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| Transition to IFRS not to be delayed |
| Asish K Bhattacharyya / New Delhi Aug 24, 2009, 00:08 IST |
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As it stands today, India will adopt International Financial Reporting Standards (IFRS) from the year 2011. Companies whose accounting year ends on March 31 will issue the first IFRS financial statements for the year 2011-12. Companies which use the calendar year as the accounting year will issue the first IFRS financial year for the year 2012.
Convergence: India will have its own set of IFRS-equivalent accounting standards. Companies which will apply IFRS-equivalent Indian accounting standards will be able to make an unreserved and unequivocal declaration that the financial statements have been prepared and presented in accordance with IFRS. Therefore, convergence implies that one or more alternative principles/methods available in IFRS may be withdrawn, but an alternative principle/method that is not available in IFRS cannot be allowed. For example, Indian regulators (e.g. ICAI) may decide not to permit use of the revaluation model for measuring property, plant and equipment. Similarly, Indian accounting standards may require disclosures in addition to those required under IFRS. There will be no substantive difference between the IFRS-equivalent Indian accounting standard and IFRS. It is quite likely that deviations, if any, will be quite insignificant. Therefore, companies should prepare a transition road map assuming there will be no difference between IFRS-equivalent Indian accounting standards and IFRSs.
Transition date: If the accounting year ends on March 31, the transition date is April 1, 2010. If the accounting year is the calendar year, the transition date is January 1, 2011. The transition date is important because all transactions and other events that will occur after the date should be presented in financial statements using the IFRSs that will be applicable at the balance sheet date of the first IFRS balance sheet. The new accounting policy based on IFRS shall be applied retrospectively, with certain exemptions that are available, IFRS-1, which stipulates principles for the first-time adoption of IFRS.
First balance sheet: The starting point in the preparation of IFRS financial statements will be the IFRS-compliant balance sheet as at the transition date. The first balance sheet will reflect the impact of application of IFRS-based accounting policies to transactions and events that occurred before the transition date. The cumulative effect of the retrospective application should be adjusted in general reserve (or any other appropriate reserve account), assets and liabilities. Therefore, balances of equity, assets and liabilities in the first IFRS compliant balance sheet might differ from those in the last audited balance sheet before the transition date.
There, are four areas to which retrospective application of the new accounting policies is prohibited by IFRS-1. The most important one is with regard to estimates. The first-time adopter is not allowed to change previous estimates unless there is evidence of error. If the estimation method was consistent with IFRS, no adjustment is required. For Indian companies, in most situations, adjustments to previous estimates will not be required.
Retrospective application: Retrospective application implies that the new accounting policies are to be applied to all transactions and other events that occurred before the transition date on the assumption that the new policies were applicable from the very beginning. The International Accounting Standards Board (IASB) appreciates the difficulties in applying new accounting policies retrospectively. Therefore, IFRS (IAS-1) provides that an entity should go back to the extent possible with reasonable efforts. An entity’s ability to go back depends on the availability of records and other information required in applying the new policy. However, if other players in the industry go back to a number of previous periods (say 10 years), it will be difficult for a company to justify its inability to go back to earlier periods covered by them.
It may be a good idea to discuss this issue in industry associations and decide a uniform policy that will be followed by all the members.
Formulation of new accounting policies: The first principle is that accounting policies should not be too onerous to be applied. These policies should be such that their application will result in fair presentation of the economic effect of transactions and other events. Financial statements should reflect the ground reality (i.e. actual operations and the nature of transactions and other events). Therefore, accounting policies, which include the methods of applying the accounting principles, should neither be too simple to reflect the reality nor too complex to apply. The concept of materiality should be applied. But that should not be used to avoid appropriate accounting for transactions or other events.
Formulation of appropriate accounting policy requires understanding the economic implications of the event/transaction and the business environment in which the company operates. Therefore, it may be a good idea to form a multidisciplinary team to formulate IFRS compliant accounting policies. It is a must to involve the auditor(s). Government companies should involve CAG representatives in the task of formulating accounting policies.
It is not advisable to blindly use templates provided by consultants. It is probable that these are imported from developed countries. It is likely that those have been developed taking into account the environment prevailing in those territories (e.g. European Union) at the point of their transition to IFRS. Therefore, templates may be used only as a starting point in formulating accounting policies.
Restatement: In some quarters, doubt has been raised on whether earlier years’ income and expenses are to be restated. It is quite clear that such restatement is not necessary. Companies will publish the first IFRS balance sheet as at the transition date, which will reflect the cumulative effect, along with the first IFRS financial statements.
IFRS is not applicable to information provided in other parts of the annual report. However, companies should voluntarily adjust the numbers they present in summary financial statements for previous years. It is quite likely that Sebi will require restatement of numbers for previous years, which will be presented in the prospectus. Therefore, companies which intend to issue shares in the near future should be ready with restated financial statements for earlier years.
Conclusion: It is important that we start our task of transition to IFRS in the right earnest. We have no time to wait and watch. However, it is not necessary to press the panic button. It is also not necessary to provide a hefty budget for the same. International experience is not necessary to seamlessly adopt IFRS. IFRS-1 has taken into account the problems faced by countries in transiting from local GAAP to IFRS. Therefore, similar difficulties will not be faced by Indian companies. It is necessary to have faith in the accountants and auditors associated with preparation and audit of financial statements, even if they do not have prior experience of guiding companies in adopting IFRS.
The Institute of Chartered Accountants of India (ICAI) is doing a commendable job of maintaining its body of knowledge up to date and in providing training to its members in IFRS. Therefore, Indian chartered accountants are competent to handle the issues that will arise in transition to IFRS. Transition may require modification of the IT system and strengthening of the internal control system for the preparation and presentation of financial statements. An immediate review of those systems is necessary.
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