Thursday, September 9, 2010

w w w. f i n a n c i a l e x p re s s . c o m

Making the most of IFRS

India should be at the forefront of adopting IFRS and shaping the global debate on new accounting standards. Its interest doesnt really lie in taking the convergence route instead
V BALAKRISHNAN
NTERNATIONAL Financial Reporting Standards (IFRS) is fast becoming the de facto accounting standard across the world. The adoption of IFRS would result in one set of high-quality, globally accepted accounting standards that would bring uniformity in reporting and make the world one common market place. Different countries had taken different paths towards adopting IFRS. Some of the countries have gone for full-fledged adoption of IFRS while some others, including India, had taken the path of convergence rather than adoption. There are varied views on adoption vs convergence. Some are of the view that adoption is the only way to achieve the goal of gettingtoasinglesetof high-quality, globally accepted accounting standards. The world is becoming one single market and adoption wouldresultinreducedreporting costs for multinational companies, better comparability of performance of companies across the world and improved allocation of capital by global investors.Theotherpointof view supports convergence, arguing that adoption of IFRS would result in countries giving up significant control of the standard setting process. The argument further goes that convergence, over a period of time, will help corporates in concerned countries to have a soft landing, while adopting certain standards in IFRScouldputtheircompaniesin a disadvantageous position. India had taken the route of convergence to IFRS by 2011. There is a clear road map for companies to converge, with the set of converged standards to be issued by the domestic accounting standard setters. While the government has taken this view and is movingtowardsitwithaplan,itis important to debate whether this is the right thing to do for India. We often hear nowadays that India is becoming an economic superpower: economic power is shifting to Asia, with countries like India and China leading theglobalgrowth.Whilethe western economies have created a structural mess around their economies and are struggling for growth, countries like India and Chinaaregrowingbetween8-10% annually . Some of the economists are predicting that this is going to be the decade of Asia and, finally , countries like India are finding their rightful place in the global investors in adopting IFRS outweigh those of converging. As a country , we should be at the forefront of adopting such a global change and lead that change.Wecantdreamof becoming an economic superpower by living in isolation. The other thing that the government has not done right is with reference to the date of adoptionof IFRSbyIndiancompanies. When the timeline for the adoptionof IFRSwasannounced, the government encouraged Indian corporates to voluntarily adopt IFRS and publish it ahead of time. The Securities and Exchange Board of India had amended the listing agreement to enable corporates to voluntarily publish their IFRS numbers. Encouraged by this, some of the companieswentaheadandadopted IFRS as issued by IASB and started publishing their financials as per IFRS. The US Securities and Exchange Commission also allowed foreign filers to voluntarily adopt IFRS as issued by IASB as there is a convergence programme happening between IFRS and US GAAP . But the current rules of the convergence programme in India insistonatransitiondateof April 1, 2010, for all corporates irrespective of whether they have earlier adopted IFRS voluntarily or not. This means that even though companies in India have adopted and published IFRS numbers

Reflect 9

ROHNIT PHORE

economic map. While India has a long way to go to become an economic superpower, considering its massive corruption and pathetic social indicators, the country is getting its rightful attention in the world because of its super growth. 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 account-

ing standard setting process. Whether we like it or not, global investors will look down on India forhavingconvergedwithIFRSin contrast to countries that adopt IFRS fully . 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 . But, will our accounting professionals have the same opportunity if India

converges with IFRS rather than adopting IFRS? I am not sure. Also, the cost of capital for Indian corporates will remain high as global investors would attach a risk premium as Indian corporates would have converged and not adopted IFRS fully . Finally, this would affect Indian corporates in their globalisation process as it would become more onerous for them to list in global equity markets. I think there is a case for India to go for full adoption of IFRS rather than convergence. The benefits for both corporates and

earlier,withadifferenttransition date (based on the encouragement from the regulators to adopt early), they need to again publish a first set of IFRS financial statementsasif theirtransitiondateis April 1, 2010. This will create an issue for corporateswhohadadoptedIFRS early . When a company adopts IFRSataparticularpoint,itneeds to take certain positions on treatment of goodwill, stock option expense, etc. However, insisting that corporates publish IFRS financials again, with a transition date of April 1, 2010, will totally defeat the purpose and would result in two sets of IFRS financials with no incremental benefit to investors. This will only create more confusion and is not in the best interest of any of the stakeholders. If the government is keen on the transition date of April 1, 2010, why did it encourage corporates to early adopt IFRS? I think the government should takeamoreliberalviewandallow corporateswhohadearlyadopted IFRS to continue publishing those numbers without the need for re-adoption with reference to thetransitiondateof April1,2010, unless the impact is significant. This will ensure continuity and would allow such companies who had early adopted IFRS a smooth transition to a new regime. The author is the chief financial officer of Infosys Technologies Ltd

Subprime monster lives on

The US Congress and President remain reluctant to fix broken underwriting, which demands upping what home buyers pay up front
of 50% down. Congress should apply the same principle to housing purchases, increasing the amount a buyer must put down and other safeguards to assure prudent lending. Congress refuses to do this. Why? Giving citizens cheap, easy housing is a great way to win votes, no matter what horrific repercussions ensue. Whos following whom? Considertheprevailingnarrativethat holds a greed-driven private sector responsible for the 2008 financial crisis. A secondary narrative points to a greed-driven Fannie Mae and Freddie Mac abandoning their credit standardsinanefforttofollowthelead of Wall Street. If these explanations fail to convince, a third blames a combination of deregulationandinsufficientregulation, again driven by greed, as rulemakers were asleep at their posts. What is missing is the central role played by an affordable housing policy built upon the misguided concept of loosened underwritinga policy created by Congress and implemented for 15 years by the Department of Housing and Urban Development and banking regulators. From 1993 onwards, regulators worked with weakened lending policies as mandated by Congress. These policies systematically dismantled a housing-finance system based on the common sense principles of adequate down payments, good credit, and an ability to handle the mortgage debt. Substitutedwasascamof liberalised lending standards that turnedouttobenostandardsatall. In 1990, one in 200 home-purchase loans (all government insured) hadadownpaymentof lessthanor equal to 3%. By 2003, one in seven home buyers had such a low down payment, and by 2006 about one in three put no money down. These policiesledmillionsof Americans tobuyhomeswithlittleornomoney down, impaired credit and insufficient income. As a result, our economy has been brought down and the taxpayers have had to foot the bill for bailout after bailout. Congress and US President Barack Obamas administration refuse to learn the lesson that is painfully aware to American taxpayers, and they have made it clear that they have no intention of fixing broken underwriting. Lets start with the latest pieces of evidence. The Dodd-Frank Bill, signed in July 2010 by the president, omitted both an adequate down payment and a good credit history from the list of criteria indicating a lower risk of default as regulators sought to define a qualified residential mortgage. This was no oversight. Republican Senator Robert Corker and others proposed an amendment that wouldhave addedbothaminimum down-payment requirement and consideration of credit history along with the establishment by regulators of a prudent underwriting standard. This amendment was defeated. In early September 2010, Fannie and Freddies regulator, the FederalHousingFinanceAgency , following requirements set out in 2008byCongress,finalisedaffordable housing mandates that are likely to prove more risky than those that led to Fannie and Freddies taxpayer bailout. As required by Congress, these new goals almost exclusively relate to verylow-andlow-incomeborrowers. Meeting these goals will necessitate a return to dangerous minimal down-payment lending, along with other imprudent lending standards. Of course, FHFA Director Edward DeMarco notes that Fannie and Freddie arent to undertake risky lending to meet these goals. As has already been noted, Congress doesnt consider low down payments and poor credit as indicative of risky lending. How convenient. The Federal Housing Administration, in its actuarial study released late last year, projected that it will return to an average FICO creditscoreof 635by2013.Thissignals the FHAs intention to return to subprime lending. Once again, Dodd-Frank supports this policy change. The FHA, the Veterans Affairs Department and the Agriculture Departments grip on the home-purchase market increases month by month. They now guarantee more than half of all homepurchase loans. However, skin in the game isnt a requirement. For example, the FHAs average down paymentisjust4%.Eventhismeagre amount disappears after adjusting for seller concessions and financed insurance premiums. On Christmas Eve in 2009, the Treasury department announced new terms to the bailouts of FannieandFreddie.StartingonJanuary1,2013,thetermsof thebailout agreement provide for a continuing obligation to provide about $274 billion in capital to Fannie and Freddie. This amount is in addition to the unlimited sums that areavailablebetweennowandDecember 31, 2012. As a result, one or bothof theseentitiescannowcontinue indefinitely as zombie institutions under conservatorship. As a society , we have to go back to at least 20% down, with limited exceptions. Credit histories need to be solid. Documentation has to be iron-clad. Lender capital levels need to be raised. Heres my proposal to bring Congresss penchant for imprudent lending to a quick end: All congressional pension assets should be invested infundsbackedsolelybythehighrisk loans mandated by federal housing legislation. I have a feeling that things would change fast. The author is a mortgage-finance consultant. He was the executive vice president and chief credit officer at Fannie Mae from 1987-89 Bloomberg

EDWARD PINTO

N THE second anniversaryof thebailoutsof Fannie Mae and Freddie Mac, itsnowobviousthatweaklending standards, serving the political interest of affordable housing for all, were the main reason for the nations mortgage meltdown. But the government just cant permit lendingtoanyoneandeveryone;it mustinsistonprudentjudgement about who will repay and who will default. Not only will borrowers who lack a down payment, steady income, employment and a good credit history probably get into troublesurprise!buttoomuch irresponsiblelendingalsocreates artificial demand for houses, driving prices into the stratosphere and, as we have just experienced, puts all homeowners at risk. The same mistake occurred in 1929,whenanyinvestorcouldbuy stocks on margin with as little as 10% down. Small wonder that after the crash the US government instituted a margin requirement

How Indian airlines took off

beingmarginalplayersinthe markettooccupyadominant space,withtheirshareof passengertrafficovertakingthe fullserviceairlines.TheDGCA of Indiaalsodidawaywithprice controlof tickets.Aliberalised domesticmarketofferedflexible pricingof tickets.Sinceairline seatsbecameperishablelike vegetables,ticketpricesstarted varyingfromdaytodayandhour tohour.Internetsaleshelped. Thisbroughtinasocial revolutionthatwassecondonly tothetelecomonewherein cheapcellularphonesbecamea socialandbusinessnecessity intermsof impact.Withairline ticketshittingbottom,the middleclassdiscoverednew freedomstotravelforbusiness andpleasurebyair.Theprofileof airtravellerswastransformed. Anexperiencelargelyrestricted togovernmentandcorporate travellersopenedouttostudents, housewives,self-employedsmall andmediumentrepreneurs. Newdemographicswerewon overbyLCCscharms. Thenextadvancetookplaceat thestartof thiscentury,when privateairlineswerepermitted toflyabroadalbeitwiththe unnecessaryconditionthatit wouldtakedomesticairlinesfive yearstoqualifyforforeign operations.Nonetheless,Indian airlinesarenowbeginningto competewiththebestinthe world.Meanwhile,ourairports wereinashabbyconditionand neededalotof improvement. Keralatooktheleadin2000, comingupwithabrandnew airportinCochin.Hyderabad andBangalorefollowedsuit. Thiswasfollowedbythe modernisationof Delhiand Mumbaiairportsthroughlongtermconcessions. Nowthatwehaveareasonably moderncivilaviation infrastructureinplacewith largedomestictrafficandgood internationalconnectivity whatshouldbeournextstep?To me,theobviousansweristo createaninternationalhubin India.Whatexactlyisahub?A hubisaplacewherealarge numberof airlinesmeetfrom differentdestinationsand exchangepassengers.Indiais well-locatedinAsia,connecting EuropewithFar-Eastand Australia.Unfortunately,since wedidnothavegoodairportsnor didweencouragealiberalpolicy towardsbilateralairservice agreements(exceptinthelast fewyears),wemissedthe opportunitythatSingaporeand Dubaiexploitedtoemergeaskey hubsinourregion(although theirowndomestictrafficwas negligible).Weneedtocorrect thismistake.Howcanwedevelop ahub?Ahubrequiresagood, friendlyairportwherewaiting andflighttransfersare facilitatedinacomfortable fashion.Italsorequiresthecity whereitislocatedtobeservice efficientandtouristfriendly . Post-CommonwealthGames,it ishopedthatDelhiwillshow theseattributes.TheHeathrow airportinLondonhascomeupas amajorhubasitdevelopedintoa greatpointof interchange withtheairportproviding modernfacilitiesevenasthecity of Londonprovidesagoodspace forabreak.IntheEast, Singaporedevelopedasahub afteritsplitwithMalaysia.First, itdevelopedanairlineandthen ahub.Similarly,Dubaidecided tofirstdevelopanairlineand thenanairport. InIndia,withthenewT3 terminalinDelhi,thereisscope fordevelopingahub.TheDelhi airporthastwoparallelrunways thatprovidegrowthpotential anditisthebusiestairportin India.Unfortunately,the existingMumbaiairportcannot growduetolimitationsof land, andthefateof asecondairportis inalimbo,thankstoJairam Ramesh.Itisnowtimeforthe governmenttotakeaconcerted decisiontodevelopan internationalhubinDelhi.For this,itwillhavetoencourage moreflightsintoDelhieven thoughourownairlinesmay seektoguardtheirturf.Wealso needtoencouragebigger aircraftlikeAirbus380tolandin Delhitocreatethecriticalmass requiredtocreateahuband competewiththelikesof SingaporeandDubai.The creationof ahubrequiresagood airport(whichwenowhave)and flightscominginfromall directions,withbothdomestic andinternationalconnectivity . Theadvantagesof developinga hub wouldbemany .Forexample, ahubprovidesanincreasein localisedtourismandovernight stays;itprovidesanincentiveto dobusinessintheregion. However,thestategovernmentof Delhineedstoplayamore proactiveroleinairporthub development,asitwillenhance thecitysbrandvaluerather thanjustsittingbackandtaking undeservedcredit. Theauthorischairmanof theInternationalFoundation forAviationandDevelopment (Indiachapter)

SANAT KAUL
FTERgetting nationalisedinthefifties, privatedomesticairlines beganre-emerginginIndiainthe nineties.Thepopularityof the newprivateairlineswentup fast astheyprovidedbetterservice andon-timeperformancewith newaircraft.Thentheconceptof low-costcarriers(LCCs)was introducedanditfoundgreat acceptability .Bythelate nineties,LCCshadevolvedfrom