Accounting regulator in India have not yet clarified on whether Indian companies, when they shift to IFRS on April 1, 2011, should recast revenues and expenses of the previous years, in line with the IFRS practices followed elsewhere, or would the domestic accounting regulator excuse local entities from this restatement.
There is an urgent need to clarify how the accounting for historical transactions and consequently revenues and expenses recognized in the periods prior to the IFRS convergence will be treated.
Clarity on this matter is critical for companies to prepare for any possible situation in the run-up to the convergence into IFRS norms.
The issue is relevant because if the restatement of earnings—as per the IFRS rules—is downwards, this could lead to similar adjustments in retained profits. This will in turn impact a company’s net worth (total share capital + reserves)—a key determinant of the value of an entity. Lower net worth affects the company’s valuation ratios, which are closely watched by investors and analysts in the market.
If India decides to implement IFRS only on transactions from April 2011, and not historically, accountants believe it will be simpler to apply. But, the issue will be that the diluted accounting norms locally will not be in line with global standards, defeating the purpose of a unified accounting rule.
Accountants are also seeking clarity on the local tax treatment involving the restatement of earnings, post the shift to IFRS norms. For instance, it is not clear whether companies can claim deduction, if there is a debit to the reserves.