The Hindu Business Line : Global practices in AS interpretations

Accounting is a means to an end and not an end in itself. Accounting follows business. The function of accounting is to ensure that business transactions are recorded in a transparent manner reflecting the economic substance of them. As business transactions get more and more complicated and as newer business models are invented, sometimes it does look as though the existing accounting standards and the accounting theory are not adequate to record those transactions.

In fact, anyone with an accounting bent of mind who reads business journals and newspapers, on coming across these new ventures would immediately think of an accounting framework and its adequacies or otherwise. In the wake of this, it is not uncommon to find that the standards do not address some specific and unique issues related to these ventures and their business models.

The process of creating or even modifying a new accounting standard takes a few years. First the theory is conceptualised and then a draft prepared. The draft is then exposed, circulated and publicised for comments which are then incorporated if found valid, finally culminating into issuing the standard.

Considering this aspect, the standard setting bodies all over the world have resorted to a shorter process through task forces which issue amendments to accounting standards. In India we have our own Accounting Standard Interpretations (ASIs), which have the authority as that of the accounting standards to which they relate. The following are the means by which the two leading global standard setters - Financial Accounting Standards Board (FASB) of the US and the International Accounting Standards Board (IASB) - address this issue.

EITF

The Emerging Issues Task Force "was formed in 1984 by the FASB in order to assist the Board in identifying current or emerging issues and implementation problems before divergent practices become entrenched. The guidance provided is often on narrow issues that are of immediate interest and importance. These issues may be in especially narrow areas having little broad-based interest.

"Although EITF pronouncements are technically category C GAAP, they are so specialised that generally there is no category A or B GAAP covering the respective topics. The Securities and Exchange Commission (SEC) believes that a Task Force consensus is GAAP for public companies, and they will question any accounting that differs from it. In addition, the SEC believes that the EITF supplies a public forum to discuss accounting concerns and assist in providing advice." (Source: Wiley GAAP 2008 - Barry J. Epstein, Ralph Nach and Steven M.Bragg.)

IFRIC

The International Financial Reporting Interpretations Committee's "function is to answer technical queries from constituents about how to interpret IFRS - in effect, filling in the cracks between different rules. In recent times it has also proposed modifications to standards to the IASB, in response to perceived operational difficulties or need to improve consistency.

"IFRIC liaises with the US EITF and similar bodies liaison as standard setters, to try and preserve convergence at the level of interpretation. It is also establishing relations with stock exchange regulators, who may be involved in making decisions about the acceptability of accounting practices, which will have the effect of interpreting IFRS. (Source: Wiley IFRS 2007: Barry J. Epstein & Eva K. Jermakowicz.) The Indian experience

In India the situation is slightly different. India adopted a slow approach to implementation of accounting standards, based on International Accounting Standards, preferring to avoid a `big bang' situation. However, the last 3-4 years have been a rollercoaster ride, with a number of standards modified and ASIs issued to meet the demands of the times and changing circumstances.

In view of the staggered process of introducing accounting standards, certain anachronisms had crept in, whereby a reference made in a particular standard did not exist till the other relevant standard had been issued. While the ASIs are meant to be explanatory and fill in gaps, sometimes substantive amendments had been made through an ASI.

"Onerous contracts"

Accounting Standard (AS) 29, Provisions, Contingent Liabilities and Contingent Assets had originally deviated from International Accounting Standard (IAS) 37, Provisions, Contingent Liabilities and Contingent Assets taking the stand (among others) that accounting for onerous contracts would distort the operating results of the year under review.

Effective April 1, 2006, the Council (of the Institute of Chartered Accountants of India) had decided to make a limited revision to AS 29. This revision had the effect of bringing into the fold of AS 29 "executory contracts", where the contracts are onerous and operating leases that have become onerous.

To explain what are onerous contracts, the Council had issued Accounting Standard Interpretation (ASI) 30 which explains that an `onerous contract' is one in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it (Source: ICAI ).

In the article on `customer loyalty programme' (Business Line, December 15), this writer had stated that onerous contracts are not recognised in Accounting Standards in India. The above is the correct position.

(The author is a Chennai-based chartered accountant.)

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