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In the year 2005, European Union made it mandatory for all the companies which were listed have to comply with International Financial Reporting Standards (IFRS) requirements when presenting their financial statements. This marked the beginning when International Accounting standard Board (ISAB) was professed as “legitimate’’. Ever since then IFRS has spread swiftly across the world. Initially there were few hindrances like by the end of year 2004 “full text of endorsed IFRS was not even available in several EU languages’’. This research examines the evolution and obstacles to convergence of Indian Accounting Standards to IFRS starting 1st April 2011 when all the listed companies in India, will be required to present their financial statements in accordance with IFRS regulations. This research also highlights the need for the country like India, to converge their Local GAAP to IFRS.
American Writer Mark Twain once commented on India and said “the cradle of the human race ,the birthplace of human speech ,the mother of history ,the grandmother of legend, and the great grandmother of human speech of the tradition.’’ India is now seen as one of the fastest growing economies in the world. The increase of number of Indian companies being listed at various stock exchanges may it be NASDAQ, NYSE or LSE, the takeovers of companies like Corus by TATA or the exponential increment of Foreign Direct Investment in the country does indicate that India is now the destination where everyone wants to be a part of it. The strong economic growth, technological advancements, inflows of foreign exchange and the ever-increasing interest of almost every nation to be a part of this growth embraces the requirement of a common language in financial statements. (Purvis, gernon, and Diamond ).
Various studies done by researchers have concluded that “principle based standards are better enforced than rule based” and this becomes one of the reasons why harmonisation is becoming more and more essential. As far as advantages and disadvantages in adhering a common accounting rule there are still concerns within a country leave apart the issue of international convergence (Ray Ball, 2006).Only time will tell whether this convergence really serve the purpose or it was just a decision made in haste to be a part of so called IFRS “brand names’’ countries.
IFAC Compliance Programme
IFAC was founded in 1977 with New York as its Headquarters. Its initial purpose was “the development and enhancement of a coordinated worldwide accounting profession with harmonised standards”(brennan,1979). Presently it is “a global organisation for the accountancy profession” and as at 10th August 2009 IFAC has 158 members from 122 countries representing 2.5 million accountants. “Its formal mission is stated as being
“To serve the public interest,IFAC will continue to strengthen the worldwide accountancy profession and contribute to the development of strong international economies by establishing and promoting adherence to high quality professional standards ,furthering the international convergence of such standards and speaking out on public interest issues where the profession’s expertise is most relevant.
To carry out this mission ,we work closely with our member bodies and regional accountancy organisations and obtain the input of regulators, standard-setters, governments and others who share our commitment to creating a sound global financial architecture”(IFAC,2006).
IFAC does not set International Financial Reporting Standards (IFRSs) are not set by IFAC rather these are set by International Accounting Standards Board (IASB) . The IFAC Board formed “the Member Body Compliance Program” to ensure that all the members adhere to the standards set by IFAC for its membership. The primary objective of which was to encourage members and strive for improvement in this area of compliance.
The IFAC Compliance program is overseen by the Compliance Advisory Panel. The primary objective of Compliance Advisory panel is to make sure that the IFAC compliance program is properly implemented as well as properly operated by the staff members of IFAC.
Statements of Membership Obligations
The IFAC Board through its Statement of Membership Obligations (SMOs) issue guidelines for the members to assist in implementation of “International standards” which are issued by IFAC and International Accounting Standard Board (IASB). The motto of SMOs is to provide pre-requisites for “quality assurance” and to investigate any disciplinary actions against any members.
All the IFAC members also have to participate in a program which is in three parts. The main purpose of this programme is that it “seeks to understand whether and how the SMO requirements are being fulfilled”. The information from this program helps the compliance committee to evaluate whether the members have prudently adhered to all the SMO requirements. These responses by the Members are taken on a periodical basis. Any changes in “legal and regulatory environment” or any other development made by any member is to be informed to this committee. This information is also updated in a questionnaire which is available online, by all the members and if there are any changes than the members are supposed to inform the compliance committee which publishes these updated responses on IFAC website.
Part 1 of this questionnaire is “Assessment of the Regulatory and Standard-Setting Framework”. This Questionnaire provides information from its members about their “regulatory and standard-setting framework in their jurisdiction”.
Part 2 is “SMO Self Assessment” which requires members to fill up a “self assessment questionnaire” which indicates how the members have incorporated or implemented international standards which are issued by IFAC and the IASB. This questionnaire also helps the committee to know whether all the members have adhered to professional standards set by the governing bodies.
Part 3, of the questionnaire is about “Action Plans”. This questionnaire requires that members to “to develop action plans, including identifying tools, resources, and regulatory changes to address areas identified through the Part 2 self-assessment”. Part 1, Part 2 and Part 3 questionnaires are accessible to public at large.
“Harmonization, standardization, and uniformity are all terms used in the literature and in previous research” (Iordanis N.Floropulos, 2006). According to Van der Tas (1988): “Materially measurable harmonization is an increase in the degree of comparability and means that more companies in the same circumstances are applying the same accounting method to an event or giving additional information in such a way that the financial reports of more companies can be made comparable.’’ Harmonisation can be understood as a procedure by which the gap between different accounting practices are reduced (Doupnik,1987).
Sir David Tweedie, Chairman of International Accounting Standards Board said “ If they all use the same methods and the accounting for one transaction is the same in Sydney, as in Seattle, as in Strasburg, and in Sheffield , then they will know where they are, and there is a demand for that type of certainty.”(FEI 2001).
Mark T.Bradshaw and Gregory S.Miller(2007) also reiterated the same and argued that the evidences are in favour of a single set of Accounting Standards which will “increase the comparability of accounting information across the countries that differ economically, politically ,and culturally”.
Emphasising the need for a “common set of accounting standards” IASB, laid three broad objectives:
a) Improvement : Improvement in existing standards,
b) Convergence : Reducing the gap between different accounting standards followed in different geographical regions,
c) Leadership : Addressing issues not resolved and developing new standards( Geoffrey Whittington,2005)
“The principles behind the adoption of International Accounting Standards by different countries have always been the subject of controversy in accounting literature” (D.Zeghal, K.Mhedhbi, 2006).India’s decision to converge to IFRS is perceived by many researchers as premature decision. Although harmonisation of accounting standards not only enhances the quality of financial reporting, increases the comparability of financial statements but without considering of “country specific environment factors” the logic/reasons for such convergence will be forfeited. Talaga and Ndubizu (1986) insisted “that a country’s accounting principles must be adapted to its local environmental conditions”. In fact, Perera(1989a) went much ahead and stated that “the accounting information produced according to developed countries is not relevant to the decision models of less developed countries”.
Case studies by different researchers with respect to developing countries have not reached any consensus whether the convergence or so called “follow the Bandwagon approach” for IFRS’s will have or is having any positive effect on economic growth. It is yet to be seen that whether India will adopt IFRS or will converge its accounting standards to IFRS. Larson (1993) studied the economic growth effect of African countries with and without these standards. His results show a positive correlation in economic growth rate with adoption of IFRS’s when adapted with “country’s local condition”.
But Woolley (1998) researched the effect of such convergence or adoption of IFRS’s in Asian countries and he concluded that there are “no significant differences in the economic growth rates”. This again emphasises the fact that researchers have distinct opinion on whether IFRS adoption results in better economic growth or does not have any significant role. Researchers like Wolk, Francis ,and Tearney (1989) argued that ,harmonisation of accounting standards is “beneficial for developing countries because it provides them with better-prepared standards as well the best quality accounting framework and principles”. Chamisa (2000) studied the “usefulness of IAS’’ for developing countries. In his case study of Zimbabwe, he argued that these standards do have a positive impact on the emerging financial markets in the developing countries.
“Economic conditions are a major determinant in the development of a country’s accounting system” D Zeghal, K Mhedhbi (2006). No doubt with the present economic growth in India which is presuming better than in any other developing nation, IFRS will definitely boost this growth. India, by adopting IFRS gives a platform for itself where the financials can be compared easily with the peers across the globe. According to Alhashim and Arpan (1992), who argued that “environmental forces influencing accounting are economic forces, social forces, the legal system, culture, and the political system”.
Though the legal structure or political system or culture might have an impact of financial reporting but there are other factors which have greater impact than these. One of these can be the education standards of the professionals in a country. As IFRS are more principle based so lots of prudence will be required from the professionals . Cooke and Wallace (1990) added to these and argued that factors such as Size of business, education level, history of country, level of wealth, their development of financial markets may have influence on accounting standards. Accounting standards are governed by economics and politics( Watts,1977 ; Watts and Zimmerman,1986) so convergence has more or less enhanced integration of markets and politics across the borders (Ball,1995).
D Zeghal, K Mhedhbi (2006) gave five hypotheses on the basis of these environmental forces. In his first Hypothesis he argues that if the country economic growth increases then the chances of adoption of the International Accounting Standards increases. This hypothesis correlates with the present status of a country like India which is exponentially growing. To maintain this growth rate it needs to be in line with global standards which will increase it “legitimacy”. As a result of which the foreign investments will increase.
In the second hypothesis he argues that the probability of adoption of IFRS increases with the increase in education level. This simply means that there is a positive relationship between educational level and the competence of the professional accountants. This hypothesis indicates that “in countries where the educational level is low and expertise is weak, there is a real barrier to the adoption of IAS”. This infers that if a country wants to adopt IFRS then it needs to strengthen its educational level. This raises few concerns if test this hypothesis with the current situation in India where there is scarcity of experts who have good knowledge of IFRS.
In his third Hypothesis which states that if a developing country has “high degree of external economic openness it will be more inclined to adopt IAS”. India being one of the fastest growing nations with increasing foreign investments is an ideal case for adoption of IFRS’s as per this hypothesis. Sir David Tweedier, IASB Chairman restating uniformity of accounting standards argued “As the world’s capital markets integrate, the logic of a single set of accounting standard is evident. A single set of international standards will enhance comparability of financial information and should make the allocation of capital across the borders more efficient. The development and acceptance of international standards should also reduce compliance costs for corporations and improve consistency in audit quality.”
Abdelsalam and Weetman (2003) argued that a factor like “familiarity and language” seems to favour countries which are Anglo-American because of obvious reasons. One being Anglo-American predominantly had a greater influence in the formulation and development of IASB and the other being, English being language of communication. Chamisa (2000) found that he anticipates that the developing countries which have “Anglo-American culture” will find it easier to adopt IFRS. This becomes the Fourth Hypothesis.
In his Fifth and final hypothesis D Zeghal and and K Mhedbi states that developing countries which have capital markets are most likely to adopt/converge to IFRS. This hypothesis emphasises the need and why India as a country should adopt IFRS. With the present scenario where all capital markets are hitting new lows, Indian markets are performing far better than any other markets across the globe. But one should always In a recent report by world bank, it has been reported that Asian countries are recovering from the present financial crises. Research done by Adhikari and Tondkar (1992) showed the similar results, that adoption of a “particular accounting system” is effected by the existence of capital market. Adhikari & Tondkar (1992) specifically argued that “country’s level of economic growth has a positive effect on the development of accounting system and practices”.
L.L.Rodrigues, R.Craig(2007) in their research by using “Hegelian dialectic concept of thesis, antithesis and synthesis” gave innovative approaches for convergence of local accounting standards with IFRS’s. They went on to and argued that “in modern society, the global harmonization of accounting standards might be regarded as uncontroversial, unremarkable, and inevitable”. Hegel in his “theory of dialectic” laid a concept which states that “contradiction is regarded as the root of all change” (hegal, 1969). He argued that change is inevitable and brings in a new structure or a concept( a thesis) which always have contradictions, which is always opposite to what stated (antithesis) but which brings in something new which is in-between both the concepts(synthesis).
Referring to this concept L.L.Rodrigues, R.Craig argued that A thesis to be a “support for globalization of accounting” and Antithesis can be said to be “conflict area” that means opposing globalization of accounting. As a consequence of thesis and antithesis another view is generated this is referred as synthesis. They outlined few proposals which arose due to thesis and antithesis. In one of the proposals they argued that all the companies should follow their national accounting standards and prepare their financial statements accordingly. At the same time these companies should also enclose few annexure in the form of reconciliation with the International accounting standards (hoarau, 1995). In their second proposal they argued that countries should “seek regional harmonization of accounting standards” (European Union or ASEAN countries).
Analysing the “regional paradigm” of harmonisation of accounting standards, Saudagaran and Diga (1997, p.2,16-7) claims that in 1997 European Union supported the idea of regional harmonisation and also in the year 1992-1993 AFA “pursued regional harmonization as a policy objective”. Referring to The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) which is an “an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and shari’a standards for Islamic financial institutions and the industry”. These standards “are either mandatory or used as guidelines by the regulators in....the kingdom of Bahrain, Dubai International financial centre ,Jordan, Lebanon, Qatar, Sudan and Syria (http://www.aaoifi.com/overview.html). These arguments are in favour of “dual standards”.
Also many countries have adopted IFRS but not for all companies rather they have two tier system. One for big corporate houses and the other for small and medium-sized entities (SMEs). Because it is the cost factor which is bothering these smaller entities. But this view is not supported by the big international accounting firms, who caution that “a two standard system, where some companies continue to use national GAAP ,may be difficult to maintain in the long run....[and] ...governments and national setters [should] develop formal convergence plans to eliminate these dual standards”(Larson and Street ,2004,p.113). L.L. Rodrigues and R.Craig also argued that companies might think full adoption of IFRS but practically it will more like to have “ostensible compliance” that is “in the form of window dressing to appease capital markets or other users of financial information”.
Chand (2005) throws a caution on Developing countries who are tempted to be a part of so called IFRS compliance members without evaluation the “cost and benefit involved in implementing IFRS”. He also emphasises the need to “improve the level of professional expertise in IFRS” before adoption or convergence to IFRS. Similar caution was advised by Shyam Sunder (2009) in his commentary “IFRS and the Accounting Consensus” stating “Get aboard if you do not wish to be left behind on the platform” cannot be a reason to converge or adopt IFRS. He argues that the standards should be developed not just as rules but rather it should be restricted to principles. Secondly a single set of accounting standards should be applied to companies especially those which are traded as it helps investors/stakeholders to compare them with their peers across the globe.
Further he argues that there should be a body which must be consisting of professionals and experts which can act as a regulatory just as Securities Exchange Commission (SEC) does in United States. He emphasis the need of educating professional to a level that they can interpret IFRS’s in a prudent manner. Financial Accounting Standard No. 157 (FASB 2006) which states that the companies can value their assets in any one of the three methods given in this standard. These methods are mark-to-market or mark-to-model or mark-to-judgement. The last method gives liberty to companies to value “as they deem fit”. Warren Buffet called this as “mark-to-myth”. Clarifications on such concept of “fair” valuation are needed as it gives an opportunity for accountants to mislead the users of the financial statements. He argues that the standard setters should minimize this “need for judgement” by properly responding to the queries/objections/suggestions raised by the professionals on these standards.
Shyam Sunder (2009) also stated a practical reason as far implementation of IFRS’s goes. He states any professional anywhere across the globe “who has been drilled to memorize the specifies” of their own national accounting standards will find it quite difficult to now thoroughly understand and cope up with the clauses of IFRS’s. Also there is only one language in these internationally acceptable accounting languages and that is English only. So those nations like China, Japan or say Italian or German would not find exact version of these standards. And we are talking about a common language of Financial Reporting.
One of the past presidents of The Institute of Chartered Accountants (ICAI) states “people who invest overseas naturally want to be able to keep track of the financial health of the securities issuers. Convergence of accounting standards is the only means to achieve this. Only talking the same language one can understand each other across borders”. N.C.Shil (2009) argues that though harmonisation will give an effect in the form of “global community as a single entity”. But there are major concerns when it comes to adoption of IFRS’s in United States where US GAAP is still functional. And it is yet to be seen as how far they will converge or they will just adopt.
Secondly, different countries have “different legal, economic, social and cultural environments” and it is very essential to analyse these differences as they just cannot be written off just to make sure that we are in line with internationally acceptable reporting standards. Thirdly, they emphasised the need of implementation not just adoption. It is quite a tedious task to implement without adequate regulatory authority. IFRS’s are principle based standards so again load of prudence will be required by the professionals who were implementing rules based accounting standards till date.
Another issue which is inevitable is the scarcity of skilled manpower in developing countries. China has reported a “shortfall of 300,000 qualified accountants and is likely to require a further three million” in times to come (N.C.Shil, 2009). More or less the same is the condition if we talk about India. At present with the current state of affairs “The ROC Mumbai has over 150,000 registered companies out of which approximately 50 percent file their documents. Over 5,000 new companies are registered every year.ROC Mumbai has 4 staff who are employed to scrutinize these fillings, none of them of whom are Chartered Accountant or Company Secretaries’’. Analyse the situation of now if India without a proper infrastructure (skilled manpower) adopt or converge to IFRS.
The concern at this hour is whether the adoption is “merely as a label” or there is a serious commitment to it. If the IFRS’s are adopted with such an intension then this will lead to increase in transparency , substantially decrease “information asymmetry, uncertainty and estimation risk”, and as a will result in “lower cost of capital and higher market liquidity”(Leuz and Verrecchia, 2000; Lambert et al., 2007a). This hypothesis was analysed by H.Daske,L.Hail,C.Leuz and R.Verdi (2007) who examined IFRS adoption by 24 countries between 1988 to 2004 and concluded that these the firms show a substantial decrease in cost of capital and exhibit “higher market liquidity” after converting themselves from their Local GAAP to IFRS. The problem faced even by European countries was the lack of clarity at the time of first-time adoption of IFRS. This issue still persists and there are still no clarifications on “transactions of specific nature such as pension and other post-retirement benefits” (R.K.Larson, D.L.Street 2004).
“The focus tends to be on what the rules say, not on how they are implemented in practice’’ (Ray Ball, 2006). In practice this has been a major concern even in Europe where implementation is still a major concern. Developing countries like India need to understand that mere restructuring or reorganisation of the standard setting body would not resolve this crisis. But including Government agencies on their board will overcome this tedious task of implementation (Peter Carlson,1997).
“The harmonisation of such standards is regarded to be neither practical nor truly valuable” (Goeltz, 1991, p.85) possibly because “investors may have developed adequate coping mechanism so that their financial decisions are not impeded”(Choi and Levich,1991,p.2)
Because different users require different information it is difficult to satisfy their financial reporting needs with the constraints of a set of inter national accounting standards.
A survey of 112 companies in India ,by Ernst & Yong showed 67% of them welcomed the decision of convergence to IFRS. But majority of them were susceptible with the deadline set by the Institute of Chartered Accountants of India and the reasons stated were quite obvious. One being the cost, whether it up gradation of IT software or cost of skilled manpower. The other reason was the jugglery in the statutory laws. The Tax laws, Companies Act 1956 and all other statutory laws are yet to be modified and in a manner that they are in line with the IFRS regulations. Taking a clue from the nations who have already transited to IFRS India as a country needs to analyse the cost benefit ratio before implementing these IFRS regulations.
“UK companies recorded an average of £ 625,000 for IFRS conversion training in 2005”.
Also Securities Exchange commission has reported that “average US corporation will spend nearly $ 32 million in IFRS adoption cost”.
Also there is a mixed feeling of whether India will follow full IFRS regulations or will opt for “modified country specific version” like in European Union ,Singapore, Japan or Australia.
Ray Ball(2006) on “International Financial reporting Standards: Pros and Cons” argued that without any doubts the “high quality” standards have now been adopted by more than 100 countries is in itself commendable. On the other side he predicts the problems with the “fascination” of IASB and FASB with “fair value accounting”. When market prices are available, for any assets, then the opportunity of manipulation by managers decreases. However there is a flaw that the managers can still manipulate by using “mark-to-model” accounting. This particular clause in IFRS increases gives an opening to managers to fabricate the valuations as per their discretion. However , IASB and FASB are determined to go move ahead with “fair value accounting” and FASB member L.Todd Johnson commented
“The Board has required greater use of fair value measurements in financial statements because it perceives that information as more relevant to investors and creditors than historical cost information. Such a measures better facilitate assessing their past performance and future prospects. In that regard, the Board does not accept the view that reliability should outweigh relevance for financial statement measures”
Ball, Robin and Wu(2003) investigated “the relationship between accounting standards and the structure of other institutions on the attributes of financial reporting system”. The study was based on four Asian countries namely Hong Kong, Singapore, Malaysia and Thailand.
They argued that these countries have a greater influence towards International Accounting Standards which as a result should produce high quality financial reporting. But the “institutional structures that provide incentives to issue low quality reports” (Robert W. Holthausen, 2003). Hence Ball, Robin and Wu predicted that outcome of such structure will have a negative impact of financial reporting.
Researchers are also of the view that the manner in which the European Union is formed, in the same manner Asian Countries can come together and come to a common consensus which allows “free mobility of capital, Labour and enterprises across the national borders of its member countries”.( Peter Carlson, 1997).
History and Overview
India is a Sovereign, Secular, Democratic Republic country. It has a Government or rather “Parliamentary system of Government”. The President is the constitutional head .In the states it is the Governor who acts as a representative of the president. There are 28 states and 7 Union territories. Each and every part of the country has a different and unique “demography, history and culture, dress, festivals, languages etc”. India is “seventh-largest country by its geographical area, second most populous country and the most populous democracy in the world”.
In India, responsibility of maintaining high standards in accounting, auditing and ethical standards are bestowed on the Institute of Chartered Accountants of India (ICAI). The Institute was established in 1949 under an act of Parliament. The headquarters of this accounting body is in New Delhi. The Institute also has five regional offices situated in Mumbai, Chennai, Kanpur, Kolkata, and New Delhi, along with these regional offices the Institute has 117 branches across the country. The Institute has also 19 chapters outside India and an office in Dubai. Presently the Institute has enrolled 350,000 students and 140,000 members. The Institute of Chartered Accountants of India is presently the Second largest accounting Body in the world.
The Institute has maintained high standards of applicability of Accounting and Ethical standards in India. Except the recent saga of Satyam Computers no major incidence of this stature had ever been reported from India.
Applicability of IFRS in India
Under the new system the following companies or entities will have to comply with the IFRS requirements:
a) Companies which are listed in any of the recognised stock exchanges.
b) Banks, Insurance companies and Financial Institutions
c) Companies which in the preceding year had a turnover or more than Rs 1 billion.
d) Companies which in the preceding year had borrowings in excess of Rs 250 million.
e) Holding or subsidiary of any of the above companies
At present IFRS is not applicable to SME’s.
Differences between the prsent regime under local GAAP and IFRS
There are issues which really putting doubts in the mind of professionals or the users of financial statement which needs immediate attention. Following are few of them:
1) As per the companies act 1956, there are specified rates for depreciation to be charged to assets by every company. The clause states that every company must charge a minimum rate of depreciation to each and every asset held. IFRS does not recognise this concept of “minimum depreciation”.
2) In India, every amalgamation must be approved by the High Court. There is no such obligation in IFRS regulation.
3) Clause 41 of the listing agreement clearly states that there should be a separate presentation of extraordinary items in the financial reporting of the listed companies whereas IFRS prohibits such presentation of extra-ordinary items.
4) IFRS conversion will have a direct impact on the reporting of Indian Banks. The transition to IFRS will affect reported net-worth, capital adequacy and available capital for all Indian Banks. Report on “IFRS convergence: Challenges and Implementation Approaches for Banks in India” argues that there will be a “significant impact” on the Banking industry in India particularly in the reporting of Financial Instruments, Derivatives and provisions to be made in case of loss on loans and advances. The” Financial parameters” such as Capital Adequacy Ratio (CAR) and “valuation metrics” on the basis of which the analysis is done, predictions on future aspects of the company are made will change drastically once IFRS is implemented.
5) In case of companies going for Initial Public Offer (IPO) it needs to file Financial Statements of previous five years as per SEBI guidelines. Now after transition to IFRS do the companies, which intend for IPO, need to file these financial statements under Local GAAP which was applicable at that time or transform these statements as per IFRS regulations? No clarifications from the Institute or Securities Exchange Board of India (SEBI) is being issued to the companies as of now.
6) The Companies Act 1956 treats Indian Companies as a “separate legal entities” where IFRS “promotes group concept”.
7) As per the present regime fixed assets are classified as “class of assets”. Under IFRS, the classification will be on the basis of their usefulness. Also under Companies Act, 1956 depreciation is not allowed on revaluation of fixed assets but if there is undervaluation then it has to be set off against “Revaluation reserve” set aside by the company in the balance sheet. IFRS promotes “fair value concept”. That implies, the companies need to revalue their assets to the market value and then apply depreciation which will be charged against profits of the company.
8) At present, Equity and Preference share capital are shown separately and they posses separate legal rights. Same is with bonds and debentures. IFRS treats debentures, bonds or preference shares which are convertible into equity as one instrument which will be classified under debt or equity portion on the basis of their fair valuation. Even redeemable preference shares for cash will be treated as debt. Now classification is not an issue but do the companies need to take sanction from the companies act for any such variation in legal rights ?
9) Reserves are the undistributed profits of the shareholders held by the company which will be distributed in the form of bonus shares or dividends or right shares. Mere transition to IFRS will either increase or decrease this undistributed profits. So, shareholder may get higher or lower returns.
10) Accounting Standards(AS) 5, “Net Profit or loss for the period, Prior Period Items and changes in Accounting Policies” states that if there are any past adjustments relating to any errors or omissions than they cannot be adjusted once the financial statements are approved by the shareholders. Rather they have to be shown as a part of disclosures. Under IFRS, such corrections can be made even after the shareholders approval.
India’s transition to IFRS will require a herculean effort from The Institute of Chartered Accountants of India. Presently there is inadequate trained resources, lack of understanding of IFRS regulations, issues which are still pending with International Accounting Standard Board(IASB) regarding revenue recognition or lease accounting and above all the concept of “fair Value accounting” needs to be properly implemented. All such issues needs immediate action as the deadline is no far off. Not even the Institute but also the Government needs to revise the Schedule VI of the companies act and will have to synchronise the other entire statutory act with IFRS requirements.
India’s persistent leadership role as an outsourcing destination including for accounting and finance makes it more appropriate to push itself for IFRS regulation.
This research study examines the effects of IFRS adoption in India. The Methodology used in this research is based on the interviews which were taken in India during the first week of July 2009.Since this research endeavours the consequences of IFRS adoption in India beginning 1st April 2011 so the interviewee were related to the profession of Chartered Accountancy. The researcher conducted the interview on one-to-one basis. Though the interviewees were reluctant to talk on this issue but agreed to share information and their views with one condition that they will not be quoted anywhere.
The researcher tried to convince the interviewee to record the interview with a surety that it will not be quoted anywhere. But the interviewee did not agree to this. So the interview was a formal discussion. The researcher had already structured the questionnaire. Another problem faced by the researcher was that during the interview the interviewee did share some information but insisted that it should not be even presented in any form. The reason which was told by the interviewee was that he or she wanted to give a true picture of the situation but upholding the integrity of the Institute and of their profession.
Sampling and Data Collection
The Researcher had through his personal as well as some official contacts in the Institute of Chartered Accountants of India approached six officials. Out of these six officials only three agreed to share some information. Thus Researcher interviewed three officials from the Institute of Chartered Accountants of India (ICAI). The Researcher was into the profession of Chartered Accountancy in India. Therefore, the researcher could easy gain access to the practicing Chartered Accountants.
After reviewing all known contacts the researcher randomly chose four members. As the researcher himself took lessons in the same Institute during his study of Chartered Accountancy, therefore, contacting the present batch was comparatively easy. The researcher randomly chose three Students, who are going to be future Chartered Accountants. The Researcher also knew people who are actively trading in the Stock Markets and also few investors who usually invest in the market by knowing the financials of the company.
The Researcher randomly chose two people from twelve of them. The sampling was based in such a manner that the researcher can get knowledge as to how much the adherence or how much the companies or the professionals are complying with the given guidelines by the institute. Therefore, the interview was structured in such a way that firstly the researcher should know exactly what is plan of action of the Institute with regard to convergence of IFRS in India. Than on the basis on the information shared by the members of the Institute the researcher went ahead to know what actually is perceived by the professionals or by the users of the financial statements. Again, there is a probability that the sample collected by the researcher might be biased. To make sure that the sample does indicate the present scenario at ground level in India, the researcher also took few illustrations from the professionals who, through the print media shared their experiences.
Following was the main structure of the interviews:
1) Why India should adopt IFRS?
2) What is the Institute of Chartered Accountants of India planning so that the convergence is smooth and is duly complied by the deadline which is 01st April 2011?
3) What is the major concern of the Institute at this hour?
4) What are the steps Institute is taking to make sure that the new professionals are competent enough so that they can handle IFRS regulations?
5) What are the objections/suggestions raised by the Industry as well as the professionals in regard to IFRS adoption?
6) How do you think IFRS conversion will change the face of financial reporting?
7) What are the problems which Indian companies are facing in implementing IFRS?
8) What is the Institute planning to make sure that proper training is being given to professionals?
9) Is Institute able to address the overflow of queries raised by the professionals with respect to various regulations in IFRS?
10) What are the steps the Government / Statutory bodies have taken so that there are no complications or overriding principles in interpretation and implementation of IFRS?
11) Are you happy with the pace the things are moving when the deadline is nearly approaching? What are your comments on convergence of accounting standards towards IFRS?
12) Being a professional Chartered Accountant what are the major issues you are encountering at present?
13) Is the Institute corresponding to your queries? How well you think the Institute is responding at present with so much pressure of deadline?
14) What are the general reactions from your clients regarding the switchover to IFRS?
15) How well do you think the professionals are prepared for such a change?
16) What is general felling and how according to you the things will change once full IFRS is implemented?
17) How well do you think the professionals are prepared for such a change?
18) What is general felling and how according to you the things will change once full IFRS is implemented?
19) Do you really feel that India as a country will be benefitted once IFRS is implemented?
On the basis of the interviews conducted by the researcher it was a general consensus that, India should adopt IFRS, knowing the fact that it is now seen as a country where every corporate house wants to come and be a part of the exponentially growing economy. Now if any Multinational company wants to invest in India it needs to read Numbers as stated in its financial statements and they will like to compare it with the peers across the globe. Since we are not following the internationally recognised and acceptable language of reporting financial statements it becomes very essential to now be aligned with the world and attract foreign investments which are key driver to any economy of a country.
The researcher on enquiring about the plan of action regarding the transition to IFRS and its swift implementation in the country as the deadline is approaching soon revealed certain interesting facts. The interviewee opinion regarding the same was that The Institute of Chartered Accountants of India has already given out fine prints on the convergence to IFRS. Though there are few issues which we need to discuss and we are in process of doing so. There are various seminars being conducted by the Institute at various parts in India. These seminars are widely welcomed by the professionals. We have made a committee which is not only working tirelessly on the regulation part but also taking note of various issues being raised by the corporate houses and professionals.
On raising the issue which the Institute is facing at this hour, the interviewee argued that the main issues in India arises when any company is preparing its financial statement not only adheres to Companies Act,1956 but also to various other statutory laws. As in the case of banking industry which follows Reserve Bank of India’s Act or in case of Insurance which is governed by The Insurance Regulatory and Development Authority ,all have to converge before India converges itself to IFRS regulations. It’s impractical to just make these laws redundant. All the statutory bodies must have to move in one direction to make sure there are no overriding provisions or clauses.
On raising concerns about whether the new professionals will be competent enough to handle IFRS regulations or not, The Institute officials were quite prompt and positive in addressing this issue. The Institute had already implemented and is practicing the same since past one year or so. The Basic structure has now been amended and recently the Institute has introduced a module for accounting standards separately. Additionally, there is a section on “Ethical Issues” in their curriculum which is also a part of the assessed modules. The new professionals will now have both the practical as well as theoretical knowledge of IFRS
On investigating about how the Institute is responding to the queries/objections by the professionals, the professionals informed the researcher that the Institute is not responding in the manner which it should have. One of the obvious reasons can be that the Institute is not in a position to give clarifications as they also might not know exactly what is the clause stating. It is quite possible that this inference might not be correct but there is no other reason as to why the Institute is pushing the matters pending. Quoting one of the conversations between professional Chartered Accountant and the institute in which the reply of the Institute was as usual a “big silence”. One of the practicing Charted accountant stated in the print media about how the Institute is corresponding to the queries. Following is the excerpt of the publication:
“. . . it is my humble submission that the whole idea of this particular workshop seems to presuppose adoption of IFRS-4 for the insurance industry, particularly the life industry, when the regulator has not taken any firm view (and, in my opinion, rightly so) on this yet.
In fact, it is also my humble opinion, IFRS is simply being thrust on us, without either Indian professionals represented by ICAI or the Indian industry being involved in the formulation of the same.
I am simply unable to fathom why the ASB of ICAI or for that matter the institute itself is bending backwards to display eagerness to adopt IFRS, which is the creation of a private body of individuals, who by no stretch of our imagination can be perceived to have knowledge of Indian commercial ethos, and fix unilateral deadlines (though recommendatory) for major business entities.
Forgive me for not being shy for articulating that people who are eager in lapping up IFRS, simply because it has been conceived in the western world, do not seem to understand that the bedrock of IFRS, which is fair value accounting, is not only unsuitable to us but also overrules the principles of prudence, going concern and conservatism, all of which are the hallmarks of good accounting that we have been taught all these years. Also, Indian business values are different and the Indian economy is more debt-driven than equity-driven.
While I strongly hold the view that IFRS is pretty unsuitable for Indian conditions and Indian business culture, deeply rooted in family-oriented ethical values, in general, I am more particularly revolted at the idea of adopting the same for insurance industry. And for two reasons:
Prudence, which should be more forcefully adopted in the insurance industry, which relies more on estimates and provisions than any other industry, will completely take a backseat, in the IFRS scenario.
The champions of IFRS always argue that IFRS, being the global accounting language, is needed to attract more FDI in to the country and that a non-IFRS-compliant nation would be perceived to be an additional risk factor by foreign investors. As everyone is aware, Indian Insurance industry does not need foreign investors but actually it is the other way around, of foreigners needing investment opportunity in the Indian insurance industry.
IFRS-4 is extant on embedded derivatives and futures, etc, which, even at a conceptual level is speculative transactions-savvy and not even permitted by the investment regulations of the regulator and any attempt to legitimise the use of such dangerous financial instruments, which will have the effect of putting the policyholders' money in deep peril, by adoption of such an IFRS, is reflective of total non-application of mind.
There is another lurking danger that is probably being overlooked. Our tax system and scheme, which is innovative enough to tax incomes which are deemed, perceived and 'not-ever-earned', might seek to tax the resultant 'revaluation surpluses' arising out of adopting IFRS, at a MAT-like scheme with promised credits at later dates. We can never take chances with our 'revenue-minded bureaucrats.' Can we?
It is my sincere opinion that the ASB and the Council should revisit the subject and resist any moves from any interested international community in the matter of adoption of any standard, be it on accounting or auditing, in which we had no role in formulation.
It is time we take a principled stand that we will be no more rule followers but rule-setters; that we will not be led but will only lead.“
The above is only one of many examples which can be stated. The role of the Institute here is again been questioned. In one of the interviews of a profession Chartered Accountant, the Institute has been referred as “a cheerleader”.
The researcher on enquiring about the future prospects after the implementation of IFRS, officials were quite confident in their views and argued that after the transition to IFRS many companies will definitely have an edge over their peers across the globe. As of now India is being the only country in the world where foreign investors are more than eager to invest their money. When the financial statements are presented in the form of the language which they believe are more adequate, more reliable and more authentic they will surely compare the financials with the market leaders. The Institute is quite confident about the future prospects on Foreign Investments to grow exponentially.
Clause 49 of the listing Agreement states that every listed company must have an audit committee and members of such committee must have been “financially literate”. The above clause will change once the companies adopt IFRS. The requirements than will be that “Board” should be “financially literate” and one Director (at least) should be “Accounting Expert”. This clause will have a huge impact on the governance structure of any organization. Once IFRS is adopted the “Audit Committee” will also share the same responsibility which presently is only shared by the Chief Financial Officer(CFO) of the company.
The researcher on asking the professionals, as to what are the major concerns faced by the companies at this hour. Following were few of the concerns which almost every professional shared with the researcher:
1) They lack the skilled professionals who are competent to handle this conversion. The problem still persists as there is no proper infrastructure where a proper training can be imparted to all the professionals. No such clarifications or guidelines are being issued from the Institute. The corporate houses are themselves hiring professionals at their own cost and training their employees. They were expecting that the Institute might arrange workshops where exposure to IFRS is given.
2) Not only Interpretation of IFRS is an issue but also interpreting the difference which will arise once the company is transited from local GAAP to IFRS. Again, the professionals were not satisfied at all with the clarifications which the Institute is issuing on various clauses in IFRS.
3) The unavailability of data for fair valuation will be another issue which the companies might face after adopting IFRS’s.
4) There is a requirement by all the companies to upgrade their “IT Division”. The software will now be upgraded so that IFRS is properly implemented. So the cost to the company will increase drastically.
5) Not only the “Audit Staff” of the company is given proper training but also the company has to make sure that right from the executive level to the operational level each and everyone knows exactly what is happening. The reason is quite obvious that if there is any confusion than it will directly impact the operations of the company. This will directly influence the “numbers” shown in the financial statements.
The researcher on asking the officials about the steps which the Institute has already taken at their end so that at least very one gets the feel of the IFRS’s. The officials argued that the Institute is already organising seminars at various branches across the nation. Not only this but the Institute already and still continuously issuing guidelines, sufficient information with regard to queries raised through its “Students Journal” or “Chartered Accountant Magazine” which are regularly published by the Institute.
But again Institute expects from the corporate houses to make sure that the information is properly conceived and proper training is provided to the professionals. According to them the Institute is regularly issuing guideline on all major issues which they think might arose on implementing IFRS. The Institute is closely working with all the statutory bodies and they are conveying meetings on a regular basis so that there is no overlapping of any proviso once IFRS are implemented.
The researcher when raised the issue that the professionals are not satisfied with their responses the Institute officials accepted that lots more have to be done in this regard. Infact one of the officials was bold enough to argue that it has not been possible to reply to each and every query raised but Institute will do everything possible to make sure that proper response is given to everyone. The problem with the Institute at present is that it flooded by enormous amount of suggestion/objections/queries and practically it becomes impossible to make sure that each and every query is responded. Though every effort is being made to resolve every query and the Institute has taken an initiative to create a department headed by one of the member of the IFRS compliance committee.
On raising a critical issue by the researcher on whether the State Government/ Central government are working with the Institute so that the transition is smooth. The Institute officials were careful and quite susceptible in responding to this query. Rather, The Institute was pretty silent in this matter and said that various statutory bodies are all working in tandem to make sure that there is no discrepancy. On asking what steps have the government taken so far, the reply was straight-forward. “We are working on it”. In a recent article published in a National Newspaper the story was self explanatory. Though the researcher quoted this article to the officials, still the response was pretty much the same “we are working on it”.
The article was “The recent RBI circulars on ‘prudential guidelines on restructuring of advances by banks’ could have the effect of disguising bad loans as “standard assets” for at least a period of 210 days, ICAI officials noted .In the wake of the spill over effects of the global downturn affecting the Indian economy, the RBI had sought to provide some breathing space to financially stressed borrowers by relaxing the asset classification norms for accounts that were being restructured. For all accounts that were categorised as “standard assets” as on September 1, 2008, a simple application from a borrower before March 31 2009 for a restructuring proposal that would be completed in 120 days would be enough to treat such accounts as “standard assets”. By this treatment, it appears that no NPA would get reflected in the balance sheet of banks as late as December 31, 2009, the ICAI has said. In the Global Trust Bank (GTB) collapse case, the auditors came under scanner for inadequate provisioning of non-performing assets.”
The crucial issue here is that these statutory bodies should make sure that they converge first rather than just thinking about converging or adoption of IFRS’s only. The outcome will be not be not is desirable if the current situation is not changed immediately. The Government is trying to resolve the issue but there will be reactions and there are from the professionals. The standards which India is following are more than four decades now. You just cannot remove the Acts straight away. The process could have been more streamlined if these statutory bodies agree to converge as early as possible. At present the situation is not that encouraging.
On asking the professionals whether they are satisfied with the efforts that the Institute has taken so far. The researcher had almost same response from each individual interviewee and was that, The Institute so far has given the broad outline for such a conversion but the “fine prints” are still to addressed by them. Majority of the professionals are really anxious to hear more from the Institute. None of the members whom i interviewed were satisfied. Rather they were just repeating that the Institute could have avoided this current crisis. They argued that if we look at the present situation where across the globe there is a meltdown India without these IFRS’s are predicting GDP growth of 9%. With the deadline approaching they are really feeling the heat. Also with no clear indication by IFAC in certain clauses also worry them.
On asking the practicing professionals about their general comments on IFRS convergence, most professionals argued that the whole idea of IFRS convergence is just “waste of time, energy and money”. One of the working Chartered Accountant said that if the logic behind IFRS adoption is that it will give more fair view of Financial Statements then he thinks there is absolutely no need to adopt or converge to IFRS. He continued and said that if the world thinks that by adoption or convergence to IFRS will prevent or reduce Fraud or enhance more disclosures than those who think that way will have to think again. Satyam was the first corporate house which reported their financial statement under IFRS regulations but also reported under US GAAP. Therefore, the reason wouldn’t be suffice if fraud and enhanced disclosures are one of the reasons for convergence.
There was a general feeling among all the professionals, more or less that India should ask the world to follow their Accounting Standards which according to them are more reliable and tested with times.
The researcher on enquiring the practicing Chartered Accountants about how IFRS implementation might affect their profession as a whole, the interviewees were quite nervous. On raising this issue, almost every one of them replied that they are really in a state of total confusion at this hour. The confusion is whether India will adopt IFRS or will converge to IFRS regulations. Few of them were bold enough to tell frankly that they really don’t know whether they will survive professionally. Reasons were quite obvious. Presume that a working professional who has worked for say 25 years or so will definitely find it difficult to follow IFRS requirements. One of the professionals even went much ahead of what the researcher thought about it and said that they at present are only getting around “Rs 15,000 (Approximately £180) per company at present for their audit services.
On implementation this cost to company will be reduced rather than increasing as almost every corporate house is at present spending huge on transforming themselves to IFRS. Not to mention that they will not agree to hike this fees at the present economic downturn where the signs of recovery are still not visible. Another issue raised by the interviewee was the concepts like “Fair Value Accounting”, “Multiple value Accounting”, Consolidation not based on ownership rather on control, Lease accounting based on substance not form, Accounting for derivatives, investments, employee benefits, and deferred taxation are few examples which will come into existence for the first time in adoption of IFRS. The Institute is yet to give clarifications on these issues.
The researcher on asking the practicing Chartered Accountants regarding how their clients are reacting on this scenario of transition to IFRS reporting, more or less everyone has a common opinion that the client is only looking at the monetary aspect. They say that the cost factor major concern. By cost they mean that the cost of conversion of their software’s cost of training of the professionals who have no knowledge of IFRS. Also they are more worried about the fact that their financial statements will not be read properly by the shareholders or stakeholders as they might not possess the knowledge to read between the lines.
There was a feeling that there might be a conflict between the statutory bodies when implementing IFRS. The reasons were simple as there is no such significant announcements made as of now by the statutory bodies as to how they will incorporate their laws when IFRS implementation will take place.
But there is a positive aspect to this also. Everybody will have to agree that confidence is the only factor which drives the market and the economy as a whole. The corporate houses know that in today’s world where the investors, shareholders, and analysts are now more alert when it comes to numbers in the financial statements. It will really be worth reporting their numbers in IFRS which is globally acceptable language where one can easily compliment and make comparison with their piers globally. This will definitely increase the confidence and investments in the company.
Yet again, raising the issue about how promptly the Institute is responding to their query or suggestions. Majority of them gave negative views on asking whether the Institute is corresponding or not. A general feeling is that Institute is not responding as expected. One of the Chartered Accountants even referred them as “A Postman”. If any query is raised by any professional then the Institute always responds that the matter is still pending or the matter has been referred to Company Law board or the matter has been now escalated to Ministry of Company Affairs (MCA).
The researcher on raising the issue of how well they think they are prepared as the deadline of IFRS implementation is not far off, majority of the professionals now believe that it is early for them to go for IFRS as per the deadline set by the Institute. Also that the general feeling in the market regarding IFRS implementation is that, India is going at a pace which is expected now to reach 9% GDP growth. This is when Indian companies are following Indian Accounting standards. They also argue that India as a country should not follow or converge to IFRS but rather they should pressurise the west to follow their standards.
One of the very crucial issues raised by the professionals was that the institute is not doing enough to make sure that we have our own say in the accounting world. We do not enough professionals who are writing research papers or into the research area as what we see across the world. The institute should make an effort so that the professionals are also inclined towards academic research also. There is no such provision as such where the institute is laying some extra funds so that there is a proper infrastructure. This is one of the very crucial factors which makes the task easy in the
The researcher also asked the professionals about their general feeling in context of this whole idea of India converging to IFRS, a majority of the interviewee had a feeling that it is a decision which has been taken in haste and has been imposed on us by the Institute. The interviewee were also anxious to know what exactly will happen after 1st April 2011 and before the Year 2014 when United States of America transits from US GAAP to IFRS regulations . And it seems unlikely that United States without making any amendments adopts IFRS . Now this will have a great effect on India as it will be in a very premature stage of implementing the IFRS’s. During this period it will be a cerotic situation where India will have to again adjust itself with the changes. This will have a negative influence on financial reporting.
ICAI’s former president T N Manoharan, in an interview was honest enough to accept “. . . what we should aspire to achieve is to secure position and role in the formulation of IFRS. We are 1.2 billion population, out of th e6.1 billion of the world, and thus have 1/6th of humanity, besides being one of the fastest growing economies. We cannot be merely adopting without a hand in the formulation. No doubt we have some representatives from the country but not nominated by ICAI.”
Finally the researcher asked every interviewee about their views regarding India as a country benefitted once these IFRS regulations are operational, most of the respondents agreed and argued that there is no doubt that the foreign investment will be increased once IFRS is implemented. As of now India being “non IFRS compliance country” is treated as “a risk” investment. This scenario will change once IFRS is implemented. Cost to company which is presently preparing multiple set of financial statements will be reduced. The amount of time consumed in the preparation of such statements can be applied in other constructive work. Companies which have subsidiaries outside India will now be able to communicate efficiently once IFRS is implemented.
Both the Holding as well as Subsidiary will be following same set of standards. That will make the “internal communication” more smooth. Above all, the professional Chartered Accountants who have no exposure to IFRS as of now will be able to compete with the world once they start working under the same environment. They will have the same knowledge and expertise which any other professional has across the globe. So as a whole the country will be benefited if IFRS is properly adopted.
The inferences from the above interviews are:
1) The professionals are really not satisfied with the efforts with which the Institute is progressing towards the deadline. They are really looking forward for more clarifications within proper response time.
2) More or less they really want that Institute should make an extra effort towards educating professionals and making them more verse with IFRS’s. Rather than just having conferences there should be a proper training programme for each and every professional. By training programme it implies that there should a say, a week-long training session to be given by anyone who know how to implement these accounting standards.
3) The Institute is still to make sure that there are adequate professionals who have prior experience of IFRS’s. There is scarcity of these professionals at present.
4) The Institute should also invite the academicians from across the world on a continuous basis. There should be a proper allocation of funds for this purpose. The only way out in such a complex situation, where India is at the moment, is to make sure there are views by these people who can really foresee the future or at the most can predict what can be the consequences under the current scenario. At present we do not have such reserves or allocation of funds. If you compare it with the European countries where there is an ongoing process in which the research is really taken seriously. That is one of the reasons why we do not have research papers from India. We should now think on investing with these professionals which can be quite beneficial in long term.
5) The Government is still not doing enough to make sure that all the statutory bodies are converged in a manner that there are no contradictions within themselves. There should be an active participation of the professionals in this process. At present this is clearly absent.
6) There is no role of the Institute or any on the members from the Institute in IFAC board at present. There are few professionals but none nominated from the institute. There should have been a proper say in IFAC’s compliance committee.
7) There is no department or a section where all the queries/suggestions can be processed. A proper allocation of a department which only deals with queries/suggestions regarding IFRS implementation should be made by the Institute.
8) The professionals were quite unsatisfied with the pace with which the Institute agreed to converge to IFRS regulations. The interviewee even referred to few companies like Satyam Computers which was first company in India which followed IFRS regulations. The majority of the interviewee were of the opinion that mere regulations would not serve the purpose. Rather educating professionals, giving proper training and making them more verse with the accounting principles will definitely help the society in the long run.