Financial disclosures bridge the information gap that exists between companies and investors. So it’s good that the Securities and Exchange Board of India (Sebi) is proposing some key changes to corporate disclosures by listed companies. This is based on a review undertaken by a Sebi-appointed disclosure and accounting standards committee.
Biannual balance sheets
This will be a big step forward since only a handful of companies—from the information technology and banking sectors—disclose this information. Annual reports of companies are available between July and September of the next fiscal.
Getting this information beforehand will be very useful for investors, especially to keep track of changes in a firm’s debt position, working capital and assets. The regulator should also mandate companies to provide a cash flow statement, which is also prevalent globally.
Convergence to IFRS
Globally, many countries are moving over to preparing financial statements under the International Financial Reporting Standards (IFRS). India too has decided to adapt these standards. The ministry of corporate affairs has tentatively announced 1 April 2011 as the date when the new standards will become applicable. But the consultative process by various bodies, to decide on the new standards and the road map for IFRS, is still on.
The Sebi committee proposes that listed companies be allowed to voluntarily adopt IFRS for consolidated financial statements. However, unless the standards are finalized, allowing companies to switch to IFRS is not advisable. This is because in the absence of any statutory accounting standards in the country, companies may choose and interpret rules according to their convenience. That may defeat the very purpose of adopting a contemporary accounting standard.
Of course, the Sebi committee’s purpose in allowing this shift is to give companies lead time to prepare for the transition. The intention is good and can be also achieved by encouraging companies to voluntarily attach a set of IFRS financials to the annual report. The core financial statements should still be based on Indian generally accepted accounting principles.
Although Indian companies report on a quarterly basis, the majority fall far short of global standards in terms of transparency. For example, companies can present either stand-alone or consolidated results. Or they could present both to the stock exchanges but publish only consolidated statements in the newspapers. They are to report stand-alone results within a month of the quarter ending, but if they audit these results, they get an extra month.
However, the biggest drawback, that has not been considered by the committee, is that quarterly consolidated results are voluntary. In the case of companies which get a large share of revenues from subsidiaries—Indian or foreign— Stand-alone results become meaningless. It is time Sebi made reporting of consolidated results mandatory. Perhaps it could be done in phases, starting with the Sensex/Nifty constituents and then expanding it to others.
The Sebi committee is proposing a uniform period of 45 days for quarterly financials. This is good for audited/consolidated financials, which had 60 days earlier. But for stand-alone unaudited financials, which have a 30-day period deadline currently, companies will get 15 days more. This delay can be avoided.
It’s also proposed that annual audited results—both stand-alone and consolidated—are now to be submitted within 60 days, which can take up to five months at present. If a company plans to submit unaudited results, it will have to do so within 45 days, which again is a big improvement.
Most of the proposals are sound but companies should move towards a 30-day period for all quarterly results, except the last quarter. Quarterly financial results are valuable for investors: they provide alerts on whether the company is deviating from the trend or if worrying signals are visible.
Their utility goes down if they are reported with a longer delay. The new proposed framework is less complex. But investors will be better off if consolidated financials are made mandatory.
Apart from the quality of disclosures, Sebi could pay some attention to form too and the adoption of XBRL (eXtensible Business Reporting Language) should be encouraged by the regulator for investors to be able to make like-to-like comparisons between different companies without great difficulty.
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