WHY IFRS?

It is the bane of our nation that for very many important issues, there is hardly any debate.  For example, year after year, budgets are passed with no meaningful discussions in the Parliament. The writ of the interested few runs riot, mainly due to large scale apathy and indifference of various sections of the society. Only some small feeble voices are heard on such issues and they are either quickly put down by force or by a brazen display of a ‘don’t care’ attitude.  The media, which is supposed to mirror the society’s views, acts on its own agenda in this nation. They blow only sensual, sentimental and sensational issues out of proportion often ignoring sensible issues that perhaps would affect the sensitivities of the senseless people they get their fodder from. The recent example is the Direct taxes Code. The media was instantly euphoric and highlighted a very few positive issues like hiking the threshold limits but has refrained from making any serious analysis or to raise appropriate din on the various issues connected to it. None of the political parties came out with any serious views on it. Only some professional bodies have been conducting some prosaic seminars, meetings etc. which may ultimately be to no avail!

Well, while even this can be tolerated to some extent as the majority of the population – which includes politicians – is still illiterate and semi literate (which is more dangerous!), the indifference displayed by members of the accountancy profession on issues concerning them is appalling. And what is more, the attitude of welcoming certain moves without even having any cursory discussions per se inside the profession, is indeed very disturbing.  I am referring to the many presumptuous actions of the powers that be of the ICAI, bordering arrogance, - concerning students, members, accounting standards etc.  Lest this article should acquire a ‘mega serial’ status, I am going to restrict myself to the issue of “standard-setting” function of ICAI. 

In one of my earlier write-ups, I have brought out the absurdity of making AS-15 mandatory for almost all business enterprises, with unadulterated non-application of mind. I am sure that I am not alone in harboring opinions that several standards have been set and made operational with no serious thoughts as to their desirability, necessity, practicality or the ability of the professional brethren to comprehend them. The climax is reaching now, with the IFRS now looming large on all of us.

There has been in the recent times an euphoria on IFRS and many seminars and programmes have been organised on this subject and ICAI has even conceptualized a fee based course on IFRS by giving a palpably false impression in the minds of the practising professionals that not only the knowledge of IFRS is going to make their wallets swell but lack of such a knowledge would drain their income stream. My grouse is that why ICAI did not think it necessary to take the profession in to confidence. Who gave them the powers to start assuming that IFRS is absolutely necessary for this nation and go for unilateral announcements on the “convergence” or “adoption” or whatever they choose to call it? As the regulatory body of accounting, is it not supposed to take holistic views on matters concerning the practices of accountancy in the nation, after considering the unique and deep rooted culture, ethos and values?

My strong view is that IFRS is pretty unsuitable for our nation and I have reasons to hold such a view. I will come back to them a little later. Let me first handle the arguments that the votaries advance why we should go for IFRS.

The arguments of the champions of IFRS are –

a.    The Government has gone ahead and committed

b.   It is from IASB, the world standard setter

c.    More than 100 nations require or permit the use of IFRS

d.   It is the global accounting language and without adoption of it, we will be ‘quarantined’

e.    Only IFRS can bring FDI

Reason 1: The Prime Minister has gone and committed to G-20 that we would become IFRS compliant and there is little that we could do on that issue anymore other than preparing ourselves.

My question: Did the Government consult ICAI before going ahead and committing so? If they did so, did ICAI have any consultative process to do a nationwide impact analysis, took the business community and the profession in to confidence and give a considered view? If the Government did not consult ICAI, was it questioned as to why they made that kind of commitment when the accounting regulator is still alive and kicking? If the Government did not think the ICAI was an entity worth consulting but only worth insulting, did ICAI at least lodge a feeble protest?  

No. Instead, ICAI has gone ahead and unilaterally fixed even a deadline for the convergence as April 2011, even though it is conscious about the various roadblocks, the clearance of any of which is hardly under its control. In effect, it has never asked the question “Why?” but instead only “When?”

Coming to the roadblocks, first of all, whether the Companies Act would be amended to effect changes in formats and the terminologies to sync with IFRS is not clear. The terms Balance Sheet, P&L a/c and Fixed Assets are to be called as Statement of Financial Position, Income Statement and Property, Plant & Equipment respectively in IFRS scenario. It is to be noted that even the Draft Companies Bill that stands approved by the Cabinet also uses the old terminologies only.

Look at the various regulators. RBI does not seem to be too enthused in changing the prudential norms in line with IFRS requirements. SEBI & IRDA do not have any announced roadmap to change the rules and regulations to conform with IFRS.

However, ICAI somehow wants to board the IFRS bus at least by forming a one man queue!

Secondly on IASB: Let us understand about this IASB. Strangely,  a sort of status that would get accorded to bodies like UNO, UNCTAD, WTO or IMF is being accorded to IASB, which, please believe me, is a self appointed, private body based out of UK with no direct or indirect sponsorship or support of any Government or international economic or financial institutions like World Bank, IMF, WTO etc.  It is governed by a Board of Trustees consisting of 22 people drawn from different nations like Netherlands, Germany, France, Poland, US, UK, Brazil etc. and has one representative from India – no, not from ICAI or from Indian Government – but Mr Mohandas Pai of Infosys – on his personal might.

These trustees appoint members of IASB who conceive IFRS, which again consists of a dozen and half persons again predominantly western. India and particularly ICAI seems to draw a lot of consolation from the fact that one Prabhakar Kalavacherla – a man of Indian origin and an Indian CA, partner in KPMG, USA – has been inducted in the Board in Jan 2009.  There are other organs like Standards Advisory Council (SAC) and IFRIC (interpretations organ of IFRS), where also there is little or nil representation from India. In any case, ICAI as an institution, which keeps bragging that it is the second largest accounting body in the world with 1.5 lakh members, is NOT represented at all, while countries with insignificant number of members have been more than adequately represented.

When it is only a private body, how come it is able to wield so much power and literally controls the whole accounting world? It is because of the unseen octopus hands of the Multinational Accounting Firms. In the IASB, 9 out of 16 members have proven affiliation with MAFs. In IFRIC, 8 out of 14 are associated with MAFs.

The same MAFs who have created a huge brand for themselves in spite of the mysterious ownerships and who have been advising various Governments in spite of their track record – starting with Enron and halting with Satyam are behind this IFRS, The reason? Create more work for themselves in an area that has been deliberately made very complicated. Create problems first and then create solutions next. Problems for everyone and solutions only from them. It is like the Anti Virus software manufacturers conspiring to produce more viruses and infecting the computers all over and thereafter selling vaccine for it. It is like making Swine flu a mighty news for creating enough and more panic and selling masks which are worth Rs. 6/- apiece at Rs. 60/- each.

The same MAFs who brought the Transfer Pricing Concept for creating more work opportunities for them, have now brought IFRS. So, what you see is

Multinational Accounting Firms In Action!

The third reason advanced is that when more than 100 nations ‘require or permit’ the use of IFRS, why not us? More than 100 countries do not have legislations against drug trafficking or immoral trafficking. Can we also abolish them here?  If there are nations that would like to emulate the West without realizing the consequences, should we also do the same? Should there not be a minimum amount of internal debate whether we require or need to permit the standards in accounting which the Western countries have devised, predominantly having their business philosophies in mind? In the West, even Ethics is practiced with a commercial mindset and in India, even commerce is practiced with an ethical mindset. With such huge and fundamental difference existing, do we not deserve at least a consultative process?

The fourth reason propounded is that IFRS is a global accounting language and for the sake of uniformity, India has to converge especially in the wake of increasing international and cross border transactions. My questions are – Do we have a global trade regime? Do we have a global tax regime? Do we at least have a global accounting year? When you cannot achieve ‘globalisation’ in all these areas, what is the urgency in having a global accounting language and why should it be thrust on all business enterprises who may never wish to go global?

Speaking of language, one is reminded of the immortal poet Bharathiar who said “Seppu mozhi pathinettudaiyal  - enil sinthanai onrudaiyal”. (A nation with eighteen languages but one mind). Have we not proved in this great nation that Unity in Diversity is a strength and not a weakness? Have not the South Indians done business in the north? (Remember, VO Chidambaranar went to Mumbai hardly knowing Hindi to buy a ship in pre independence times). Have not the Rajasthanis and Marwaris come to South and began flourishing in money lending businesses? Have not our Chettiyars and Muslims gone all over the Far East and established businesses? Have not our Gujaratis gone to UK and Africa and successfully established their business empires? Have not our Malayalis gone all over the world?  Has language been a barrier at any point of time for us? If it is a problem for those wishing to deal with us, it is simply their problem. Not ours.

The fifth point that they forcefully make is that only IFRS can bring FDI in to this country as a non IFRS compliant nation would be perceived as an additional threat and thus attract less FDI only.  

Statistics show that our Gross domestic savings rate is at 37% and our Gross Investment rate is at 38%. This means that 95% of our investment needs are taken care of by internal savings and only 5% FDI is needed – roughly 1% of the GDP. (Source: RBI Annul report 2009). And even in that 5%, more than half is round tripped to the country as Mauritius accounts for 45% and Singapore accounts for 9% of the total FDI inflow). When facts are such, the impression that is sought to be created that only FDI can drive our national economy is motivated, mischievous and even malafide. India is a large consumption economy and doing business here is as much beneficial, if not more, to the other nations as it is to us. And for this, bending backwards and inviting IFRS with open hands is like subjecting oneself to chemotherapy for a nonexistent abscess, which is anything but cancerous.

Readers may perhaps wonder that I am being critical of IFRS only on such peripheral issues and that probably IFRS has its conceptual advantages. I shall only deal with a few of the concepts and leave you to judge for yourselves.

Fairvalue measurement in accounting is the bedrock of IFRS. This is a concept that is completely repugnant to the Going Concern concept of accounting. This means that assets have to be valued on their ‘exit values’. That is if you buy a Skoda Motor Car at a cost of say Rs. 10 lakhs on 30^th September, 2009 and as you drive out of the showroom, its resale price drops to Rs. 8 lakhs, you can only take Rs. 8 lakhs as your asset value when you draw up your Balance Sheet on the evening of 30^th Sept, 2009, writing off Rs. 2 lakhs in a few hours. Similarly, if you have an immovable property that you bought 10 years back at a cost of Rs. 15 lakhs and the market value is determined today as Rs. 1.5 crores, you must revalue it to mark to market. This is what IFRS calls ‘fair’. (Incidentally, in IFRS, there is nothing called “True & Fair”. Truth has been left behind with the conservatists and only “Fair” is carried forward!- And here, we are trying hard to resurrect Truth i.e, Satyam!).

In a nation like ours, where many corporates including the PSUs like LIC, State Bank, HAL, BEML,NLC etc had heavily invested in immovable properties whose values have soared phenomenally in the last decade, you may well decide what would be the impact in their Balance Sheets (oops…statement of financial position!)

Similarly, if an enterprise makes investments, regardless of its stated intentions and accounting policies with respect to its Asset Liability matching and with “to be held to maturity” plans, they will have to Mark them to market!

So ridiculous this concept is that if you begin applying it when you have wonderful FMs who can tax ‘revaluation surpluses’ under Income Tax law and also levy Gross Assets Tax on the values you show in Balance Sheets, you can be certain that you will not be left with many Balance Sheets to put your autographs on!

Even in the West, where this has been conceived, this fair value concept has come in for strident criticism. Many have even attributed this as the reason for the melt down and slower than anticipated recovery. Christopher Whalen, Managing Director of risk research firm Institutional Risk Analytics says : "It's ridiculous to apply fair value accounting to assets that have no market," and further adds "All this volatility we now have in reporting and disclosure, it's just absolute madness. It breeds over pessimism. Most of the losses reported by the banks were noncash. The only people who benefit from this are the hedge funds, who make money off volatility."

Charlie McCreevy, EU internal market commissioner, urged the International Accounting Standards Board (IASB) in May 2009, at the Financial Reporting in a Changing World conference in Brussels, to be more flexible on mark-to-market accounting rules in the light of the current financial crisis. And in US, the FSAB went ahead and relaxed its MTM rules.

There has been a considerable debate even inside the Big 4 firms on this potentially dangerous concept. In fact E&Y, UK  itself has come out with a brilliant paper on ‘How fair is fair value?’ and has subtly questioned the valuation methods advocated by IASB. Especially on the mathematically calculated model of ‘fair value’ which it calls is a prediction not an observation. “In essence it is based on internally-derived assumptions and judgments about the future, to a degree not generally appreciated. It involves theorising about hypothetical markets that have hypothetical buyers and sellers, who are assumed to have as much knowledge about, and interest in, the particular assets concerned as does the reporting entity”, it adds.

In a country like ours which is debt driven, even to think of applying IFRS concepts as would be applicable for equity driven economies of the western world is reflective of non-application of mind. I keep using this same terminology as anything else would be considered defamatory. 

Another concept is recognition of “constructive obligation” in the books as opposed to “contractual obligations”.  This involves provision for even unknown and unascertainable liabilities. Simply stated, a contingency liability (AS 29) provision which is recognized as a fact has to be recognized as a figure. Seemingly an over cautious approach, this could have the effect of distorting the actual financial health of an enterprise. However, when it comes to events after the Balance Sheet like proposed dividend etc., IFRS talks in a different tone.

Time Value of Money is another concept that is under IFRS. Let me explain. If you sell goods worth Rs. 10 lakhs and give a credit period of 90 days, you have to take only the value of that Rs. 10 lakhs, as it would be valued after 90 days that is after giving the discounting factor, in your Sundry Debtors. Here it is not even a fact but a fiction that gets translated in to a figure.

Componentisation for the purpose of arriving at depreciation is another ‘brilliant’ idea propounded in IFRS. If you buy a car, you will have to estimate the useful life of each of its component like engine, upholstery, tyres, chassis, body, instrument panel etc. and charge depreciation for each of it differently.

So, friends, be prepared to unlearn what all you thought was accounting. Conservatism, prudence, going concern, matching revenues with costs, historical cost are all going to be archaic concepts soon. And we have dedicated cheerleaders for these amongst us.

Sri Y.V.Reddy, former Governer of RBI in a recent interview said: “a large part of financial activities happen in US and UK and it is in their national interest to ensure that their domination in financial intermediation continues. To that extent, the model may be tilted in their favour if the agenda is dictated by them”. Ditto for IFRS.

I am not suggesting that we should be the world leaders in standard setting. Let us set standards for us and let them set standards for them. Those who need to operate in foreign soil can go ahead and re-state their financials and whoever wants to do businesss here, can re-state their financials as per Indian GAAP. Arm’s length can be practiced here much better.

Albert Camus, the French Nobel Laeurate said “Don’t follow me – I may not be able to lead you.  Don’t lead me – I may not be able to follow you. Walk beside me and be my friend”. This is a well meant advice. Is anyone prepared to listen?

PS Prabhakar