The convergence to IFRS

ACCOUNTANCY

In the history of civilisation, a time comes when an idea, a thought, or a concept catches the fancy of masses and spreads across the globe rapidly. Since 2005, we have been living in the midst of such a contagion "" the relentless march of IFRS, the International Financial Reporting Standards.

IFRS, in its present form, was implemented in January, 2005. Today, the EU, Australia, Hong Kong, China and the West Asia require publicly listed companies to be IFRS compliant. More than 100 countries mandate or permit IFRS, which is now rapidly becoming the common language of business.

The last bastion, the United States, has indicated acceptance of IFRS without reconciliation to US GAAP for foreign fillers by 2009 and is also considering usage of IFRS by US companies.

Today, it is no longer a question of 'Should India convert to IFRS?'. But rather, a question of 'By when would India fully convert to IFRS?'. The ICAI has tried to answer this with a Convergence Declaration for all Public Interest Entities from 1st April 2011 and that will be extended to other entities in a phased manner.

The Convergence declaration is a noble intention but its implications have not really been understood. A convergence by 1st April 2011 actually means that comparatives from 1st April 2010 have to necessarily be IFRS compliant; which in turn means that by the end of 2009-10 companies should have an IFRS closing Balance Sheet.

To enable Convergence, a large number of Acts require to be amended. For starters, the Companies Act, 1956 and the Banking Regulation Act, 1949 and each and every Act that has any pronouncement on accounting, Presentation, Measurement and Disclosure, requires to be brought in line with IFRS requirements, or better still, all provisions in the various Acts require to be jettisoned.

With IFRS, basic definitions will change. Preference Equity would become Loans; Dividends would become Interest; Hedge Accounting would arrive in all its glory and complexity; Embedded Derivatives would be discovered, prised out and valued; Business Combinations would be accounted for on fair-value Basis, unlike historical costs under Indian GAAP.

Further, companies would have to redefine their key performance indicators and redefine their distributable profits. Banks and lending institutions would require re-contracting covenants and milestones. Managerial and other remuneration and compensation benchmarks would have to be re-designed and IT & MIS systems would have to be re-designed to capture newly required information.

While revenue authorities would have to be re-oriented on the change in the basic accounting framework, Markets, Investors and Analysts would have to re-skill themselves.

The entire panoply of the Accounting Standards Board of ICAI, the National Advisory Committee on Accounting Standards (NACAS), SEBI's Committee on Disclosure and Accounting Standards (SCODA), RBI's pronouncements on revenue recognition, valuation etc. would have to be dismantled.

Companies in India have, of late, frequently resorted to the strategy of forwarding detailed schemes of accounting entries, which are not necessarily Indian GAAP compliant, to obtain a favourable judicial dispensation. Indian GAAP defers to judicial pronouncements on accounting matters, even though the recommended position might not be as per accounting standards.

This is because the preface to Accounting Standards itself states that legislative/judicial pronouncements are of higher hierarchy. However, this does not work in an IFRS scenario and any judicial pronouncement at variance with an IFRS pronouncement would render accounts non-IFRS compliant.

It is a matter of great concern that India's name does not figure on the list of more than 100 countries who have embraced IFRS. We have only made statements of intention to converge without having seriously thought through the issues, whereas an already IFRS compliant China would be laughing all the way to the bank!

The author is director, Ernst & Young India Pvt Ltd