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Global accounting standard: Challenges

India faces
December 27, 2008 13:29 IST

The Securities and Exchange Commission on August 27, 2008, issued a roadmap of
transition to International Financial Reporting Standards by US domestic
companies from 2014.

The issues relating to the roadmap will soon be set to debate and public comments.
This move of the US to endorse and participate in the creation of a truly global
GAAP-IFRS, puts aside their pride in their national GAAP (Generally Accepted
Accounting Principles), and is a significant move towards the emergence of IFRS as
a global accounting language.

India will be adopting IFRS from 2011 which means our national GAAP will be the
same as that practised in over 100 countries today.

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government
The Indian GAAP has conceptual differences with IFRS and our legal and regulatory
frameworks need to be amended for us to adopt IFRS as written by the International
Accounting Standards Board, the standard setting body of IFRS.
IASB requires that compliance to IFRS be explicit and in an unreserved manner. The
bridge between Indian GAAP and IFRS needs legal sanctions through Parliament for
the adoption of IFRS in India.

Concept of a group

The Companies Act (The Act) treats Indian companies as separate legal entities,
while IFRS promotes a group concept, where individual legal entities lose their
individual relevance to the overall economic entity, the group, except for legal or tax
compliance.

The Act does not specifically deal with consolidated accounts or their auditors'
reports. Hence the form of accounts adopted by a group can be different from the
format specified by the Act for individual companies.

Our tax laws asses individual entities as separate units for tax and do not asses the
group as a single taxable entity. Hence the role of consolidated accounts has no
relevance for tax purposes. In many countries like the US, the group could be the
primary unit for tax assessment in one legal jurisdiction and the consolidated
accounts then become relevant.

Fixed assets

There is a significant distinction between the Act and IFRS for fixed assets - the
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concept of components of fixed assets based on their usefulness.

This means that various significant components embedded in an asset having

different useful lives will be depreciated separately. It would be appropriate to

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Under IFRS, the fair estimate of the retirement obligation of an asset is discounted
to a fair value and recognised as a liability. The corresponding costs are capitalised
with the fixed assets. In India, future costs are not allowed to be discounted and
capitalised and they are recognised as a liability when they become an obligation.
The Companies Act prohibits depreciation on revaluation of fixed assets to be
reflected in the profit and loss account as such depreciation is netted off against the
reserve specifically created on revaluation in the balance sheet.
IFRS is based on fair value concepts and where a company revalues its fixed assets
to reflect its current value, the depreciation of the revalued assets is routed through
the income statement and affects the earnings.
Capital and reserves
If we look at the capital side of the balance sheet, the Companies Act requires capital
instruments to be separately disclosed as equity and preference shares and there are
separate provisions that govern the issue of these instruments and their relative
legal rights. Similarly, convertible debentures or bonds, whether they are in Indian
or foreign currency, have specific rules relating to their issue and disclosure in the
accounts.
There are also foreign exchange regulations which would also come into play
relating to these bonds. IFRS treats debentures, bonds or preference shares that are
convertible into equity shares as compound instruments that need to be segregated
into a debt and an equity portion based on their relative fair values.
Similarly, a redeemable preference share for cash will normally be a debt. Such re-
classification of preference shares to debt or equity or creating equity instruments
from bonds or debentures will need sanction of the Companies Act, which lays down
rules on how such instruments are to be issued and shown in the accounts.
Mere segregation by using IFRS principles will not comply with the Act, nor will it
retain the legal rights and obligations that are associated with these instruments.
This leaves a gap between our current laws and IFRS.
Reserves in a balance sheet are a result of past profits following Indian GAAP and
are available to shareholders either as dividend or distributed on dissolution. Upon
transition to IFRS, an entity will have an increase or deduction of reserve just by the
application of the new GAAP. A shareholder could have more distributable reserves
or conversely if the reserves get wiped out, it could leave him poorer due to such a
change.
How changes in GAAP affect the wealth or earnings of the shareholders will be the
cornerstone of decisions.
IFRS and initial public offerings
Some other areas of attention would be the rules relating to initial public offerings.
Under the current laws, five years of audited financial accounts under Indian GAAP
form the base financial information for an IPO.
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The efforts a company needs to make if they are to re-cast their accounts to IFRS for
the past five years will be significant. How the Act and Sebi will define this
requirement will be important for companies looking for an IPO in the next few
years.
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Correction of past errors

Correction of errors under IFRS can be made in the years they pertain to, even if
they are audited and adopted by the shareholders. Currently, past errors in India are
shown as adjustment relating to previous years in the current year as no changes can
be made to the accounts as adopted by shareholders.

Furthermore, no specific disclosure relating to the error is required to be made. If we

go the route of IFRS, the restatement of material errors is a feature that Indian
companies and their auditors will need to be aware of. Whether or not this triggers a
number of lawsuits in the future against the company and their auditors, only time
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These are some of the indicative areas where an amendment to the law needs to be
made if we are to converge with IFRS. We have a choice of having specific
differences in India between the accounting principles followed here and those
under pure IFRS.

These divergences are euphemistically referred to as 'IFRS Lite' and are not
considered by the SEC and IASB as explicit compliance of IFRS. IFRS promotes the
principle that the same economic transaction happening in New York, New Delhi or
Sao Paulo will have the same accounting result. The question is, how different India
wants to be in this regard.

The writer is the national leader of the IFRS practice of

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Total 3 messages Pages | 1

Compliance with IFRS

by anand subbarathnam (View MyPage) on Jun 03, 2009 10:48 PM

Today hardly 35% of Indian Companies are in a position to comply with IFRS.God knows how they will cope up
especially the State Run PSUs and smaller companies which dont have access to qualified IFRS trained man
power.Are our universities, educational service providers other than ICAI upto scratch.Only time will tell

Forward | Report abuse

Govt. need to act in public interest

by Prabhakar BV (View MyPage) on Dec 27, 2008 07:23 PM

Adopting Global Accounting Standard is itself not sufficient and not going to help in containing frauds or scams.

Govt of India should realise that Global standards need to be followed in all cases.

Following Global standards randomly is disastrous in the long run.

Particularly Govt needs to consider some of the following:

1) As per Global practices, there is an independent public Board which will monitor the functioning of Public
Accountants. For instance, in USA, there is an independent PCOAB which grants licenses to CPAs or other
professionals. Whereas in India, we do not have such Public Board to monitor the functioning of Chartered
Accountants. Every thing is left to Institute of Chartered Accountants. Probably, there is a high risk of scams like
MADOFF, waiting to happen in India.

2) Accounting standards are also laid down by a Public body in other countries as per best global practices. Whereas
in India again every thing is left to ICAI, which claims to be sole accounting regulator.

3) Again, Peer Review is conducted by Public Board like PCOAB in other countries by independent professionals,
whereas in India again so-called Peer review is reportedly done by ICAI.

Govt of India and ICAI need to act in larger public interest and not in its own or its members' interest.

Forward | 'Report abuse' disabled by moderator

Comply with RTI Act

by New York (View MyPage) on Dec 27, 2008 06:00 PM

All publicly listed companies including SATYAM must comply with RTI Act (Right To Information).

Because all listed companies own and operate on public aka shareholders money which is 10 times the company
quarterly revenue.

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