April 1, 2011 is fast approaching. This is the date when India will adopt the new set of IFRS-convergent accounting standards. As the date is approaching, we are observing a lot of excitement and worries. It is quite natural. But it should not lead to panic. The panic may lead to a decision to defer the adoption of the IFRS-convergent accounting standards. This will hurt the interest of investors in Indian companies.
The government has decided not to adopt IFRS, rather to converge Indian accounting standards with IFRS. Convergence implies that Indian accounting standards may exclude or modify some of the accounting principles and methods stipulated in IFRS and may include certain accounting principles and methods, which are not stipulated in IFRS. The government and various committees of experts formed by the government thought it prudent to have this flexibility in the interest of Indian companies. They had set out the guiding principle that deviations from IFRS would be only to the extent that it is absolutely necessary in the prevailing Indian business environment. Many accountants and users of financial statement assumed that the deviations would be only cosmetic. Therefore, they are not happy with the proposed deviations, which are not cosmetic.
There is a consensus that integration of capital market is facilitated if companies across the globe use a common business language. This consensus among stakeholders located in different territories has lead to the movement for convergence of accounting practices across the globe. India has to fall in line because India needs foreign capital for its economic growth and also because many Indian companies aspire to become truly multinational in terms of operations and shareholding.
IFRS has emerged as the benchmark because it is iss-ued by a world body and the US GAAP has lost its sheen post-accounting scam, which led to the enactment of the Sarbanes-Oxley Act. However, it is well accepted that the purpose of convergence will not be achieved unless US GAAP converges with IFRS. Therefore, both IASB and FASB have taken number of joint projects to bridge the gaps between IFRS and US GAAP. As a result, IFRS is significantly influenced by views taken by USA on various accounting issues.
It may be incorrect to assume that IFRS accounting principles and methods are best suited for all. Some experts believe that IFRS should be simplified. Therefore, choice of IFRS as the benchmark is based on many considerations and not because every stakeholder believes that it provides best accounting solutions in all situations. Therefore, it is a faulty argument that Indian companies will suffer in the long run because government’s decision to carve in and carve out of IFRS in formulating IFRs-convergent accounting standards.
A question that is being asked whether India is hurrying in converging its accounting practices with IFRS, particularly because USA will take another five years to achieve convergence and some other countries have decided to delay the convergence. Those who are arguing for deferring the convergence have ignored the fact that the government has decided to adopt IFRS-convergent in phases, which is an intelligent move. In the first phase large companies (net worth Rs. 1,000 crores), companies that are included in Nifty 50 or Sensex 30 and companies whose securities are listed in a foreign exchange will adopt the new set of accounting standards. Thus, companies which will adopt new accounting standards, in the first phase, are either large or high performers. It is unlikely that those companies are not prepared for adopting IFRS-compliant accounting standards, particularly because government’s plan to converge Indian accounting standards with IFRS was made known much earlier. The assumption that they may not be ready is farfetched. It is also expected that the government will not delay the notification of those accounting standards and will bring necessary changes in the legal framework. It is working overtime to achieve the target date committed by it. Those who argue for deferment also ignore the fact that Indian accounting practices could not keep pace with globally accepted accounting practices. Therefore, Indian accounting practices are long due for revision. Therefore, it is appropriate to align Indian accounting practices with globally accepted accounting practices as early as possible.
Let us hope we shall be able to keep our commitment to transit to IFRS-convergent accounting standards on April 1, 2011.
E-mail: asish.bhattacharyya@gmail.com