Given that in the next couple of years, more than 150 countries would have adopted IFRS, the question why IFRS has become irrelevant. Rather seamless implementation of IFRS is now the matter of discussion. The Institute of Chartered Accountants of India (ICAI), in a proactive move, took the first initiative by issuing a concept paper last year to adopt IFRS by 2011. Unfortunately, the ICAIs recommendations will have to be legislated before they become binding.
Under the Companies Act, mandatory standards are notified in the Companies (Accounting Standards) Rules. Therefore, one approach to adopt IFRS may very well be to notify the standards in the Rules. However, there are two problems here. First, the notification process will have to be quick enough to keep pace with frequent changes in IFRS and, second, the existing position is that accounting standards (even if notified in the Rules) cannot override any Act or main legislation and if there are conflicts, the Act will prevail. Unfortunately, many IFRS provisions actually conflict with the existing provisions of the Companies Act. Some of these comprise presentation under Schedule VI, depreciation under Schedule XIV, treatment of preference capital and preference dividend, capitalisation of exchange difference, definition of subsidiary, to name a few. Therefore, adoption of IFRS in India would require amendments to the Companies Act.
Assuming that the Act is not amended, it is highly likely that Sebi may require IFRS accounts through the listing agreement. In this scenario, companies would be required to file two different sets of financial statements, one under IFRS as required by Sebi, and another under the Companies Act, in compliance with the its requirements and Indian GAAP. That would be cumbersome indeed.
In the case of banks, amendments would have to be made in the Banking Regulation Act. In addition to this Act, a large number of accounting promulgations are issued by RBI, some of which conflict with the existing IFRS. Take, for instance, the impairment of loans and advances. Impairment, as per RBI rules, is determined on specific formulae, whereas under IFRS, it is calculated using a discounted cash flow method.
Direct and indirect tax is another major issue which needs to be addressed. Many IFRS provisions will have significant impact on profit or loss, particularly because of the impact of unrealised fair value changes recognised under IFRS but which hitherto remained unrecognised under Indian GAAP. Some IFRS provisions are fundamentally different from Indian GAAP and may create huge tax exposure. For example, in the case of BOT contracts, current income-tax is based on toll collection, which is also aligned to accounting under Indian GAAP. Under IFRS, on completion of the construction, the same is treated as construction revenue that results in an intangible asset (right to collect toll in future). Thus, IFRS result in huge upfront revenue and a tax exposure. The finance ministry should conduct a review of IFRS and clarify tax treatments. The approach could be off line accounting adjustment in the tax computation statement, to remove tax hardships.
There are other legislations also that need to be studied, like the Electricity Act in the case of power companies, Insurance Act and IRDA promulgations in the case of insurance companies, Clause 41 and other Sebi promulgations.
Conversion is not an accounting exercise but an all-pervasive exercise that affects business, IT, tax, compensation schemes, debt covenants and selling arrangements. Considering the conversion is a lengthy process, if IFRS provisions are to be adopted in India by 2011 (actually 2010 because of comparability), the regulatory changes should have already been in place. The ICAI, corporate entities, industry associations and professionals and the government should make an all-out effort for appropriate amendments as soon as possible. It would enable corporate entities to anticipate the regulatory change and start preparing for IFRS conversion.
The author is partner, Ernst & Young. These are his personal views