The Ministry of Corporate Affairs had originally planned to implement International Financial Reporting Standards (IFRS) in India in a phased manner, starting from April 1, 2011. However, owing to legal and tax issues raised by companies, the implementation was deferred.

There have been two key developments since. First, the Government notified Companies Act 2013, which contains many requirements aligned to IFRS.

For instance, the new Act prohibits a prescribed class of companies from using securities premium to write off the premium payable on redemption of debentures and preference shares. Under IFRS, such premium is typically charged to profit-and-loss as interest expense. The Act also mandates component accounting for depreciation. Additionally, it permits the prescribed class of companies to depart from prescribed useful lives. These provisions allow companies to follow IFRS requirement.

The Central Board of Direct Taxes constituted an Accounting Standards Committee to formulate tax accounting standards (TAS).

In October 2012, the committee issued 14 draft TAS for public comments.

Time for Ind-AS

The Ministry is now preparing to implement the Indian version of IFRS (known as Ind-AS). According to the draft implementation plan, a company with net worth exceeding Rs 1,000 crore may have to apply Ind-AS from April 1, 2015. Companies whose net worth exceeds Rs 500 crore and are not covered in phase 1 may have to apply Ind-AS from April 1, 2016. Other listed companies may apply Ind-AS from April 1, 2017.

The proposed implementation of Ind-AS is a step in the right direction — it will result in significant improvements to financial reporting and corporate governance practices.

Outdated GAAP

The current Indian GAAP has served well for many years. However, for almost a decade, there has been no major change/ improvement in Indian GAAP, leaving it outdated. On many aspects, the accounting under the current Indian GAAP does not reflect true economic substance.

Moreover, absence of guidance has led to differing practices. There are no notified accounting standards to deal comprehensively with derivatives and hedge accounting. The Institute of Chartered Accountants of India requires companies to provide for mark-to-market losses on derivatives. Some companies provide for gross loss on instrument-by-instrument basis, some provide only for net loss on a portfolio of derivatives, while others may contend that loss on derivative will be offset by gain on the underlying item. Hence, they may not provide for mark-to-market loss.

Also, no notified accounting standard deals comprehensively with business combination accounting. Rather, different standards deal with different types of business combinations, and the accounting prescribed varies significantly. For example, AS-21 requires the acquisition of a subsidiary to be accounted at book value. In the case of an amalgamation, a company may be able to reach either the pooling of interest method or the purchase method, depending on the structuring and detailed facts. Even under the purchase method, a company may use either the book value method or fair value approach.

Closing the gaps

The application of Ind-AS will significantly reduce arbitrage, and accounting will be governed more by the substance of the transaction. Nonetheless, if Ind-AS is implemented in the current form, there will be a few gaps.

For instance, under Ind-AS, the International Financial Reporting Issues Committee’s interpretation of Service Concession Arrangement is not notified. This means Ind-AS may not address accounting for build-operate-transfer arrangements. The Ministry should fill these gaps before implementing Ind-AS. Also, there should be no major differences between Ind-AS and IFRS.

The author is a senior professional in a member firm of Ernst & Young Global

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