Convergence of global reporting standards – is it a desirable proposition for India?(IIFT Magazine)

by Anoop Poonia on Monday 7 February 2011, 1:35 AM | Category: Banking and Finance| View: 1922 views

 *This article was featured in the January edition of the finace Magazine-Infineeti- of Indian Institute of Foreign Trade.*

Convergence of global reporting standards – is it a desirable proposition for India?

As the business environment is becoming increasingly global and companies are listing themselves in stock exchanges of various countries, the need for a common platform and framework for understanding and reporting of accounts is increasing.

Looking at a broader picture, bringing about a convergence to the International Financial Reporting Standards or IFRS by various group entities will enable the management to bring all the components of the group on a common financial reporting platform. This will eliminate the need for multiple reports and significant changes and filing of financial statements in different stock exchanges. Thus it also reduces the cost by cutting down on the operational time and human resources. But IFRS does not improve upon the existing financial reporting quality and it is not easy to bring about the convergence. More importantly, it does not yet completely solve the problem of creating a common platform for reporting. Most countries reserve the right to carve out selectively or modify standards they do not consider in their national interest, an action that could lead to incomparability — the very issue that IFRS seeks to address. Also there is still a lot of space left for subjective interpretation given its principle-based roots. This in turn leads to an unwanted increase on management decision.

We often hear nowadays that India is becoming an economic superpower: economic power is shifting to Asia, with countries like India and China leading the global growth. While the western economies have created a structural mess around their economies and are struggling for growth, countries like India and China are growing between 8-10% annually. If India has to find its rightful place in the world, it should shed its inhibitions and act with confidence in taking on the world.

India should be at the forefront of adopting IFRS and shaping the global debate on the standard setting process; it should forcefully participate in the global accounting standard setting process. IFRS is also a global opportunity for India on the accounting services front. It is a great opportunity for Indian accountants to service the external world. India, with its massive workforce, can become the accounting hub for the world by recreating the magic created by the IT industry.

With the IFRS implementation timeline set for April 2011, we would see, nearly 1500 companies(Companies with net worth between Rs 500 Cr to Rs. 1000 Cr) in India moving to a different way of writing accounts, as per IFRS;  junking the age old Indian Generally accepted Accounting Practices i.e. the Indian GAAP. The conversion from Indian GAAP to IFRS will impact all stakeholders, be it corporate preparers, audit committee and board members, auditors, regulators, investors, analysts and even the public at large.

Corporate preparers would need to understand the impact of the change in accounting principles on their financial statements, financial reporting processes and IT systems. Audit committee and Board members would also need to understand the new reporting principles. Similarly, investors and analysts would need to understand the impact of the new reporting principles on key metrics such as revenues, net profits, earnings per share and reported book value, which have an impact on how businesses are valued.

If so much will have to change, then why did the Government decide on getting IFRS into India? Some pros of the system that the Government had in mind are as follows:

  • Implementation of a single set of accounting standards internationally would enable standardization and better quality.
  • It would also permit international capital to flow more freely and lowering of the cost of capital as there will be a reduction of perceived accounting risk. Accounting risk refers to the risk in investing that derives from difficulties in understanding the accounting principles being applied by the reporting entity, and the possibility that financial reporting standards may not be uniformly adhered to.
  • It would be beneficial to regulators too, as the complexity associated with understanding various reporting regimes would be reduced.
  • For investors, it will help to understand opportunities better as it will enhance understanding of the financial statements and aid better assessment of the investment opportunities available outside their home countries. Large public companies with subsidiaries in multiple jurisdictions would be able to use one accounting language company-wide and present their financial statements in the same language as their competitors. Interestingly, 90 per cent of the respondents to an International Federation of Accountants(IFAC) survey in 2007 said IFRS adoption is very important for economic growth
  • It benefits the accounting professionals such that they will be able to sell their services in different parts of the world. Come 2014, the US will align its accounting practices with the International Financial Reporting Standards (IFRS). Over 100 countries mandate that companies operating on their soil conduct financial reporting in accordance with IFRS. India is to get on to the IFRS regime in a phased manner beginning next year. This gives Indians a huge business opportunity. Vast number of companies in the US in itself gives birth to a need for outsourcing work related to the migration to IFRS. The US does not have enough resources to migrate to IFRS on its own. A large chunk of work will come to India. Even after the migration exercise is over, Indian BPOs would enjoy business opportunities in terms of “lot of bookkeeping work”. India could become the “accounting hub” of the world.

Thus from this perspective convergence with IFRS makes sense. And India is not alone in this; countries of the European Union, Australia, Russia and New Zealand have already adopted IFRS for listed enterprises. China has adopted IFRS since 2008 and countries such as Canada and North Korea have a timeline 0f 2011, similar to that of India for IFRS implementation.

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