The Hindu Business Line : ‘Converge, not adopt’

The Ministry of Company Affairs (MCA) has stated that India would converge with IFRS but not adopt it. While this could sound confusing initially, it appears that all that the MCA is saying is that there could be small differences with Indian regulatory requirements, which compels one not to embrace IFRS (International Financial Reporting Standards) with open arms.

While it is a fact that one needs to be sensitive to local conditions, the concern — that one need not adopt IFRS in view of the impending changes to come in IFRS — seems unnecessary.

It is a fact that IFRSs are being subject to changes ever so frequently but one cannot take away the central theme of all IFRSs — to enable formulation of a single set of global accounting standards that would invariably be followed.

Valuing assets and liabilities at fair values in most cases is one of the sine qua nons of IFRS, the practical benefit of which cannot be diluted. However, given the different regulatory agencies in India, the convergence project should be a joint effort of all — the MCA, the ICAI, SEBI, the RBI and IRDA. Amending the respective pieces of legislation to make way for IFRS provisions could take some time and effort.

Convergence Report

The Institute of Chartered Accountants of India (ICAI) has already issued a Convergence Report with IFRS that lays out a roadmap for convergence — the ICAI also does not use the term adopt.

However, in the summary of the convergence strategy the ICAI states thus: “Keeping in view the complex nature of IFRSs and the extent of differences between the existing ASs and the corresponding IFRSs and the reasons therefor, the ICAI is of the view that IFRSs should be adopted for public interest entities such as listed entities, banks and insurance entities and large-sized entities from the accounting periods beginning on or after April 1, 2011.”

The use of the word adopt here seems to convey convergence and not adoption. Keeping local conditions in mind, the ICAI has changed the definition of Level 1 entities — the ones that have to follow all Indian accounting standards. In respect of entities other than public interest entities, namely, ‘small and medium-sized entities’ (SMEs), a separate standard may be formulated based on the IFRS when finally issued by the IASB, after modifications, if necessary. Compliance with this IFRS for SMEs is not necessary to make India IFRS-compliant. The format of IFRSs to be adopted for public interest entities should be the same as that of IFRSs, including their numbers.

The numbers of the existing Accounting Standards may be given in brackets for easier identification.

Just do it

Although some IFRSs are tricky, one should not be overly worried on that count. The fact that the title of the standards has moved from Accounting (IAS) to Financial Reporting (IFRS) reflects that all that is sought is to report on certain norms. Contrary to popular perception, IFRS does not mandate ripping out all line items in the balance-sheet and stating them at what they would fetch if sold in the marketplace — exceptions are provided.

Disclosure norms under IFRS are stringent. Differences with Indian accounting standards are significant but not complicated — by issuing AS 32 on financial instruments, the ICAI has reconciled a major part of the difference.

It does not matter if we converge or adopt as long as we do not deviate from the mantra of IFRS — a preference for fair value with detailed disclosures. One expects joint action from the regulatory agencies working in tandem with the MCA and the ICAI soon.

(The author is a Hyderabad-based chartered accountant. Responses to blfeedback@thehindu.co.in)

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