Issue not with standards, but with interpretation6 min read . Updated: 06 Dec 2009, 11:05 PM IST
Issue not with standards, but with interpretation
Issue not with standards, but with interpretation
New Delhi: Jamil Khatri, executive director and head of accounting advisory services at KPMG in India, with 12 years of experience in international reporting on US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), spoke in an interview about the challenges of implementing IFRS norms by the April 2011 deadline. Edited excerpts:
The Institute of Chartered Accountants of India (Icai) has been saying there is no deviation between Indian standards and IFRS so not much preparedness is needed.
At a conceptual level, several Indian standards are similar with international standards.
We (at KPMG India) have seen, the issue is not with standards, but the way standards are interpreted. In India, there are many people who issue interpretations. For example, you have a body which is called the expert advisory committee, which issues interpretations. We have also seen instances where the interpretations, in fact, conflict with each other and conflict with the underlying substance of the standard. This has resulted in a deviation in the way same standards are applied in India and applied internationally.
From a theory perspective, when Icai says these standards are similar, I think they are correct but in practice we have seen lot of these standards are applied differently than they are applied internationally. That is a gap that we need to bridge in addition to the three-four new standards that I have talked about.
What about discrepancy in the standard relating to exchange rate fluctuation which created a controversy earlier this year, and that relating to fair value?
As far as foreign exchange is concerned, the Indian standard AS 11 was fully converged with the international standard until the ministry (ministry of corporate affairs) came up with a notification, which permitted a deviation from the standard. The whole concept of recording forex gain or loss through profit and loss account is not new to Indian companies except that there is a moratorium in terms of doing it. So it is just a matter of going back to what was there earlier, I hope, and India achieves convergence.
As far as fair value is concerned, on financial instruments, the concept under IFRS is that if you have investments or derivatives all have to be carried at fair value. And then, depending upon the nature and purpose of these instruments, you record for the gain or loss either through profit and loss account that affects EPS (earnings per share) or directly to your net worth.
That is a big area, which is different from the way we are doing under the Indian GAAP. Because, today most investments are carried at cost with the provision only if there is a permanent diminution. That is really the concern around the fair value.
How do you explain permanent diminution?
Suppose you have bought an investment at Rs100. And the market price has gone down to Rs40 and you know that it will never go back to Rs100, you make a provision because you know you are never going to recover full value of your investments. But that itself is a loose kind of term and many companies wait for several years before they half admit that there has been a permanent diminution.
Another area that I want to highlight is that in India a lot of accounting is still governed by regulations. For instance, companies use share premium account or court schemes, approved by the courts, which are used to write off a lot of these items. We have seen instances where the goodwill arising out of an acquisition or asset arising out of an acquisition has been adjusted against the share premium account, so on and so forth. Redemptions on premium of debentures are also adjusted against share premium accounts.
All this reflects that they do not show true cost of raising capital. In the case of a debenture, interest is charged to the profit and loss account but if there is a redemption premium, which is nothing but one kind of interest, companies routinely charge to share premium account, which is permissible under the Companies Act, 1956.
So while the standard may say companies have to charge all costs to the profit and loss account because of the environment around the Companies Act and the interpretations of standards, the results you get may be very different from what would be acceptable internationally.
How many companies do you think are prepared to converge Indian standards with IFRS?
Infosys Technologies Ltd has already started reporting under IFRS in addition to Indian GAAP, others like Wipro Technologies Ltd and Dr Reddy’s Laboratories Ltd are in advanced stage of preparation and will soon be ready. My experience suggests there are 150-200 companies which today are at an advanced stage of preparation in terms of the impact of IFRS on their financial statement.
What is the kind of expertise KPMG is providing to Indian companies?
Firstly, we have set up an accounting advisory services, a specialized group comprising 100 people. Our job is to help assist companies moving to IFRS. Secondly, we have nine senior-level people who were involved in implementing IFRS in Singapore, the UK, Australia and the Middle East for several years, now working with Indian clients. Our third initiative is with NIIT Imperia (centre for advanced courses for executives). Using NIIT Imperia’s distance-learning infrastructure, we are offering a training and certification course in IFRS. It is a six-week programme, where one day in a week an executive will be required to go to the NIIT studio, get trained by a KPMG speaker and take an exam. They are certified in IFRS if they pass the exam. This is attracting a lot of people from smaller towns.
How prepared are Indian chartered accountants (CAs) to report on IFRS?
What I have seen is there is a lot of enthusiasm and aptitude among Indian chartered accountants. In the past they have stepped up to face changes. The question now is, do we have the framework to gear CAs to step up to that level? While KPMG may have 10 courses and train 1,000 people, there are more than 100,000 CAs who need to be trained. More initiative should, therefore, come from regulators such as the Icai. To be fair to them they have started an 80-hour course.
Whether we’ll be able to converge for all companies by April 2011, don’t think so. But I don’t think the government is looking at that either. I feel convergence should happen in a phased manner.
When you say phased manner, what is the timeline that you have in mind?
One thing I have been advocating heavily, even if you take the US, the Americans have proposed to converge from 2014-2016. Accordingly, if you are what is called in the US a large accelerated filer (largest of the listed companies), you will comply with IFRS from 2014, if you are an accelerated filer (not a large enough listed company but still a big company), than you converge by 2015, For small business issuers or residual companies you will follow 2016.
Similarly, for India, I suggest if you are a large listed company with global operations you should comply by 1 April 2011, if you are not such a large company you converge by 2012 and for the residual companies it should be 2013.
The scale of the problem is so big you don’t know where to start. But if we follow a phased manner we will get there.