The Hindu Business Line : IFRS: Standard of the future

It is by now known enough that International Financial Reporting Standards (IFRS) would dictate standard-setting in the future. The International Accounting Standards Board (IASB) — the standard-setter — is continuously making amendments to the standards to ensure that a single set of global accounting standards becomes the norm.

The Financial Accounting Standards Board (FASB) has also amended some of its standards to bring them on a par with IFRS. India has announced that it would convert to IFRS effective 2011.

Towards this end, the Institute of Chartered Accountants of India (ICAI) has issued a Convergence Report for convergence to IFRS w.e.f. April 1, 2011.

Need for Convergence

In this era of globalisation and liberalisation, the world has become an economic village. The globalisation of the business world and the attendant structures and regulations, which support it, as well as the development of e-commerce make it imperative to have a single globally accepted financial reporting system.

A number of multinational companies are establishing their businesses in emerging economies and vice versa.

The entities in emerging economies are increasingly accessing the global markets to fulfil their capital needs by getting their securities listed on the stock exchanges outside their country. The Convergence Report goes on to state that there are immense benefits to the economy, investors, industry and accounting professionals.

All-at-once Approach

The ICAI did consider converging with IFRS in stages but decided to adopt a one-time convergence save for issue of a new accounting standards for small and medium enterprises (SMEs). The ICAI also examined whether an entity should have a choice to become fully IFRS compliant before April 1, 2011.

The ICAI is of the view that an early adoption of IFRS should be encouraged as has been the practice for all Indian accounting standards. However, such an adoption should be for all IFRS and that it cannot be on selective basis.

The recent Notification of the ICAI regarding booking of losses on derivative contracts seems to contradict the above approach.

Format of converged Accounting

The ICAI considered whether the existing Accounting Standards should be revised to make them fully compliant with IFRS by the specified date or on the specified date the IFRS themselves should be adopted. In either case, Indian-specific regulatory/legal aspects may be included in a separate section, where appropriate.

The ICAI is of the view that it would be more cumbersome to follow the first approach, that is, revising the Accounting Standards. Therefore, the second approach, that is, IFRS, including the IFRS numbers, should be adopted from the specified date of April 1, 2011. The IFRS should be issued as Indian Accounting Standards, which would be considered IFRS-equivalent.

Conversion example

Considering that the accounting standards in India have been modelled largely on the erstwhile International Accounting Standards (IAS) and the fact that standards for SMEs would be issued separately, the ICAI could have considered earlier adoption of IFRS. Although the convergence paper does state that earlier adoption is encouraged, history has proven that in case a sunrise date is set for a particular legislation, compliance would start only from that date. Although the convergence paper talks of cooperation from other institutions too, the onus of ensuring a smooth transition to IFRS would lie only on the ICAI.

The recent example of a software company based out of Hyderabad that converted its accounts to IFRS should give enough confidence to the ICAI. The only major difference reported was that on accounting for stock options for which we do not have any accounting standard.

The differences between Indian accounting standards and IFRS as mentioned in the Convergence Report throw out the fact that most of the major areas of difference are in disclosure requirements only. It would also be a signal to the ICAI to issue a standard on accounting for stock options at the earliest and to regularise the standards on accounting, measuring and disclosing financial instruments.

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