The Hindu Business Line : Convergence of accounting standards

Foreign institution investors (FIIs) are investing in a big way globally, as also are several Indian companies through GDRs (global depository receipts) and ADRs (American depository receipts).

The television brings into our drawing rooms online movements of share prices across the world.

Need for accounting standards

In this situation, there is a strong need for legislation to bring about uniformity, rationalisation, comparability, transparency and adaptability in financial statements. And this underlines the need to have stringent norms for preparation and presentation of financial statements.

The legislation

The International Accounting Standards Committee (IASC) was constituted in 1973 to formulate accounting standards. So far 41 standards have been issued by the IASC. Barring Canada, Japan and the US, all countries have accepted these standards.

To give proper direction on how to interpret these standards led to the setting up of the Standards Interpretations Committee in 1997.

On May 25, 2000, the US Securities and Exchange Commission suggested the acceptance of IAS for use in cross-border listings in the US, without reconciliation to results under the US GAAP (Generally Accepted Accounting Principles).

In 2001, the international fraternity of accountants took stock of the situation and constituted the International Accounting Standards Board (IASB) to evolve and prescribe norms for treatment of several items in the preparation and presentation of financial statements.

IASB adopted all the 41 standards issued by the IASC till 2001. These standards were thoroughly revised and updated in view of the changes in industry and the need for rationalisation.

The US Financial Accounting Standards Board (FASB) and the IASB are in the process of eliminating the differences in some of the standards.

The International Financial Reporting Interpretations Committee (IFRIC) was constituted to replace the SIC. This committee meets periodically to discuss and spell out their interpretations. It deals with mature as well as emerging issues.

The former are those covered by existing standards but not satisfactorily practised, and the latter are new topics relating to an existing IAS but not considered while developing the standard.

IASB publishes a report on the decisions taken immediately after each meeting of the IFRIC.

Some of the other major international bodies in the realm of international accounting are the European Commission (EC), the UN, the International Federation of Accountants (IFAC) and the Organisation for Economic Co-operation and Development (OECD).

Scope and application of IAS

IASs are intended to be applicable only to material items in financial statements. Prospective in application, their scope is given at the beginning of each IAS.

The IASs do not override the law of the land on matters of financial presentations. They concentrate only on essentials and are so designed not to be too complex to permit adaptation at the global level.

Accounting standards in India

All the member-countries, including India, have taken upon themselves the task of prescribing accounting standards. In 2001, the Government constituted the Accounting Standards Board.

The Institute of Chartered Accountants of India, the apex body of accounting and auditing, constituted an Accounting Standards Board on April 21, 1977, to pronounce standards on various items of the financial statements.

This Board has been releasing standards from time to time. Certain of the standards have also been revised/deleted/curtailed in the light of new and additional Standards as well as the experience of the industry.

Till now, 29 Accounting Standards have been issued by the ICAI as against the 41 International Accounting Standards. There are also five International Financial Statements Reporting Standards (IFRS).

Concept of true and fair: The financial statements of an entity cannot be said to be showing a true and fair view unless these financial statements have been drawn up in accordance with the broad accounting framework which is synonymous to Generally Accepted Accounting Principles (GAAPs).

GAAPs

As per Auditing and Assurance Standard 28 issued by the ICAI, the financial statements have to be extracted from the books of account maintained as per the broad framework of accounting so as to be reported to be showing a true and fair view. GAAPs consist of four components: the requirements of law; judgments of various courts of law; pronouncements of the governing body from time to time; and requirements of regulatory Authority SEBI.

In India, since the ASB is not yet functional, the accounting standards as pronounced by the ICAI are adaptable by every entity whose financial statements are subject to audit.

Certain of the accounting standards conform to the International Accounting Standards. Effort is on to match Indian standards with the IASs. There are significant variations between the Indian and international accounting standards. A study of the variations between the two would be interesting. Here are a few of them:

Valuation of inventories: LIFO method is not allowed as per Indian AS but is permitted under US GAAPs.

Pooling of interests method for mergers is allowed under Indian AS but not under US GAAPs.

Interest costs and borrowing costs are treated differently in Indian AS and US GAAPs.

Prevailing laws of the land significantly contribute to the variances between accounting standards of one country with the other. Perhaps the title of account as well as nomenclature differs from one country to the other.

Procedure for standard setting

Accounting standard setting, by its very nature, involves reaching an optimal balance of the requirements of financial information for various interest groups having a stake in financial reporting.

To reach a consensus, to the extent possible, as to the requirements of the relevant interest-groups and, thereby, bringing about general acceptance of the accounting standards among such groups, considerable research, consultations and discussions with the representatives of the relevant interest-groups at different stages of standard formulation becomes necessary.

The standard-setting procedure of the ASB, as briefly outlined below, is designed in such a way so as to ensure such consultation and discussions:

Identification of the broad areas by the ASB for formulating the accounting standards.

Constitution of the study groups by the ASB for preparing the preliminary drafts of the proposed accounting standards.

Consideration of the preliminary draft prepared by the study group by the ASB and revision, if any, of the draft on the basis of deliberations at the ASB.

Circulation of the draft, so revised, among the Council members of the ICAI and 12 specified outside bodies such as the Standing Conference of Public Enterprises (SCOPE), the Indian Banks' Association, Confederation of Indian Industry (CII), the Securities and Exchange Board of India (SEBI), the Comptroller and Auditor General of India (C& AG) and the Department of Company Affairs, for comments.

Meeting with the representatives of specified outside bodies to ascertain their views on the draft of the proposed accounting standard.

Finalisation of the exposure draft of the proposed accounting standard on the basis of comments received and discussion with the representatives of specified outside bodies.

Issuance of the exposure draft inviting public comments.

Consideration of the comments received on the exposure draft and finalisation of the draft accounting standard by the ASB for submission to the ICAI for its consideration and approval for issuance.

Consideration of the draft accounting standard by the Council of the Institute, and, if found necessary, modification of the draft in consultation with the ASB.

The accounting standard, so finalised, is issued under the authority of the Council.

(To be concluded)