(Contd) Part ll:Convergence of global reporting standards – is it a desirable proposition for India?
by Anoop Poonia
Category Banking and Finance


Thus the convergence with the global accounting standards is a noble intention, but it has far reaching implications too, which need to be understood before moving ahead. First of all when the timeline for the adoption of IFRS was announced, the government encouraged Indian corporate to voluntarily adopt and publish it ahead of time. A convergence by 1st April 2011 implies that the comparatives from 1st April 2010 will necessarily have to be IFRS compliant, which is not the case as no company has prepared IFRS closing Balance Sheet for the year ended March 2010.

Thus there would be no basis for an inter-period comparison because the numbers that would emerge after compliance to IFRS would be based on different accounting principles as compared to the Indian GAAP. In order to make sense out of the numbers and make comparison it is necessary that same accounting standards are applied from year to year.

Besides our country would need IFRS trained professionals for which the Institute of Chartered Accountants of India (ICAI) would need to impart special training to its students and existing members alike. We do not even have a set of trainers who can conduct such training across the nation. The demand supply is so skewed that everyone seems to be conducting some training program for IFRS with the sole exception of the ICAI. Many members feel, the ICAI lacks the necessary in-house expertise to prepare an original document on this subject, why give an assurance to the nation about implementing IFRS within the next couple of years?

The primary consumers of the financial reporting are the small investors who even now find it virtually impossible to decipher the annual financial statements. Now IFRS will usher in a brand new paradigm wherein such small investors will have to unlearn their understanding of financial reporting practiced till date in India. In direct contrast, the entire exercise of converging to IFRS could well benefit the FIIs and large investors. What is galling is that the Indian household i.e. small investors contribute approximately 80 per cent of the total domestic savings in India which stands at a healthy 37-39 per cent of GDP with a corresponding impressive domestic investment rate. It will indeed be unfortunate that policy in India is tweaked to favor the foreign 2 per cent vis-à-vis the domestic 37 per cent. 

Coming to the technical aspects of IFRS we will see that the concept of mark-to-market which is at the core of the entire IFRS regime — is being debated in the very country of its origin. Crucially, it is seen as one that exaggerates boom in a bull run and exacerbates gloom during a bear run. In the process, IFRS, it is argued, accentuates the volatility in the markets and thereby ends up actually driving capital away from markets.

Also in India the accounting related requirements are issued not only by the ICAI, but also by various other regulatory bodies, such as SEBI (Securities and Exchange Board of India), RBI (Reserve Bank of India) and IRDA. Now all these bodies will have an additional headache of not only being consistent with each other but also with the IFRS.

The issues to be addressed don’t stop here, to affect this convergence a large number of acts will also have to be amended. For starters, the Companies Act 1956 and the Banking Regulation Act 1949 and each and every act that has any provisions related to Accounting, Presentation, Measurement and Disclosure, will have to be brought in line with the IFRS requirements.

There are more implementation related problems because of conflicting regulatory framework and divergent view of the national standard-setter on many accounting issues. For example, current investments are valued at lower of the cost or fair value under Indian Accounting Standards 13 (IAS 13).After implementation of IFRS, they are to be calculated at fair value only.

Time lag in adopting a new accounting approach is very high in India although all Indian accounting standards are based on the IAS/IFRS. Improvement in the presentation of financial statements has been delayed because of regulatory framework. There is resistance to deregulate the format of the financial statements.

Also India does not have national standards on investment property, agriculture, share-based payment, non-current assets held for sale, etc. Existing standards are not updated. It was the responsibility of national standard-setter to replace the orthodox investment accounting standard in a timely manner which is another extreme of the application of historical costs ignoring the available fair market value of a financial asset. As a result, almost all Indian standards have become divergent over the years. Given the proposition of converged set of accounting standards, the situation will not improve. The converged set of standards will become divergent in no time given the adaptation time lag in India.

Despite so many odds in implementing IFRS in India and post implementation challenges, we cannot deny the fact that common accounting system is the need of the financial world to bring a stable, transparent system which is fair to investors across the world, whether local or foreign. As per India, the economic growth rate will get a positive boost with more foreign investment attracted to Indian Economy. We may see a surge of Mergers and Takeover activities within IFRS compatible countries including India. A well thought off plan with planning in advance by the companies of India with collaboration and support provided by the regulatory authorities will definitely make the transition successful.



Wiley IFRS Interpretation and Application of International Financial Reporting Standards , Barry J. Epstein and Eva K.  Jermakowicz , 2008