Recently, the auditor’s comments on the financial statement of an aviation company drew a lot of media attention. Two issues were highlighted. First, regarding an accounting policy that apparently is not consistent with the extant Indian accounting standards (AS). The second related to the auditor’s comments on the ‘going concern’ status of the company. The media rushed to the judgement that the deviation from AS was an attempt at earnings management, and that the auditor’s comment on ‘going concern’ cast doubts on the long-term survival of the company. As it turns out, this media frenzy ignored some of the realities of the accounting environment in India.
In 2006, India decided to converge its accounting standards with IFRS effective from April 1, 2011. This created a lot of enthusiasm among companies. They started preparing for the transition to IFRS. As a result, accountants and auditors are now more exposed to accounting principles and methods stipulated in IFRS. However, for various reasons, the time-line for convergence set by the government could not be achieved. Instead, while government did notify Ind AS, a set of accounting standards fully converged with IFRS, it has yet not notified the date for transition to this set of standards. The decision to defer implement Ind AS is the right decision, as a radical change in accounting practice should not be brought in hurriedly. But this has created an awkward situation.
Accounting standards notified by the Ministry of Corporate Affairs (MCA) is the law of the land. Therefore, accounting policy of companies should be in conformity with accounting standards applicable at the date of the preparation and presentation of financial statements. Most accountants and auditors hold the view that Indian Companies Act does not provide for ‘true and fair override’. Consequently, any deviation attracts audit qualification. Extant Indian accounting standards (AS) are based on earlier versions of IFRS. But since then the two have diverged. Accounting standards evolve. They are revised from time to time. For example, they are revised when standard setters and users find the existing accounting principles inappropriate in a changed environment or when new types of transactions have emerged, or when the cost of applying the most appropriate accounting principles and methods has been reduced due to stabilization of economic models or due to the improvements in accounting and finance skills of members of the accounting and auditing profession. Therefore, it may not be incorrect to say that accounting principles and methods stipulated in revised IFRSs are superior to those stipulated in earlier versions of IFRSs on which the ASs are based. In some situations, application of current IFRS improves the presentation of financial statements. As a result companies prefer to apply IFRS even at the risk of attracting audit qualification.
In the case of the aviation company, it capitalises the cost of maintenance and overhauling aircrafts-which is substantial-and depreciates it over the time till the next maintenance and overhauling falls due. This is the requirement under IFRS and a practice which is followed globally. Although AS allows this accounting practice, it is not articulated very clearly. As a result, generally accepted accounting practice in India is to charge the expenditure in the profit and loss account for the year in which the expenditure is incurred. This accounting practice does not distort the’true and fair view’ for companies for which such cost is low. But, this distorts the true and fair view of performance of an airline. Therefore, the adoption of IFRS is justified. In this case it is not appropriate to jump to the conclusion that deviation from current accounting practice was aimed at earnings management.
Companies disclose the accounting policy clearly and apply the same consistently from year to year. A mature capital market forms its own view when the company reports its accounting policy transparently. Market views ‘cherry picking’ by companies adversely. For example, if a company applies IFRS only where it suits the management and applies AS to other transactions, the market will penalize the company. The best practice would be to apply the compete set of a particular accounting standards to prepare and present financial statements. For example, a company should apply either IFRS or AS to all the transactions and other events. At present the law does not permit the use of IFRS. The Companies Bill under consideration allows a company to apply either IFRS or Indian Accounting Standards. Enactment of this Bill will hopefully release Indian accountants from the dilemma of choosing between correct accounting and compliance with the letter of the law.
We shall discuss the e issue of ‘going concern’ in the next column.
Asish K Bhattacharyya E-mail: asish.bhattacharyya@gmail.com
Affiliation: The Director, International Management Institute - Kolkata
