 "Benefits of IFRS would start to flow in 2018: Ian Mackintosh")
The International Accounting Standards Board (IASB), the independent standard-setting body, has put out a single set of accounting standards under the International Financial Reporting Standards (IFRS). India is scheduled for transition to IFRS-compliant Indian Accounting Standard (Ind-AS) from April 2016. Ian Mackintosh, vice-chairman, IASB, tells Sudipto Dey greater transparency in financial reporting and higher level of disclosure are likely to lower the cost of capital for Indian businesses in the long term. Edited excerpts:
Has the accounting profession become more globalised with the adoption of IFRS in the past 10 years?
The organisation began as a national accounting standards committee in 1973 as a gathering of professionals. Most nations, including India, picked up the standards and adopted them for their own situations. However, in 2001, the organisation was re-structured, trustees were put together, and the board was formed. Since then, the number of countries using the standard (IFRS) has been growing. In an in-depth survey of 140 countries, we found 114 used the IFRS. This means for accountancy, there is a common language. In some ways, this is globalisation of the accountancy profession. So, people can move from country to country with the basic background of IFRS. It has been quite a revolution in 14 years. What drove it essentially was the globalisation of the markets. It became obvious you needed a common language for financial reporting, as everyone had a different financial reporting standard. We are very happy that India is joining in at this stage.
India had a false start in 2011. How well prepared is corporate India and the government?
The government announced it in its Budget last year and seems determined to achieve it this time - April 1, 2016. There has been a small hiccup with revenue recognition standard, as we delayed it by one year. So, they, too, have delayed it by one year. The Reserve Bank of India has put out a consultation paper for making banks compliant by 2018. The gap after that is of insurance companies.
We would have preferred a full adoption of IFRS. However, the carve-outs are much fewer than when they first started talking about it in 2011. We will keep working with India to narrow the gap. We think India has done a good job if it sticks to the road map.
The next challenge is to get companies organised. Europe introduced IFRS in 2005, and there have been two reviews since then. Companies are happy that it has lowered the cost of capital. Over the long term, Indian companies should also expect tangible benefits.
How long will it take for companies to start getting those benefits?
Generally, results start to come out after two years of applying the standards. It would be reasonable to expect the benefits would start to flow in around 2018. For foreign investors looking at India, it takes time to trust and understand the financial situation that companies are in.
One apprehension among corporates is that the cost of compliance will go up under the new regime.
There is a transition cost involved on adoption but I am not very sure if there is more cost on on-going basis. One complaint is that there will be many more disclosures, and that is a fair comment. We have a disclosure initiative where we try to look in a holistic way what disclosures we should have. We should have an objective for a disclosure. We often encounter these questions from companies, and even auditors. The other comments we get from investors and analysts who are always pushing us for more disclosures. So, we try and strike a balance.
We are looking at the whole principles of disclosure. That might result in us reviewing the existing disclosures across all standards. With each new standard, we are reviewing it after every three years to see if it is having the effect that we thought it would have. That is one time we take a look at disclosures.
We want India to be more involved in the standard-setting process. We will hold a conference (on the new standards) in February next year, and a trustee meeting in October. The trustee meeting would be a good occasion to emphasise the good work that India has done. It would be good time to spread the message that India's financial reports would be more in line with other countries' reports.
What challenges should Indian companies prepare for when they start transitioning?
The biggest question is where our standard setting is going to go. One of the challenges is how long will we keep coming out with new standards and changing things. Companies need some stability and certainty in what they are doing. In the past 14 years, we have had some very large standards, and we are coming to the end of them. Next we are looking at are leases, and that will change accounting quite a lot.
The US is still not on IFRS. Is there hope of getting them on board?
We continue to work with the US Financial Accounting Standards Board and have achieved a lot of convergence on revenue recognition, leasing, business combination and valuations. We did not get to a totally converged answer but a relatively converged one. They have a very strong board and they are the largest economy in the world, and have questions on sovereignty. We need to keep working with them. They do allow foreign listers to file using IFRS. There are 500 companies that file in the US using the full IFRS.
Has the accounting profession become more globalised with the adoption of IFRS in the past 10 years?
The organisation began as a national accounting standards committee in 1973 as a gathering of professionals. Most nations, including India, picked up the standards and adopted them for their own situations. However, in 2001, the organisation was re-structured, trustees were put together, and the board was formed. Since then, the number of countries using the standard (IFRS) has been growing. In an in-depth survey of 140 countries, we found 114 used the IFRS. This means for accountancy, there is a common language. In some ways, this is globalisation of the accountancy profession. So, people can move from country to country with the basic background of IFRS. It has been quite a revolution in 14 years. What drove it essentially was the globalisation of the markets. It became obvious you needed a common language for financial reporting, as everyone had a different financial reporting standard. We are very happy that India is joining in at this stage.
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The government announced it in its Budget last year and seems determined to achieve it this time - April 1, 2016. There has been a small hiccup with revenue recognition standard, as we delayed it by one year. So, they, too, have delayed it by one year. The Reserve Bank of India has put out a consultation paper for making banks compliant by 2018. The gap after that is of insurance companies.
We would have preferred a full adoption of IFRS. However, the carve-outs are much fewer than when they first started talking about it in 2011. We will keep working with India to narrow the gap. We think India has done a good job if it sticks to the road map.
The next challenge is to get companies organised. Europe introduced IFRS in 2005, and there have been two reviews since then. Companies are happy that it has lowered the cost of capital. Over the long term, Indian companies should also expect tangible benefits.
How long will it take for companies to start getting those benefits?
Generally, results start to come out after two years of applying the standards. It would be reasonable to expect the benefits would start to flow in around 2018. For foreign investors looking at India, it takes time to trust and understand the financial situation that companies are in.
One apprehension among corporates is that the cost of compliance will go up under the new regime.
There is a transition cost involved on adoption but I am not very sure if there is more cost on on-going basis. One complaint is that there will be many more disclosures, and that is a fair comment. We have a disclosure initiative where we try to look in a holistic way what disclosures we should have. We should have an objective for a disclosure. We often encounter these questions from companies, and even auditors. The other comments we get from investors and analysts who are always pushing us for more disclosures. So, we try and strike a balance.
We are looking at the whole principles of disclosure. That might result in us reviewing the existing disclosures across all standards. With each new standard, we are reviewing it after every three years to see if it is having the effect that we thought it would have. That is one time we take a look at disclosures.
We want India to be more involved in the standard-setting process. We will hold a conference (on the new standards) in February next year, and a trustee meeting in October. The trustee meeting would be a good occasion to emphasise the good work that India has done. It would be good time to spread the message that India's financial reports would be more in line with other countries' reports.
What challenges should Indian companies prepare for when they start transitioning?
The biggest question is where our standard setting is going to go. One of the challenges is how long will we keep coming out with new standards and changing things. Companies need some stability and certainty in what they are doing. In the past 14 years, we have had some very large standards, and we are coming to the end of them. Next we are looking at are leases, and that will change accounting quite a lot.
The US is still not on IFRS. Is there hope of getting them on board?
We continue to work with the US Financial Accounting Standards Board and have achieved a lot of convergence on revenue recognition, leasing, business combination and valuations. We did not get to a totally converged answer but a relatively converged one. They have a very strong board and they are the largest economy in the world, and have questions on sovereignty. We need to keep working with them. They do allow foreign listers to file using IFRS. There are 500 companies that file in the US using the full IFRS.