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March 2011

GAPs in GAAP – Are We Really Converging to IFRS ?

By Dolphy D’Souza | Chartered Accountant
Reading Time 7 mins

Accounting standards

On a perusal of Ind-ASs, the Indian IFRS equivalent, it is
clear that they are not the same as IFRS as issued by IASB in many respects. The
differences are so numerous that people are questioning the need to change from
existing Indian GAAP to another form of Indian GAAP. Is the change and hard work
justifiable, if Indian entities are unable to proclaim that their financial
statements are IFRS-compliant and use them for cross-border fund raising or
other purposes ?

Certainly each country should have its own endorsement
process to notify accounting standards. However, that process should not be used
for ‘carve-outs’ unless they are absolutely necessary in the rarest of rare
circumstances and on sound technical grounds. The main concerns on Ind-AS are as

    (a) IFRS as issued by IASB are accepted globally on all major stock exchanges. As Ind-AS contain significant deviations from IFRS, the same may not be accepted for the purpose of raising funds from capital markets outside India. Adopting IFRS without carve-outs will make capital flows in and out of India seamless.

    (b) Global and local investors and the analyst community may not find Ind-AS financial statements very useful, as they will not be comparable with peer group companies across the globe.

    (c) In India, there are many entities with a presence in more than one part of the world, for example, they may have foreign parents/subsidiaries. Such companies look at conversion to IFRS as an opportunity to have one accounting language across all their units and eliminate the need for preparing financial statements under multiple GAAPs. The only way this can be achieved is if the entity complies with IFRS as issued by the IASB in entirety.

    (d) There is a threat that IASB may publicly disown Ind-AS as being IFRS-compliant, in which case India’s G-20 and commitments made to European Union may be put to question.

    (e) Adopting IFRS without deviations would help India’s young accounting work force to seek global opportunities and also significantly enhance its BPO potential.

Many of the differences between Ind-AS and IFRS do not
represent the economic substance of the transaction and hence may be a
disservice to all investors and providers of risk capital (and not just global
investors), for whom these financial statements are predominantly prepared. For


  • The option to defer
    exchange differences on long-term monetary items is given with an intention to
    provide relief to companies who want to smoothen the impact of exchange
    differences on its statement of profit and loss. Notwithstanding the
    intention, amortisation will not result in smoothening in all cases. If
    exchange rates show an increasing trend, then exchange difference impact of
    earlier years will cause a major dent in subsequent years close to repayment
    of those long-term monetary items — for example — A company has taken a loan
    of USD 100 in year 1999-2000 repayable after three years when the exchange
    rate was 1 USD = Rs. 43. Exchange rates at the end of year 1999-2000,
    2000-2001 and 2001-2002 were 1 USD 43.63, Rs. 46.46 and Rs. 48.89,
    respectively. If the company does not avail the option, it will charge off
    exchange loss of Rs. 63, Rs. 283, Rs. 243 in each of the year respectively.
    With the use of option, charge to P&L in each of the year will be Rs. 21, Rs.
    163 and Rs. 406, respectively. It is clear that the use of option will lead to
    backloading charge of earlier years in certain situations.

  • Whilst
    smoothening may be preferred by some preparers of financial statements, what
    is relevant to investors and analyst is a full recognition policy, as that
    depicts the position of the company as at a particular date, which an
    amortisation policy distorts. Assuming all things remain the same, a company
    would be preferred by an investor if it did not have a carry forward exchange

    Further, there are other related issues which are not addressed in Ind-AS —
    for example — whether deferment of gains/losses as per the option will impact
    the calculation of adjustment to interest cost as per Ind-AS 23 or how hedge
    accounting will work if a company has taken fair value hedge against the
    underlying foreign currency monetary item ?

  • Unlike IFRS, Ind-AS
    40 does not permit the use of fair value model, for measurement of investment
    property. Ind-AS 40, however, mandates the fair value disclosure for
    investment property. A big accounting firm recently conducted a survey on IFRS
    financial statements of 30 global real estate companies. Out of these 30
    companies, 27 have used the fair value model. Considering the global practice,
    Indian real estate companies should also be allowed to reflect true value of
    their assets in their balance sheet as that is the only relevant yardstick
    from an investor ‘s perspective. Whilst under Ind-AS 40 information on fair
    value will be required in the notes to financial statements these would not be
    prepared with the same level of rigidity as it would if those were recorded in
    the financial statements.

  • As per IAS 19,
    the rate used to discount post-employment benefit obligations is determined by
    reference to market yields on high quality corporate bonds. IAS 19 allows the
    use of market yields on government bonds as a fall-back if there is no deep
    market in corporate bonds. In contrast, Ind-AS mandates the use of market
    yields on government bonds for discounting, in all cases. Many Indian
    companies have operations all across the globe including regions where there
    are deep and liquid markets for high-quality corporate bond rates only. Ind AS
    should permit the use of high-quality corporate bond rates in such instances
    to avoid practical difficulty in re-computing defined benefit obligation of
    foreign operation who were determining their defined benefit liability using
    IAS 19 or equivalent principles. This will also result in the saving of time
    and cost for preparers of financial statements.

  • Ind-AS 101 does
    not mandate comparative information to be given as per Ind-AS. The comparative
    information will be under the Indian GAAP. It is difficult to understand how
    investors or analysts can understand these financial statements that do not
    contain comparable numbers prepared under the same framework.

In addition, it is likely that practice related differences are likely to emerge between IFRS and Ind-AS. For example, globally under IFRS, rate regulated assets are not recognised as they do not fulfil the definition of an asset under the IFRS framework. Under the current Indian GAAP practice is to recognise rate-regulated adjustments as assets. It is most likely that this practice under the Indian GAAP may be carried forward under Ind-AS. Another example is that of agricultural accounting. Under IFRS biological assets are fair valued under IAS 41. However, Ind-AS will not contain any standard on agricultural accounting for the time being and consequently the practice of measuring biological assets at cost under the Indian GAAP most likely would be carried forward under Ind-AS.

Regulatory hurdles may also widen the gap between Ind-AS and IFRS — for example — depreciation rates under Schedule XIV of the Companies Act may de facto become the norm though those may not reflect the useful life of an asset for a company and hence may not comply with IFRS. The Companies Act needs to be amended to disable certain sections which are not aligned to IFRS accounting, for example, section 391 and section 394 permit departure from accounting standards in an amalgamation or restructuring exercise. Even if these sections are amended, those probably can only have a prospective effect. Therefore it is not clear what happens to the accounting prescribed in court sanctioned schemes prior to amendment of section 391 and section 394 which may be in conflict with IFRS.

Further, more changes may emerge in the future between the two frameworks, as IFRS standards undergo a change, which may not be incorporated in Ind-AS. Given the existing date uncertainty on IFRS implementation, and the substantial dilution of IFRS, the global community would question India’s ability to push through major reforms. By adopting IFRS as it were, India could have played a leading role in the global arena; unfortunately, this is a missed opportunity, for a nation that aims to become the third largest economy in the next few decades. People will continue to question the need to move from one set of Indian GAAP to another set of Indian GAAP.

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