IFRS – Finally the Indian Blueprint of Roadmap out

Ministry of Corporate Affairs has come up with notification dated 22nd January 2010, putting to rest few of the speculations about transition to IFRS in India. As per the notification, transition to IFRS will happen in three phases. The ICAI and Government have stuck to the initial target of 1st April 2011, but the application will be for a limited few. There is no full convergence, in the sense that not all Indian companies can draw unreserved statement of compliance with IFRS. Status of Banking and Insurance companies will be announced in due, and proposal to amend Companies Act by February 2010 indicate serious action from the Government to transit to IFRS and direction to ICAI to recommend converged Accounting Standards by 31st March 2010 means a whack at the country’s premier accounting body to make timely move to IFRS.

The THREE Phases

In phase I, companies falling under the following categories need to prepare opening Balance Sheet as at 1st April 2011:
· Companies forming part of Nifty – 50 index
· Companies forming part of Sensex – 30 Index
· Companies whose securities are listed outside the country
· Companies (whether listed or not) having networth is in excess of Rs. 1000 Crores

In phase II, companies (whether listed or not) having networth in excess of Rs. 500 Crores are required to prepare opening Balance Sheet as at 1st April 2013.

In phase III, listed companies having networth lower than Rs. 500 Crores are required to prepare opening Balance Sheet as at 1st April 2014.

Further confusions

The notification brings a new dimension to the history of confusions surrounding convergence. There is hue and cry among the MNC audit firms about the definition of networth for the purpose of applicability of IFRS. These are noises which are made for the purpose of being noticed. Networth, in any age is not going mean differently. It is straight-forward and simple. Any case, networth, though defined can never be inclusive of outside liabilities in the form of secured loans, etc. Networth can be only one for the company. When two different networth can be worked, either one is not networth or the persons computing are not worth to do the job. However, noises being made are loud enough for consideration and we can expect some more clarification in this front, any modification to include or exclude items in networth.

If you can break down the companies covered in phase I and list it, there would be few hundred companies which will be covered. Nifty 50 covers most of the companies under Sensex 30 (not sure whether there will be any which is not covered). There may be 100 or so companies listed outside India. Coming to networth in excess of Rs. 1000 Crores, there will be hardly any companies which will be bracketed into this particular category. A rough analysis of financial statements reveals that networth can be abysmally low in comparison with extent of public accountability. I understand there should be some logic in coming at this conclusion, though cannot comprehend the same.

The notifications clearly mentions a new set of standards called converged Accounting Standards, which will be in line with IFRS needs to be applied in phases. So, there will be one more set of Accounting Standards, the existing set. The existing set would be applicable to companies covered in phases II and III and also to the companies which are not covered in any of the phases above, now would mean SMCs, notwithstanding the definition of SMCs in Companies (Accounting Standards) Rules 2006. By 2015, there would be say, 25 – 28% of all companies will be preparing financial statements in line with IFRS. Large portions will continue to be preparing financial statements under existing accounting standards, as understood today, because there are no clear signals on IFRS for SMEs. Since there will be two sets of accounting standards it is inferred that there will be no separate standards for SMEs. There can be other view that no IFRS for SMEs for the time being and may be considered after 2014.

The notification talks of companies, whereas IFRS is clearly based on the concept of Group, there is no question of separate financial statements for the Parent. When a parent falls under Phase I, whether the subsidiary needs to prepare financial statements in Phase I or as applicable to it as an individual entity is an issue to be addressed. There can be arguments that since consolidation is mandatory, subsidiary have to be under converged standards. But statutory clarity is required to avoid confusion. However, clarity is inevitable, when subsidiary falls under Phase I and parent falls under Phase II or III.

There is one more clarity needed. The notification talks of opening balance sheet as of 1st April. It can be inferred that comparatives need not be presented for the first year in each of the phases, similar to the Hong-kong model of IFRS convergence.

Next issue to be considered is whether companies not required to comply with converged Accounting Standards will be able to adopt the converged accounting standards? This question is important because the listed companies which are not covered in phase I, would like to present financial statements under converged standards. There may also be other sufficiently large unlisted companies which would like to have their financials under converged standards.
Last but not the least of all is, there is still no clarity on first-time adoption, whether there would be any reconciliations required with previous GAAP and options that would be available while adopting for the first time.

Nevertheless, Government from time to time has been reiterating its firm commitment to converge and this is one more indication of the stand, there is little dilution in the impact that it was meant to make.