Over 100 countries across the globe speak the same accounting language; while we in India, enrolled in this language course, wish to complete it in time and with good grades. Transition from Indian GAAP (Generally Accepted Accounting Standards) to IFRS (International Financial Reporting Standards) has its own set of benefits and challenges for those who prepare and use financial statements. Harmonization of existing standards with IFRS requires changes not only in the accounting procedures but also in the legal regulatory framework and IT systems. Switchover to IFRS will transform the way companies and markets judge performance and value. So, are we ready to handle the new accounting regime that comes in force in India from April 2011? Is India Inc aware of the intricacies and methods that would come along with new standards? And most importantly, in the wake of global financial crisis and our own economic slowdown, could we switch to IFRS in 2 years? The answer to these questions should be clearly given.
The transition from Indian GAAP to IFRS is complicated. This is so because of the complex procedures that we have currently in place and the aggressive timelines that require companies to prepare their first IFRS balance sheet by April next year. The convergence with IFRS will facilitate comparability and benchmarking performance across border, provide easier access to cheap capital and debt at reduced risk premium, lower operating costs by eliminating the need for multiple reporting, enhance transparency and finally build the corporate brand value of Indian companies. In addition, the use of IFRS would impact the compensation structures of employees, debt and borrowing covenants of lenders, change the key performance metrics and change the way investors perceive companies. Hence, all companies should swiftly move towards implementation of IFRS to avail the convergence benefits which would get reflected in the economy�s growth. When will they dig themselves out from under the current crisis, and put IFRS back on the priority list, is yet to be seen.
The first major step towards transition has been taken by ICAI (Institute of Chartered Accountants of India) which has published a white paper drawing up a roadmap for implementation of IFRS, but a lot needs to be done at the micro level.
Changeover to IFRS involves three key issues: First the complexity of accounting framework in India with multiple standard-setters viz., ICAI, SEBI (Securities and Exchange Board of India), NACAS (National Advisory Committee on Accounting Standards), Income Tax Authorities, Companies Act, and industry regulators viz., RBI (Reserve Bank of India), IRDA (Insurance Regulatory and Development Authority) etc. A smooth transition calls for a concerted effort on their part to coordinate their plans and to create an understandable accounting landscape that will prevail in 2011. Second, the non-availability of a large pool of IFRS literates. In the US (which could possibly move to IFRS in 2014), all educational institutions and professional bodies are revamping their curricula to include IFRS learning. Whereas in India, the only major initiative taken by ICAI in this direction has been the launch of IFRS certificate course and IFRS training program for professionals. Third, India is working towards a moving target as IFRS is expected to undergo change between now and 2011 putting us at a comparative disadvantage as we still don�t know what would be the IFRS requirements to apply in 2011.
The following step-by-step transition methodology can be adopted to resolve the above issues in a phased manner
Phase I – Diagnostic Review
Every company has its own needs and culture and the transition methodology can be tailored to the organization specific requirements. In this phase, all companies carry out a diagnostic review to assess the IFRS impact on financial reporting, long-term contracts, supporting business processes, information systems, tax compliance and employee benefits. This is done to equip businesses with a better sense of what changes would be required and how much time and resources would go into ensuring a smooth transition. This way the companies can also plan their strategy for the road ahead.
Phase II � Setting up an IFRS conversion project
This phase involves designing of conversion strategy, establishment of IFRS accounting policies, carrying out operational and systems changes, and eventually coming out with the first comprehensive IFRS financial statement.
Phase III � Incorporating Change
In this phase, attempt should be made to integrate IFRS changes into day to day operations, processes, and systems and controls. The idea is to establish a sustainable process which a company can repeat to produce meaningful information not only immediately but also long after the conversion takes place.
IFRS is important from investor confidence perspective but can�t be considered as an accounting firewall against all frauds. Satyam was one of the first Indian companies to announce transition to IFRS but the Rs 7,000-crore financial fraud shows that the real problem is in the auditing process and the corporate governance framework, not in the accounting standards. The present financial crisis has thrown up a new set of problems of credit, job losses, decreased consumer spending and shrinking margins, and it comes as no surprise that the companies don�t seem to be in a rush to implement IFRS. Regulators are also too occupied in grappling with new challenges to keep up the momentum. Moreover, the modification of Income-tax Act, Companies Act and other legislations that run counter to IFRS is not easy, and in practice, such legislative activity could take years. Therefore, ICAI and the Government have to play a larger role in addressing these problems to avoid long delays.