Accounting standards
On 31 May 2010, the Institute of Chartered Accountants of
India (ICAI) issued Ind-AS 41, an exposure draft (ED) on the Indian equivalent
of IFRS 1 First-time Adoption of IFRS. There are some differences, which
apparently appear minor but have some significant consequences. Going ahead
there will be two sets of accounting standards in India, one is the Indian GAAP
and the other IFRS converged Standards which are likely to be known as ‘Indian
Accounting Standards (Ind-AS).’
Ind-AS will be issued by the ICAI and will have to be
notified in the Companies (Accounting Standards) Rules through NACAS. It will be
a separate body of accounting standards which may not always be the same as IFRS
issued by the International Accounting Standards Board (IASB) (hereinafter
referred to as ‘IFRS’). In other words there may be differences between the
converged standards notified in India and IFRS. This is clear from the EDs on
the converged standards issued by the ICAI so far. Other than Ind-AS 41, we see
differences in other standards, for example, the discount rate used for
long-term employee benefits and the recognition of actuarial gains/losses. Ind-AS
is likely to force a government bond rate for discounting and would require full
recognition of actuarial gains/losses. IFRS requires the use of a high-quality
corporate bond rate and the government bond rate is permitted as a fallback only
where there is no deep market for corporate bond. IFRS allows the corridor
approach, which permits not to recognise the actuarial gains/losses within the
corridor, and the deferral of actuarial gains/losses beyond the corridor amount.
Also under IFRS, full recognition in other comprehensive income or P&L is
permitted as other alternatives.
Many entities around the world are able to make a dual
statement of compliance on their financial statements, which is an unreserved
statement that the financial statements are in accordance with IFRS and the
standards notified in their local jurisdiction. This is only possible where
there are no differences between IFRS and the standards notified or else those
differences may be minimal and have either no impact on the entity or the impact
is immaterial. The advantage of making a dual statement of compliance is that
the financial statements can be used within India as well as in almost all major
capital markets in the world which accept IFRS financial statements. If Indian
companies fail to make dual statement of compliance, they may need to reconvert
again in accordance with IFRS, at the time of foreign listing.
Any Government would be challenged in making a decision as to
whether to adopt full IFRS or to make certain deviations which are deemed
necessary. As already stated, the advantage of adopting full IFRS is that it
would certainly help entities that are having or seeking foreign listing. Also
Indian entities that have several foreign subsidiaries which use IFRS, would
prefer to have the entire group on IFRS, rather than for different companies of
the group to be on different national versions of IFRS. However, such companies
as a percentage of total companies in India may be small and hence the
Government may not deem fit to impose full IFRS on all the companies in India.
This then brings us to the next point, what kind of changes from IFRS should the
Government consider when notifying Ind-AS. Certainly not the changes that are
being contemplated, with regards to the discount rate and the accounting for
actuarial gains and losses. Some countries have only a corporate bond market and
virtually no government bond market. An Indian entity that has a subsidiary in
such a country will not be able to use a government bond rate, as none exists.
In which case, a question on how to comply with Ind-AS may arise. With regards
to accounting for actuarial gains/losses, the author believes that if the
multiple options are available to entities in other countries, Indian entities
should not be deprived of that benefit. It is interesting to note that Australia
started off eliminating multiple options when it first notified the IFRS
standards. However, it later fell back to allowing the full range of options
under IFRS.
Other challenges under Ind-AS to making a dual statement of
compliance are :
-
There are
numerous differences between IFRS 1 and Ind-AS 41, which have been described
elsewhere in this article. If these differences are relevant to a company,
then dual statement of compliance may not be possible.
-
Ind-AS 41 allows
a company not to provide comparative numbers in accordance with Ind-AS. The
companies that use this option will not be able to provide a dual statement of
compliance as this will not be in accordance with IFRS.
-
Another option
for Indian companies is to present Ind-AS comparatives for 2010–11 in addition
to the Indian GAAP comparatives. A company which intends to comply with both
Ind-AS and IFRS in its first Ind-AS financial statements may consider this
option to be more suitable. This option is, however, not without challenges.
IFRS 1.22 covers the scenario where a company presents comparative information
or a historical summary in accordance with both IFRS and Indian GAAP. It
requires a company to label such comparative information prominently as the
Indian GAAP information, as not being prepared in accordance with IFRS, and to
disclose the nature of the main adjustments that would make the Indian GAAP
comparatives comply with IFRS, although quantification is not required. If all
the notes (including narratives) contain Indian GAAP comparative information,
labelling of such information may be very challenging. Besides presentation of
Indian GAAP comparative in the first Ind-AS financial statements is a huge
challenge as the Ind-AS format for the income statement and balance sheet are
significantly different from the Schedule VI formats. Furthermore, the Ind-AS
disclosure requirements are more extensive than those of the Companies Act and
Indian GAAP. It is therefore difficult to see how the Indian GAAP and Ind-AS
financial statements could be presented in the same document, without amending
the presentation/disclosure of Indian GAAP numbers significantly.
(4) It
is a well-accepted position in India that if the requirement of an accounting
standard are not in conformity with law, the law will prevail over accounting
standards. This aspect is recognised in paragraph 4.1 of the Preface to the
Statements of Accounting Standards. The ED of Ind-AS 41 and other exposure
drafts issued by the ICAI contain a reference to the Preface. We understand
that as part of IFRS conversion exercise, the MCA will also modify the
Companies Act, 1956, to remove existing inconsistencies with Ind-AS. However,
there may be other laws prescribing treatments contrary to Ind-AS or such
inconsistencies may arise in future. We believe that any such inconsistency
with law if any will not allow Indian companies to make a dual statement of
compliance with IFRS.
(5) The
Expert Advisory Committee (EAC) of the ICAI has been issuing opinions on
matters relating to application of accounting standards. If the
opinions/interpretations on Ind-AS are not in accordance with global
interpretations/ practice or the views of the IASB, then differences would
arise though the basic standards themselves may be the same or similar.
(6) A
final set of converged standards have not yet been notified. It is expected
that there may be some differences between the notified standards and IFRS, as
discussed elsewhere in this article. We also understand that many corporate
entities are making strong representations on issues that are very significant
to them, such as the accounting of foreign exchange gains/losses on long-term
loans, or the prohibition on the percentage of completion method in the case of
real estate companies. At this point in time, it is a matter of conjecture as
to how these issues would be resolved.
(7) There
is no clarity on the application of Schedule VI and Schedule XIV and what their
role would be under Ind-AS.
(8) In
future, differences between notified standards and IFRS may arise, if the
Ind-AS do not keep pace with the changes in IFRS or where there are
disagreements. This feature is clearly visible in many jurisdictions that have
converged to IFRS in the past.
Differences with IFRS 1 :
Most of the first-time
exemptions/exceptions in Ind-AS 41 are in line with IFRS 1. However, the ICAI
has made few changes while adopting IFRS 1 in India. The changes broadly are :
(i) IFRS
1 provides for various dates from which a standard could have been implemented.
For example, a company would have had to adopt the de-recognition requirements
for transactions entered after 1 January 2004. However, for Ind-AS 41 purposes,
all these dates have been changed to coincide with the transition date elected
by the company adopting Ind-AS;
(ii) Deletion
of certain exemptions not relevant for India. For example, IFRS 1 provides an
exemption to a company that adopted the corridor approach for recording
actuarial gain and losses arising from accounting for employee obligations. In
India, since corridor approach is not elected, the resultant first-time
transition provision has been deleted;
(iii) Adding
new exemptions in Ind-AS 41. For example, paragraph D 26 has been added to
provide for transitional relief while applying AS 24 (Revised 20XX) —
Non-current Assets Held for Sale and Discontinued Operations. Paragraph D 26
allows a company to use the transitional date circumstances to measure such
assets or operations at the lower of carrying value and fair value less cost to
sell; and
(iv) Under
IFRS 1, equity and comprehensive income reconciliation to the previous GAAP is
required for the comparative year only. Under Ind-AS, such reconciliation is
required for the comparative (if presented) as well as the current year.
There are other interesting differences as
well. If a company becomes a first-time adopter later than its subsidiary,
associate or joint venture, it compulsorily needs to measure, in its
consolidated financial statements, the assets and liabilities of the subsidiary
(or associate or joint venture) at the same carrying amounts as in the
financial statements of the subsidiary (or associate or joint venture). The ED
of Ind-AS 41 also contains the same exemptions/ requirements. However, these
exemptions/requirements are based on Ind-AS financial statements; without any
reference/fallback to IFRS. This indicates that if a parent, subsidiary,
associate or joint venture of an Indian company is already using IFRS in its
separate/consolidated financial statements, the company will not be able to use
those financial statements in its transition to Ind-AS. This will create
considerable workload for Indian companies that have global operations.
Ind-AS 41 will be applicable to the first
set of annual Ind-AS financial statements prepared by a company. The first
Ind-AS financial statements are defined as the first annual financial
statements in which a company adopts Ind-AS by an ‘explicit and unreserved
statement of compliance with Ind-AS.’ The ED does not recognise or allow any
fallback on IFRS for this purpose. This indicates that companies, which are
already IFRS compliant, e.g., in accordance with the option given by the SEBI
or to comply with foreign listing requirements, will not be allowed to use
these financial statements to claim compliance with Ind-AS for the first time
and on an ongoing basis. Rather, they will need to prepare their opening
balance sheet in accordance with Ind-AS again. This will create additional
work-load for Indian companies listed on US and other foreign stock exchanges
or have used the voluntary option of SEBI and have already transitioned to
IFRS.
Conclusion :
Overall the author believes that Ind-AS
should not make any departures from the full IFRS standards unless they are
required in the rarest of rare cases. This will ensure that we receive the full
benefit of adopting full IFRS standards. So far it appears that the departures
that are expected to be made (discount rate on long-term employee benefits or
accounting of actuarial gains/losses) are unwarranted. As the standards are not
yet notified, and as companies make strong representations, it is not clear at
this stage, what exceptions would be made to the full IFRS standards. The
Government will have to exercise judgment on what departures to make; this
could be in the area of foreign exchange accounting, loan loss provisioning in
the case of banks, completed contract accounting in the case of real estate
companies, etc. There has to be a solid technical argument for making these
exceptions, and a balance achieved between interest of various stakeholders,
such as the company, investors, national interest, etc.
