The Hindu Business Line : Polishing standards

“A gem is not polished without rubbing, nor a man perfected without trials” — so goes a Chinese proverb. Regulators globally have been attempting to publish polished accounting standards which are universally accepted. Till some years back, US GAAP was considered to be the Bible for accounting standards — it was rule-based and had different standards for different industries.

The failure of mega-sized corporations brought out the inherent shortcomings in US GAAP and led to the International Accounting Standards Board (IASB) taking the lead in formulating International Financial Reporting Standards (IFRS) for the global market. The Institute of Chartered Accountants of India (ICAI) — intent on converting to IFRS from 2011 — has recently been doing some loud thinking about formulating industry-specific accounting standards. This does not mean that it is bidding IFRS goodbye and embracing US GAAP — it is attempting the best of both worlds.

Industry-wise standards

Industry-wise accounting standards are not new in India. The Reserve Bank of India (RBI) obtained some relaxations in the application of Indian Accounting Standards to banks and financial institutions while the Insurance Regulatory and Development Authority (IRDA) already provides details on what an insurance company’s financial statement should disclose.

With plenty of action on the new legislation front — Direct Taxes Code, Goods and Services Tax, an all-new Companies Bill and IFRS, all due shortly — the ICAI has formed committees to decipher the impact of these regulations on specific industry sectors. A full-blown application of fair value to the financial instruments of banks and financial institutions — as instructed by AS 30, 31 and 32 — could impact the financials of these institutions drastically.

It is felt that the recent controversies in a telecommunications company that has apparently been charged with under-reporting of revenue may not have occurred had we had clear-cut disclosure norms for telecommunications companies, including amounts owed to the regulator.

SOP 97-2

There are quite a few benefits of industry-wise accounting standards. SOP 97-2 issued by the Financial Accounting Standards Board (FASB) in the US is yet considered to be one of the best accounting standards for revenue recognition for the services sector in general and for the software services sector in particular. The SOP covers every possible scenario for revenue recognition in this industry. US GAAP is flooded with such standards.

With multiple regulators in India, the ICAI has normally issued general accounting standards and has worked with the regulator to permit deviations from their standards if warranted. One would expect the same to occur for the transition to IFRS too. With a committee set up to draft a roadmap and sub-committees to decipher the impact of IFRS industry-wise, the ICAI is going to be flooded with plenty of reports within days of each other. The challenge would be to comprehend all those reports and act on them- at speed.

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

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