Mumbai: The implementation of International Financial Reporting Standards (IFRS) in India is set to bring more revenues for audit firms that are looking to hike fees from clients, citing increased workload and complexity involved in the new accounting regime.
According to the IFRS road map of the ministry of corporate affairs, firms in the 50 stock Nifty index, companies listed abroad and all firms having net worth of at least Rs1,000 crore will have to report their financial statements under the new regime by April 2011.
While the details of the accounting regime that will be finally adopted in India are still being worked out and analysts are trying to figure out the impact the new accounting standards will have on company valuations, auditors are enthusiastic about the changes.
They are looking to charge more fees and have already been earning a fair share of revenue from the special teams that they have formed to help firms transition to the new regime.
“In our experience the new standards will increase the costs of compliance, as both the time involved and the level of specialization will undergo significant change in the initial period,” said N. Venkatram, IFRS country leader, partner at Deloitte Touche Tohmatsu International.
“Over time, without considering inflation, we may see a 15-25% correction (increase) in fee levels for existing clients, with significantly larger increases on new accounts,” he added.
Unlike the Indian accounting standards, which are rule-based and rely more on historical costs when it comes to valuation of assets, IFRS involves principle-based standards. For instance, while all preference shares are classified as equity under Indian standards, in the new system of accounts, the preference shares could be classified as debt or equity depending on the rights of the preference shareholders.
IFRS will also bring about a change in the accounting standards for derivative contracts. Under Indian accounting standards, “the practice followed for accounting of derivatives and financial instruments is diverse and most of the derivatives and financial instruments are not accounted for in the balance sheet or the profit and loss account,” a 2 December report by Charanjit Attra, head of the IFRS research advisory team at ICICI Securities Ltd, said.
Also, foreign exchange gains and losses on any asset has to be recognized immediately in the income statement under IFRS.
IFRS requires the company management to specify the assumptions being made in order to arrive at the “fair value” of assets—a feature, which according to experts, will likely bring more transparency in the way companies make financial disclosures.
Additional disclosures under IFRS would mean increase in the size of annual reports as well as new methods of evaluating assets such as investment property—which can now be accounted at their “fair value” rather than historical cost.
Auditors have been training their staff to implement this new system and expect to recover the costs in the years ahead.
Audit fees rose after the implementation of IFRS in Europe, said Attra.
Jamil Khatri, head of accounting advisory services at KPMG, said it would be difficult to arrive at the exact increase in fees; for a large company, he said, IFRS would mean 10-20% more work for auditors. Khatri said that the accounting advisory services group —formed two years ago to help companies in their transition from the old system of accounting to IFRS—accounts for a substantial portion of the revenues of the firm.
Rising audit fees do not always guarantee better accounting standards, a 30 November research report by Bhargav Budhhadev, vice-president, research at Ambit Capital Pvt. Ltd, said. Companies that paid auditors more in audit, as well as consultancy, fees do not score higher when it comes to better accounting practices, the report pointed out.
Both Budhhadev and Attra said the implementation of IFRS is going to tighten standards and help analysts evaluate companies better. “The quality of accounting will go up and it will enable fund managers to make peer-group comparisons with firms in other emerging markets,” Budhhadev said.
To be sure, the actual impact depends on the way IFRS is implemented in India. “A watered down version of IFRS customized to suit special interest groups who are lobbying for changes might not lead to greater transparency,” said an analyst with a local brokerage who did not want to be identified.
Harini Subramani contributed to this story.