New-age accounting standards

New-age accounting standards
22 Aug, 2007, 0000 hrs IST, ECONOMIC TIMES

By Dolphy D'Souza

There are now more than 100 countries across the world where international financial reporting standards (IFRS) is required or permitted. IFRS came into prominence when EU decided to adopt it for all its members starting from 2005. Since then, and in a very short span of time, IFRS spread very rapidly all across the world.

The Institute of Chartered Accountants of India (ICAI) decided recently that Indian accounting standards will be fully in line with the IFRS from April 1, 2011 for listed companies and will be extended to other entities in a phased manner. The decision was expected as more than 100 countries around the world currently follow IFRS, and the US SEC is proposing to eliminate, for IFRS foreign filers, the reconciliation requirement to US GAAP.

The convergence to IFRS will greatly enhance Indian entities’ ability to raise and attract foreign capital at low cost. It will also mean escape from multiple reports for huge Indian multi-national companies that have to prepare their financial statements under multiple GAAPs. The Indian professional, trained under IFRS, could very well become a globe trotter.

If he is a home bird, he still would be much sought-after by accounting firms and Indian entities converging to IFRS. With the world changing to IFRS, BPO/KPO businesses in India would have a massive requirement for IFRS resources, and Indian IFRS-literate resources could feed this appetite and provide a huge fillip to this sector. It could be the next big thing for the BPO/KPO business in India. The opportunities are tempting, but they come with huge challenges.

The IFRS adoption by 2011 will have a significant impact on all stakeholders, such as the ICAI, CA, regulators, preparers of financial statements, analysts, users of financial information, etc. Firstly, ICAI will have to give up its function of drafting and issuing accounting standards.

Instead, its focus would be changed to ensure that India’s interest is protected at the international accounting standards board (IASB) level. Given that India is such a huge economy, it will have to ensure adequate representation at the IASB level. Secondly, ICAI will have to set up a formal accreditation process and impart IFRS training to existing as well as prospective members, before 2011. That is not going to be an easy task.

Right now accounting standards or accounting-related requirements are issued not only by the ICAI but various regulators/regulations, e.g., the RBI, Sebi, IRDA, Companies Act, etc. Sebi prescribes accounting for ESOPs, MFs, and presentation format for quarterly reporting, etc.

The Companies Act has various accounting-related aspects covered under Schedule VI, Schedule XIV, section 78, etc. In the case of amalgamation and restructuring, high courts in India require accounting treatment, which may not be in accordance with the accounting standards.

Global frameworks do not recognise such override by non-standard setters. The RBI prescribes accounting requirements for banks, such as accounting for derivatives or provision for NPAs, etc. If the April 2011 deadline has to be met, all these legal hurdles will have to be addressed as soon as possible. That can be done through appropriate amendments in the law, which is a significant challenge in the IFRS convergence process. For example, it would be extremely difficult to convince the RBI to require banks to follow IFRS, rather than the RBI prescribed accounting pronouncements.

IFRS are fair value driven, which result very often in unrealised gains and losses. How are these to be dealt with for income-tax purposes? Are these taxable? Can unrealised gains be distributed as dividends under the Companies Act? These are the questions that would have to be addressed much before the 2011 deadline.

The change from Indian GAAP to IFRS will have a significant impact on various entities’ financial statements and performance indicators. But it can get far more complicated than that, since it would also significantly affect management compensation, stock options, debt covenants, tax liability, distributable profits, etc. IT and internal MIS systems will have to be modified in time, so that it could generate robust and reliable IFRS information on a timely basis.

IFRS are rigorous but the over-emphasis on fair valuation can bring in a lot of subjectivity and volatility in the financial statements, besides requiring a lot of hard work and use of valuation professionals to make those estimates. Under such circumstances, would it be right to subject SMEs to the rigors of IFRS? There is hope here, since the IASB has issued a draft standard for SMEs, which is a simplified form of the main IFRS. Hence the concerns of SMEs should be adequately addressed.

Going ahead, the challenge is not only for India, but also for the IASB. It will have to keep in mind the interest of all member countries when issuing IFRS, bring stability in the entire framework, provide clarity on confusing issues, address appropriately the fair value criticisms and, most importantly, ensure that the standards are interpreted and applied consistently, be it Asia, Africa or America.

(The author is partner, Ernst & Young. Views are personal)