As India continues along the path of economic growth and integration with the rest of the world, our financial reporting also needs to remain relevant and comparable. Our regulators had set out a phased plan to converge to the International Financial Reporting Standards (IFRS) a set of accounting standards issued by the International Accounting Standards Board.
A lot of effort was spent in indigenising the IFRS standards to address concerns raised by various stakeholders. This resulted in the issuance of a set of standards called Ind-AS in February last year. The implementation of these new standards also requires changes to the Companies Act.
The Ind-AS standards are yet to be notified and the modification to the Companies Act is awaited. Stakeholders including industry and tax authorities have raised arguments against Ind-AS and its implementation roadmap. At present, India's move to IFRS has moved into a silence zone.
If Indian companies are to compete with their global peers for capital and customers, our financial reporting should be based on globally accepted standards. The Indian standards now are relatively simple and continue to be relevant for simple businesses and transactions. With the increasing level of complexity in businesses and transactions, there is a need for upgrading them. For example, Indian standards need improvement in areas like consolidation, accounting for mergers and acquisitions, financial instruments, share-based compensation, revenue recognition, etc. Typically, this leads to foreign investors requesting Indian companies to translate their financial statements to an accounting language they understand, that is, IFRS or other standards. India has missed its initial date with IFRS. When IFRS was initially introduced around the world (in the early 2000's), the International Board made a commitment to provide a “stable platform.” Companies adopting IFRS had the comfort that the standards would not change in the near term, easing their transition. That is no longer true. The Board has been working on a slew of measures to change several standards including those for revenue recognition, leases, financial instruments and presentation of financial statements. This has resulted in a lot of debate amongst IFRS users who are faced with these changes which impact financial reporting and other business practices. Other countries such as the US and Japan have adopted a wait-and-watch approach to adopting IFRS for this reason. It seems appropriate for India to follow suit.
What are our options?
Upgrading current standards: With IFRS itself being a moving target, one option may be to allow its backdoor entry by changing standards and introducing new standards to address areas where guidance is lacking or is not comprehensive. This would encompass making existing standards applicable to all or select companies — for example, a single standard on share-based compensation can be made applicable to all companies, whereas financial instruments standards (AS 30, 31) can be made applicable to select large companies; amending existing standards or introducing new standards for uncovered topics — for example, consolidation based on control rather than voting rights along with necessary modification to the Companies Act; and narrowing down the options permitted by existing standards — for example, the standard on amalgamations can be altered to make the use of fair value accounting mandatory for all mergers and acquisitions.
These would result in one uniform set of standards being applicable to all Indian companies enhancing comparability to the rest of the world and easing an eventual transition to Ind-AS.
Mandate IFRS/Ind-AS to public-interest entities: Another option may be to make it mandatory for select Indian companies (for example, listed companies) to use IFRS/Ind-AS for their consolidated financial statements. This may exclude banks and insurance companies until IFRS 9 is finalised. It would though entail preparation of multiple financial statements and records. Alternatively, both the above approaches may be implemented simultaneously.
The above approaches would permit the use of the existing framework for purposes of income tax, dividend distribution and regulatory reporting with minimal modification to the Companies Act.
Further, from the Reserve Bank of India's perspective, it may continue to regulate banks with their regulatory guidance (for example, Income Recognition, Asset Classification norms) applicable to bank's standalone financial statements.
On the other end of the spectrum, one may consider adopting IFRS as is since the current Ind-AS include a number of exemptions or carve-outs which some view as defeating the purpose of any move to IFRS. Such a move may be too onerous given the level of change going on in IFRS and the approach being considered in the US and Japan.
What will help is a clear message from the regulators regarding India's move to Ind-AS/ IFRS — both the approach and timing, so as to provide companies in India with a clear roadmap on the way forward.
Shrenik Baid is Executive Director, PwC India. (With inputs from Karan Marwah, Associate Director)
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