ifrs the way forward1692-1695

8/14/2019 IFRS the Way Forward1692-1695

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The Chartered Accountant 1693May 2007

That, however, does not mean that we exposeall our non-global Indian companies to 2500 pageso IFRS text particularly Small and Medium Sized Enterprises (SME).It may be noted that a substantial

portion o Indias GDP is contributed by SMEs. Itwould be unwise to impose unwanted accountingburden on SMEs. I and when a SME becomes aglobal player, it can shi t to IFRS.

Going orward, there should be two categories o reporting entity in India, the SMEs and the rest, i.e.,global companies, listed companies, and companieswith public accountability. The latter should ollowIFRS and the SMEs should ollow standards that aretypically driven to meet limited user requirement,such as those o taxation authorities. Seen romthis angle, both disclosure as well as recognitionexemptions should be given to SMEs. For example,since SME accounts are predominantly used or taxpurposes, impairment and de erred taxes and suchother accounting requirements may not be relevantto SMEs. SMEs would have private lenders, butlenders have evolved their own independent basiso assessing SMEs and that would not be dependenton SMEs ollowing IFRS. I India were to convergeto IFRS, the existing SME standard will need to berevised to exempt SMEs rom the rigours o IFRS.

Whilst departing rom IFRS is not a solution,India nevertheless needs to be sensitive to thepit alls o ully converging with IFRS, so that we canprepare ourselves and take appropriate remedialaction. There are challenges that nations adoptingIFRS need to counter in the coming days. One bigchallenge or countries adopting IFRS is the shortageo resources, particularly IFRS-trained pro essionals.

With Chinas listed companies adopting IFRS,demand or accountants is rising and could run into

the millions in coming years i the new standardsare rolled out or all o the countrys companiesand not just the listed ones. Accountants say thatthe challenge or China will lie in getting its over1,100 listed companies to establish the appropriate

nancial reporting systems and in training enoughquali ed accountants. Our view is that it will be areal challenge or China to train su cient numbersto cater or the exponential growth o its economyin the coming years, said Eric Anstee, London-based chie executive o the Institute o Chartered

Accountants in England & Wales. To put this incontext, China currently has a short all o 300,000

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quali ed accountants and is likely to require a urther three millionover the coming years i it is to keep pace with its current rate o economic growth, he added.

Also, since IFRSs are air value driven, IFRS nations would need

a large pool o valuation experts. India should be aware o thesechallenges and tackle them through advance planning, withoutdelaying its IFRS convergence target.

One common criticism about IFRS is that it is heavily loaded inavour o air valuation principles. These principles are very subjective

and would result in signi cant volatility in periodic results. Worse still,whilst every other IFRS standard requires application o air valuationprinciples, there is not a single IFRS standard which provides guidanceon how air values are determined. A UK-based global accounting rmdid a small exercise to determine how reliable air values are. It wasnoticed that in a live example on ESOP valuation by making changesto the model input variables, all o which ell within the bound o acceptability, the option expense or a particular company could havebeen varied rom 40% to 155% o reported income.

The FASB has recently issued Statement o Financial AccountingStandards No. 157 Fair Value Measurements (SFAS 157), whichestablishes a single set o guidance or air value measurementsunder US GAAP. The IASB (IFRS standard setter) recognised the need

or consistent guidance on measuring air value in IFRSs and orconvergence with US GAAP. Consequently, IASB has decided to usethe FASBs Statement as the starting point or developing its own

standard on how to measure air values.One o IASBs challenges is to ensure that it brings stability in the

entire ramework, provide clarity on a large number o con using issues,address appropriately the air value criticisms and most importantlyensure that the standards are interpreted and applied consistently, beit in Asia, A rica or America.

A global accounting rm reviewed the rst IFRS nancialstatements o some o the largest corporations, to assess the degreeo consistency and comparability among companies that has resultedin IFRS adoption, and to ascertain how per ormance measures basedon IFRS have been used in market communications. The key ndingso the survey are:l Despite the challenges and the signi cant departure rom

previous national GAAP, the rst IFRS implementation has beena resounding success overall.

l Companies that have applied IFRS rst time continue to maintainthe favour o previous national GAAPs in the absence o best IFRSpractice, which will take some time to evolve.

l Signi cant judgements had to be applied in many situations,which exposes the conficts within and between IFRS standards.

l The absence o industry-related IFRS standards and best practices(which will evolve overtime), consistency and comparabilitybetween various companies in an industry was a ected.


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l Companies have widely used alternative, non-IFRS measures ormarket communication. This accentuates managements concernthat IFRS nancial in ormation may not be su cient at this pointin time. However, this could be due to the act that the rst IFRS

nancial statements required a lot o adjustments to the previousnational GAAP nancial in ormation. Further, as analysts improvetheir understanding o IFRS, the need to use non-IFRS measuresmay decline overtime.

l IFRS standards are excruciatingly complex compared toprevious national GAAPs, with 2000 disclosure requirements,approximately double that o UK and Australian GAAP, and ourtimes o French GAAP. Getting IFRS resources and IFRS technicalexpert is becoming increasingly a challenge. This is a real dangerand bold measures would be required on the part o IASB to makethese standards user- riendly and easy to implement.

In India we have our own distinctive problems. There are multipleregulators in the eld o accounting standards, or example, i thereis a listed bank, it has to ollow accounting norms prescribed by SEBI,RBI, ICAI, Companies Act and Banking Regulation Act. Some o theaccounting requirements could be inconsistent with each other andsome are de nitely inconsistent with IFRS. I IFRS implementation hasto be e ective, the regulators would need to stay out o prescribingaccounting norms.

Take Companies Act or instance. A large number o accountingpromulgations therein are contrary to IFRS requirements. These are

in the areas o presentation o nancial statements, treatment o pre erence capital as equity rather than as liability, Section 78 whichallows premium on redemption to be charged to securities premiumaccount, Schedule XIV which prescribes statutory depreciationrates, and capitalisation o oreign exchange di erences, etc. I IFRShas to be implemented, Companies Act would need to stay away

rom accounting prescriptions. Similarly, RBI accounting norms orprovisioning o non-per orming assets or accounting or derivativesare incompatible with the requirements o IFRS.

Another legal hassle is the powers o the High Court to stayapplication o accounting standards or to prescribe accountingrequirements in the case o merger and amalgamation situations,which are o ten contrary to sound accounting practices. All this woulda ect smooth convergence to IFRS.

The ICAI has set up an IFRS convergence task orce to look into various convergence issues and prepare a road map or ullconvergence. Whilst a ull convergence may be appropriate, the task

orce also needs to keep the interest o Indian companies and Indianeconomy in mind. A case in point is the de erral o VRS cost or ESOPaccounting based on intrinsic method, which though a departure

rom IFRS, is nevertheless necessary. However, such exemptionsshould be subject to a sunset clause, so that a ew years down theline, ull convergence could be achieved.

The convergence task is challenging, but needs to be done. r

ifrs the way forward1692-1695

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