Indian IFRS — adoption or convergence?

The Institute of Chartered Accountants of India (ICAI) issued Ind-AS 41, an exposure draft (ED) on the Indian equivalent of IFRS 1, First-time Adoption of IFRS. Ind-AS will be a separate body of accounting standards which may not always be the same as IFRS issued by the International Accounting Standards Board (IASB) (hereinafter referred to as “IFRS”).

Thus, if an Indian parent has foreign subsidiaries, which are already using IFRS, the Indian parent will not be able to use those financial statements in its transition (as well as on an ongoing basis) to Ind-AS and will have to convert the already IFRS compliant subsidiary to Ind-AS.

Further, companies which are already IFRS compliant, for example, to comply with foreign listing requirements, will not be allowed to use these financial statements to claim compliance with Ind-AS. This will create considerable workload for global Indian companies.

Many entities around the world are able to make a dual statement of compliance on their financial statements, which is an unreserved statement that the financial statements are in accordance with IFRS and the standards notified in their local jurisdiction. This is only possible where there are no differences between IFRS and the standards notified locally.

The advantage of making a dual statement of compliance is that the financial statements can be used within India as well as in almost all major capital markets in the world which accept IFRS financial statements. If Indian companies fail to make dual statement of compliance, they may need to reconvert again from Ind-AS to IFRS, at the time of foreign listing.

The positives

Any Government would be challenged in making a decision as to whether to adopt full IFRS or to make certain deviations which are deemed necessary. The advantage of adopting full IFRS is that it would certainly help entities that are seeking foreign listing. Also, Indian entities that have several foreign subsidiaries which use IFRS would prefer to have the entire group on IFRS, rather than for different companies of the group to be on different national versions of IFRS.

However, such companies as a percentage of total companies in India may be small and hence the Government may not deem fit to impose full IFRS on all the companies in India for the sake of this relatively small advantage. Therefore, what kind of changes from IFRS should the Government consider when notifying Ind-AS? Certainly not the ones that are being contemplated, for example, the discount rate and the accounting for actuarial gains and losses with regard to measurement of pension obligation.

With regard to accounting for actuarial gains/losses, multiple options, including deferring actuarial gains/losses, are available under IFRS which entities in other countries are using. Indian entities should not be deprived of that benefit, as is evident from the relevant exposure draft issued by ICAI. It is interesting to note that Australia started off eliminating multiple options when it first notified the IFRS standards. However, it later fell back to allowing the full range of options under IFRS.

Overall, Ind-AS should not make any departures from the full IFRS standards unless they are required in the rarest of rare cases. This will ensure that we receive the full benefit of adopting full IFRS standards.

Unwarranted departure

So far it appears that the departures that are expected to be made (discount rate on long term employee benefits or accounting of actuarial gains/losses) are unwarranted.

As the standards are not yet notified, and as companies make strong representations, it is not clear at this stage what further exceptions would be made to the full IFRS standards. The Government will have to exercise judgment on what departures to make; this could be in the area of foreign exchange accounting, loan loss provisioning in the case of banks, completed contract accounting in the case of real estate companies, and so on.

There has to be a solid technical argument for making these exceptions, and a balance achieved between interest of various stakeholders, such as the company, investors, national interest, and so on.

More importantly, the accounting treatment should fairly represent the substance of the transaction. That, under no circumstances, should be compromised.