Corporate governance is a buzz-word today, listed companies in the lime light and particularly those which have borrowed funds from institutions or who have placed shares with foreign financial investors are obliged to make a serious or token effort towards implementing principles of good corporate governance. One of such principles relates to adopting and applying recognised accounting principles and practices. In India, these are best reflected in the accounting standards issued by the Institute of Chartered Accountants of India. Accounting standards reflect the best of accounting practices and help bring uniformity and transparency in accounts. Till very recently, however, accounting standards had no legalforce as regards companies or other entities. The recent amendment to the Companies Act, 1956, makes, perhaps for the first time in India, application of the accounting standards compulsory. There are several issues a company (small or big) must note in this regard.

The amendment comes into effect from October 31, 1998. Accordingly, all accounts finalised on or after this date will have to comply with the accounting standards. Accordingly, companies whose accounting year has ended on December 31 or March 31, 1999 will have to comply with the accounting standards.

The compliance will have to be made by all companies, big or small, private or public, listed or unlisted. While large companies having adequate and qualified staff may not face much difficulty in understanding and applying the various accounting standards, smaller companies (particularly those which are effectively incorporated proprietorships or partnerships) may face difficulties. As is found in respect of other newly introduced laws,compliance by such companies is very poor, mainly because of lack of awareness as well as lack of educated personnel to understand and apply the complex provisions. It is likely that for some years accounting standards may face a similar fate.

Accounting standards of the Institute of Chartered Accountants of India are presently 15 in number though reports suggest that within one year itself, the number will double. That apart, existing accounting standards may undergo a revision.

Prior to the recent amendment, there did exist a compulsion (imposed by the Institute of Chartered Accountants on its members) on the auditors to check on the compliance of accounting standards and to report on their compliance or otherwise. However, this compulsion did not apply to the companies themselves. Now, the obligation has been cast on the company as well as the auditor.

Companies, particularly small ones, will have to tackle various difficulties that will be faced as regards the implications of applying accountingstandards for tax purposes. While courts have generally looked upon the accounting standards and other pronouncements of the Institute of Chartered Accountants of India as the authoritative view of what constitutes the best accounting practice, often, courts have also departed from accounting standards. One reason for this is that the tax law sees each year as an independent period for levy of tax. Further, the tax department views accounting standards and, indeed, accountants in general, as being over-conservative. It is said that they will be quick to provide for losses but reluctant, till a fairly advanced stage, to recognise income. While to a certain extent this is true, the underlying principle is of prudence. If an income is recognised which does not finally realise (or an expense not provided but which actually arises), the profits will be shown at a higher figure and be even distributed. The effect on the solvency of the company in such a situation is obvious. Disclosure of higher profits may resultin levy of tax but the profits may finally be found to have never existed and it may be impossible either to get a refund or even backward adjustment of the tax.

To add to this, the tax law lays down that it will have its own accounting standards, two of which are already notified. This provision was introduced many years back, when there was no statutory provision for compliance of accounting standards by companies. One hopes that with the new statutory provision, the provision in Income Tax Act is either repealed or not implemented.

Difficulty also arises when there are certain provisions in the tax law which provide either for an accounting treatment or for deduction of expense/recognition of income, which directly conflicts with accounting standards. In some cases, this may be to give assessees incentives and, in other cases, there may be other objectives.

Companies also may have to look at another area of difficulty. It may so happen that they deem it fit not to comply with certain specificaccounting standard. Whether this may amount to a violation of the law is a separate question altogether which also needs attention. However, disclosure will have to be made about such non-compliance and the financial effects to be given. It is likely that the tax department may chose to reject the accounting policy of the assessee, if the tax effect is favourable to them. Thus, the company may be put to litigation.

Companies will also have to carefully evaluate the transitional effects arising more so in the first year of implementing so many accounting standards at one stroke. There may be income of several years which may need recognition at one stroke (or the reverse case where income recognised may need de-recognition). Similarly, for expenses, either many year's expenses may have to be recognised at one stroke. How will such accumulations be treated? The law does not provide for any guidance though some light is thrown by the accounting standards themselves, or by other authoritative material.However, this may be found inadequate.

Finally, a company will have to keep in mind the provisions of the so-called minimum alternate tax (MAT). This provision entitles the department to tax book profits, though at a lower rate, if found favourable. The implications of applying accounting standards on MAT have also to be considered.

To conclude, there cannot be two views that introduction of mandatory accounting standards is a positive step for all concerned. However, there needs to be greater alignment with the tax law, more awareness created, and also for providing authoritative guidance for the transitional issues.

The author is a Mumbai-based chartered accountant