By: Joydeep Dass
Faculty – Finance
Introduction – The IFRS (International Financial Reporting Standards) convergence has gained momentum all over the world and India is no exception. As the world is going global on a massive scale, the need for convergence seems all the way more important. The need for common acceptable standards have been felt the world over and as of date, approximately 100 countries either have adopted fully or have converged IFRS standards with their own standards. The ultimate goal of convergence is to have common acceptable standards, which is practiced world over ensuring transparency & utility of financial information.
Indian Scenario – The Institute of Chartered Accountants of India (ICAI) develops Accounting Standards. India officially decided in 2007 to converge with IFRS. The ICAI and IASB (International Accounting Standard Board) then decided to work together, collaborate and develop quality and comparable accounting standards instead of fully adopting the IFRS standards completely. The ICAI decided to adopt IFRS and set the target period as April 2011 but delayed implementation due to procedural and operational reasons.. Finally, The Ministry of Corporate affairs has announced the implementation of new standards effective from 1ST April 2016 over a period of four years till 1st April 2019. All applicable & existing standards would cease after the target date of implementation. The Ministry of Corporate affairs have notified the implementation dates as below.
- Listed Companies with more than 500 crores of net worth – 1st April 2016
- Listed Companies with more than 250 crores of net worth – 1stApril, 2017
- Banks, Insurance & Financial Service Companies – 1st April, 2019
Need for Convergence
The need for IFRS convergence in India is necessary due to the following reasons:
To ensure a general understanding of best accounting practices
To make the financial statements reliable, comparable & transparent
To standardize financial accounting & reporting across the globe
To promote foreign Investment & spur Industrial growth
To eliminate information barriers for users of financial statements
1. < /span>Easy access to global financial capital markets – Indian companies would be able to procure investments from abroad on cheaper favourable terms, which in turn can fund their growth and expansion.
2. Cross Border trade & Investments – Indian firms following IFRS would be able to do business by listing abroad and this would facilitate more trade & investment in unrepresented geographies.
3. Eliminate differential reporting – Indian Companies having business abroad would be able to do away with preparing separate financial statements, as they would be following IFRS standards. This would reduce duplicity in financial reporting & eliminate unnecessary reporting.
4. Improved quality & comparability of financial reporting – The converged IFRS standards are of high quality, easily enforceable and globally acceptable which in turn increases reliability & comparability. Lenders and Investors will have more confidence in Indian businesses because of the commonly followed Accounting standards & procedure thereby improving trust & confidence.
5. Accounting Profession – Accountants & Finance persons working in financial reporting domain would also benefit by highlighting their expertise & talents abroad. They will be more competent to take up challenging global roles worldwide.
1. Training & Awareness – Many do not know the IFRS standards & lack of knowledge & awareness makes it a difficult task of implementation. Finance professionals will have to be adequately trained and than the standards can be implemented consistently and uniformly in right spirit.
2. Changes in Indian regulation – Current regulations governing the financial regulation would need a complete overhaul to implement the IFRS standards. The Companies Act 1956, SEBI act 1992, IT Act 1962 etc. will have to be amended to bring them in line with IFRS regulations. These legal hurdles is a major constraint in the path of IFRS convergence.
3. Fair Value system of measurement – The IFRS considers the fair value system of asset measurement and the Indian GAAP recognizes historical system. This divergence of system would create volatility and subjectivity in financial statements. This would lead to different results for performance & earnings of the Company.
4. IT systems – Financial accounting software and tools used for reporting would have to be completely changed resulting in substantial investment in IT infrastructure for Indian Companies. Indian companies are habitually reluctant when any proposal involves cost, time & effort.
5. Small & Medium businesses – The SME sector in India is comparatively larger than other Countries. The cost of convergence far outweigh the advantages of convergence for these small businesses. The dearth of resource and skills in financial knowledge adds up to the problem of implementation in this sector. In addition, SME’s cannot be ignored, considering the role they play in the Indian economy.
The road to IFRS convergence with the Indian Accounting standards is certainly a difficult task. All stakeholders should agree & convince themselves of the gains that would accrue once the standards are converged. Most importantly, this will increase credibility of the Indian businesses in the International financial market & they will reap significant benefit out of it. Indian businesses cannot afford to be complacent any further as India has already been lagging behind. The process of convergence & transition has been slow as of now and if required Indian businesses may seek help and advice from counterparts in advanced countries who were successful. The Government should set up a task force, which will recommend changes in existing laws facilitate regulatory compliance and monitor implementation to ensure completion by the agreed timelines.