We need all stakeholders - industry, ICAI, government, RBI, SEBI, tax authorities - to engage in the transition to IFRS.
The Asian Crisis in the 1990s made the world sit up and recognise the need for corporate governance as a mechanism to safeguard investments in public enterprises and heightened the importance of having a global Generally Accepted Accounting Principles (GAAP) for comparability and transparency of financial information across continents. The US accounting scandals of Enron, Worldcom, Adelphia or the European scandals of Ahold or Parmalat enforced the view that a framework of governance and global GAAP needs to emerge to safeguard capital in companies, which in the digital age is without the protection of political or physical borders.
David Tweedie, the Chairman of International Accounting Standards Board said in the Europe Club of Canada on 25 April 2008 that: “In the midst of the Asian financial crisis, several companies whose financial statements seemed to indicate that they were secure, suddenly went bankrupt casting great doubt on the veracity of the statements and in particular the national accounting standards in use. While it is important not to overstate the role of accounting standards and practices in precipitating the Asian financial crisis, it is clear that confidence in financial reporting practices in that region disappeared.”
“As a consequence, financing, much of it short term in nature and not subject to any capital controls, was withdrawn. Interest rates rose, investment ground to a halt, and an economic slowdown followed. In the aftermath of the crisis, it was unlikely that confidence in the existing or any revised national standards could be restored rapidly, indeed, if ever. The obvious choice was to move to an internationally accepted set of standards.”
Since 2001, the mission given to IASB was to create a single set of principles-based global financial reporting standards that are used throughout the world’s capital markets. The overriding principle is that irrespective of the country of origin of a transaction, whether in New York, New Delhi, or London, the accounting should provide a consistent answer to the same economic transaction.”
The Institute of Chartered Accountants of India, National Committee of Accounting Standards and the government of India have affirmed that India will transition into International Financial Reporting Standards (IFRS) as the accounting principles for the country from April 1, 2011. Entities which are either listed companies or companies filing for a listing or companies having over a threshold of sales of 100 crore or public debt of over 25 crore are covered by the first wave. These are called public interest entities. The small and medium enterprises (SMEs) will be covered at a later date which is yet to be decided.
The dilemma — incremental or big bang approach?
Nations around the world are faced with the dilemma of whether their national accounting standards should be aligned to IFRS or take the big bang approach of adopting IFRS as written by IASB and follow standards that are globally applied irrespective of the economic environment.
In India, a debate is raging amongst various stakeholders, including the government whether we should converge or adopt IFRS. While the former would mean that we amend and modify IFRS standards to be relevant to India, the latter would mean that we adopt IFRS standards as they are written by IASB to be the accounting language of India. ICAI in their decision paper on convergence has stated, “Convergence with IFRS — all at one approach — that IFRS will be adopted for public interest entities for accounting periods starting on or after 2011”. But doubts are now arising due to differing views of various stakeholders on how the roadmap to 2011 will be drawn.
IFRS with modifications by various countries would result in multiple and possibly conflicting versions of IFRSs globally. A misplaced sense of national pride or intense pressure from industries make countries amend or alter IFRS principles to suit the national requirements. This becomes IFRS as applied by a specific country as opposed to IFRS as issued by IASB. This would defeat the purpose of global convergence, which is to move toward a single set of high-quality accounting standards for use throughout the world. This rationale is reflected in the US Securities and Exchange Commission’s (SEC) announcement of the elimination of the requirement for foreign private issuers to reconcile their IFRS financial statements to US GAAP. The SEC has stated that the reconciliation requirement is being dispensed with only for financial statements prepared using IFRSs as issued by the IASB so as “to encourage the development of IFRS as a uniform global standard, not a divergent set of standards applied differently in every nation”.
We have this wonderful opportunity to move into a globally acceptable financial principles, which is considered comprehensive and followed by over 120 countries in the world. By 2011, IFRS is expected to be followed by 150 countries. How can we call ourselves a global power and not adopt global standards as our own? In due time, by virtue of India’s economic, intellectual and geo-political weight, we will be a principal player in formulating these standards.
Way forward
The roadmap to 2011 needs to be comprehensive as it has been detailed in the ICAI’s concept paper on convergence with IFRS in India. Out of the 38 effective IFRS standards, there are only 2 standards in India that have no difference with IFRS and six have minor differences. Eighteen standards of IFRS will need a level of technical preparedness by the industry and the professionals for implementation or would have conceptual differences with the Indian standards. Ten standards need changes in laws and regulations for them to comply with the principles of IFRS. The effort to harmonise is still huge as there has to be a consensus amongst the various stakeholders including the government as some of the provisions of the Companies Act or other Acts like the RBI Act etc, need to be amended for compliance with IFRS principles.
The tax laws, companies law and other laws for specialised industries including banking, insurance etc, need to be reviewed to determine the differences with IFRS as we currently apply them and mechanism to deal with them on convergence. Though IFRS has been written with the intention of global application, we would also need to evaluate whether under the Indian economic environment, application of any specific IFRS principle would make our industries vulnerable to the results and if there is a compelling reason that such applications will be inappropriate in India. Such deviations should be few and rare.
There is still a long road ahead. We need all the stakeholders — the industry, ICAI, government, RBI, SEBI, tax authorities and other regulators to engage in the transition process to IFRS. The debate we need to engage is to holistically review if any application is inappropriate for India and address such issues in the transition provisions including those relating to first time adoption. The thought behind actions needs to be clearly articulated and debated.
We have some time ahead and can meet the deadline of 2011 but clarity of thought and speed of action would be of essence.
The author is national leader IFRS practice, PricewaterhouseCoopers
