There is a lull in the International Financial Reporting Standards (IFRS) training market. Building capabilities for implementing IFRS is no more a priority for companies because it is difficult to guess when the government will notify the effective dates for the implementation of converged Indian Accounting Standards (IndAS). India is not an exception in deferring the implementation of IFRS. The momentum for convergence of accounting practices globally has slowed down. It received a thrust when EU member countries converged their accounting standards with IFRS. This happened in the year 2005. After 2005 only a few important countries (e.g., Canada, Republic of Korea and Russia) have adopted IFRS from 2011/2012.
IASB is marketing IFRS hard. But the users and preparers of financial statements are divided over the issue of adoption of IFRS or convergence of accounting practices with IFRS. Everyone is not sure that adoption of IFRS or convergence of accounting practices benefits the entities and the country. All the arguments in favour and against IFRS are based on perception because there is lack of impact study in India or elsewhere. It is difficult to properly study the impact of adoption of IFRS before implementation. The impact might differ across countries because the gap between the accounting practices before adoption of the IFRS varies widely across countries. Therefore, the assessment of the impact of IFRS should be country-specific.
In the remaining of the article, we shall use the word ‘adoption’ to refer to both adoption and convergence.
Integration of capital markets improves the efficiency in allocating resources to assets across the globe. This benefits countries, of course, subject to severe limitations due to differences in culture, investors’ behaviour, regulations, government’s priority etc. While integration of capital markets is desirable, it is not established that convergence of accounting practices is the most important factor in facilitating that integration. We often say that accounting is a business language. Therefore, it is argued that if different countries can adopt a common language, the flow of capital across different capital markets will be facilitated. However, the common accounting language argument for the adoption of IFRS is not as strong as is made out by those who support adoption of IFRS.
Flow of international fund depends on the relative attractiveness of the destination. Attractiveness of the destination depends on the expected return on investment and the risk in investing in a particular market, which depend on many socio-economic and political factors, and also on the quality of financial reporting and corporate governance. Therefore, managing those factors and improving the quality of financial reportingand corporate governance are more important than introducing a common business language. No one has companied that inflow of foreign capital has been affected adversely because Indian accounting practices are primitive. Similarly Japan’s growth was not affected by accounting practices that deviated significantly from US GAAP. Incidentally, Japan initiated accounting reform only in 1990.
Improvement in the quality of financial reporting requires regulators to protect audit independence, quickly identify audit failures and earnings management and take stringent penal actions against those who are found guilty. IFRS does not necessarily improve the quality of financial information, although, those who are in favour of the adoption of IFRS believe that it does so.
The extant accounting standards should be evaluated in terms of the desirable qualitative characteristics of financial information being provided through financial statements and necessary changes should be incorporated, wherever required. Adoption of IFRS may be made voluntary for international companies domiciled in the country. Japan has adopted this policy.
They will take a decision this year on whether they will make application of IFRS mandatory from the year 2016.
The fundamental qualitative characteristics of financial information is that it should be relevant and should faithfully represent what it purports to represent. We should evaluate each accounting standard from this perspective.
Perhaps, those who argue that India should not hurry in adopting IFRS are right. Accounting practices evolve slowly.
Sudden change disturbs the whole system. The initiatives so far by the regulators and the government have created general awareness about IFRS.
Therefore, the ground is prepared to bring necessary changes in accounting practices. The immediate task should be to improve extant accounting standards, wherever required.
It is expected that the new avatar of NACAS, which will come into existence after promulgation of the new Companies Act will take all the steps necessary to further improve the quality of financial information.
Affiliation: Chairperson, Riverside Management Academy (www.riversidemanagement.in)