The Hindu Business Line : Notification review

The Ministry of Corporate Affairs (MCA) has issued a Press Note on June 13, 2008, with the subject ‘Notification of Accounting Standards by the Government under the Companies Act, 1956’. Delving into the history of accounting standards, the Press Note mentions about accounting standards prescribed by the Institute of Chartered Accountants of India (ICAI) being mandatory only for its members till the Companies (Amendment) Act, 1999 conferred on them a legal sta tus.

It goes on to mention about the National Committee on Accounting Standards (NACAS) which has ratified AS 1 to AS 28 prescribed by the ICAI.

The Press Note then pulls a surprise by stating that while notifying the accounting standards, the Government has enabled disclosure of company accounts in a transparent manner at a par with widely accepted international practices through a process of convergence with International Financial Reporting Standards (IFRS).

Although the accounting standards prescribed by the ICAI and notified by the Government are modelled on the erstwhile International Accounting Standards (IAS), there are significant differences between these standards due to amendments to the IAS and non-amendments to the Indian standards. The Note mentions about prescribing a separate standard for small and medium enterprises (SMEs).

The differences

The differences between Indian accounting standards and IFRS can be gathered from the standards on SMEs. The IFRS defines SMEs as entities that do not have public accountability. Public accountability is defined to mean an entity which has issued debt or equity securities in a public market or it holds assets in a fiduciary capacity for a broad group of outsiders, such as bank, insurance company, securities broker/dealer, pension fund, mutual fund, or investment bank.

On the other hand, in India enterprises are classified into three levels with listed and proposed-to-be-listed companies, banks, financial institutions and insurance companies and companies with turnover in excess of Rs 50 crore or borrowings in excess of Rs 10 crore forming the first level. And companies with turnover in the Rs 40 lakh to Rs 50 crore band and borrowings between Rs 1 crore and Rs 10 crore forming the second level. The residual companies make up the third.

It is apparent that with the adoption to IFRS, there would only be two levels and no third. Both the standards prescribe omission from the applicability of standards to SMEs, limited disclosure requirements and time to implement new standards issued.

Adoption

The Convergence Paper on IFRS issued by the ICAI states that the ICAI would continue to issue standards under IFRS and not embrace the ones issued by the International Accounting Standards Board (IASB) in toto. While this would certainly ensure continuity in the issuance of standards and familiarity with a standard-setter, care should be taken to ensure that exceptions from IFRS are not too many.

The Financial Accounting Standards Board (FASB) in the US has taken a significant step in doing away with a reconciliation statement to US GAAP for non-US entities that file financial statements in the US with an assurance to enable this for US entities also.

With Indian entities becoming major players in the global M&A market — a significant portion to which is in US and Europe — the lesser the deviations from IFRS for Indian entities, the better it would be.

Process of revising

The ICAI is in the process of revising seven of its present accounting standards on disclosure of accounting policies, contingencies and events after the balance-sheet date, prior period items, revenue recognition, amalgamations, government grants and fixed assets and issuing six new ones on share-based payments, insurance contracts, agriculture, retirement benefit plans, investment property and non-current assets held for sale.

As per IFRS norms, even prior period numbers should be restated which would make 2010 financial statements IFRS-compliant. Give a one-year gestation period to comprehend the new standards, the ICAI should ensure that all amendments and new standards are issued by 2009.

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

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