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IFRS Gets A Shot In The Arm

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Financial reporting in India got an unexpected push from the finance Minister Arun Jaitley in Budget 2014, with his announcement that IFRS will be implemented from 2016-17. The International Financial Reporting Standards, a harmonised set of accounting rules followed by most of the world, were all but ready a few years ago. But staunch opposition from a few top corporates meant the project was shelved, many fearing that it would never see the light of day. Foreign investors, among others, have been asking for its implementation so that accounts of Indian companies are prepared under the same rules as their global peers.

But the announcement is only a beginning. For IFRS to become reality, much needs to be done in the next couple of years. Failing that, it may meet the same fate it did the last time round in 2011. For that, the apex accounting body, the Institute of Chartered Accountants of India, and the Ministry of Corporate Affairs will have to work in tandem to sort out the deficiencies.

The ICAI has been preparing for IFRS for at least seven years now, says K Raghu, President of the Institute. Corporates also have had ample IFRS training for its accountants back in the days when it was considered imminent. So skills updation for those who matter need not be a big challenge. The challenge will be to ensure the rules for implementation are laid out clearly.

First, there needs to be clarity on taxation. Taxation was one of the major reasons why industry resisted the last time round, says Amarjit Chopra, a former president of the ICAI. Indian companies file their returns based on the profit in their books of account, which is then adjusted to comply with tax rules on deductions and exemptions. IFRS, with its focus on conservatism leading to earlier write-downs, may have the effect of dramatically altering the initial profit that is so used. If profits are less than what the tax department expects, they will make disagree with the accounting. If it is higher, they will lap up the extra revenue.

To address this, the government had come out with a set of tax accounting standards, with guidelines for most disputable areas. There are still many issues that need to be sorted out. The government must work on bringing clarity to these.

Secondly, there is the interplay with corporate law. The Companies Act has rules regarding issues such as what can be paid out as dividend. If IFRS implementation drastically reduces profits, it will also mean that companies will not be able to pay shareholders like they would have earlier.

Jamil Khatri, Global Head of Accounting Advisory Services at KPMG explains how Europe found a way around (the impact on distributable profits).  In the EU, he says, since IFRS was mandated only for consolidated financial statements, the impact on distributable profits that are based on standalone legal entity financial statements, was managed.  Certain other countries, he added, modified their company law to allow companies to pay dividends after adjusting for the effect of the major changes due to IFRS.

Finally, the standards themselves will have to be relooked. India has not adopted IFRS as is. India has framed a set of accounting rules, known as Ind AS, which are compliant with the IFRS. Since then, some of the original IFRS standards, prominently the one on how to recognise revenue, has undergone a change. Indian authorities will have to make a corresponding change in Ind AS for convergence to be meaningful.

Then there is the question of who it will have to apply to. ICAI president Raghu says the cost of complying may be prohibitive for small and medium enterprises. So the Institute will most likely come out with a set of easier to implement guidelines for these enterprises.

IFRS can be an important step in India’s bid to attract foreign investment. And with the government now openly backing it, the implementation seems nearer than ever. But these niggles need to be taken care off.