Previous GAAP on first-time adoption of Ind AS

Ind AS 101 is modelled on the same lines as IFRS 1; however, there are some critical differences. One of them is with respect to previous GAAP, from which one would transition to IFRS or Ind AS. IFRS 1defines the term “previous GAAP” as a basis of accounting that a first-time adopter used immediately before adopting IFRS. Thus, an entity preparing two complete sets of financial statements, which are publicly available, for example, one set of financial statements as per the Indian GAAP and another set as per the US GAAP, may be able to choose either GAAP as its “previous GAAP.”

Ind-AS 101 defines the term “previous GAAP” as the basis of accounting that a first-time adopter used immediately before adopting Ind-AS for its statutory reporting requirements in India. For instance, companies preparing their financial statements in accordance with section 133 of Companies Act, 2013, will consider those financial statements as previous GAAP financial statements.

The Securities and Exchange Board of India (SEBI) had on 9th November, 2009 issued a press release permitting listed entities having subsidiaries to voluntarily submit the consolidated financial statements as per IASB IFRS. Further, SEBI issued a circular, dated 5th April, 2010, wherein the Listing Agreement was modified to this effect from 31st March, 2010. Consequent to this, many companies voluntarily prepared and published audited consolidated IASB IFRS financial statements. However, Companies Act, 2013 requires all Indian companies to prepare consolidated financial statements under Indian GAAP, with a one year moratorium (see box below).

Companies (Accounts) Rules, 2014

Rule 6
Manner of consolidation of accounts.- The consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards:

Provided that in case of a company covered under subsection (3) of section 129 which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.

Companies (Accounts) Amendment Rules, 2015

In the Companies (Accounts) Rules, 2014,-

(ii) in rule 6, after the third proviso, the following proviso shall be inserted, namely:-

“Provided also that nothing in this rule shall apply in respect of consolidation of financial statement by a company having subsidiary or subsidiaries incorporated outside India only for the financial year commencing on or after 1st April, 2014.”

Consequently, before transiting to Ind AS, most Indian companies will have consolidated financial statements prepared under Indian GAAP. The only exception seem possible is where a company early adopts Ind AS from the financial year beginning 1st April 2015. Therefore, in most cases, both from a separate and consolidated financial statement Indian GAAP will be the previous GAAP for transition to Ind-AS.

The SEBI’s initiative to allow IASB IFRS financial statements was seen by many as a step in the right direction. The option to voluntarily prepare IASB IFRS consolidated financial statements was not only used by companies who were Foreign Private Issuers (FPI) but also other companies that did not have any global listing. Companies that published voluntarily consolidated IASB IFRS financial statements and their investors were able to compare the performance with the global peers. This put the best Indian companies on a very strong footing.

One had hoped that this option would be continued, and companies would be allowed voluntarily to use IASB IFRS for their financial statements instead of Ind AS (that has numerous carve outs from IASB IFRS). However, this option did not come through. Worse still, one hoped that there would be a provision to transition from IASB IFRS to Ind AS. However, that too did not come through. Consequently, all Indian companies will have to mandatorily transition from Indian GAAP (which is their previous GAAP for statutory reporting in India) to Ind AS.

Consider an example. A company transiting from Indian GAAP to Ind-AS, has as options, to retain the book value of fixed assets recorded under previous GAAP (Indian GAAP) or record them at fair value under Ind AS. If the option to use IASB IFRS financial statements as previous GAAP was allowed, companies could have used the book value recorded in IASB IFRS financial statements. This would have reduced the differences between their IASB IFRS financial statements and Ind AS financial statements. Probably these companies would have ended up in a situation where there would be no difference between IASB IFRS and Ind AS financial statements.

However, given that previous GAAP has to be Indian GAAP, these companies may have to deal with a permanent set of differences between Ind AS and IASB IFRS financial statements.

The idea behind having a uniform GAAP (Indian GAAP) for transitioning to Ind AS was probably rooted in the thinking of achieving consistency. However, this thinking is akin to missing the wood for the trees. By wanting to achieve local consistency, the standard setters are giving up on global consistency. Secondly, this is also putting a lot of companies to unnecessary hardship. Lastly, given the numerous options and exemptions within Ind AS on first time adoption, consistency can never be achieved.

Therefore, there is a strong argument to make appropriate amendments to the standards and allow companies to continue with IASB IFRS option or in the least to allow the IASB IFRS financial statements as previous GAAP financial statements.