Companies Bill contains numerous provisions aligned to International Financial Reporting Standards. Under the Bill, utilisation of securities premium will be restricted to a prescribed class of companies whose financial statement complies with specified accounting standards. In meeting IFRS requirements, such companies cannot utilise the securities premium to write off preliminary expenses of the company, write off preference share or debenture issue expenses, and provide for premium payable on redemption of preference shares/ debentures. However, if the prescribed class of companies is notified immediately, the impact will be felt straightaway in Indian GAAP financial statements. As this is not the intention, the Ministry of Corporate Affairs should notify the prescribed class at a date aligned to IFRS implementation; otherwise there may be unintended consequences.
For changes in accounting policies and correction of past errors, IFRS requires restatement of comparative numbers. Currently, according to the Ministry’s circular, a company can reopen and revise its accounts after they have been adopted during the annual general meeting and filed with the registrar to comply with any other law for a true and fair view. Thus, the current Companies Act is not suitable for IFRS implementation. Under the Bill, voluntary revision of financial statements is permitted and, hence, aligned to IFRS implementation. However, the revision process is cumbersome, including prior approval from the Income Tax Appellate Tribunal. In other words, under IFRS, every company should take adequate precaution in the selection of accounting policies and ensuring that errors are rare occurrences.
Currently, the Securities and Exchange Board of India requires all listed companies seeking approval for a draft merger, amalgamation or restructuring scheme to file an auditors’ certificate to show that the accounting complies with standards. There is no such requirement for unlisted companies, including their subsidiaries. Under Companies Bill, the Tribunal will not sanction capital reduction, merger, acquisition or other arrangements unless the accounting treatment complies with standards and an auditor’s certificate is filed. This is aligned with IFRS.
Schedule II of the Companies Bill sets out the useful lives of assets. Companies other than the prescribed class (essentially IFRS companies) should mandatorily adhere to these useful lives as minimum rates. The prescribed class of companies are allowed to depart from Schedule II useful lives to comply with IFRS. It is not clear whether these companies will be notified immediately or after IFRS is in force. If notified later, then all companies have to comply with Schedule II useful lives as minimum rates as soon as the bill becomes law. As the useful lives in many cases have been drastically reduced, the overall impact of depreciation on the profit-and-loss account can be negative.
Companies Bill requires component accounting, where components are depreciated based on their useful lives rather than the life of the principal asset. This is aligned to IFRS. However, until Indian GAAP applies (and the prescribed companies are not notified), companies should mandatorily follow useful lives under Schedule II. It is unclear how component accounting can be applied here, as that inherently involves departure from useful lives prescribed for the principal asset.
Under the Bill, for revaluation, depreciation will be based on the re-valued amount rather than historical cost. This is aligned to IFRS and will have a negative impact due to higher depreciation in the profit-and-loss account.
The Companies Act does not prohibit companies from creating treasury shares under a High Court scheme. The Companies Bill prohibits this, and a transferee company cannot hold any shares in its name or in the name of a trust either on its behalf or that of its subsidiary/ associate companies. Such shares should be cancelled or extinguished. The accounting of treasury shares is often misused. Currently, companies recognise dividend income on treasury shares and gain/ loss arising on sale of treasury shares in the profit-and-loss statement. This is inappropriate because any income cannot be derived by transacting with oneself. Such practices will not be possible if the Bill becomes an Act and is also aligned to IFRS.
The Institute of Chartered Accountants of India recently proposed a revised IFRS roadmap, which is also endorsed by the National Advisory Committee on Accounting Standards. According to this roadmap, IFRS implementation will be staggered, beginning from April 1, 2015. Of the two main hurdles to smooth implementation of IFRS, the one with respect to Companies Bill has been removed, while the other related to tax accounting standards needs to be resolved in the coming months.
Dolphy D’Souza is Partner and National Leader – IFRS Services in a member firm of Ernst & Young Global