Accounting Standards
The implementation of IFRS required a well coordinated
approach among various regulators. Understanding this need, the Ministry of
Company Affairs (MCA) set up a high powered group comprising of various
stakeholders such as NACAS, SEBI, RBI, IRDA, ICAI, IBA and CFOs. The core group
was supported by two sub-groups. The sub-groups will have further meetings with
regard to the roadmap for banking and insurance companies which is still under
discussion.
The author completely supports the roadmap. This is a
historic event — one that would catapult India, its entities and finance
professionals to much greater heights.
Under the roadmap, there would be two separate sets of
Accounting Standards u/s 211(3C). The first set would comprise of standards that
are converged with IFRS and would apply to specified companies in phases. The
second set, comprising of existing Indian accounting standards, would apply to
all other companies, including SMEs.
Phase 1 companies will prepare their opening IFRS balance
sheets on 1 April, 2011. Phase 1 would apply to listed and non-listed companies
with a net worth of greater than Rs 1000 crores, and to companies whose
securities are listed on a foreign stock exchange. If one has a calendar year,
then the opening IFRS balance sheet will be prepared not on 1 April, 2011 but 1
January, 2012. The listing requirement will be with regard to securities and
will include a lot of listings in addition to shares, such as ADR, GDR, FCCB,
etc.
Phase 2 companies will prepare their opening IFRS balance
sheets on 1 April, 2013. Phase 2 would apply to listed and non listed companies
with a net worth of greater than Rs 500 crores.
Phase 3 companies will prepare their opening IFRS balance
sheets on 1 April, 2014. Phase 3 would apply to all other listed companies. IFRS
standards will not apply to non-listed companies with a net worth of less than
500 crores and to SMCs, though they can voluntarily apply to IFRS.
The draft of Companies (Amendment) Bill proposing changes to
the Companies Act is under preparation. The amendment is required to make the
Companies Act consistent with the requirements of IFRS. These changes include
section 391, 394, 78, 100, Schedule VI, Schedule XIV, etc. A new section will
also be introduced to make consolidation mandatory under the Companies Act, even
for non-listed companies.
IFRS standards will be notified by 30 April, 2010. The author
does not expect any carve-ins or carve-outs, and it would be possible for Indian
entities to provide a dual statement of compliance both under IFRS, as adopted
by India, and IFRS, as issued by IASB. However, one should be prepared for any
elimination of alternate accounting treatments provided under IFRS standards.
For example, in the case of long-term employee benefits, it is possible that
actuarial gains and losses may have to be recognized in the P&L account in full,
and the corridor approach or full recognition in ‘Reserves’, allowed under IFRS
of IASB, is not allowed under IFRS as adopted in India.
Net worth has not been defined, but probably it means what we
have always been used to: share capital and free reserves. It would include
securities premium but not fixed asset revaluation reserve. P&L debit balance
should be subtracted from share capital and reserves. Net worth would be based
on Indian GAAP stand-alone account of the entity.
To determine applicability, the net worth for which balance
sheet date should be considered? Theoretically, it could be 31 March 2009, 2010
or 2011 or all three. It is unlikely to be 31 March, 2011 for practical reasons.
Doing the net worth test based on the balance sheet date of 31 March, 2011, will
leave entities with little or no time to prepare for IFRS for the year 2011-12
(actually the first quarter of 2011-12 for listed entities). Therefore, in the
author’s view, the test should be done based on the balance sheet on 31 March,
2009. The MCA should confirm this by way of guidance.
Questions have been raised on whether IFRS comparative
numbers are required from 2010-11. Whilst this will be clarified in further
guidance, it would make enormous sense to prepare IFRS comparatives for the
following reasons:
1. IFRS comparatives (2010-11), instead of Indian GAAP
comparatives, would make 2011-12 IFRS financial statements meaningful to all
stakeholders
2. Preparing IFRS from 2010-11 will enable one to be ready
for robust IFRS reporting in the first quarter of 2011-12
3. The 2011-12 IFRS financial statements will be compliant
both with Indian law and IFRS, as issued by IASB. Hence dual statements of
compliance can be made by entities.
4. If 2010-11 IFRS comparatives are not prepared, then
effectively 2011-12 IFRS statements become comparatives for 2012-13 IFRS
statements. Under IFRS 1 framework, the comparative year’s accounting policy
should be consistent with the first IFRS financial statements. This may mean
that the already prepared and published numbers of 2011-12 IFRS financial
statements may undergo a change subsequently to make them consistent with the
2012-13 IFRS accounting policies.
Therefore, from practical considerations, the transition date
should be 1 April, 2010, instead of 1 April, 2011.
There may be good news for early preparers, but one that
needs endorsement by further guidance from the MCA. If an entity has already
prepared/published IFRS financial statements, then on 1 April, 2011 one does not have to reconvert again. In other words under IFRS,
an entity can be a first time adopter only once.
Another related question is whether entities not covered at all in any of the phases can adopt IFRS or those covered in later phases can apply IFRS in earlier phases. The roadmap is clear that a company which is not covered under any of the phases may adopt IFRS on a voluntary basis. The author believes that similarly, a company covered in later phases should be allowed to apply IFRS early. Since the issue is an important one, the MCA should provide guidance on the matter as soon as possible. Allowing voluntary adoption of IFRS will help a subsidiary, joint- venture or associate of a company covered under the roadmap to use their IFRS accounts prepared for group reporting and consolidation purposes, and for stand-alone statutory financial reporting also.
Changes in various other legislations would be required, e.g., SEBI will need to change the require-ments relating to interim financial statements to make them compliant with IAS 34. The RBI will need to look at its prudential norms, incorporate appropriate prudential filters, etc., as and when IFRS becomes mandatory for banks and so on.
A key concern has been the IFRS implications with regard to income-tax. Recently a committee has been set up by CBDT to look into the impact of IFRS on income tax computation and income tax legislation. The Indian tax authorities will certainly need some time to look into this whole aspect as well as to make appropriate changes to the Income Tax Act, if required. It is, therefore, likely that for some years Indian GAAP may continue as the base for determining taxable income. Besides, it is almost unlikely that some assessees in India will be taxed based on IFRS numbers and others on Indian GAAP numbers. In simple words, for some years to come, an entity’s ERP system should enable generation of both Indian GAAP and IFRS numbers: IFRS for statutory reporting and Indian GAAP for income -tax purposes. Similarly, there would be indirect tax issues. For example, under IFRS, revenue numbers would change and that may have impact on the license fees that telecom companies pay or VAT, etc.
The MCA should provide immediate guidance on these various issues. There will be many challenges, but they come with exciting opportunities. With IFRS, India can aspire to become the accounting hub of the world. Finally, a quote from Charles Darwin: “It is not the strongest of the species that survives, nor the most intelligent, but the most responsive to change”.
