IFRS, direct tax code set to make next fiscal challenging for CAs -Mr G. Ramaswamy, Vice-President, ICAI

Accounting professionals geared up for implementation of IFRS.

 

The financial year 2011-12 is going to be more vibrant, especially for the accounting professionals, with the implementation of Direct Taxes Code (DTC) and the convergence of Indian accounting standards with IFRS (International Financial Reporting Standards), according to Mr G. Ramaswamy, Vice-President of the Institute of Chartered Accountants of India (ICAI).

Speaking to presspersons on the sidelines of the inauguration of the national conference on 'Direct taxes and allied laws', organised by the Direct Taxes Committee of ICAI here on Friday, he said the next financial year will be a great year for the country.

The professionals will be geared up for the implementation part, and the corporates on the compliance part. This will lead to increase in the revenue collection also, he said. Stating that a lot of developments are taking place with regard to the implementation of IFRS, Mr Ramaswamy said that the ICAI is gearing up its members and industry towards the achievement of the committed date of April 1, 2011. The IFRS will be implemented in a phased manner from 2011-14.

"We are conducting national workshops and meetings throughout the country creating awareness, involving professionals and those who are interested in it. Special e-learning courses and certificate courses are available for chartered accountants," he said.

The ICAI also has mutual recognition arrangements with accounting bodies in England and Wales and Australia. "We are also in dialogue with Canada, Singapore, Malaysia and New Zealand institutes. We are coordinating with them," he said. On the Direct Taxes Code (DTC), he said that for the first time, a proposed legislation was open for debate throughout the country. Tax payers, academicians and chartered accountants have given their views. Stating that the final version will be tabled in Parliament, he said the deadline for DTC implementation is April 2011.

He said the Central Council of ICAI has proposed an amendment on the type of action to be taken in the case a firm is involved in cases of violation. "The Central Council has debated on that. We are proposing an amendment. So we are giving suggestions to the Government," he said.

NETWORKING

On the networking of CAs, he said today, 70 per cent of chartered accountants are small and medium practitioners. If the Chartered Accountants (Amendment) Bill 2010 is passed in Parliament, more number of CAs can come together and form an LLP (limited liability partnership) firm. Apart from CAs, these firms can include cost accountants, advocates, valuers, actuaries, and may be MBAs (finance).

END USE AUDIT

An LLP firm can give a host of service, he said, adding that LLPs will be one of the important mediums for the CA firms.

Mr Ramaswamy said that ICAI is already interacting with the Comptroller & Auditor General for end use audit.

Giving the example of National Rural Employment Scheme (NREGS), he said it is being implemented throughout the country through State Governments. So, there should be checks and balances.

"We have already made representation to the Comptroller & Auditor General that NREGS should be audited by the CAs. That will help small and medium practitioners also. It can be monitored throughout the country by CAs. With this, end user can be identified properly," he said.

Stating that the Comptroller & Auditor General is very positive on this, he said, "They have collected information about the CAs available throughout the country. We have given district-wise data. We are pursuing them to make it mandatory."

Indian IFRS — adoption or convergence? -DOLPHY D'SOUZA

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The advantage of adopting full IFRS is that it would certainly help entities that are seeking foreign listing.

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The Institute of Chartered Accountants of India (ICAI) issued Ind-AS 41, an exposure draft (ED) on the Indian equivalent of IFRS 1, First-time Adoption of IFRS. Ind-AS will be a separate body of accounting standards which may not always be the same as IFRS issued by the International Accounting Standards Board (IASB) (hereinafter referred to as "IFRS").

Thus, if an Indian parent has foreign subsidiaries, which are already using IFRS, the Indian parent will not be able to use those financial statements in its transition (as well as on an ongoing basis) to Ind-AS and will have to convert the already IFRS compliant subsidiary to Ind-AS.

Further, companies which are already IFRS compliant, for example, to comply with foreign listing requirements, will not be allowed to use these financial statements to claim compliance with Ind-AS. This will create considerable workload for global Indian companies.

Many entities around the world are able to make a dual statement of compliance on their financial statements, which is an unreserved statement that the financial statements are in accordance with IFRS and the standards notified in their local jurisdiction. This is only possible where there are no differences between IFRS and the standards notified locally.

The advantage of making a dual statement of compliance is that the financial statements can be used within India as well as in almost all major capital markets in the world which accept IFRS financial statements. If Indian companies fail to make dual statement of compliance, they may need to reconvert again from Ind-AS to IFRS, at the time of foreign listing.

The positives

Any Government would be challenged in making a decision as to whether to adopt full IFRS or to make certain deviations which are deemed necessary. The advantage of adopting full IFRS is that it would certainly help entities that are seeking foreign listing. Also, Indian entities that have several foreign subsidiaries which use IFRS would prefer to have the entire group on IFRS, rather than for different companies of the group to be on different national versions of IFRS.

However, such companies as a percentage of total companies in India may be small and hence the Government may not deem fit to impose full IFRS on all the companies in India for the sake of this relatively small advantage. Therefore, what kind of changes from IFRS should the Government consider when notifying Ind-AS? Certainly not the ones that are being contemplated, for example, the discount rate and the accounting for actuarial gains and losses with regard to measurement of pension obligation.

With regard to accounting for actuarial gains/losses, multiple options, including deferring actuarial gains/losses, are available under IFRS which entities in other countries are using. Indian entities should not be deprived of that benefit, as is evident from the relevant exposure draft issued by ICAI. It is interesting to note that Australia started off eliminating multiple options when it first notified the IFRS standards. However, it later fell back to allowing the full range of options under IFRS.

Overall, Ind-AS should not make any departures from the full IFRS standards unless they are required in the rarest of rare cases. This will ensure that we receive the full benefit of adopting full IFRS standards.

Unwarranted departure

So far it appears that the departures that are expected to be made (discount rate on long term employee benefits or accounting of actuarial gains/losses) are unwarranted.

As the standards are not yet notified, and as companies make strong representations, it is not clear at this stage what further exceptions would be made to the full IFRS standards. The Government will have to exercise judgment on what departures to make; this could be in the area of foreign exchange accounting, loan loss provisioning in the case of banks, completed contract accounting in the case of real estate companies, and so on.

There has to be a solid technical argument for making these exceptions, and a balance achieved between interest of various stakeholders, such as the company, investors, national interest, and so on.

More importantly, the accounting treatment should fairly represent the substance of the transaction. That, under no circumstances, should be compromised.

(The author is Partner & National IFRS Leader, Ernst & Young)

IFRS: An idea whose time is yet to come

M. RAMESH

It is common sense that for any reform to succeed, the call for it should come from the market. The need should precede the deed. Looked at from this angle, it does appear that the International Financial Reporting Standards, or IFRS, which some 1,500 Indian companies should begin to follow from April 1, 2011, is an idea whose time has not yet come.

It does appear as though Corporate India is being hustled into adopting accounting standards that it neither knows nor needs.

The ushering in of IFRS, at least in India, is founded on a heap of myths: That all the countries in the world are following IFRS and India should not isolate itself. That IFRS will facilitate capital inflows. That it is transparent and, hence, investor-friendly.

Flawed arguments

But if you look at these closely, there are serious flaws in each line of argument. For instance, that over a hundred countries (including China and Pakistan) are on board is of little relevance.

The economic world cleaves into three major blocks — the US, the EU and Japan. Two of the three — the US and Japan — have not adopted IFRS. The US has said it would get on board only in 2015 and Japan is not sure if it wants to. For the same reason, the argument about more capital inflows does not hold water. First of all, it is a moot point whether the kind of ephemeral capital that flows into the stock markets, creating headaches for the monetary authorities, is desirable or not. More fundamentally, there is no evidence of anybody — either an FII or an FDI investor — having said, "the potential investee company's accounts are not IFRS-compliant, so I do not want to put my money in it."

Nor does there seem to be any call from the domestic market. Indian companies never said they were handicapped in raising funds because their accounts are drawn up according to the principles of Indian GAAP.

On the contrary, funds seem to be flowing in — only a couple of days ago, the Economic Advisory Council to the Prime Minister said that India will attract $73 billion of capital in the current year, which is $53 billion more than what the country got last year.

Notably, the Chairman of the EAC, Dr C. Rangarajan, feels that $30 billion of the inflows will be foreign direct investment. Clearly, nobody is waiting for IFRS to bring money into India. The transparency argument is equally porous. There is no evidence that disclosures have either prevented fraud or helped investors make informed decisions.

On the contrary, we Indians are conservative by nature and most accountants frown at the fair value and income recognition provisions. It is never wise to count your chickens before they are hatched and, if you are a construction company (for instance), it is prudent to book in your incomes only after the contract is over and payment received.

Lot of work left

Even if we have to 'converge' (which should be understood in contrast with 'adopt', says the Government), there is still a lot of work to do, such as bringing the tax and company law regimes in alignment with the accounting standards. The absence of such alignment, especially on the tax front, is a major source of disappointment to Indian companies today.

In a recent interview to this correspondent, the Union Minister for Corporate Affairs, Mr Salman Khurshid, cautioned that we should not get trapped into some "spurious idea of sovereignty". More than not being an isolationist, India should be seen as a leading contributor in the evolution of ideas and, he said, even Japan consults us (on IFRS).

Just as it is important not to get trapped into any spurious idea of sovereignty, it is also necessary not to turn into self-congratulating mode in the name of 'leadership'. In the case of IFRS, leading is bleeding, and if the Companies Bill can wait for a decade for finest-tuning, so can IFRS — at least until the US and Japan do it first.

Assessing the future of IFRS

MOHAN R. LAVI

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It is well-nigh impossible to mandate a one-size-fits-all policy regarding IFRS

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Albert Einstein said, "I never think of the future — it comes soon enough."

The future of International Financial Reporting Standards (IFRS) has been debated recently since the US seems to be leaden-footed over moving over to IFRS.

Though IFRS statements are permitted for non-US filers now, the true test of IFRS would come when it is accepted for US filers too.

In India, there have been statements from the powers-that-decide that IFRS would be tuned to Indian conditions. The much discussed and derided fair value may be one of the areas that India could decide to give a go-by to.

The US and IFRS

Since the Norwalk Agreement, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working together to attempt and issue accounting standards using the same criteria and concepts.

However, the much-maligned IAS 39 on Financial Instruments and its subsequent avatars (IFRS 7 and 9) have been a bone of contention. The US Securities and Exchange Commission (SEC) hopes to give companies plenty of time to adjust to IFRS. In November, the SEC issued a "roadmap" that could lead to regulations requiring US businesses to file their financial statements using IFRS by 2014, or by 2011 for companies that volunteer.

One of the hurdles that is being bandied about is the high costs of moving over to IFRS.

A similar argument was raised when the Sarbanes Oxley Act was passed but the regulators did not relent.

Costs have never ever been an issue in an economy such as the US which anyway thrives on borrowed money. It may not be an aberration to state that the rule-bound and industry-specific US GAAP has failed to pass the "stress test" — stressing on entities to disclose their deeds. Enron, WorldCom, Lehman Brothers, AIG and Goldman Sachs would never get an award for best-presented accounts.

Goldman allegedly failed to disclose to investors that it was betting against subprime mortgage investments it pushed on clients — it was pushing a product which it knew ab initio would fail. They got away with a considerable fine and a tarnished image.

In accounting, entities can falter either by failing to account for a transaction, accounting it incorrectly or failing to disclose the what, why and when of accounting that transaction.

The former two may not get the nod from the auditor while the latter possibly could. IFRS thrives on detailed disclosures which mark a welcome departure from differing rules for differing industries.

It is time for the US to accept the generous gaps in its GAAP and consider IFRS as an acceptable alternative.

Indian Standards?

After recently issuing Ind-AS 41 — First time adoption of International Financial Reporting Standards — the ICAI completed its wish-list of issuing IFRS-compliant standards. The ball is now in the court of the regulators — SEBI, the RBI and the MCA — to tweak their legislation to accommodate IFRS.

Ind-AS 41 made a significant departure from its international equivalent IFRS-1 in not mandating companies to present their comparatives as per IFRS but keeping it as an option. One of the sine qua nons of the IASB is that entities make a full and unreserved compliance with IFRS which may not be met with in case the option is opted for.

As long as this treatment is enshrined in the statutory laws, it may not appear in red ink in the auditors' report as a qualification but the IASB may not consider them to be IFRS-compliant. This could lead to different accounting treatment between a fully-compliant controlling office and an Indian-compliant subsidiary or vice-versa rekindling interest in preparing a reco statement.

China objected to the stringent norms for disclosure of related parties in IFRS which adds further evidence to the fact that it is well-nigh impossible to mandate a one-size-fits-all policy regarding IFRS.

The IASB could do well to provide broad benchmarks for their standards and permit countries to frame their standards within these benchmarks. There can be no doubt that IFRS would remain in India — even if it is a desi version.

(The author is a Bangalore-based chartered accountant.)

Cos lining up offers may have to clarify IFRS valuation changes

Four PSUs also eyeing public issues.

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There can be no assurance that our adoption of IFRS will not adversely affect our reported results of operations or financial condition, and any failure to successfully adopt IFRS by April 2011 could have a material adverse effect on our stock price. — Engineers India prospectus

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Jayanta Mallick

Kolkata, July 21

Large public sector companies that are offering shares before April 1 may have to take a stand on issues related to transition to the International Financial Regulation Standards (IFRS).

These companies, which are filing draft red herring prospectus (DRHP), cannot avoid referring to the transition. They have to explain the likely impact the change in accounting system will have on valuations.

The transition to IFRS is likely to happen from April 1 next year.

Engineers India, Hindustan Copper, Coal India and SAIL are planning IPOs before April 1 next year.

Engineers India, which has already filed its DRHP, explained its position vis-à-vis the transition in the document. Hindustan Copper told Business Line that it would also do the same.

No legal requirement

Coal India and SAIL are expected to talk about the issues related to the transition in their respective DRHPs, to be filed before April 1 next year.

Mr Jamil Khatri, Head of Accounting Advisory Services, KPMG in India, said: "Companies that file a DRHP prior to April 1, 2011, would need to determine the date from which IFRS will be applicable for them. If a company files a DRHP prior to April 1, 2011, and expects to transition to IFRS from April 1, 2011, it would have to consider the need to present investors with IFRS compliant numbers for historical periods included in the DRHP.

"While this is not a legal requirement, investor interest would be best served if their investment decisions are based on numbers computed on a basis that the company will use going forward."

Hindustan Copper Ltd, which is preparing a DRHP for its share offer, is transitioning into IFRS next fiscal.

It's Chairman and Managing Director, Mr Shakeel Ahmed, said that the company's DRHP would deal with IFRS related issues and would provide clarifications in the context of the transition.

Engineers India has considered the transition as a risk factor. It said in the DRHP: "Significant differences exist between Indian Generally Accepted Accounting Practices (GAAP) and other accounting principles, such US GAAP and IFRS, which may be material to investors' assessment of our financial condition and results of operations."

Interestingly, Indian GAAP does not have a concept of restatement of comparatives except in case of special-purpose financial statements prepared for a public offer of securities.

Engineers India said that it had not determined the impact IFRS adoption would have on the company's financial reporting.

"There can be no assurance that our adoption of IFRS will not adversely affect our reported results of operations or financial condition, and any failure to successfully adopt IFRS by April 2011 could have a material adverse effect on our stock price," it said.

In the first phase, Sensex and Nifty companies, entities with net worth over Rs 1,000 crore and local companies whose shares are listed abroad are required to be IFRS compliant from the next financial year.

The companies, which are not issuing shares, would have enough time for handling this changeover issues as the converged standards are only applicable to annual consolidated results.

Financial year

Mr Jagannadham Thunuguntla, Equity Head of SMC Capital Ltd, said the companies that follow the April-March financial year would need to effect the transition for the first time in the annual consolidated result of 2011-12. Those companies that begin financial year other than in April will have more time.

According to experts, IFRS will impact revenues, earnings, book values and debt. Investors need to think through the issue of comparability between peer companies and look for off-balance sheet elements in the standalone statement

"Many investors may have applied global benchmark PE multiples to previous earnings computed as per Indian GAAP. In such cases, it may be logical to apply the global benchmark multiples to comparable earnings computed under IFRS," added Mr Khatri of KPMG.