Converging accounting standards challenge issuers

By Arun Balasubramanian,Linklaters

The International Accounting Standards Board (IASB) recently reported the announcement by the Council of the Institute of Chartered Accountants of India (ICAI) at its July 2007 meeting that Indian accounting standards will achieve full convergence with International Financial Reporting Standards (IFRS) for accounting periods commencing on or after 1 April 2011.

This article, the second of two on the subject, considers some of the challenges Indian companies and auditors face in making the transition to IFRS financial reporting.

Harmonizing standards

Arun Balasubramanian, Partner, Linklaters
Arun Balasubramanian

Alongside Indian generally accepted accounting practices (GAAP), Indian companies are also subject to a number of additional accounting standards and related requirements. For example, the Indian securities regulator sets out standards for accounting for employee stock option plans and presentation formats for quarterly financial reporting, while the Reserve Bank of India is the standard keeper for accounting by banks, including the treatment of non-performing assets.

Anachronisms also persist, such as the courts’ power to direct accounting treatments for mergers and restructurings that may vary from generally accepted accounting standards. For effective IFRS convergence, it is important that these multiple requirements are harmonized, deviations from IFRS kept to a sensible minimum and IFRS consistently applied across companies and industry sectors.

Strengthening resources

The complexity of IFRS requires considerable new accounting resources. These include introducing relevant coursework at the university level, offering training resources to existing accounting professionals and formalizing accreditation processes so that a sufficient depth of IFRS trained resources is available to meet the convergence deadline.

The ICAI, which is responsible for certifications for the profession, will need to shift its emphasis to these areas and also engage closely with the International Accounting Standards Board (IASB) to ensure evolving IFRS and related requirements are effectively communicated to the profession.

In the short term, there are likely to be significant costs associated with strengthening accounting resources, including implementing adequate internal financial reporting systems and disclosure controls in companies, to which efforts management will be required to devote extensive time.

Valuation issues

While the shift from historical cost accounting to fair value accounting under IFRS improves balance sheet visibility, it also creates challenges such as potential volatility in periodic results and treatment of unrealized losses or gains. IFRS will need to continue to be refined with respect to the central question of how fair value is to be determined, particularly for assets and liabilities that do not necessarily have a real and determinable market value; FAS 157, issued by the Financial Accounting Standards Board, has provided a starting point for the IASB’s efforts in this regard.

The shift to fair value accounting also will require a pool of valuation experts to be developed and to be available to help companies and accountants make appropriate fair value determinations.

Changing perceptions

While several principles of Indian GAAP already align with IFRS, Indian GAAP is less detailed and perhaps less rigorous in certain demands. For example, it does not contain disclosure guidance or prescribe the minimum structure of financial statements (they are drawn from the Indian Companies Act). It also does not require disclosure of critical judgments by management in applying accounting policies, making it difficult for investors and other market participants to understand a company’s performance and potential, which may hinder long-term growth. A consequence of convergence is that companies must begin to shift their perceptions of financial reporting away from mere compliance to robust and transparent financial disclosure.

The challenges facing Indian companies, accountants and professional bodies in implementing IFRS are significant but not insurmountable.

They appear to have more to do with developing appropriate technical resources and understanding the new standards in the short to medium term than with any deeper issues. Many Indian companies already have well developed financial reporting procedures in place and are clearly aware of the benefits of IFRS for their long-term growth plans. As they continue to expand rapidly in India and overseas, these companies will doubtless benefit quickly from convergence with IFRS.

Arun Balasubramanian is a partner at Linklaters. His practice is focused on India-related capital markets matters, and his recent transactions include the US$2.2 billion IPO of DLF, the US$1.9 billion IPO of Cairn India, the US$700 million AIM listing of Unitech Corporate Parks and GDR and QIP offerings for a number of issuers His other transactions include the IPOs of TCS, NTPC and IDFC and the ONGC and IPCL disinvestments.


Linklaters Allen & Gledhill

One Marina Boulevard #28-00



Tel: +65 6890 7377