India's leading IFRS Expert Charanjit Attra elaborates on Adoption of Ind-AS -101

India’s leading IFRS Expert Charanjit Attra elaborates on Adoption of Ind-AS -101

Charanjit Attra – Executive Director – New initiatives and Strategies, 3i- Infotech Ltd

Elaborates on Adoption of Indian Accounting Standards – ‘Ind-AS -101’

Ministry of Company Affairs has issued a latest road map for implementation of Ind AS – India’s accounting standards converged with IFRS. Ind AS will become mandatory in a phased manner effective April 1, 2016 (with comparatives for the year March 31, 2016) for certain specified classes of companies. Companies will also have an option to voluntarily adopt Ind AS for the current financial Year.

Mr. Charanjit Attra, Executive Director- New initiatives and Strategies, 3i Infotech Ltd. on the Implications & Impact of IFRS on the Indian Corporate Sector:-

1. Why should India adopt International Financial Reporting Standards?

India, as a country is on growth path and the world is looking at investing in the country’s companies. Further the foreign investments are also required in the country to bridge the fiscal and current deficits. One of the key requirements of the investors would be a transparent set of financial reporting by the Companies through its financial statements. The accounting standards in the present form have certain limitations which require the essential additions or modifications; for example:-

a. The standards did not have specific accounting standards for key areas like financial instruments including derivatives, consolidation, employee stock options, loan loss provisioning etc though they were covered by the regulators only for the regulated entities.

b. The entire accounting was based on historical costs convention through which it was difficult to gauge the current value of the assets and liabilities of the Companies fully. The introduction of fair value accounting would surely bridge the gap.

c. Today a lot of Indian companies have international offices and businesses. It was not possible for the investors to do a comparison with their peers due to the differences in the accounting standards.

The aforesaid factors required adoption of a set of accounting standards which would make financial statements more transparent and had disclosures which would improve the understanding of the company’s businesses. IFRS provided that set of accounting standards. The ICAI and NACAS has reviewed these standards in detail and issued IND AS which have the necessary carve outs to suit the Indian business environment.

2. How will the new Accounting Standards add value to Indian Companies? What new avenues would open up with this adoption?

The adoption of IND AS (the Indian version of IFRS) would benefit Indian companies in the following ways:-

a. The Indian corporate sector would be able to raise funds internationally as the financial statements under IND AS would be comparable internationally and give better comfort to the investors. Also the companies will be able to access newer markets for fund raising and conducting businesses.

b. The financial statements would be acceptable by all the regulators as more than 100 countries have adopted IFRS.

c. Since Indian Companies have International Offices, adapting the Ind IFRS would save the time to prepare financial statements as per different GAAPs, as a single set of accounting standards would be applicable.

Further the management of the companies would be able to compare their performances with their peers effectively and be more competitive in various markets.

3. How do you see the transition taking place? What are the main challenges towards this transformation?

The MCA has given the road map for the Implementation of IND AS for companies, except banking, insurance and NBFC’s, which are listed and having net worth above 250 crores. Our view is that for effective transition, the Companies would have to start the process immediately. The Companies would face challenges on the accounting side and on the technology side.

The challenges that the companies will face on the accounting side would be as follows:-

a. Presently there is a shortage of fully trained IFRS resources in the country. Though the ICAI has been conducting various training programs it will be still be a challenge to get the right resources for the job.

b. The implementation of IND AS would require training to all the departments of the company as with IND AS the accounting will not be restricted only to the accounting or the finance departments.

c. The fair value accounting would bring in volatility in the earnings of the company and the same volatility would have to be explained to all the stakeholders. (Investors, customers, lenders and employees) of the Company which could be a challenge.

The challenges that the companies would face on the technology side are as follows:-

a. IND AS adjustments like classification of financial instruments, fair value accounting and the IRR method of accounting would require major changes in the ERP or accounting systems being used by the Company.

b. Further during the transition period the companies would have to maintain a parallel set of accounting records for which getting a technological solution would be challenging.

4. We understand, EU were the first ones to have adopted IFRS? Which other countries have joined this accounting revolution globally?

There are totally more than 110 countries who have adopted IFRS, other than the countries in the EU, countries like Canada, Singapore, Hong Kong, some countries in the Middle East and Africa regions have also adopted IFRS.

5. Do you think it’s a timely action for India to adopt IFRS, are we being pro-active or reactive with this move?

The IND AS implementation should not be delayed further. India was one of the first countries after the EU to agree on the IFRS adoption and I would think it was a proactive step then and it’s not been reactive at all.

6. Could you please help elaborate on how is the transformation being planned? As it’s a gigantic task, influencing the companies past, current and future Accounting Declarations, how safeguarded is the interest of the company?

The transformation to IND AS will have to be driven by the senior management and it will have to be ensured that the impact of this implementation is understood and communicated properly to the users of the financial statements. The disclosures required by IND AS 101 “First time adoption of financial statements” has ensured that adequate information is given in the notes for the readers to understand the transition. Further IND AS 101 allows gives certain exceptions to the retrospective application to the accounting standards and allows differences in adoption to be adjusted in the retained earnings. Further the ICAI and the NACAS have allowed certain carve outs from the existing IFRS’s to ensure that the interests of the companies are safe guarded.

7. As an IFRS expert, what’s your guidance to our readers?

I would sincerely request the users to view this as an accounting change and get a proper understanding of the same. Further for the management of the Company, it is essential to use the exceptions on first time adoption carefully as the same could have larger impacts on the future. At the same time, the companies would have to start looking at the changes that would be required to be made to their ERP or accounting systems. Also the project of IND AS conversion will have to be driven by the senior management of the Company and the same cannot be left to the accounting and financing teams.