Home / Politics / Shift to IFRS may lead to accounting chaos

New Delhi: With just a year to go before Indian companies bring their accounts in line with new standards, experts say lack of clarity could lead to balance-sheet confusion, misleading shareholders and investors.

Accounting standards in India will have to conform to International Financial Reporting Standards (IFRS) starting 2011, along with companies in another 150 countries, moving away from norms such as US GAAP (generally accepted accounting principles) or Indian GAAP.

IFRS has been created by the International Accounting Standard Board (IASB), an independent, privately-funded standards body based in London.

Aligning with IFRS norms will help Indian companies raise cheaper capital overseas, besides making foreign listings and setting up subsidiaries and joint ventures abroad less cumbersome.

Salman Khursheed, minister of state in the ministry of corporate affairs (MCA), reiterated that the new accounting system would start on time.

“The ministry has met its commitment of starting IFRS-compliant reporting by 2011," he had said on 1 February at the inaugural function of the Competition Commission of India’s new premises. “Finer issues, if any, will be dealt with by the core group in detail."

The core group was created by MCA to decide on issues relating to IFRS.

The ministry had announced a three-phase convergence schedule in January. In the first phase, listed companies, including those on overseas exchanges, and those with a net worth of Rs1,000 crore, will adopt IFRS standards in April 2011.

The second phase will comprise companies with a net worth of Rs500-1,000 crore, which will move to IFRS starting April 2013. Listed companies having a net worth of Rs500 crore or less will converge in April 2014.

“The announcement does not elaborate on when the net worth would be determined," said Jamil Khatri, head of accounting advisory services at audit and consulting firm KPMG in India. “Net worth, which is a sum of share capital and reserves, changes every quarter depending on the profitability of the company. Suppose the net worth of a company is Rs900 crore in the quarter ending December 2010, and suddenly rises to Rs1,000 crore on 31 March 2011, there will be very little time for the company to comply with IFRS."

He suggested that companies start evaluating net worth according to existing standards to determine whether it exceeds Rs1,000 crore. Those that qualify should start preparing for new accounting standards on 1 April 2011, Khatri said.

Dolphy D’souza, partner (assurance) at audit and consulting firm Ernst and Young Pvt. Ltd, said the process needs to be kicked off early. “In my view, the test should be done based on the balance date of 31 March 2009, because doing the net worth test based on the balance sheet date on 31 March 2011 will leave entities with little or no time to prepare for IFRS for the year 2011-12. MCA should confirm this by guidance," he said.

D’souza and Khatri also said it makes sense for companies to go in for IFRS comparative numbers in 2010-11 although the ministry has not prescribed it, as this is an IASB requirement from the following year onwards.

“This will help all stakeholders get a better idea about their companies as it will give dual statement for compliance," said D’souza. “This will also help them go in for a robust reporting in the first quarter in 2011-12."

T.V. Mohandas Pai, Infosys Technologies Ltd director and member of the core group for accounting convergence, said all the outstanding issues will be addressed soon.

“The core committee is fine- tuning various provisions for converging," he said. “In my opinion, there are no major glitches."

Khatri also questioned whether companies going in for convergence in the first phase would be able to announce consolidated accounts that include subsidiaries, joint ventures and associates.

The government also needs to clarify on the applicability of IFRS to non-banking financial companies (NBFCs) because a separate road map is being devised for banking and insurance companies.

NBFCs, too, are regulated by the Reserve Bank of India.

Another issue that needs to be clarified pertains to companies that have issued foreign currency convertible bonds.

“Just like companies issuing American depository receipts and global depository receipts have to converge in the first phase, will companies issuing these also need to converge in the first round?" Khatri asked.

With regard to computation of income-tax, a committee has been set up by the Central Board of Direct Taxes (CBDT).

“Income-tax authorities will need time since changes will be very pervasive," D’souza said. “In my view, for some years to come entities should be prepared to generate both Indian GAAP and IFRS numbers. IFRS for statutory reporting and Indian GAAP for tax purposes."

Pai said the CBDT committee will provide detailed guidelines shortly.

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