Shift to new accounting norms by FY16 difficult, say experts

India Inc may find it difficult to adopt the Indian Accounting Standards (Ind-AS based on international standards) by 2015-16, as suggested by finance minister Arun Jaitley in his maiden Budget speech, due to complexities in adapting to accounting changes required in short time coupled with amendments that may be required in the income tax laws, said corporate law and accounting experts.

The International Financial Reporting Standards (IFRS) are designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries.

Over 130 countries in the world have move to accounting standards set up by IFRS whereas Indian companies are following the “Generally Accepted Accounting Principles (GAAP). The finance minister, however, wants India Inc to shift to Ind-AS, an accounting standards issued by corporate affairs ministry based on IFRS.

On July 10, the finance minister proposed adoption of Ind AS for all companies except banks and insurance companies, voluntarily with effect from financial year 2015-2016 and mandatorily with effect from financial year 2016-2017.

However, as per N Venkatram, managing partner – audit, Deloitte Haskins & Sells LLP, it may be impractical for companies to shift to Ind-AS in the limited time frame.

?It is unclear as to whether the new standards will be applied to the stand-alone company accounts or to their consolidated accounts. If Ind-AS is applied only to the consolidated financial statements, companies will have to continue with a different set of standards to satisfy the tax authorities, who would look to the stand-alone financial statements to determine tax liability. This is not a desirable situation,? said Venkatram.

Experts said there are key differences between Indian GAAP and Ind-AS relate to areas such as financial instruments, business combinations (mergers and acquisitions), revenue recognition, stock option accounting, etc.

Explaining the difference, Sai Venkateshwaran, head of accounting advisory services, KPMG India said: “If a company is doing an acquisition of another company, as per current accounting standards, the current carrying value of the assets and liabilities of the acquired entity are consolidated, with the balance amount of the acquisition cost being attributed to goodwill. However, under Ind-AS, such acquired assets and liabilities would be recorded at their fair values, with a corresponding adjustment to the goodwill. This generally results in a step up in the value of assets, recognition of previously unrecognized assets, such as intangibles, and a reduction in goodwill.” This would in turn impact reported earnings and EPS as the assets are amortized / depreciated resulting in a higher charge to the P&L, said Venkateshwaran.

According to Pankaj Chadha and Jigar Parikh, partners in a member firm of Ernst & Young Global, impact on transition to Ind-AS will impact all industries, however each sector will have different challenges.

?Accounting for derivatives and embedded derivatives will have significant impact in sectors like manufacturing, telecom ? for e.g. procurement contracts whose pricing are linked to currency or commodity price index may require separation of embedded derivative,? said Chadha.

According to Parikh, the exchange difference accounting is not based on functional currency concept in Indian GAAP.