David Tweedie, the Chairman of International
Accounting Standards Board said in the Europe Club of Canada on 25 April 2008
that : “In the midst of the Asian financial crisis, several companies whose
financial statements seemed to indicate that they were secure, suddenly went
bankrupt casting great doubt on the veracity of the statements and in particular
the national accounting standards in use. While it is important not to overstate
the role of accounting standards and practices in precipitating the Asian
financial crisis, it is clear that confidence in financial reporting practices
in that region disappeared.” “As a consequence, financing, much of it short term
in nature and not subject to any capital controls, was withdrawn. Interest rates
rose, investment ground to a halt, and an economic slowdown followed. In the
aftermath of the crisis, it was unlikely that confidence in the existing or any
revised national standards could be restored rapidly, indeed, if ever. The
obvious choice was to move to an internationally accepted set of standards.”
Since 2001, the mission given to IASB was to create a single set of
principles-based global financial reporting standards that are used throughout
the world’s capital markets. The overriding principle is that irrespective of
the country of origin of a transaction, whether in New York, New Delhi, or
London, the accounting should provide a consistent answer to the same economic
transaction.” The Institute of Chartered Accountants of India, National
Committee of Accounting Standards and the government of India have affirmed that
India will transition into International Financial Reporting Standards (IFRS) as
the accounting principles for the country from April 1, 2011. Entities which are
either listed companies or companies filing for a listing or companies having
over a threshold of sales of 100 crore or public debt of over 25 crore are
covered by the first wave. These are called public interest entities. The small
and medium enterprises (SMEs) will be covered at a later date which is yet to be
decided.
The dilemma — incremental or big bang approach ?
Nations around the world are faced with the dilemma of whether their national
accounting standards should be aligned to IFRS or take the big bang approach of
adopting IFRS as written by IASB and follow standards that are globally applied,
irrespective of the economic environment.
In India, a debate is raging amongst various
stakeholders, including the government whether we should converge or adopt IFRS.
While the former would mean that we amend and modify IFRS standards to be
relevant to India, the latter would mean that we adopt IFRS standards as they
are written by IASB to be the accounting language of India. ICAI in their
decision paper on convergence has stated, “Convergence with IFRS — all at one
approach — that IFRS will be adopted for public interest entities for accounting
periods starting on or after 2011”. But doubts are now arising due to differing
views of various stakeholders on how the roadmap to 2011 will be drawn.
IFRS with modifications by various countries would
result in multiple and possibly conflicting versions of IFRSs globally. A
misplaced sense of national pride or intense pressure from industries make
countries amend or alter IFRS principles to suit the national requirements. This
becomes IFRS as applied by a specific country as opposed to IFRS as issued by
IASB. This would defeat the purpose of global convergence, which is to move
toward a single set of high-quality accounting standards for use throughout the
world. This rationale is reflected in the US Securities and Exchange
Commission’s (SEC) announcement of the elimination of the requirement for
foreign private issuers to reconcile their IFRS financial statements to US GAAP.
The SEC has stated that the reconciliation requirement is being dispensed with
only for financial statements prepared using IFRSs as issued by the IASB so as
“to encourage the development of IFRS as a uniform global standard, not a
divergent set of standards applied differently in every nation”.
We have this wonderful opportunity to move into a
globally acceptable financial principles, which is considered comprehensive and
followed by over 120 countries in the world. By 2011, IFRS is expected to be
followed by 150 countries. How can we call ourselves a global power and not
adopt global standards as our own ? In due time, by virtue of India’s economic,
intellectual and geo-political weight, we will be a principal player in
formulating these standards.
Way forward the roadmap to 2011 needs to be
comprehensive as it has been detailed in the ICAI’s concept paper on convergence
with IFRS in India. Out of the 38 effective IFRS standards, there are only 2
standards in India that have no difference with IFRS and six have minor
differences. Eighteen standards of IFRS will need a level of technical
preparedness by the industry and the professionals for implementation or would
have conceptual differences with the Indian standards. Ten standards need
changes in laws and regulations for them to comply with the principles of IFRS.
The effort to harmonise is still huge as there has to be a consensus amongst the
various stakeholders including the government as some of the provisions of the
Companies Act or other Acts like the RBI Act etc., need to be amended for
compliance with IFRS principles.
The tax laws, companies law and other laws for specialised industries including banking, insurance etc., need to be reviewed to determine the differences with IFRS as we currently apply them and mechanism to deal with them on convergence.
Though IFRS has been written with the intention of global application, we would also need to evaluate whether under the Indian economic environment, application of any specific IFRS principle would make our industries vulnerable to the results and if there is a compelling reason that such applications will be inappropriate in India. Such deviations should be few and rare.
There is still a long road ahead. We need all the stakeholders – the industry, ICAI, government, RBI, SEBI, tax authorities and other regulators to engage in the transition process to IFRS. The debate we need to engage in is to holistic ally review, if any, application is inappropriate for India and address such issues in the transition provisions including those relating to first time adoption. The thought behind actions needs to be clearly articulated and debated. We have some time ahead and can meet the deadline of 2011, but clarity of thought and speed of action would be of essence.
We need all stakeholders – industry, ICAI, government, RBI, SEBI, tax authorities – to engage in the transition to IFRS, says Kaushik Dutta.
(Source: BusinessStandard,25-8-2008)
