Approaching IFRS (the International Financial Reporting Standards) through a converged set of accounting standards, as announced by India, is a highly inconsistent but alternative line of thinking, observes T. P. Ghosh, Professor in the Institute of Management Technology, Dubai International Academic City, UAE (www.imtdubai.ac.ae).
For starters, it may help to know why there is a growing interest among all capital market participants including the SEC in the US for accepting a single set of robust accounting standards. Many multinational companies and national regulators and users support global standards because they believe that the use of common standards in the preparation of public company financial statements will make it easier to compare the financial results of reporting entities from different countries, explains Ghosh, in the course of a recent interaction with Business Line over the phone and email.
“They believe it will help investors to understand opportunities better. Large public companies with subsidiaries in multiple jurisdictions would be able to use one accounting language company-wide and present their financial statements in the same language as their competitors. Interestingly, 90 per cent of the respondents to an IFAC survey in 2007 said IFRS adoption is very important or important for economic growth (www.ifac.org).”
What worries Ghosh is that many countries that claim to be converging to international standards may never get to full compliance. “Most reserve the right to carve out selectively or modify standards they do not consider in their national interest, an action that could lead to incomparability — the very issue that IFRS seek to address.”
Excerpts from the interview.
Globally, is the IFRS debate getting caught up in rhetoric? Is there disharmony in the understanding of the terms associated with international financial reporting?
Possibly, the fair value measurement of assets and liabilities is not appropriately perceived. In particular, there is confusion about the methodology to be adopted for fair value measurement of non-traded financial assets at initial recognition; and subsequent measurement is not properly understood.
Nevertheless IFRS get adequate acceptance. Of course, in many jurisdictions the critical issue is the diminishing role of the national standard-setters in the post-IFRS adoption era. In the case of convergence, the national standard-setters can retain their roles and responsibilities.
Of course, there are certain serious conflicts such as the regulatory minimum depreciation versus accounting depreciation, or prudential provisioning versus accrued loss approach for provisioning. There is the fear of under-depreciation or under-provisioning.
International standard-setters have the concern of over-conservatism. National regulators could avoid this debate by creating regulatory reserve. Dividend distribution policy can easily be regulated taking care of the desired level of retention.
To add to our woes, there is also confusion about the term convergence. Malaysia wishes to converge to IFRS by 2012 but “convergence with IFRS means full compliance with IFRS as a basis for financial reporting system in Malaysia.” On January 28, 2010, the Brazilian Federal Council of Accounting and the Brazilian Accounting Pronouncements Committee signed a memorandum of understanding (MoU) with the IASB that sets end-2010 as the target date for full convergence with IFRS and establishes a framework for future co-operation between the organisations.
The Korean Accounting Standards Board (KASB) has adopted IFRS as Korean IFRS (K-IFRS) which are completely identical to IFRS except for the timing differences for newly-published IFRS. K-IFRS are proposed to be kept up-to-date as IFRS change.
K-IFRS will be required for all listed companies in Korea from 2011. Unlisted companies may elect to use K-IFRS. All listed companies other than financial institutions can apply K-IFRS as early as 2009 on a voluntary basis. This alternative is somewhat as in India except that Indian Accounting Standards Board has been engaged in a lengthy process of reissuing exposure drafts on a globally exposed set of accounting standards for Indian convergence.
What is your view on India’s approach towards IFRS?
India is pursuing a convergence approach. Convergence implies allowable differences in presentation, measurement, recognition and disclosures. Of course, it is not yet clear whether there will be full compliance or not.
But the recent press release of the Ministry of Corporate Affairs signals divergence. It seems India will not apply IFRS 1, ‘First-time Adoption of International Financial Reporting Standards,’ in the convergence process. There is already announcement of exemption from providing comparatives in the IFRS convergence, which is contrary to the requirement of IFRS 1.
Also, there is an announcement regarding the issuance of the revised Schedule VI. The IAS 16, ‘Property, Plant and Equipment,’ on the contrary, requires depreciation charge based on estimated useful life, residual value and major components of an asset.
Unlike Malaysia and Canada, India has not yet signalled full convergence.
How has been the record in the implementation and adoption of national accounting standards in India? Do you expect that many of these issues will be ironed out in the post-IFRS era?
There are three issues – conflicting regulatory framework, divergent view of the national standard-setter on many accounting issues, and procedural delays.
Time lag in adopting a new accounting approach is very high in India although all Indian accounting standards are based on the IAS /IFRS. Improvement in the presentation of financial statements has been delayed because of regulatory framework. There is resistance to de-regulate the format of the financial statements.
AS 16 to AS 29 were issued after an average time lag of 5 years. The time lag was due to ideological resistance. There has been very low acceptability of segment reporting, consolidation, and deferred taxation.
India does not have national standards on investment property, agriculture, share-based payment, non-current assets held for sale, etc.
Existing standards are not updated. Here, procedural delays may be major reasons rather than serious ideological differences. For instance, there could be no reason for revising conditions for revenue recognition or accepting the concept of operating segment. There could be no ideological difference in accepting balance sheet liability method of deferred taxation.
AS 30 to AS 32 are issued but not implemented, which are major divergent areas. Understandably there is implementation difficulty. But it was the responsibility of national standard-setter to replace in a timely manner the orthodox investment accounting standard, which is another extreme of the application of historical costs ignoring the available fair market value of a financial asset.
As a result, almost all Indian standards have become divergent over the years.
Given the proposition of converged set of accounting standards, I don’t think the situation will improve. The converged set of standards will become divergent in no time given the adaptation time lag in India.
In what areas of IFRS transition do you foresee Indian corporates facing difficulties?
Difficult areas are many, of which the important ones are –
i) Componentisation of property, plant and equipment and making depreciation charge.
ii) Re-creation of cost records of property, plant and equipment for IFRS adoption or determining fair value which will be the deemed costs.
iii) Measurement of amortised cost of financial liabilities and financial assets having scheduled cash flows.
iv) Creation of tax base of assets and liabilities.
v) Decomposing compound financial instruments.
vi) Application of impairment analysis on loans and receivables in place of standardised provisioning.
Interestingly, any retrospective application of change in accounting policies and rectification of errors will cause considerable difficulties in the post-IFRS era. Local accounting software should be effective enough to capture retrospective application and retrospective restatement.
Any other points of interest.
Major issue is global harmonisation of financial reporting necessitated by the cross-border listing and fund-raising; this seems to be forgotten in the convergence process. Uniformity in financial reporting would be feasible through IFRS adoption, not through convergence with differences. The G-20 leaders also emphasised on global financial reporting standards.
Second, instead of reproducing a converged set of standards with differences or full convergence, it could be appropriate to list the IFRS clauses which India does not wish to accept and provide additional guidance wherever the national standard-setters think appropriate. This would help the issuer of financial reports and users to reconcile the divergences.
