Total convergence to IFRS by 2011

Starting from the accounting period commencing on or after April 1, 2011, all listed companies and enterprises in which public fund is invested will be required to prepare and present financial statements using the accounting principles and methods stipulated in International Financial Reporting Standards (IFRS). The decision by the Council of the Institute of Chartered Accountants of India (ICAI)has not come as a surprise. Most recent accounting standards deviate very little from the corresponding IFRSs. Therefore, the trend towards convergence was established firmly before the Council's decision.

The decision of the Council is right. Perhaps, there was no alternative. Countries all over the world including the European Union and the US are moving towards total convergence with IFRS. The International Accounting Standards Board (IASB) issues IFRS. Till now 102 countries have adopted IFRS.

In a related development, the US Securities and Exchange Commission (SEC), in its meeting held on the 27 July this year, proposed to allow the US companies to choose between (IFRS) and the US Generally Accepted Accounting Principles (GAAP) for the preparation and presentation of financial statements. The SEC will issue the proposal for public comments. This step signifies that in the near future, there will be near total convergence between the IFRS and the US GAAP.

In June 1973, the International Accounting Standards Committee (IASC) was formed as an independent private-sector body through an agreement made by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland and the USA. Since 1983, the IASC's members have included all the professional accountancy bodies that were members of the International Federation of Accountants (IFAC). The objective of IASC was to formulate and publish International Accounting Standards (IAS).

In 2001, the IASC was dissolved and the IASB was formed. The IASB structure has the following main features: the IASC Foundation is an independent organisation having two main bodies, the trustees and the IASB, as well as a Standard Advisory Council and the International Financial Reporting Interpretation Committee. The IASB has the sole responsibility for setting accounting standards.

These days, because of globalisation the companies which traditionally relied on financial institutions and domestic capital markets for financing, have access to equity capital outside their national boundaries. However, the world of financial reporting has been slow to respond. Movement towards total convergence of accounting practices in different countries has gained momentum only in last five years. The impetus came from the European Union (EU) which, in June 2002, announced that it would present proposals to introduce the requirement that all listed EU companies report in accordance with IAS by 2005.

The IASB and the Financial Accounting Standards Board (FASB) of US has now largely aligned their agendas to the extent that most major projects""such as business combinations, income taxes, revenue recognition and employee benefits accounting ""are now undertaken jointly. As a result, today there are essentially only two global-scale systems of financial reporting""IFRS and US GAAP.

Total convergence of Indian GAAP with IFRS will bring fundamental changes in some areas such as the preparation and presentation of consolidated financial statements, accounting for mergers and acquisitions, accounting for intangible assets with indefinite useful life such as product brand, accounting for goodwill, and accounting for provisions. For example, although, the principles for consolidation in the AS is same as those stipulated in IFRS, unlike IFRS, the AS does not require incorporation of the assets of the subsidiaries in the combined balance sheet at the fair value of those assets at the dates of acquisition of shares in the subsidiary. Similarly, while IFRS recognises the excess of the fair value of assets acquired over the purchase consideration as negative goodwill (bargain profit), AS recognises it as capital reserve. Adoption of IFRS will improve disclosures in financial statements, because IFRSs require much more disclosures than what is required by ASs.

It is unlikely that the valuation of companies will be affected by change in the accounting policy. Empirical researches show that valuation does not depend on the accounting policy of the company provided there is adequate disclosure.

Companies should welcome this change as it will enhance the credibility of their financial statements and will provide easy access to foreign capital.

ICAI should lend support to the University Grants Commission (UGC) to restructure the accounting curriculum and to prepare the course material. ICAI has taken a bold step. It will be very difficult to reverse the decision. It is necessary for ICAI to create awareness among all stakeholders about the kind of challenges that are likely to arise. For example, IFRS is moving towards full fair value accounting of financial instruments, including liabilities.

ICAI should work to improve the comfort level of the accounting profession in accepting fair value accounting of financial instruments. Comfort level will come only when an average member of the profession will appreciate and understand the underlying issues. This can be achieved only by strengthening the continuing professional education (CPE). Moreover, ICAI should proactively contribute to the formulation of IFRS.