Efforts to bring about convergence and harmonisation of accounting standards date back to the 1950s, and remain a challenge for international accounting bodies, regulators and the business community. Convergence of accounting standards involves establishing a single set of standards that will be used internationally and, in particular, narrow down the differences between the more popular GAAPs — namely, International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP).
Harmonisation is required due to the globalisation of businesses and an increase in cross-border investments and borrowings. A single set of accounting regulations would facilitate comparability of organisations through consistent, reliable and high-quality financial reporting and disclosures.
Currently, multinationals originating from different nations have their financial information in IFRS or US GAAP if they are listed in the US or European exchanges, or in the GAAP of their domicile country. Indian multinationals currently preparing financial statements in Indian GAAP may soon have to follow their global peers, and this is one reason why Indian GAAP should converge with global GAAP.
Banks registered in India follow Indian accounting standards and RBI guidelines for their financial statements. There is a significant difference between local and international accounting practices, making it difficult to compare local banks with global peers.
The core group set up by the Ministry of Corporate Affairs to draw a roadmap for convergence with IFRS had suggested phase-wise implementation from April 2011 to 2014. This has been deferred, pending resolution of taxation issues and because some key IFRS are under revision by the International Accounting Standards Board (notably IAS 39 on financial instruments, which is to be replaced by IFRS 9).
There are several significant differences between the accounting practices adopted by Indian banks and their international counterparts.
In India, the provisioning norms for non-performing loans, or NPL, are driven by RBI guidelines, which generally prescribe a defined percentage of provisioning based on the sub-category of the NPL. However, under international GAAPs the provisioning is based on the incurred loss model and tends to be judgmental and subjective. These norms would change after IFRS 9 is adopted. In recent months, the RBI has released a discussion paper on the introduction of dynamic provisioning for banks to address the issue of countercyclical provisioning framework, with parameters based on the credit history of Indian banks.
Under RBI guidelines, investments are accounted under the conservative model of valuation, wherein unrealised losses at the period-end are accounted for and gains ignored on category-wise basis. Under international GAAPs, all unrealised gains and losses are recognised, as they reflect a true and fair view of the financial position of the assets.
There are other differences between the accounting policies adopted by Indian and global banks, such as amortisation of fees and costs; accounting for derivatives, securitisations and business combinations; compensation cost; and deferred tax and consolidation.
Given the stringent Basel III capital requirements and talk of consolidation and international expansion, Indian banks have to gear up for international GAAPs. A few private sector banks that have prepared accounts under a different GAAP have reported significant variances in profitability, indicating that accounting rules and regulations play a pivotal role in determining the profitability and financial position of an organisation.
Kalpesh J. Mehta is Partner, Deloitte Haskins & Sells, and Neville Daruwalla is Manager, Deloitte Touche Tohmatsu India Pvt Ltd