Financial Daily from THE HINDU group of publications
Thursday, Apr 08, 2004
Local standards are very foreign to CAs
Some examples are now discussed to highlight the gaps in educating the members.
Though not officially acknowledged, two standard textbooks on accounting and auditing occupied the field for long, compelling every student to learn of these. Unfortunately, failure to update them saw the developments in the accounting and auditing areas not being imparted to the new generation of accountants. Further, no attempt was made to fill this vacuum, either through articles in the journal or the holding of seminars. Thus, all types of accounting practices flourished under the very nose of the Institute and the regulatory authorities. Accountants' `prosperity' depended on their creativity to abridge account transactions. Thus was born the concept of abridged accounts followed by abridged audit reports. Accountants served the cause of their masters, leaving vast trail of uncovered scams, vanishing companies, and so on. Even mutual funds, co-operative banks and NBFCs became bankrupt with none becoming accountable for the malaise.
Pronouncement, Guidance Notes
Rather than respond to issues as an accountant or accountancy body, the ICAI always reacted keeping in mind the consequences that may arise on account of its recommendations, thereby, resulting in the total negation of accounting norms. Here are some examples:
Under these legislation, deduction was provided on account of the capital base existing on the opening day of the accounting year, and, any bifurcation would have resulted in a lower capital base to be reflected.
It is after much pressure that the ICAI came out with its pronouncements to say that the company should necessarily show separately, the provisions made on account of these items.
The article pointed out that by amortising the interest over the life of the asset, a shipping company could distribute dividends and also pay the full managerial remuneration without any curtailment. On the other hand, if the entire interest due for the financial period is provided in the accounts, there would have been no dividend nor, for that matter, any managerial remuneration. The Department of Company Affairs (DCA) stepped in and referred the matter to the Institute, which resulted in this statement being issued.
This created a huge uproar and, after a couple of years, the Institute disapproved this practice. Thus, all companies started de-capitalising the interest and, at present, there is some order in the realm of capitalising interest on borrowed cost.
The sagging link
With growing public pressure, the Institute started linking its Standards with International Accounting Standards by making few modifications. This created a huge knowledge gap among Indian accountants who were caught unawares with regard to these new directives.
An academic person will always wonder as to the rationale of adopting wholesomely the International Accounting Standard in the Indian context, as confusion often remains even after completing the task. Some knowledge gap situations that arose on account of adopting the International Accounting Standards are:
The standard stipulates that the capitalisation of borrowing costs should be done on weighted-average basis weighted average with regard to the borrowings that are outstanding during the period other than specific borrowings. This apart, AS 16 also stipulates that first a capitalisation rate should be worked out in respect of borrowings of general purposes and, then, the same rate should be applied in respect of the borrowing costs. The steps identified are as follows:
Step 1: Calculation of borrowing costs after taking into account any loan repayment, if any;
Step 2: Calculation of average unspecified borrowing outstanding during the year;
Step 3: Calculation of average interest on unspecified borrowings for the year;
Step 4: Average interest rate for the year; and
Step 5: Capitalisation of interest by applying the average rate worked out above with regard to unspecified borrowings.
These show that neither the Institute nor any of the auditors had recommended this method to be followed by any of the corporates.
Can it be said all the accounts of yesteryear were wrong?
In the case of deferred tax liability, a question was recently raised as to whether it is a liability to be deducted to find out the net worth of the company. None could answer this query convincingly, though one could draw reference to varied practices followed by lenders and investors. The Institute has not found a solution to this query.
Both these, though illustrated to some extent in the standard, are foreign to accountants to say the least.
Thus, Indian accountants today have a knowledge gap on account of their abrupt linkage with International Accounting Standards.
There are no research articles of substance prepared by the Institute on any of the controversial aspects. The scene can be likened to a child dropped in a narrow lane of a jungle with the destination remaining quite invisible.
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