It is not an article on procedures and technicalities of IFRSs but a generic one for a common man who is more concerned with results than with accounting intricacies and sophistications. The term IFRS has four components –International- Financial- Reporting -Standard of which the first three are defining components for the fourth one, that is Standard.
What is Standard? - In common parlance, it is accepted level used to make comparisons. In other words, it is the level of quality which is considered acceptable. For each accounting issue/subject, we have to take a ‘stand’ that is legal and permissible, logical and consistent, ethical and moral and above all, ground to reality beyond all doubts whence all the stake holders will understand the issue as to recognition and measurement, presentation and disclosure in the same wavelength and mode. Regulatory authorities in every country have over the periods developed their own accounting standards on each issue/subject as people in the respective GAAP understand the accounts as they should.
When I was an article-clerk way back in the sixties in the bygone century, the concept of ‘Standard’ was not rooted that much as they are developed today leaving the accounting professionals then to devise generic routes for accounting issues, mostly dictated by legal obligations and commonsense gathered and gained through time tested past experience in the profession.
Even as late as the fag end of the previous century, there were less than 20 standards on major issues. Thereafter, year after year, new standards sprang up and blossomed to catch up the ever increasing demands thrown up by complex, multiple and multi part business developments around the world so much so one is even provoked to wonder whether it was high time to have a family planning for accounting standards! Even to the extent of pitying the CA students to comprehend the ever expanding battery of standards!
Since then, time has passed leaps and bounds. Now, thanks to globalization, investments flow across national borders, securities are listed in stock exchanges across the globe; and there is ever increasing necessity for developing uniform standards that is acceptable by all the stake holders around the world
Therefore, the word ‘International’ is the first and foremost defining component of the word ‘Standard’. Today, when there is cold in America or in any other part of the world, we sneeze it here in India that is the level of intensity to which we are pushed today. Stock exchanges across the globe move and swing in tandem and sympathy with other stock exchanges starting from the one in Japan when the Sun rises first to stock exchanges in America where the Sun rises when it sets in India. In a scenario like this, it is paramount and of utmost important to set the tune of standards in rhyme and rhythm to harmonize with the multilateral business dimensions spread across. That is the background music to be set in true and fair, in drafting the standards, lest end up to face music in incurring and dealing wrath!
The second defining factor is ‘Financial’ Indian accounting standards are simply known as ‘Accounting Standards’. But, since the countries are reduced to global villages in the changed and charged global atmosphere, it is but natural; stakeholders consider more in terms of their investments in different parts of the world. Accounting is mere rendering of accounts as per standards. No doubt, it is paramount, but expected of any business! But, then, it is recognition and measurement and their presentation and disclosure are the key to global investors for a decision.
In fact, the Indian mind set is conservative. In respect of fair valuation, which is defined as the value of an asset or liability that commands in an arm length transaction, the Indian GAAP so long considers the fair value if it is lesser of the cost of investment. But, if the fair value is more than the cost, it is simply ignored .If we look at the issue unbiased, is it not hypocrisy, duplicity and double standards? In the merited view of the stake holders’ perspective, fair value has to be laced into the fabric of valuation when investments are held or designated for trading.
Fair valuation is not fair and lovely, the latter being the cream that is applied only to make fair and lovely. On sweat, it may fade away. It’s a temporary phenomenon. Fair valuation is factual and real, while the other is artificial and make-believe; and if we have to say in accountants’ language, it is widow dressing
Then, why apprehend and undue fear on fair valuation considering the limited nature of the assets/ liabilities that is subject to fair valuation? Moreover, fair valuation is optional in most of the circumstances. In the case of Property, Plant and Equipment, it is only elective. It is not pushed on ones throat. An entity considering the business perspective, it goes either for it or not – if it goes for it, increase in value will be parked in Revaluation Reserve.. Under Indian GAAP as on date also, this option is available. But, under IFRS, it is made more stringent making it obligatory on the entity to periodically to revalue. What is wrong in it? Not only that, there is an inherent deterrent built in IFRS mechanism where depreciation on exalted value will impact the Income Statement as compared to Indian GAAP where stripped depreciation only influences the Income statement. . Even on disposal of assets revalued, it will not influence the results of the year since will be transferred to straight to retained earnings under IFRS regime. In view of this, an entity may ponder over umpteen times before opting for it, in the case of depreciable assets, since it may impact bottom line adversely.
However, one disturbing feature is when an entity elects an exemption to go far fair value as deemed cost at the time of first time adoption of IFRSs, whence the deference in value is directly recognised in retained earnings even without disposal of assets. To ward off, the Companies Act should step in to prevent any dividend out of not realised.
Fair valuation is also allowed on optional basis in respect of Investment Property, but here, it will influence the Income statement, rightly so, considering the texture and tone of the Investment Property- it is held to make profit out of sale unless held to earn rental income. Again, in the case of biological assts and produce it is through fair value less cost to sell through P&L accounts, obviously considering the fragile nature of the assets
Similarly, in the case of financial instruments, where they are held or designated for trading or in the case of Derivatives unless there is effective hedging, it is fair value through P& L account keeping in view of the purpose and tenor of the Instruments. It is but logical to recognise in the Income Statement since there are held for trade. This departure is a welcome change though for Indian traditional thinking it will be diffident and insecure to stomach for some more time until acclamised.
The Third defining component is ‘Reporting’ Reporting is sine-quo- non but Indian Standards barring ‘Interim Financial Reporting Standard’ are not vocal on that presumably because it is obvious. The word ‘reporting’ is to tell or write something factual. If we analyze the word ‘report’, it is based on or in accountants’ parlance, coined on the word ‘port’. In the port trust, goods exported or imported are dispatched or delivered as they are without doctoring. In airport, authorities only facilitate air bound passengers either to board or disembark- no other change. For computer savvy, in portal, what is fed is delivered-no change what so ever. Portrait is nothing but painting, drawing or photograph of a specified person-lest it is any other picture.
Once I traveled from then Madras to Mumbai. When got down at Dadar, iwas looking for a porter Then, I saw a person as tall as an actor in the film “Coolly’ He came nearer to me and asked in his unique base voice ‘what you want?’ sir. After a bargain, he lifted my luggage and placed on the taxi as directed. No change in the luggage. What is emphasized is self- explanatory and evident. The report should neither twist nor covey anything away from factual. When the investment becomes global, report should be all the more factual in a defined format so that all stock holders understand in the same wavelength. It is why ‘Reporting’ is like the final over in a game of cricket that determines the result of the game is the core defining factor of a Standard in IFRS.
After defining IFRS, the next important thing that engages our mind is ‘how to go about?’ There are two ways- one to ‘adopt’ IFRSs as they are and the other to ‘converge’. It is in Indian physic or gene, to think ‘why we should adopt especially when we can afford to have our own children!-well-defined Standards. Therefore, ICAI has taken the route of ‘convergence’. Convergence does not in any way dilute IFRSs. When options are there, under Indian version, ICAI may elect one for the country wide application. Indian government and ICAI may add some more disclosures without in any way diminishing the required disclosures under IFRSs.
One of the members of IASB has discretely told in a meeting that some countries that have opted for convergence regret at leisure since they have to frequently catch up with IFRSs developments that take place more often than not, thanks to pulls and pressures from the various governments, business interests and accounting fraternities across the globe. This factor has to be kept in mind to tailor our converged standards. If our Standards are not on time basis laced to developments and amendments to IFRSs, we may be driven to a piquant situation ‘where we are converged in principle but alas, lagging behind! This scenario will unfold when our Standards are to be approved by NACAS and our Financial Statements are prescribed by the respective ACTS- whether the Government that very often embroiled in trail for survival will cope with the frequent calls for change in Standards and Financial Statements. Time only will answer.
Road Map:
Now, let us go to the Road Map for Ind.AS, as notified by the Ministry of Corporate Affairs on 16th April 2015 according to which the Companies and their auditors shall comply with the Indian Accounting Standards (Ind. AS) specified in Annexure to these rules in preparation of their financial statements and audit respectively, in the following manner, namely:-
(i) any company may comply with the Indian Accounting Standards (Ind. AS) for
financial statements for accounting periods beginning on or after 1st April, 2015, with the comparatives for the periods ending on 31st March, 2015, or thereafter;
(ii) the following companies shall comply with the Indian Accounting Standards (Ind AS) for the accounting periods beginning on or after 1st April, 2016, with the comparatives for the periods ending on 31st March, 2016, or thereafter, namely:-
(a) companies whose equity or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of rupees five hundred crores or more;
(b) Companies other than those covered by sub-clause (a) of clause (ii) of sub rule (1) and having net worth of rupees five hundred crores or more;
(c) holding, subsidiary, joint venture or associate companies of companies covered by sub-clause (a) of clause (ii) of sub- rule (1) and sub-clause (b) of clause (ii) of sub- rule (1) as the case may be; and
(iii) the following companies shall comply with the Indian Accounting Standards (Ind AS) for the accounting periods beginning on or after 1st April, 2017, with the comparatives for the periods ending on 31st March, 2017, or thereafter, namely:-
a. companies whose equity or debt securities are listed or are in the processof being listed on any stock exchange in India or outside India and havingnet worth of less than rupees five hundred crore;
b. companies other than those covered in clause (ii) of sub- rule (1) and sub clause (a) of clause (iii) of sub-rule (1), that is, unlisted companies having worth of rupees two hundred and fifty crores or more but less thanrupees five hundred crores.
c. holding, subsidiary, joint venture or associate companies of companies covered under sub-clause (a) of clause (iii) of sub- rule (1) and sub-clause (b) of clause (iii) of sub- rule (1), as the case may be:
Provided that nothing in this sub-rule, except clause (i), shall apply to companies whose securities are listed or are in the process of being listed on SME exchange as referred to in Chapter XB or on the Institutional Trading Platform without initial public offering in accordance with the provisions of Chapter XC of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
Still in consideration!
Some news is in the horizon as to Ind. AS on new revenue standard. ‘The National Advisory Committee on Accounting Standards (NACAS) has not recommended any voluntary adoption of new revenue standard – Ind. AS 115 – by companies in India, even as it has made a case for its deferral’, Chairman AmarjitChopra
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