Accounting
IFRS – The Way Forward
Convergence to International Financial Reporting Standards (IFRS) is a much talked about
issue in the accounting world today. Many nations except the US and some others have
switched over to IFRS while many others are in the process of converging their national
GAAPs to IFRS. India nevertheless needs to be sensitive to the pitfalls of fully converging
with IFRS. This article provides an overview of the IFRS in the Indian context.
I
nternational Financial Reporting Standards (IFRS)
is gathering storm and most countries barring
the US and a few others have either adopted
IFRS or their national GAAPs are converging to IFRS.
Australia, New Zealand, Singapore, China, Middle
East, Japan, Africa and the European Union are
prominent names that have either adopted or are
converging to IFRS. The numero uno status to IFRS
came about after the EU made IFRS mandatory for
all its listed companies starting 2005. Consequently,
more than 8,000 EU listed companies adopted IFRS
in one go.
As per the findings of a survey of the chairmen
of 145 European companies by the executive search
firm Russell Reynolds: (a) more than half chairmen
of the companies with US listings said that they
would consider de-listing because of Sarbanes-
Oxley in spite of the difficulties of taking shares off
the US exchanges (b) 70 per cent of those heading
companies not yet listed in the US said Sarbanes-
Oxley would dissuade them from seeking a US
listing.
An extensively regulated US capital market is
losing its attractiveness and predominance of US
GAAP. This could make large companies look at
other capital markets and in many of those capital
markets IFRSs are accepted. Whilst such situations
provide IFRS an opportunity to flourish, it would
nevertheless be inappropriate to see things merely
from that perspective. This is because IFRS on its
own stands a fair chance, with its acceptance by
EU as well as given the fact that many countries
traditionally followed IFRS or an IFRS-inspired
national GAAP.
More than 1,100 Chinese companies have recently
switched over to new accounting standards bringing
— CA. Dolphy D’Souza
(The author is a member of the Institute. He can be
reached at dolphy.dsouza@in.ey.com)
1692 The Chartered Accountant May 2007
their books in line with international norms. From
next year the companies will have to apply a new set
of 38 standards—the China Accounting Standards
System—that are basically in line with IFRS. But there
is much more at stake than improving accounting
practices in China’s listed firms. Chinese companies
are increasingly looking overseas for funds as well
as acquisitions, and adopting IFRS will make both
easier by increasing companies’ transparency and
credibility. “To become an economic superpower,
China needs capital to fund growth, and it will help
if its companies speak the same business language
as the rest of the world,” says Winnie Cheung, chief
executive of the Hong Kong Institute of Certified
Public Accountants.
India follows Indian GAAP, which is inspired by
the erstwhile International Accounting Standards
(IAS). However, Indian GAAP has not kept pace
with the changes that followed IAS’s updation to
IFRS. The most important change being the ap-
plication of fair valuation principles. Key standards
based on fair valuation principles that have not yet
been rolled out under Indian GAAP are relating to
business combinations, financial instruments and
investment properties. Other than these there are
many areas where there are critical differences be-
tween Indian GAAP and IFRS.
The key questions for India, therefore, are:
Should Indian GAAP be converged with IFRS? What
are the pros and cons? What are the hurdles and
impediments in fully converging with IFRS? What
are the precautions that need to be taken?
Whether Indian GAAP should be converged
with IFRS? Is there an option or alternative? IOSCO
requires all its constituents to converge to IFRS and
therefore departing from IFRS is not a solution.
Besides, India is a global country and if it has to
invest abroad or attract inbound investment it has to
follow global standards. Seen from this perspective,
the sooner we converge to IFRS the better. When
the world is following IFRS, can we lag behind?
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That, however, does not mean that we expose

all our non-global Indian companies to 2500 pages
of IFRS text particularly Small and Medium Sized
Enterprises (SME). It may be noted that a substantial
portion of India’s GDP is contributed by SMEs. It
would be unwise to impose unwanted accounting
burden on SMEs. If and when a SME becomes a
global player, it can shift to IFRS.
Going forward, there should be two categories of
reporting entity in India, the SMEs and the rest, i.e.,
global companies, listed companies, and companies
with public accountability. The latter should follow
IFRS and the SMEs should follow standards that are
typically driven to meet limited user requirement,
such as those of taxation authorities. Seen from
this angle, both disclosure as well as recognition
exemptions should be given to SMEs. For example,
since SME accounts are predominantly used for tax
purposes, impairment and deferred taxes and such
other accounting requirements may not be relevant
to SMEs. SMEs would have private lenders, but
lenders have evolved their own independent basis
of assessing SMEs and that would not be dependent
on SMEs following IFRS. If India were to converge
to IFRS, the existing SME standard will need to be
revised to exempt SMEs from the rigours of IFRS.
Whilst departing from IFRS is not a solution,
India nevertheless needs to be sensitive to the
pitfalls of fully converging with IFRS, so that we can
prepare ourselves and take appropriate remedial
action. There are challenges that nations adopting
IFRS need to counter in the coming days. One big
challenge for countries adopting IFRS is the shortage
of resources, particularly IFRS-trained professionals.
With China’s listed companies adopting IFRS,
demand for accountants is rising and could run into
the millions in coming years if the new standards
are rolled out for all of the country’s companies
and not just the listed ones. Accountants say that
the challenge for China will lie in getting it’s over
1,100 listed companies to establish the appropriate
financial reporting systems and in training enough
qualified accountants. “Our view is that it will be a
real challenge for China to train sufficient numbers
to cater for the exponential growth of its economy
in the coming years,” said Eric Anstee, London-
based chief executive of the Institute of Chartered
Accountants in England & Wales. “To put this in
context, China currently has a shortfall of 300,000

May 2007 The Chartered Accountant 1693

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qualified accountants and is likely to require a further three million

over the coming years if it is to keep pace with its current rate of
economic growth,” he added.
Also, since IFRSs are fair value driven, IFRS nations would need
a large pool of valuation experts. India should be aware of these
challenges and tackle them through advance planning, without
delaying its IFRS convergence target.
One common criticism about IFRS is that it is heavily loaded in
favour of fair valuation principles. These principles are very subjective
and would result in significant volatility in periodic results. Worse still,
whilst every other IFRS standard requires application of fair valuation
principles, there is not a single IFRS standard which provides guidance
on how fair values are determined. A UK-based global accounting firm
did a small exercise to determine how reliable fair values are. It was
noticed that in a live example on ESOP valuation by making changes
to the model input variables, all of which fell within the bound of
acceptability, the option expense for a particular company could have
been varied from 40% to 155% of reported income.
The FASB has recently issued Statement of Financial Accounting
Standards No. 157 Fair Value Measurements (SFAS 157), which
establishes a single set of guidance for fair value measurements
under US GAAP. The IASB (IFRS standard setter) recognised the need
for consistent guidance on measuring fair value in IFRSs and for
convergence with US GAAP. Consequently, IASB has decided to use
the FASB’s Statement as the starting point for developing its own
standard on how to measure fair values.
One of IASB’s challenges is to ensure that it brings stability in the
entire framework, provide clarity on a large number of confusing issues,
address appropriately the fair value criticisms and most importantly
ensure that the standards are interpreted and applied consistently, be
it in Asia, Africa or America.
A global accounting firm reviewed the first IFRS financial
statements of some of the largest corporations, to assess the degree
of consistency and comparability among companies that has resulted
in IFRS adoption, and to ascertain how performance measures based
on IFRS have been used in market communications. The key findings
of the survey are:
l Despite the challenges and the significant departure from
previous national GAAP, the first IFRS implementation has been
a resounding success overall.
l Companies that have applied IFRS first time continue to maintain
the flavour of previous national GAAPs in the absence of best IFRS
practice, which will take some time to evolve.
l Significant judgements had to be applied in many situations,
which exposes the conflicts within and between IFRS standards.
l The absence of industry-related IFRS standards and best practices
(which will evolve overtime), consistency and comparability
between various companies in an industry was affected.

1694 The Chartered Accountant May 2007

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l Companies have widely used alternative, non-IFRS measures for

market communication. This accentuates managements’ concern
that IFRS financial information may not be sufficient at this point
in time. However, this could be due to the fact that the first IFRS
financial statements required a lot of adjustments to the previous
national GAAP financial information. Further, as analysts improve
their understanding of IFRS, the need to use non-IFRS measures
may decline overtime.
l IFRS standards are excruciatingly complex compared to
previous national GAAPs, with 2000 disclosure requirements,
approximately double that of UK and Australian GAAP, and four
times of French GAAP. Getting IFRS resources and IFRS technical
expert is becoming increasingly a challenge. This is a real danger
and bold measures would be required on the part of IASB to make
these standards user-friendly and easy to implement.
In India we have our own distinctive problems. There are multiple
regulators in the field of accounting standards, for example, if there
is a listed bank, it has to follow accounting norms prescribed by SEBI,
RBI, ICAI, Companies Act and Banking Regulation Act. Some of the
accounting requirements could be inconsistent with each other and
some are definitely inconsistent with IFRS. If IFRS implementation has
to be effective, the regulators would need to stay out of prescribing
accounting norms.
Take Companies Act for instance. A large number of accounting
promulgations therein are contrary to IFRS requirements. These are
in the areas of presentation of financial statements, treatment of
preference capital as equity rather than as liability, Section 78 which
allows premium on redemption to be charged to securities premium
account, Schedule XIV which prescribes statutory depreciation
rates, and capitalisation of foreign exchange differences, etc. If IFRS
has to be implemented, Companies Act would need to stay away
from accounting prescriptions. Similarly, RBI accounting norms for
provisioning of non-performing assets or accounting for derivatives
are incompatible with the requirements of IFRS.
Another legal hassle is the powers of the High Court to stay
application of accounting standards or to prescribe accounting
requirements in the case of merger and amalgamation situations,
which are often contrary to sound accounting practices. All this would
affect smooth convergence to IFRS.
The ICAI has set up an IFRS convergence task force to look
into various convergence issues and prepare a road map for full
convergence. Whilst a full convergence may be appropriate, the task
force also needs to keep the interest of Indian companies and Indian
economy in mind. A case in point is the deferral of VRS cost or ESOP
accounting based on intrinsic method, which though a departure
from IFRS, is nevertheless necessary. However, such exemptions
should be subject to a sunset clause, so that a few years down the
line, full convergence could be achieved.
The convergence task is challenging, but needs to be done. r

May 2007 The Chartered Accountant 1695