Financial reporting made headlines when in 2005 the European Union adopted the International Financial Reporting Standards (IFRS). The idea was to enforce high-quality financial reporting standards that are understood by all.
Not long ago, IFRS made headlines in India with the announcement that Indian GAAP (generally accepted accounting principles) will converge with IFRS. While that decision is pending, there is debate whether India really needs IFRS. The answer is ‘yes’, ‘no’, and ‘maybe’, and perhaps also depends on whom you ask the question.
The financial reporting standards currently followed in India are a combination of the standards notified by the Ministry of Corporate Affairs, guidance issued by the Securities Exchange Board of India (SEBI), guidance from the Institute of Chartered Accountants of India (ICAI), and industry-specific guidance from regulators.
The ICAI constituted the Accounting Standards Board in 1977 and the first set of Indian accounting standards was formulated in the 1980s. They were based on the international standards issued by the International Accounting Standards Committee, the predecessor to the International Accounting Standards Board responsible for developing IFRS. But there are shortcomings in Indian GAAP, especially because it has failed to keep pace with changing international standards.
For example, unlike IFRS, Indian GAAP lacks sufficient guidance in areas such as accounting for business combinations and financial instruments; the current literature is not on par with the guidance evolved under IFRS and USGAAP.
So, is IFRS the solution then? It certainly has a strong case in its favour, especially with its wide acceptability across the globe.
IFRS financial statements are considered high-quality, alongside those presented under USGAAP. Some prefer IFRS, which is principles-based, over USGAAP, which is seen as a rules-based guidance. As IFRS finds acceptability when raising capital in the world’s biggest markets, it can certainly help Indian business gain more credibility and grow.
Updated for global needs
IFRS is regularly improved and updated to keep pace with international developments. So IFRS convergence is indeed a good solution to improve Indian GAAP, but it has its challenges.
And the challenges are not easy to overcome in a developing economy like India. At a micro-level, an immediate challenge is the cost of convergence. Other challenges include deficiencies in corporate practices, systems and processes.
At a macro-level, however, the structural challenges include lack of trained professionals, diversified sources of industry-specific accounting guidance, and cultural barrier to accepting foreign accounting principles.
A major issue for Indian regulators is the lack of IFRS knowledge and experience in the accounting and auditing profession here. There is a need to align the industry-specific accounting guidances issued by various regulators. For example, the Reserve Bank of India issues guidance for banking companies, the Insurance Regulatory and Development Authority issues guidance for insurance companies, the Central Electricity Regulatory Commission issues guidance for electricity companies, SEBI issues guidance for listed companies, and the Ministry of Corporate Affairs too issues certain guidance.
Need for wider understanding
These requirements sometimes create deviations from the accounting standards. Thus, while it might be easier to replace accounting standards, replacing the other sources of Indian GAAP would require a wider understanding of the implications.
The significance of corporate financial reporting should be tied to what it means to users and their decision-making based on it — whether it is efficient operations, making investments and acquisitions, or raising capital or debt. Thus, only when financial reporting is seen as a means to maximising the real value in businesses will it no longer seem to be a burden.
The author is Partner, Assurance, Grant Thornton India LLP.
Kovid Chugh, ManagerAssurance, contributed to the article .