Why delay IFRS adoption?

The International Accounting Standards Board (IASB) has been urging many countries to adopt its standards, citing better disclosure and some semblance of a uniform accounting language.

India succumbed in 2009 and brought out a road-map in 2010 outlining transition over four years. The Institute of Chartered Accountants of India (ICAI) quickly brought out India version of IFRS, calling them Ind-AS. The National Committee on Accounting Standards did not waste too much time mulling over these standards which were forwarded to the Ministry of Corporate Affairs (MCA).

Last week, the MCA notified 35 Ind-AS which would now form a part of the Companies Act. However, to prove that they have not yielded in toto , the date from which these standards would need to be followed is not April 1, 2011 as originally contemplated, but will be announced later. Converting the opening balance sheet as April 1, 2011 would mean the closing balance sheet as at March 31, 2012. Since Ind-AS 101 gives an option not to show the comparative figures of the previous year as per Ind-AS norms ( though it is very unlikely any companies would opt for this), March 31, 2012 can still be the effective date provided a clarification is issued early.

A new Schedule VI to the Companies Act has also been announced. The new Schedule takes into account all requirements of IFRS, particularly the distinction between current and non-current assets.

Omissions

Significant omissions in the above list are the equivalent standards for IAS 41 on Agriculture and IFRS-9 – the new standard for financial instruments. It is felt that application of the concept of Fair Value would be extremely detrimental to a sensitive sector such as Agriculture in India though IAS 41 focuses on biological assets and not merely crops. On financial instruments, since the IASB is issuing IFRS 9 in four instalments (three of which have already been issued), may be the MCA feels that it is preferable to wait for the standard to be issued in full.

Reasons for deferment

The reasons given for the impasse regarding the date from which the new standards would come into effect are stated as giving consideration to the tax and other effects of the transition. Other effects have not been detailed. As IFRS lives on the concept of fair value, there could be significant volatility in the financial statements in some years.

However, it has to be stated that the tax department has never sweated too much about accounting standards and has not given specific instructions regarding Indian Accounting Standards and there is no reason why it would give special attention to IFRS. The expected announcements in Budget 2011 regarding IFRS turned out to be only expectations.

With the DTC appearing near-final soon, there is remote possibility of the law being altered to accommodate IFRS. Under IFRS, an entity may have to adopt the same approach to obtain deductions as it would for a change in the depreciation policy or a large write-off under present laws. The concept of deferred tax has been introduced with the singular intent that there is equity between tax profits and book profits and any differences between them get evened out over a period of time.

Since the first clutch of companies consisted principally of listed companies, the stoic silence of the Securities and Exchange Board of India (SEBI) regarding IFRS has not helped. As a market regulator, there are numerous non-accounting issues that SEBI would need to address regarding IFRS such as the quarterly results reporting etc.

Having opted for a carve-out approach, India has the flexibility to tune thestandards to our conditions though this may not get an overwhelming approval from the IASB.

While much has been said about the ill-effects of IFRS, its focus on financial reporting and disclosure are strong pluses. There are entities in India that have seen the advantages of IFRS by reflecting service concession agreements as Intangible Assets instead of Fixed Assets.

One can't learn swimming without getting wet or developing cold feet at the edge of the pool.

Having declared an intention to converge with IFRS by making commitments at the G-20 summit and having notified Ind-AS, Schedule VI and Schedule XIV, there appears to be no point in biding time.

A delayed start for the first set of entities would have a trickle-down effect on the subsequent sets.

(The author is a Bangalore-based chartered accountant)

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