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Converging with IFRS: No need to rush

Synopsis

India's move to converge with the International Financial Reporting Standards (IFRS) in a phased way starting April 1, 2011 is pragmatic and welcome for investors and companies.

India’s move to converge with the International Financial Reporting Standards (IFRS) in a phased way starting April 1, 2011 is pragmatic and welcome for investors and companies. The new accounting practice, to be called IND-AS, will transform the company balance sheet and improve transparency in financial statements. Indian companies would find it easier to list on international stock exchanges and raise cheaper funds overseas. Those already listed will see their compliance costs drop. The government has done well to provide a roadmap for transition to IFRS, spanning four years. A phased transition will enable course-corrections.

The decision to converge towards, rather than wholly adopt, IFRS also makes sense. Sure, the accounts of an corporate entity should be understood by all countries. A uniform accounting language is in order, with 120 countries — excluding the US — allowing the use of IFRS. However, one size doesn’t fit all and there will be differences between IND-AS and IFRS developed by the International Accounting Standards Board (IASB). The government should notify IND-AS without delay and ensure that relevant amendments are made to the Companies Act to incorporate the new standard. This would mean putting the Companies Bill, now being vetted by a parliamentary committee, on fast track. Else, the government would have to issue an ordinance to amend the Companies Act. But that is a bad, and avoidable, option.

Around 300 companies, including the Nifty 50, BSE 30, companies listed overseas and companies with a net worth of over Rs 1,000 crore, will converge with IFRS from April 1, 2011. Private companies with a net worth of Rs 500 crore or less and small and medium companies will be out of IFRS, though they can voluntarily comply with the new standard. So, there will be two sets of accounting standards. However, the convergence with IFRS is more than just a technical accounting exercise. It has tax implications. The potential challenge for tax officers will be to deal with fair value accounting that gives rise to the recognition of unrealised profits and losses. Clarity on tax treatment is a must to facilitate smooth transition to the IFRS and investor awareness.

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