Finally the Ministry of Corporate Affairs notified 35 Indian IFRS standards (Ind-AS), without announcing the implementation date. Therefore there is no guarantee that the April 1, 2011 implementation date as indicated in the road map will be achieved. Standards on insurance, leasing, service concession arrangements, mineral resources, agriculture and rate regulation have not been issued. Though the notified standards refer to a framework, the same is also not notified.
Accounting for real estate, financial instruments, fixed assets, foreign exchange accounting and first-time adoption have been changed significantly. Optional accounting treatment allowed under IFRS have been eliminated, for example, the option to account for investment property at fair value or preparing profit and loss account using a functional classification in IFRS is not available under Ind-AS. The notified standards do not contain the scoping requirements for consolidation, as the same is expected to be dealt with by the forthcoming Companies Amendment Bill.
Comparative numbers
Ind-AS first time adoption standards do not require comparative numbers to be provided, and imposes a huge penalty to companies that do want to provide comparative numbers. The one's that want to provide comparable numbers will have to transition on two dates (April 1, 2010 and April 1, 2011), which seems rather unique, unnecessary and self-defeating. The approach results in non-matching of the balance sheets and in many cases, may actually distort comparability.
The option to amortise foreign exchange losses under Ind-AS would end up distorting EPS and market valuation of companies. For example, A company has taken a loan of $100 in year 1999-2000 repayable after 3 years when exchange rate was Rs 43 to a dollar. Exchange rates at end of year 99-00, 00-01 and 01-02 were 43.63, 46.46 and 48.89 respectively. If the company does not avail the option, it will charge off exchange loss of Rs 63, Rs 283 and Rs 243 in each of the year respectively. With the use of option, charge to P&L in each of the year will be 21, 163 and 406 respectively. It is clear that use of option will lead to backloading charge of earlier years in certain situations.
The implementation of Ind-AS is also subject to successful enactment of the Companies Amendment Bill, as numerous sections such as 391, 394, 100, 78, Schedule VI and Schedule XIV conflict with the requirements of IFRS. Worse still, the depreciation rates under Schedule XIV could become the de facto rates under Ind-AS, though in principle those may not reflect the useful life estimates of the management under IFRS.
Tax situation
The tax situation is equally compelling. Typically IFRS accounts are meant for investors. Taxation has a different purpose and hence will have a different perspective compared to an investor. For example, an investor in an investment property company would evaluate the company based on the fair value of the investment properties. Tax, on the other hand, will focus more on rental income and realised profits on sale of the investment properties. It is therefore imperative that in the long run tax authorities develop their own tax accounting standards that necessarily would have to depart from IFRS. The question therefore is what should be done in the interim. Some argue that tax could continue under current Indian GAAP. But that would mean, companies would have to prepare both Ind-AS and Indian GAAP financial statements a move that is resisted by many.
However, given that the objective of investors and tax authorities will remain different, it is an inevitable consequence that two sets of standards would be required. Things could be made a little easy, for example, by requiring reconciliation from IFRS profit numbers to taxable income rather than a full tax financial statement. But the point remains that two set of standards will be required, and taxation authorities cannot indefinitely continue to fill the gap by using court rulings as that would make the entire environment uncertain and litigious.
Not IFRS-compliant
Some argue that the notified Ind-AS standards are more close to Indian GAAP, than they are to IFRS. Certainly Ind-AS are not IFRS-compliant. The gap may further widen on account of local interpretations of standards and legal conflicts. Further IFRS standards are very dynamic and Ind-AS will have to keep pace with the changes. Under these circumstances, it is questionable if we have fulfilled our commitment to converge to IFRS made at the G-20 summit. Moreover, the original purpose of making financial statements relevant for global and local investors and to speak in a common accounting language so as to facilitate inbound and outbound capital flows is lost. Indian companies will question the need to move from one form of Indian GAAP to another form of Indian GAAP.
Too many open questions
There are too many more open questions on the applicability of the roadmap itself and the notified standards. Whether leasing, infrastructure and other Ind-AS standards can be early applied? What framework unlisted private equity and venture capital funds should apply? What accounting will apply to oil & gas companies? A group comprising of an insurance company and a Phase 1 company needs to prepare consolidated accounts under Ind-AS, though otherwise the insurance company is covered only in the following phase. As the implementation date for Ind-AS on insurance contracts is not yet notified, how can the group practically comply with the requirement of preparing consolidated accounts under Ind-AS?
Those close to the implementation are aware that the entire situation has become a maze and the penalty of sticking to an artificial deadline could be high. Under these circumstances it is better to pause, and resolve all the issues in a time-bound and professional manner. Everyone is looking to India to play the leadership role. Part of the problem arises when we try to adopt standards in bits and pieces rather than as a whole. By taking a little more time, India should look at adopting the IFRS system in full in the near term, so as reap full benefits and make Indian financial statements of value to local and global investors.
(The author is Partner and National IFRS Leader, Ernst & Young.)