Hurdles in converging Indian accounting standards with IFRS
D. Murali and George Verghese
Chennai, July. 25: Convergence of Indian accounting standards with the international standards may have to contend with more than one obstacle, point out experts in the profession.
For one, the accounting standards or accounting-related requirements are issued not only by the ICAI (Institute of Chartered Accountants of India) but various regulators, such as the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority (IRDA).
“SEBI prescribes accounting for ESOPs (employee stock option plans), mutual funds and presentation format for quarterly reporting. The Companies Act, 1956 has various accounting-related aspects covered under Schedules VI and XIV, Section 78 and so on,” says Mr Dolphy D’Souza, Partner, Ernst & Young Pvt Ltd.
A few days ago, ICAI spoke of year 2011 as when we would be totally aligning our standards with the IFRS (International Financial Reporting Standards).
Pursuant to Section 211 of the Companies Act, the central Government had issued a notification prescribing accounting standards for companies, and these standards are basically those issued by the ICAI. “Convergence would, therefore, require the Government to prescribe IFRS as the accounting standards for the purpose of compliance with Section 211,” says Mr Rajesh Arora, Partner, BSR & Co.
“Another issue that would have to be is resolved relates to the status of Schedule VI since its requirements are not necessarily in consonance with the presentation requirements of IFRS.”
The RBI prescribes accounting requirements for banks, such as accounting for derivatives or provision for non-performing assets.
Then, there are the ‘overriding’ obstacles. Mr D’Souza draws attention to the fact that in the case of amalgamation and restructuring, high courts require accounting treatment that may not be in accordance with the accounting standards. “Global frameworks do not recognise such override by non-standard setters.”
These apart, there are many other niggling questions that need to be answered before the 2011 deadline. “IFRS is fair-value driven, which very often results 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?”
If the April 2011 deadline has to be met, all these hurdles will have to be addressed on a priority basis, says Mr D’Souza. “That can be done through appropriate amendments to 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 RBI-prescribed accounting pronouncements.”
The change from Indian GAAP to IFRS is expected to have a significant impact on the financial statements and performance indicators. “The new standards can significantly affect managements’ compensation, stock options, debt covenants, tax liability, and distributable profits,” he explains. “IT (information technology) and internal MIS (management information system) will have to be modified in time, so that they are able to generate robust and reliable IFRS information on a timely basis.”
IFRS is considered to be more rigorous than Indian standards. Also, the IFRS’ emphasis on fair valuation, it is feared, 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, cautions Mr D’Souza.
To save the small and medium enterprises (SMEs) from the rigours of IFRS, a simplified draft of the main IFRS has been issued.
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