Ministry of Corporate Affairs continues to demonstrate that it is committed to adhere to the road map issued earlier for the implementation of Indian Accounting Standards fully convergent with International Financial Reporting Standards (IFRS). It has notified 35 such accounting standards (Ind-AS) on February 25, 2011. It has issued revised schedule VI to the Companies Act, which is consistent with Ind-AS. The revised schedule VI is applicable from April 1, 2011.
However, in spite of the commitment of the Ministry of Corporate Affairs and extraordinary efforts put by ICAI and NACAS to finalise Ind-AS, India might fail meet its commitment to the international community. The web site of the Ministry of Corporate Affairs says, "The date of implementation will be notified later on." It has created confusion among companies, which were preparing to adopt the new set of accounting standards from April 1, 2011. They do not know which set of accounting standards (AS or Ind-AS) will be applicable in the preparation and presentation of financial statements for the first quarter ending on June 30, 2011.
The ostensible reason for the deferment of implementation of Ind-AS is that the Finance Ministry is yet to resolve income tax issues. Implementation will wait till the resolution of those issues. The issues are complex and the possibility of early solution is remote. It is likely that the revenue department will not use Ind-AS to compute taxable income. The logic is quite simple.
Subject to certain exceptions, the income tax law accepts GAAP (commercial accounting principles and methods) to calculate the taxable income. The GAAP, which is currently in use, is focused on transactions and uses historical cost, with some exceptions like valuation of inventories. Therefore, the figures in financial statements are easily verifiable.
The income tax authority is comfortable in using those principles and methods for computing the taxable income. Figures in the profit and loss account, which are estimates based on management's perspective on the economic implications of external and internal environments are usually excluded in computing the taxable income.
For example, impairment loss and provision for doubtful debts are not allowed as deductions in computing taxable income. Similarly income tax law provides methods and rates for calculating depreciation on fixed assets and does not accept the depreciation calculated by companies using the estimated useful life and residual value. The income tax authority will be uncomfortable in using principles and methods stipulated in Ind-AS because it uses fair value measurement more extensively than the use of same in current GAAP.
Fair value, even if estimated based on observable prices in an active market, is a perception. It is a general belief that the preparers of financial statements can manipulate the fair value. Companies are uncomfortable in including change in fair value for calculating MAT because, in a way, income or loss arising from the change in fair value is notional; and it has no impact on current cash flows to the company. Both the income tax authority and companies are uncomfortable with some other accounting principles and methods stipulated in Ind-AS.
One view is that Ind-AS should be applied to prepare and present consolidated financial statements. The argument is that income tax is assessed for individual companies and not at the group level and therefore, income tax will be assessed based on separate financial statements prepared by individual companies using the current GAAP.
It might be true that the best solution at this point is to use current GAAP in computing taxable income. But that should not lead to another decision that Ind-AS should be used only to prepare and present consolidated financial statements.
If subsidiaries are permitted to use current GAAP, it will hurt the interest of non-controlling shareholders in those companies. Ind-AS requires companies to record transactions based on their economic implications and not on the basis of their form. It also requires disclosure of information, which companies do not disclose today. The suggested solution will not reduce the cost of preparing two sets of financial statements by subsidiaries.
This is so because in order to prepare consolidated financial statements using Ind-AS will require all group companies to prepare separate financial statements, which will be used for consolidation, using Ind-AS. All stakeholders will be benefitted if Finance Ministry takes a view on use of Ind-AS early.
