciation is based only on the
useful life of an asset. AS 14 — Accounting for Amalgamations permits using the
pooling of interest method. It also permits accounting to be done based on the
treatment prescribed in the scheme approved by the High Court. This will not be
permissible under IFRS. Definition of subsidiary under the Companies Act is at
variance with the definition of subsidiary under IFRS. There is a conceptual
difference in AS 22 — Accounting for Taxes on Income and the corresponding IFRS.
Accounting for preference shares could also be different under IFRS.
Presentation of financial statements under IFRS is different from the form in
Schedule VI of the Companies Act. Concept of ‘Comprehensive Income’ is alien to
Indian GAAP.
Adopting IFRS will require
changes in the various laws, regulations and rules. The Ministry of Corporate
Affairs (MCA) needs to spell out its strategy in this respect. It needs to
clarify whether India would adopt IFRS and Interpretations issued by the
International Financial Reporting Interpretations Committee (IFRIC) or it will
issue separate standards which converge with IFRS. The Companies Bill, 2009
proposes that a National Advisory Committee on Accounting and Auditing Standards
will be constituted to advise the Central Government on formulation and laying
down of accounting and auditing policies and standards. Effectively, the Central
Government will lay down the standards and ICAI will only be consulted by the
National Advisory Committee. Tax authorities need to consider the impact of
adopting IFRS and whether adoption will bring about further diversion between
the reported income and the taxable income leading to increased litigation in
the field of direct taxes. All regulators — SEBI, IRDA, Reserve Bank, MCA need
to deliberate on IFRS at the earliest.
IFRS themselves are not free
from criticism. IFRS are moving towards ‘fair value’ based accounting. In the
context of financial instruments, IFRS have come under substantial criticism.
There is a section that believes that valuation of financial assets at ‘fair
value’ or current market value aggravated the recent financial crisis. As a
result, very recently, the European Commission postponed the application of
first stage of IFRS 9 — Financial Instruments. European Central Bank and
European regulators believe that accounting rules should be a tool to ensure
economic and financial stability. Back home, the recent amendment to ‘AS 11 —
The Effects of Changes in Foreign Exchange Rates’ permitting amortisation of
certain foreign currency fluctuation differences, is an example of using
accounting rules to attempt to ensure economic and financial stability. This
would not be possible once IFRS are adopted.
IFRS themselves are under the
process of revision. There are various projects undertaken by IASB which will
bring about further changes in IFRS. Thus, the goal of convergence or
harmonisation itself is like shooting a moving target. If MCA decides to issue
separate accounting standards that converge with IFRS, the process will be even
more difficult, but India will have retained the right to make changes in IFRS
as applicable in India, where necessary.
The International Organisation
of Securities Commission (IOSCO) has a significant influence in formulation of
IFRS. These standards are therefore not necessarily suitable for SMEs
considering the cost of compliance and sophistication involved. Realising this,
IASB has recently issued a separate standard for application by SMEs. MCA, ICAI
and other stakeholders need to discuss the desirability or otherwise of its
adoption in India.
In the whole process, the accounting and auditing profession should not be caught unawares. The Journal has been publishing articles on IFRS for some time now. BCAS is celebrating December as ‘IFRS month’. In line with that, this issue of the Journal focusses on IFRS with three articles on the subject.
Experience shows that the Government issues notifications making new regulations only at the last moment and when infrastructure is still not fully in place. However, considering the importance of and complexities involved in the application of IFRS, one hopes that MCA will bring clarity to the issue at the earliest and make the transition to IFRS as smooth as possible.
