The Hindu Business Line : Moving closer to IFRS

Consequent to the one-off notification issued by the Institute of Chartered Accountants of India (ICAI) advising corporates to mark-to-market all outstanding derivative contracts on their balance-sheets, there has been action aplenty. Banks and corporates have not only provisioned for some of their losses but have also been taken to court to establish who should take responsibility for the losses. On the face if it, banks selling these exotic derivatives would consider the claims of the corporates to be no-brainers since they enjoy the exotic profits that come with some of these products. However, the very nature of the agreements entered into are so complex that either of the warring parties could find some escape mechanism.

A beginning

The ICAI, as a follow-up measure, has adopted AS-32 — Financial Instruments-Disclosures from April 1, 2009 and mandatory from April 1, 2011 with earlier adoption encouraged. AS 32 does not differ substantially from IFRS-7 which has a similar heading — requiring entities to disclose exposures to the risks involved in financial instruments. The objective of this standard is to require entities to provide disclosures in their financial statements to enable users to evaluate the significance of the financial instruments. Users would also be able to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed and how it manages those risks. This standard should not cause entities to sweat as much as the notification did since it only exhorts detailed disclosure which they are used to anyway, thanks to the Indian Companies Act and Clause 49 of the Listing Agreement.

For the users of financial statements, it would need them to know the complications and intricacies of financial instruments to know if the company they have put their money onto is using the right risk management techniques. It is another point altogether that they cannot do much in case they disagree with the risk management techniques adopted.

NACAS?

The National Committee on Accounting Standards ( NACAS) was formed with the objective of implementing prescribed accounting standards in India — the ICAI proposes, NACAS disposes. The Committee comprises an eclectic mix of professionals from varied interests. Since inception, NACAS has only given a couple of announcements stating that they prescribe all the 28 accounting standards announced by the ICAI.

With the ICAI declaring 2011 as the sunrise year for a migration to IFRS, the role of NACAS comes into question. It has taken the ICAI about a couple of years to get AS 32 from the drawing board to adoption — if NACAS takes a similar time-frame, migration to IFRS could be stalled. An amendment to the Companies Act, replacing NACAS with ICAI as the authorised standard setter and an amendment to the Chartered Accountants Act, 1949 empowering the ICAI to prescribe and adopt IFRS, would do the trick.

The missing standards

With the adoption of AS 32, the only standards that the ICAI has not issued which the IASB has is the one on share-based payment. This assumes importance since IFRS 2 on share-based payment is not only about employee stock option plans but also payments given in the form of shares for any goods or services availed of. The Guidance Note issued by the ICAI on this topic targets only about stock option schemes while the scope of the IFRS is much larger. The recent spurt in inflation would tempt one to prescribe an accounting standard for a hyper-inflationary economy which the IFRS has and the ICAI does not, but it does appear that the inflation is way below the 100 per cent needed for an accounting standard. The ICAI would be issuing various other amendments to bring Indian Accounting Standards on a par with IFRS. The action on this front has only begun.

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

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