Glitch in India's transit plan to IFRS

MUMBAI: As India prepares to align the country’s accounting practices with International Financial Reporting Standards or IFRS, a grey area in
its implementation is a nagging concern for companies and accounting firms.

The confusion is whether Indian companies, when they shift to IFRS on April’01, 2011, should recast revenues and expenses of the previous years, in line with the IFRS practices followed elsewhere, or would the domestic accounting regulator excuse local entities from this restatement.

“There is an urgent need to clarify how the accounting for historical transactions and consequently revenues and expenses recognised in the periods prior to the IFRS convergence will be treated.” said V.Venkataramanan, Director, accounting advisory services, KPMG.

Venkataramanan said the clarity on this matter is critical for companies to be prepared any possible situation in the run up to the convergence into IFRS norms.

Officials at the domestic accounting regulator— The Institute of Chartered Accountants of India (ICAI)— were not available for comment on the matter.

The issue is relevant because if the restatement of earnings, as per the IFRS rules, is downwards, this could lead to similar adjustments in retained profits. This will inturn impact a company’s net worth (total share capital+reserves), a key determinant of the value of an entity. Lower networth affects the company’s valuation ratios, which are closely watched by investors and analysts in the market.

If India decides to implement IFRS only on transactions from April 2011, and not historical, accountants believe it will be simpler to apply. But, the issue will be that the diluted accounting norms locally will not be in line with global standards, defeating the purpose of a unified accounting rule.

The executive director at a global accounting firm, who did not wish to come on record on this specific subjest, said, “The revenue restatement strictly as per IFRS will be more of a negative for Indian companies, especially the smaller ones, though, just for the short term. We do not see much scope for dilution of IFRS norms by ICAI.”

Accountants are also seeking clarity on the local tax treatment involving the restatement of earnings, post the shift to the IFRS norms.