I have attempted to highlight one very important effort being made the world over and that is of harmonisation of accounting standards of various countries. While this article explores this subject in great detail, the whole issue is about having such a common accounting language that is not only well understood by different countries but also of such high standards that it is widely accepted.
Presently, financial analysts and informed investors complain of the gaps between the accounting standards of various countries which are so much that one needs a translation of such financial statements from other countries.
However, the attempts of harmonisation of accounting standards is not without its hurdles. This detailed article looks broadly at the scene and status.
1) Scope and approach
The scope of this article, as is evident from the title, consists of two different parts. First, an overview of Indian accounting standards is made and then a case is to be made out for harmonisation of Indian accounting standards with accounting standards generally having global acceptance.
However, though these two topics, taken out of context, may sound different, they are actually part of a common theme, namely, where Indian accounting standards are compared to GAS, what are their perceived inadequacies generally and whether we should harmonise the two and, if yes, how, when and to what extent.
2) Overview of Indian accounting standards in the context of global harmonisation
a) The source of Indian accounting standards are obviously the international accounting standards (IASs). ICAI has agreed to give due consideration to IASs as issued from time to time and to endeavour to adopt them in India with due consideration for local conditions. Thus, while we will in good faith fall in the footsteps of the IASs, our path has some breadth so that we can and do make changes to suit local conditions.
b) In the process, ICAI has notified 18 accounting standards and is in the process of issuing at least a couple more. To reiterate, we will find a very close parallel in our accounting standards and the IASs. IASs are 40 in number in terms of their series though they are actually 34 on account of some of them being replaced by splitting or supersession.
c) In India, accounting standards have finally been given statutory recognition in 1998 in terms of newly introduced sections 210A, 211(3A), 211(3B) & 211(3C) in the Companies Act, 1956.
d) We have accounting standards for tax purposes also. Section 145 of the Income-tax Act, 1961, requires that the accounting standards notified under that section should be followed in the computation of certain income for the purposes of that Act.
3) What is "harmonisation" of accounting standards
"Harmonisation is a process by which accounting moves away from total diversity of practice". Harmonisation of accounting standards can also be described as an ongoing movement of adapting accounting standards to the best of the world’s accounting standards in the context of local conditions.
Harmonisation is also not standardisation or uniformity in the sense of all countries’ accounting standards being identical. This, as will be discussed later, is simply not achievable and in fact is seen to be a lost cause by most authorities.
a) Objective of harmonisation.
The objective of harmonisation should not be blind adherence to any particular model - even IAS. The objective should be to strive for greater credibility and consequently acceptability at the national and international level.
b) Is there a globally acceptable model of accounting standards
A problem is that there is no globally acceptable model of accounting standards that can b adhered to. While IASs are very widely perceived and accepted to be the international models, on account of various reasons, there is resistance amongst some countries, mainly USA, to IASs being a global model. Hence, if there is no unanimously acceptable model, what is the benchmark for harmonisation
c) Harmonisation of regulation relating to accounting standards.
Accounting standards have to be seen in the backdrop of the law that deals with how accounting standards are dealt with - ie, by making them mandatory or otherwise treating them as relevant expert opinion on the best of accounting policies.
Individual countries have different approaches under law for determining what are the acceptable accounting principles and practices.
As stated, presently, in India, the accounting standards issued by ICAI, are to be followed mandatorily. Harmonisation would not be complete until the regulatory framework is also harmonised.