CA Pradeep G Bajoria
International Financial Reporting Standards (IFRS) are principle based standards as against the rule based standards currently in force; that establishes recognition, measurement, presentation and disclosure requirements relating to transactions and events that are reflected in the financial statements. IFRS was developed in the year 2001 by the International Accounting Standards Board (IASB) to provide a single set of high quality, understandable and uniform accounting standards.
IFRS in India
India is one of the over 100 countries that have or is on the verge of converging with IFRS with a view to bring about a uniformity in reporting systems globally, enabling businesses, finances, and funds to access more opportunities.
The Ministry of Corporate Affairs (MCA) in its press release dated 25th February 2011 had notified 35 Indian Accounting Standards converged with IFRS (known as IND AS). The MCA will implement the IND AS in a phased manner after various issues (for example tax related issues) are resolved with the concerned departments/authorities. Though, there has been considerable delay in the implementation of these standards, efforts are on the run. The newly revised Schedule VI which is based on IAS 1 is a clear evidence of being optimistic on convergence with IFRS.
Need for IFRS in India
A number of multi-national companies are establishing their businesses in various countries with emerging economies and vice versa. The entities in emerging economies are increasingly accessing the global markets to fulfill their capital needs by getting their securities listed on the stock exchanges outside their country. Capital markets are becoming integrated worldwide. More and more Indian companies are also being listed on overseas stock exchanges. Sound financial reporting structure is imperative for economic well-being and effective functioning of capital markets.
Why convergence is required in India?
The aim has always been to follow the IFRS, to the extent possible, while formulating the Accounting Standards. However, deviations from IFRS have been made due to various unavoidable reasons as mentioned below:
1. To maintain consistency with the Legal and Regulatory Requirements
2. Economic environment
3. Level of preparedness
4. Conceptual differences
Benefits of convergence with IFRS
1. Increase in the growth of business worldwide.
2. Increase in investment and inflow of foreign currency from overseas market
3. Information will be more reliable and comparable as the Balance Sheet and Profit & Loss Account will be prepared using a common set of accounting standards (i.e. IFRS). Such information will help investors to explore investment opportunities easily & quickly as against the financial statements prepared using a local or different set of accounting standards.
4. As IFRS is accepted worldwide, convergence with IFRS will increase investor’s confidence.
5. Companies will be able to raise money not only from domestic market but also from overseas markets at lower cost if their financial statements comply with globally accepted accounting standards.
6. Load of preparing financial reporting as per each countries requirement is reduced with the convergence of IFRS because of the worldwide acceptance of IFRS.
7. Convergence also reduces the costs of preparing the financial statements as only one set of financial statements needs to be prepared instead of different sets of financial statements as per different countries requirement.
Impact of IFRS on Indian Banking Industry
1. The financial impact of convergence with IFRS will be significant for banks in India, particularly in areas relating to loan loss provisioning, financial instruments and derivative accounting.
2. In banking companies, financial reporting policies are specified by the Reserve Bank of India. Adoption of IFRS requires a significant change to such existing policies and could have a material impact on the financial statements of the companies.
3. In addition to the financial accounting impact, the convergence process will have a huge impact on the financial reporting systems (including IT systems) and compliance processes.
4. Banks operates in a regulated industry (in India it is regulated by RBI) and hence is subject to strict regulatory compliances. Applicability of IFRS may amount to increase in losses and impairment in loans which would ultimately affect the available capital and capital adequacy ratios.
Why India is deferring implementation of Converged IFRS (Ind AS)
1. Unlike several other countries, the accounting framework in India is deeply affected by laws and regulations. Changes may be required to various regulatory requirements under the Companies Act, 1956, Income Tax Act, 1961, SEBI, RBI, etc. so that IFRS financial statements are accepted globally.
2. It is also argued that countries like the USA and Japan had not adopted the IFRS as they are still studying the implications of the move. As USA will probably adopt IFRS in 2014 and Japan in 2015 various speakers and delegates argue that India can also defer the implementation of Ind AS to 2014/2015. The debate still continues.
3. Lack of preparedness and confusion over taxation matters, corporates had been lobbying hard to defer the implementation, arguing that they were not prepared for such a convergence right now.
4. Due to political disturbance number of bills (for example Banking Laws (Amendment) Bill, 2011, the Companies Bill 2009, Direct Taxes Code Bill, 2010 etc) are pending for implementation, which has also led to the deferment of IND AS.
5. One of the facts is also that the IFRS itself is undergoing a change which could be also one of the reasons according to me for deferring the implementation of IND AS.
(The author is working as a functional consultant in Banking and Financial services group with Tata Consultancy Services Ltd and can be reached at his email id firstname.lastname@example.org)