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IFRS the Way Forward1692-1695

IFRS the Way Forward1692-1695

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1692The Chartered AccountantMay 2007
 Accounting
IFRS – The Way Forward
I
nternational Financial Reporting Standards (IFRS)is gathering storm and most countries barringthe US and a ew others have either adoptedIFRS or their national GAAPs are converging to IFRS.Australia, New Zealand, Singapore, China, MiddleEast, Japan, Arica and the European Union areprominent names that have either adopted or areconverging to IFRS. The numero uno status to IFRScame about ater the EU made IFRS mandatory orall its listed companies starting 2005. Consequently,more than 8,000 EU listed companies adopted IFRSin one go.As per the ndings o a survey o the chairmeno 145 European companies by the executive searchrm Russell Reynolds: (a) more than hal chairmeno the companies with US listings said that theywould consider de-listing because o Sarbanes-Oxley in spite o the diculties o taking shares o the US exchanges (b) 70 per cent o those headingcompanies not yet listed in the US said Sarbanes-Oxley would dissuade them rom seeking a USlisting.An extensively regulated US capital market islosing its attractiveness and predominance o USGAAP. This could make large companies look atother capital markets and in many o those capitalmarkets IFRSs are accepted. Whilst such situationsprovide IFRS an opportunity to fourish, it wouldnevertheless be inappropriate to see things merelyrom that perspective. This is because IFRS on itsown stands a air chance, with its acceptance byEU as well as given the act that many countriestraditionally ollowed IFRS or an IFRS-inspirednational GAAP.More than 1,100 Chinese companies have recentlyswitched over to new accounting standards bringingtheir books in line with international norms. Fromnext year the companies will have to apply a new seto 38 standards—the China Accounting StandardsSystem—that are basically in line with IFRS. But thereis much more at stake than improving accountingpractices in China’s listed rms. Chinese companiesare increasingly looking overseas or unds as wellas acquisitions, and adopting IFRS will make botheasier by increasing companies’ transparency andcredibility. “To become an economic superpower,China needs capital to und growth, and it will helpi its companies speak the same business languageas the rest o the world,” says Winnie Cheung, chie executive o the Hong Kong Institute o CertiedPublic Accountants.India ollows Indian GAAP, which is inspired bythe erstwhile International Accounting Standards(IAS). However, Indian GAAP has not kept pacewith the changes that ollowed IAS’s updation toIFRS. The most important change being the ap-plication o air valuation principles. Key standardsbased on air valuation principles that have not yetbeen rolled out under Indian GAAP are relating tobusiness combinations, nancial instruments andinvestment properties. Other than these there aremany areas where there are critical dierences be-tween Indian GAAP and IFRS. The key questions or India, thereore, are:Should Indian GAAP be converged with IFRS? Whatare the pros and cons? What are the hurdles andimpediments in ully converging with IFRS? Whatare the precautions that need to be taken?Whether Indian GAAP should be convergedwith IFRS? Is there an option or alternative? IOSCOrequires all its constituents to converge to IFRS andthereore departing rom IFRS is not a solution.Besides, India is a global country and i it has toinvest abroad or attract inbound investment it has toollow global standards. Seen rom this perspective,the sooner we converge to IFRS the better. Whenthe world is ollowing IFRS, can we lag behind?
Convergence to International Financial Reporting Standards (IFRS) is a much talked aboutissue in the accounting world today. Many nations except the US and some others haveswitched over to IFRS while many others are in the process of converging their nationalGAAPs to IFRS. India nevertheless needs to be sensitive to the pitfalls of fully convergingwith IFRS. This article provides an overview of the IFRS in the Indian context.
(The author is a member of the Institute. He can be reached at dolphy.dsouza@in.ey.com)
— CA. Dolphy D’Souza
 
The Chartered Accountant 1693May 2007
 That, however, does not mean that we exposeall our non-global Indian companies to 2500 pageso IFRS text
 particularly Small and Medium Sized Enterprises (SME).
It may be noted that a substantialportion o India’s GDP is contributed by SMEs. Itwould be unwise to impose unwanted accountingburden on SMEs. I and when a SME becomes aglobal player, it can shit to IFRS.Going orward, there should be two categories o reporting entity in India, the SMEs and the rest, i.e.,global companies, listed companies, and companieswith public accountability. The latter should ollowIFRS and the SMEs should ollow standards that aretypically driven to meet limited user requirement,such as those o taxation authorities. Seen romthis angle, both disclosure as well as recognitionexemptions should be given to SMEs. For example,since SME accounts are predominantly used or taxpurposes, impairment and deerred taxes and suchother accounting requirements may not be relevantto SMEs. SMEs would have private lenders, butlenders have evolved their own independent basiso assessing SMEs and that would not be dependenton SMEs ollowing IFRS. I India were to convergeto IFRS, the existing SME standard will need to berevised to exempt SMEs rom the rigours o IFRS.Whilst departing rom IFRS is not a solution,India nevertheless needs to be sensitive to thepitalls o ully converging with IFRS, so that we canprepare ourselves and take appropriate remedialaction. There are challenges that nations adoptingIFRS need to counter in the coming days. One bigchallenge or countries adopting IFRS is the shortageo resources, particularly IFRS-trained proessionals.With China’s listed companies adopting IFRS,demand or accountants is rising and could run intothe millions in coming years i the new standardsare rolled out or all o the country’s companiesand not just the listed ones. Accountants say thatthe challenge or China will lie in getting it’s over1,100 listed companies to establish the appropriatenancial reporting systems and in training enoughqualied accountants. “Our view is that it will be areal challenge or China to train sucient numbersto cater or the exponential growth o its economyin the coming years,” said Eric Anstee, London-based chie executive o the Institute o CharteredAccountants in England & Wales. “To put this incontext, China currently has a shortall o 300,000
 Accounting
 
1694The Chartered AccountantMay 2007
 Accounting
qualied accountants and is likely to require a urther three millionover the coming years i it is to keep pace with its current rate o economic growth,” he added.Also, since IFRSs are air value driven, IFRS nations would needa large pool o valuation experts. India should be aware o thesechallenges and tackle them through advance planning, withoutdelaying its IFRS convergence target.One common criticism about IFRS is that it is heavily loaded inavour o air valuation principles. These principles are very subjectiveand would result in signicant volatility in periodic results. Worse still,whilst every other IFRS standard requires application o air valuationprinciples, there is not a single IFRS standard which provides guidanceon how air values are determined. A UK-based global accounting rmdid a small exercise to determine how reliable air values are. It wasnoticed that in a live example on ESOP valuation by making changesto the model input variables, all o which ell within the bound o acceptability, the option expense or a particular company could havebeen varied rom 40% to 155% o reported income. The FASB has recently issued Statement o Financial AccountingStandards No. 157 Fair Value Measurements (SFAS 157), whichestablishes a single set o guidance or air value measurementsunder US GAAP. The IASB (IFRS standard setter) recognised the needor consistent guidance on measuring air value in IFRSs and orconvergence with US GAAP. Consequently, IASB has decided to usethe FASB’s Statement as the starting point or developing its ownstandard on how to measure air values.One o IASB’s challenges is to ensure that it brings stability in theentire ramework, provide clarity on a large number o conusing issues,address appropriately the air value criticisms and most importantlyensure that the standards are interpreted and applied consistently, beit in Asia, Arica or America.A global accounting rm reviewed the rst IFRS nancialstatements o some o the largest corporations, to assess the degreeo consistency and comparability among companies that has resultedin IFRS adoption, and to ascertain how perormance measures basedon IFRS have been used in market communications. The key ndingso the survey are:
l
Despite the challenges and the signicant departure romprevious national GAAP, the rst IFRS implementation has beena resounding success overall.
l
Companies that have applied IFRS rst time continue to maintainthe favour o previous national GAAPs in the absence o best IFRSpractice, which will take some time to evolve.
l
Signicant judgements had to be applied in many situations,which exposes the conficts within and between IFRS standards.
l
The absence o industry-related IFRS standards and best practices(which will evolve overtime), consistency and comparabilitybetween various companies in an industry was aected.

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