The finance ministry has taken the view that the International Financial Reporting Standards (IFRS) needs to be adopted only on consolidated accounts of corporate groups as is the practice in Europe. It feels the proposed fair-value-based accounting regime cannot be enforced on a standalone basis to individual firms as has been recommended by the accounting rule maker ICAI and the corporate affairs ministry.
The ministry’s views would be formally conveyed to the corporate affairs ministry shortly for the latter to make necessary changes in the norms, according to a source privy to the matter.
North Block reckons that adoption of IFRS for individual companies has several serious implementation issues, which would derail efficient tax administration.
IFRS, which is followed in more than 100 countries, is believed to capture a more realistic picture of a companys financial health than the existing Indian accounting norms, which are more conservative. The most talked about virtue of IFRS is that it requires companies to show the actual market value of assets instead of their cost of purchase. But the frequent re-assessment of assets and liabilities based on fluctuating market value would cause hardships to taxation, which is based on the cost of purchasing the asset (called the historical cost), feels the finance ministry.
North Block also has serious concerns on the sentiment-driven volatility embedded in fair valuation of assets and liabilities, also because it would impact taxation.
For the purpose of taxation, the market value of an asset becomes meaningful only when it is sold or bought. Adoption of fair valuation of assets for preparing financial statements would lead to a situation where companies may be asked to pay tax on gains or appreciation of assets even if they are not sold. Similarly, companies can show a lower tax liability when asset prices go down, even if they have not actually incurred that loss in a transaction, explained an official.
Taxation of notional (unrealised) profits and losses would have huge revenue implications when IFRS is implemented on the top 100 companies in India, said another government official. IFRS is based on arbitrary pillars. Why bring fiction into profits, asked this official.
The whole of Europe has adopted IFRS on consolidated accounts and not on standalone basis.
As per the current road map, companies on NSEs Nifty 50 and BSEs Sensex 30, companies listed abroad and all companies with a net worth of over Rs 1,000 crore will have to converge their opening balance sheets with IFRS on April 1, 2011. Others will follow in due course.
The finance ministry will soon give its views on the subject to the corporate affairs ministry to make possible changes, said a government official privy to the development.
The corporate affairs ministry and ICAI stand by their road map but agreed to work with the finance ministry to sort out the tax issues. We stand by the road map prepared by a core panel, which includes industry representatives. It would be difficult to alter the road map at a juncture so close to the deadline. We are in constant touch with the finance ministry to sort out the tax issues, said Renuka Kumar, joint secretary, ministry of corporate affairs.
ICAI sources said that in Europe, both IFRS and taxation are implemented on the consolidated financial statements.
India could make a beginning by implementing IFRS on individual companies and then move on to consolidated accounts; otherwise, it would create confusion among all stake holders, said an ICAI source, who asked not to be named.
When contacted, ICAI president Amarjit Chopra said, We stand by our commitment to implement IFRS from April 1, 2011 as per the road map. Prime Minister Manmohan Singh has also made this commitment to the world. We will do whatever is possible from our end to make this goal a reality. ICAI has already given a list of implementation issues to be sorted out to both the ministries.