 "Allow individual firms to use full IFRS if they wish to: Hans Hoogervorst")
Hans Hoogervorst, as chairman of the London-headquartered International Accounting Standards Board (IASB), is responsible for global implementation of the International Financial Reporting Standards (IFRS). India is adopting IFRS with some carve-outs, known as Indian Accounting Standard (Ind AS), in a phased manner. In the first phase, to be implemented by 2016-17, companies over Rs 500 crore net worth are to do so. This will be followed with all listed companies, and unlisted companies with over Rs 250 crore net worth, adopting it in 2017-18. Hoogervorst spoke to Abhineet Kumar on the sidelines of KPMG IFRS Conference on what this means for Indian companies. Edited excerpts:
Since India is not adopting full IRFS, what would be the global sanctity of accounts under Ind AS?
Every country has full right to choose the path it wants to take, to adopt IFRS or not. India is not the only country which has chosen part-convergence instead of total conversion. Most countries have chosen immediate full conversion to IFRS, as you then have a one-time conversion cost and immediate benefit of international recognition and lowering of capital cost.
China has also decided to move the India way, with seven to eight carve-outs. I have looked at those and most are minor. But it will have an impact — India will not be recognised internationally as far as IFRS is concerned. Also, international investors do not have the time to look at what the differences are. They only see it is a different standard. So, there are disadvantages. The advantage is that you take your own pace. It might, then, be easier for the local markets to get used to a new standard.
Does that bother IASB, in terms of achieving its goal?
I’d suggest to the Indian authorities that companies wanting to adopt the full IFRS get the liberty to do so. Keep this flexibility. There is certainly an option given by the Securities and Exchange Board of India for Indian companies to adopt full IFRS. Seven big companies have already done so. It would be a tragedy if those companies are not allowed to.
IFRS has come up with new regulations for financial instruments and revenue regulation for which the implementation time is much later. Since India is having its first phase of implementation for Ind AS the next financial year, what should it do?
Especially for countries like India which are on the way, we allow early adoption. They do not have to change twice. For companies that operate in countries which have already adopted IFRS, this is a big change, so the implementation date is longer. Indian companies have the advantage that they can change to the new standard from the beginning.
One contention in IFRS implementation in India has been the fair value mechanism. Since the local economy does not have as many data points available as in a matured market, would it not be a challenge?
The use of fair value is not as prevalent in IFRS as people often think. We have mixed measurements. We also use a lot of historical cost and amortised cost; not everything is fair value. If there are particular instruments that need to be arrive through a fair value mechanism for which there is no active market, we allow companies to make the estimated value of these instruments. That can be difficult but that would be difficult in a developed market as well. We do understand that emerging economies can have challenges. That is why we have an emerging market committee, which is also participating despite the fact that you have not fully adopted IFRS. There, we discuss these issues and offer solutions.
How would the adoption lead to ease of raising foreign capital for Indian companies?
IFRS creates trust with foreign investors. They do not have the time to understand the differences between various country-specific standards for accounting. They want something that is everywhere, which they can understand easily. It immediately raises the international appeal of capital markets in India. It is good for investors but is also very good for Indian companies, which will have a lower cost of raising capital. You also have quite a few multinational corporations (MNCs) here — for them, it is a huge advantage that they can operate around the world with one standard.
There is also a view that IFRS is biased towards MNCs' needs and there is not much for small companies in it.
It is certainly more important for companies which have international operations. If we didn’t have MNCs and all companies operated in their own geography, we wouldn’t have had IFRS. The reality is that companies around the world operate internationally. Companies that are small can grow big tomorrow as an MNC. It is also an advantage for them that they can work with a standard that is recognised globally.
Having said that. it is up to India, what it wants to do. If it wants to apply it to all companies or only to big ones. They have started with the big ones and I think that is a wiser route, without bothering the small ones.
Are you satisfied with its progress in India so far?
We see a lot of action and flurry of activity. It is a big difference between now and a couple of years earlier. So, we are on the right track. The only thing I really want to ask the attention of the authorities is to allow individual companies to use full IFRS if the latter wish to.
Since India is not adopting full IRFS, what would be the global sanctity of accounts under Ind AS?
Every country has full right to choose the path it wants to take, to adopt IFRS or not. India is not the only country which has chosen part-convergence instead of total conversion. Most countries have chosen immediate full conversion to IFRS, as you then have a one-time conversion cost and immediate benefit of international recognition and lowering of capital cost.
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Does that bother IASB, in terms of achieving its goal?
I’d suggest to the Indian authorities that companies wanting to adopt the full IFRS get the liberty to do so. Keep this flexibility. There is certainly an option given by the Securities and Exchange Board of India for Indian companies to adopt full IFRS. Seven big companies have already done so. It would be a tragedy if those companies are not allowed to.
IFRS has come up with new regulations for financial instruments and revenue regulation for which the implementation time is much later. Since India is having its first phase of implementation for Ind AS the next financial year, what should it do?
Especially for countries like India which are on the way, we allow early adoption. They do not have to change twice. For companies that operate in countries which have already adopted IFRS, this is a big change, so the implementation date is longer. Indian companies have the advantage that they can change to the new standard from the beginning.
One contention in IFRS implementation in India has been the fair value mechanism. Since the local economy does not have as many data points available as in a matured market, would it not be a challenge?
The use of fair value is not as prevalent in IFRS as people often think. We have mixed measurements. We also use a lot of historical cost and amortised cost; not everything is fair value. If there are particular instruments that need to be arrive through a fair value mechanism for which there is no active market, we allow companies to make the estimated value of these instruments. That can be difficult but that would be difficult in a developed market as well. We do understand that emerging economies can have challenges. That is why we have an emerging market committee, which is also participating despite the fact that you have not fully adopted IFRS. There, we discuss these issues and offer solutions.
How would the adoption lead to ease of raising foreign capital for Indian companies?
IFRS creates trust with foreign investors. They do not have the time to understand the differences between various country-specific standards for accounting. They want something that is everywhere, which they can understand easily. It immediately raises the international appeal of capital markets in India. It is good for investors but is also very good for Indian companies, which will have a lower cost of raising capital. You also have quite a few multinational corporations (MNCs) here — for them, it is a huge advantage that they can operate around the world with one standard.
There is also a view that IFRS is biased towards MNCs' needs and there is not much for small companies in it.
It is certainly more important for companies which have international operations. If we didn’t have MNCs and all companies operated in their own geography, we wouldn’t have had IFRS. The reality is that companies around the world operate internationally. Companies that are small can grow big tomorrow as an MNC. It is also an advantage for them that they can work with a standard that is recognised globally.
Having said that. it is up to India, what it wants to do. If it wants to apply it to all companies or only to big ones. They have started with the big ones and I think that is a wiser route, without bothering the small ones.
Are you satisfied with its progress in India so far?
We see a lot of action and flurry of activity. It is a big difference between now and a couple of years earlier. So, we are on the right track. The only thing I really want to ask the attention of the authorities is to allow individual companies to use full IFRS if the latter wish to.