IFRS: More time will benefit all

Instead of notifying Indian IFRS standards in bits and pieces with a lot of loos
e ends, it will be worthwhile to adopt a holistic approach taking some more time
to address all issues in full before implementation.
Finally the Ministry of Corporate Affairs notified 35 Indian IFRS standards (Ind
-AS), without announcing the implementation date. Therefore there is no guarante
e that the April 1, 2011 implementation date as indicated in the road map will b
e achieved. Standards on insurance, leasing, service concession arrangements, mi
neral resources, agriculture and rate regulation have not been issued. Though th
e notified standards refer to a framework, the same is also not notified.
Accounting for real estate, financial instruments, fixed assets, foreign exchang
e accounting and first-time adoption have been changed significantly. Optional a
ccounting treatment allowed under IFRS have been eliminated, for example, the op
tion to account for investment property at fair value or preparing profit and lo
ss account using a functional classification in IFRS is not available under Ind-
AS. The notified standards do not contain the scoping requirements for consolida
tion, as the same is expected to be dealt with by the forthcoming Companies Amen
dment Bill.
COMPARATIVE NUMBERS
Ind-AS first time adoption standards do not require comparative numbers to be pr
ovided, and imposes a huge penalty to companies that do want to provide comparat
ive numbers. The one's that want to provide comparable numbers will have to tran
sition on two dates (April 1, 2010 and April 1, 2011), which seems rather unique
, unnecessary and self-defeating. The approach results in non-matching of the ba
lance sheets and in many cases, may actually distort comparability.
The option to amortise foreign exchange losses under Ind-AS would end up distort
ing EPS and market valuation of companies. For example, A company has taken a lo
an of $100 in year 1999-2000 repayable after 3 years when exchange rate was Rs 4
3 to a dollar. Exchange rates at end of year 99-00, 00-01 and 01-02 were 43.63,
46.46 and 48.89 respectively. If the company does not avail the option, it will
charge off exchange loss of Rs 63, Rs 283 and Rs 243 in each of the year respect
ively. With the use of option, charge to P&L in each of the year will be 21, 163
and 406 respectively. It is clear that use of option will lead to backloading c
harge of earlier years in certain situations.
The implementation of Ind-AS is also subject to successful enactment of the Comp
anies Amendment Bill, as numerous sections such as 391, 394, 100, 78, Schedule V
I and Schedule XIV conflict with the requirements of IFRS. Worse still, the depr
eciation rates under Schedule XIV could become the de facto rates under Ind-AS,
though in principle those may not reflect the useful life estimates of the manag
ement under IFRS.
TAX SITUATION
The tax situation is equally compelling. Typically IFRS accounts are meant for i
nvestors. Taxation has a different purpose and hence will have a different persp
ective compared to an investor. For example, an investor in an investment proper
ty company would evaluate the company based on the fair value of the investment
properties. Tax, on the other hand, will focus more on rental income and realise
d profits on sale of the investment properties. It is therefore imperative that
in the long run tax authorities develop their own tax accounting standards that
necessarily would have to depart from IFRS. The question therefore is what shoul
d be done in the interim. Some argue that tax could continue under current India
n GAAP. But that would mean, companies would have to prepare both Ind-AS and Ind
ian GAAP financial statements a move that is resisted by many.
However, given that the objective of investors and tax authorities will remain d
ifferent, it is an inevitable consequence that two sets of standards would be re
quired. Things could be made a little easy, for example, by requiring reconcilia
tion from IFRS profit numbers to taxable income rather than a full tax financial
statement. But the point remains that two set of standards will be required, an
d taxation authorities cannot indefinitely continue to fill the gap by using cou
rt rulings as that would make the entire environment uncertain and litigious.
NOT IFRS-COMPLIANT
Some argue that the notified Ind-AS standards are more close to Indian GAAP, tha
n they are to IFRS. Certainly Ind-AS are not IFRS-compliant. The gap may further
widen on account of local interpretations of standards and legal conflicts. Fur
ther IFRS standards are very dynamic and Ind-AS will have to keep pace with the
changes. Under these circumstances, it is questionable if we have fulfilled our
commitment to converge to IFRS made at the G-20 summit. Moreover, the original p
urpose of making financial statements relevant for global and local investors an
d to speak in a common accounting language so as to facilitate inbound and outbo
und capital flows is lost. Indian companies will question the need to move from
one form of Indian GAAP to another form of Indian GAAP.
TOO MANY OPEN QUESTIONS
There are too many more open questions on the applicability of the roadmap itsel
f and the notified standards. Whether leasing, infrastructure and other Ind-AS s
tandards can be early applied? What framework unlisted private equity and ventur
e capital funds should apply? What accounting will apply to oil & gas companies?
A group comprising of an insurance company and a Phase 1 company needs to prepa
re consolidated accounts under Ind-AS, though otherwise the insurance company is
covered only in the following phase. As the implementation date for Ind-AS on i
nsurance contracts is not yet notified, how can the group practically comply wit
h the requirement of preparing consolidated accounts under Ind-AS?
Those close to the implementation are aware that the entire situation has become
a maze and the penalty of sticking to an artificial deadline could be high. Und
er these circumstances it is better to pause, and resolve all the issues in a ti
me-bound and professional manner. Everyone is looking to India to play the leade
rship role. Part of the problem arises when we try to adopt standards in bits an
d pieces rather than as a whole. By taking a little more time, India should look
at adopting the IFRS system in full in the near term, so as reap full benefits
and make Indian financial statements of value to local and global investors.