Convergence to Global Accounting Standards Indian Scenario

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Convergence to Global Accounting Standards
Indian Scenario

• Sunil Goyal
• Past President, ICAI

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Indian Accounting Standards

• Accounting Standards are being issued by the
  Institute of Chartered Accountants of India
  (ICAI) in India.
• With a view to formulate Accounting Standards
  (ASs), the Accounting Standards Board (ASB) was
  constituted by the ICAI in 1977.
• While formulating ASs, the endeavor of the ICAI
  remains to converge with the IFRSs.
• Major countries throughout the world are
  converging either with US GAAPs or with IFRSs

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US GAAPs

• USAs principal financial reporting rule-making
  body is the Financial Accounting Standards Board.
• Evolution of accounting standard-setting in US
  started much earlier as compared to IASs/ IFRSs.
• As a result, there is strong influence of US
  GAAPs in countries where the rule-makers often
  adopted US GAAPs

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International Financial Reporting Standards
(IFRSs)

• International Accounting Standards Committee
  (IASC) was founded in 1973 to issue International
  Accounting Standards (IASs).
• IASC continued to issue IASs till 2001.
• In 2001, with a view to strengthen the standard
  setting process at international level, the
  International Accounting Standards Board (IASB)
  took over IASC.
• New Standards issued by the IASB are stated to be
  IFRSs.
• Objective of IFRSs is to reduce alternatives and
  bring uniformity.

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Global Financial Reporting IFRSs have a crucial
role to play than US GAAPs
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Global Standards IFRSs or US GAAPs

• IFRSs are principles-based with limited
  application guidance
• US GAAPs are rulebased with more specific
  application guidance
• To illustrate
• IAS 17, Leases, distinguishes finance lease from
  operating lease based on principle of substance
  over form, whereas Corresponding US GAAPs lay
  down rules for making such distinction.

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Global Standards IFRSs or US GAAPs (contd. )

• Examples
• IAS 27, Consolidated and Separate Financial
  Statements, lays down criteria of power to govern
  financial and operating policies for
  identification of subsidiaries.
• The corresponding US GAAPs lay down requirement
  for majority ownership of shares only.
• In India, the Companies Act definition is based
  on either majority ownership or board control.
• US GAAPs on Related Party Disclosures lay down
  fixed 10 percent ownership criteria for
  significant influence.
• IAS 24 does not lay down any fixed criteria. 20
  ownership is given as example only.

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Global Standards IFRSs or US GAAPs (contd. )

• In the principle-based standards, the
  transactions can not be manipulated easily to
  achieve a particular accounting.
• FASB is also broadly adopting the principle-based
  approach instead of rule-based approach.
• Over the last few years, there is an increased
  trend towards harmonization with the IFRSs.

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World-wide acceptance of IFRSs

• Many countries, including all 25 members of the
  European Union, require adoption of IFRSs for the
  first time from 2005
• Australia has adopted IFRSs from 2005.
• A number of other countries have stopped
  developing national accounting standards and have
  adopted IFRSs.
• Canada has indicated that it would converge with
  IASs/IFRSs from April 1, 2011.
• China and Japan have agreed to converge with
  IFRSs
• The on-going convergence between IFRSs and US
  GAAPs is another important step towards the
  global acceptance of IFRSs.

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Accounting StandardsIndian Scenario
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Indian Scenario

• In India, the Accounting Standards are being
  formulated on the basis of the IFRSs/ IASs issued
  by the IASB.
• While formulating standards, the endeavor of the
  ICAI is converge with the IFRSs to the extent
  possible.
• So far, the ICAI has issued 29 Accounting
  Standards (ASs) corresponding to IFRSs.
• (A Comparative Statement of Indian Accounting
  Standards and IFRSs is available separately.)

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Indian Scenario (contd. )

• As in case of IFRSs, the Indian Accounting
  Standards are also principle based.
• ASs deal with the following four aspects
• Recognition
• Measurement
• Disclosure
• Presentation
• Some of the recent Indian Accounting Standards
  are totally at par with IFRSs in all four aspects.

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Indian Scenario (contd. )

• To illustrate, the following ASs do not have any
  difference with corresponding IFRSs
• AS 7, Construction Contracts
• AS 28, Impairment of Assets
• At present, Keeping in view the requirements of
  listing on foreign stock exchanges and
  information requirements of foreign investors,
  some Indian companies are presenting financial
  statements as per IFRSs and US GAAPs, in addition
  to the Indian Accounting Standards.

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Indian Scenario (contd. )

• Once there is a convergence between the three,
  the need for the same would not be needed.
• Significant progress has already been made in the
  direction.
• This is evident from a recent News Report.
  According to this Newsreport, the financial
  statements prepared as Indian ASs are now being
  accepted in the London Stock Exchange (LSE).
• (Mr. Hugh Sandeman, Head of Business Development
  for India on LSE)

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Indian Scenario (contd. )

• While formulating Indian Accounting Standards,
  changes from the IFRSs are made only in those
  cases where these are unavoidable considering
• Legal and/ or regulatory framework prevailing in
  the country
• In certain cases, the legal and regulatory
  requirements are at variance from IFRSs.
• ICAI has to consider these while formulating
  IFRSs.

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Indian Scenario (contd. )

• Legal and/ or regulatory framework
• To illustrate
• As per IAS 32, Financial Instruments
  Presentation, preference shares that provide for
  mandatory redemption by the issuer are considered
  as liability, based on the substance, whereas as
  per the Companies Act, 1956, these are a part of
  equity.
• IAS 27, Consolidated and Separate Financial
  Statements, defines the terms control in a
  manner which is different from that followed in
  the definitions of the holding and subsidiary
  companies under section 4 of the Companies Act,
  1956.

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Indian Scenario (contd. )

• To reduce or eliminate the alternatives so as to
  ensure comparability.
• In certain cases, the IFRSs allow alternative
  treatments.
• Endeavor of ICAI is to reduce or eliminate the
  alternatives so as to ensure comparability.
• For example
• IAS 23, Borrowing Costs, prescribes expensing of
  the borrowing costs as the benchmark treatment.
  However, it also allows capitalisation of
  borrowing costs as an allowed alternative.
• In India, AS 16 does not allow any alternative
  and borrowing costs directly attributable to the
  acquisition, construction or production of a
  qualifying asset are to be capitalised.
• IASB has also recently decided to revise IAS 23
  to require the same.

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Indian Scenario (contd. )

• Level of preparedness of various interest groups
  involved in implementing the accounting standards
• In a few stray cases, practical difficulties are
  perceived in implementation of certain IFRSs,
  considering the level of preparedness in the
  country.
• ICAI has to make changes in the corresponding
  IFRS for the time being till preparedness is
  achieved.
• To illustrate, considering practical
  difficulties, the ASB has decided not to require
  mandatory adoption of the component approach
  prescribed in IAS 16, Property, Plant and
  Equipment.
• Under the components approach, fixed assets are
  segregated into various significant components
  for the purpose of accounting, for example, for
  depreciation

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Indian Scenario (contd. )

• With a view to further enhance the level of
  convergence with the IFRSs, the ICAI is
  formulating certain new ASs, examples include
• Financial Instruments Presentation
  (corresponding to IAS 32)
• Financial Instruments Recognition and
  Measurement (corresponding to IAS 39)
• Financial Instruments Disclosures (corresponding
  to IFRS 7)
• Agriculture (corresponding to IAS 41)
• Insurance Contracts (corresponding to IFRS 4)

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Indian Scenario (contd. )

• ICAI is also revising some of its existing
  Accounting Standards to bring them at par with
  the IFRSs. To illustrate
• AS 1, Disclosure of Accounting Policies
• AS 5, Net Profit or Loss for the Period, Prior
  Period Items and Changes in Accounting Policies
• AS 10, Accounting for Fixed Assets

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Indian Scenario (contd. )

• The accounting standards have been granted legal
  recognition under the Companies Act, 1956.
• Under the Act, the Central Government has the
  power to notify the accounting standards upon
  recommendations of the NACAS.
• As per the Act, NACAS considers Accounting
  Standards issued by the ICAI.

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Indian Scenario (contd. )

• The NACAS has reviewed all the Accounting
  Standards issued by the ICAI till date.
• The NACAS, on February 7, 2006, has submitted its
  recommendations on accounting standards 1 to 7
  and 9 to 29 issued by the ICAI to the Government.
• AS 8, Accounting for Research and Development,
  not recommended since it has already been
  withdrawn by the ICAI.
• The Accounting Standards recommended by the NACAS
  are the same as those issued by the ICAI read
  with ASIs.
• These are likely to be notified shortly.

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Thank You