Time to get some clear guidance

The Indian economy has transformed over the past two decades, with the reach of Indian business leaders across geographies increasingly redefining how business is transacted.

This, in turn, has brought about complex business arrangements, shining the spotlight on the financial statements prepared by Indian companies.

This calls for critically evaluating whether the Generally Accepted Accounting Principles, or GAAP, applied by an Indian company truly reflect the substance of underlying business transactions, and the disclosures enable comparability with peers at the local and global level.

This brings us to an interesting question: What are the generally accepted accounting principles in India, generally known as Indian GAAP? Does it refer only to the standards issued under Section 211 (3C) of the Companies Act, 1956, or does it encompass the various other literature available (including guidance notes, advisory opinions, and others issued by various regulators acting as standard setters)?

Indian GAAP comprises

Accounting standards referred to in Section 211 (3C) of the Companies Act;

Schedules to the Act (such as Schedule VI [revised]);

Notifications on accounting issued by the Ministry of Corporate Affairs from time to time;

Accounting guidance issued elsewhere in the Act (for instance, Section 78);

Guidance notes and recommendatory standards issued by the Institute of Chartered Accountants of India;

Expert advisory committee opinions of ICAI.

Due to the multiplicity of guidance, there is confusion among users, leading to diverse practices and increased risk of non-compliance, thereby undermining the objective behind the standards.

There are ample examples to illustrate this shortcoming. For instance, both AS-16 and an MCA notification provide guidance on accounting for foreign currency gains or losses on loans utilised for capital expenditure. Similarly, there is guidance under Section 78 and AS-1 on accounting for premium on redemption of debentures.

A possible solution to this is the codification (or indexation) of all accounting guidance relevant to the majority of Indian corporates (with the exception of certain regulated sectors such as banks and insurance companies). A good example is the way in which the US Financial Accounting Standards Board (FASB) codified the US GAAP to cut through the clutter of unstructured literature.

Logically, the focus should be on indexing relevant literature such as accounting standards, related guidance notes, opinions and references in notifications, against a particular class of transactions such as leases, financial instruments and so on. The aim should be to define and implement a structure for clarity on the

Scope of accounting guidance;

How to account for a particular transaction or classes of transactions;

Accounting options available;

Disclosures needed in the financial statements.

Here’s an illustrative format:

Accounting topic or class of transactions (such as leases)

Definitions (finance lease, operating lease, and so on)

Forms of instruments

Accounting guidance on each form

Disclosure requirements

Basis of accounting conclusions.

Either the Corporate Affairs Ministry or ICAI should put in place a structure that allows users to understand the applicability, relevance and available choices for accounting each transaction.

Whilst the convergence to IFRS (IND-AS) continues, this is expected in phases over a number of years. Furthermore, a number of Indian companies may not be covered by these standards (such as unlisted companies with low net-worth). Accordingly, it is important to codify the accounting literature to add to the credibility of financial statements.

The author is a Chartered Accountant

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