Accounting convergence to help desi cos raise funds abroad
June, 16th 2008
We are living in a world where watertight compartments are increasingly becoming extinct. Companies are acquiring overseas, selling local and hence, are aptly called 'glocal'. However, money spent or earned is accounted in different ways. Not only is this a cumbersome exercise, but it may lead to problems that could be avoided if we had convergence. And, convergence, as we know, leads to a common view or opinion.
Accounting authorities around the whole world have been thinking on the same lines. While the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) continue to work closely on converging International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles in the United States (US GAAP); the Institute of Chartered Accountants of India (ICAI) has released a 'Concept Paper on Convergence with IFRSs in India'. The Indian body's paper details the strategy and roadmap for convergence of Generally Accepted Accounting Principles in India (Indian GAAP) with IFRS effective April 1, 2011.
In short, IFRS is the future, says Mr Richard Rekhy, Chief Operating Officer, KPMG India. IFRS are accepted as a financial reporting framework for companies seeking admission to almost all of the world's bourses, he elaborates. This is important. Several Indian companies that seek to raise capital and list securities in the US capital markets or other exchanges like the London Stock Exchange or the Alternative Investment Market in London; may be required to convert their financial statements to IFRS to meet with the regulatory requirements, Mr Rekhy thinks. Business Line caught up with him over the electronic mail. To know more on IFRS, why accounting convergence is vital, how India Inc. could benefit, read on
First, why convergence?
Most standard-setting bodies have acknowledged that the ultimate goal of convergence is to have a single globally accepted financial reporting system. A combination of the proposed convergence of national standards with IFRS and the direct use of IFRS in more than 100 countries means that the accounting languages of the world may ultimately converge to IFRS.
How does India Inc. gain?
Our global experience indicates that there is more to be gained from convergence to IFRS than just compliance with legislative requirements. Key benefits for corporate India may include better access to global capital markets, significant improvement in comparisons with global peers and impetus to cross-border acquisitions and economic activity.
Better access to global capital markets and global investors. How?
IFRS are accepted as a financial reporting framework for companies seeking admission to almost all of the world's bourses. Currently, several companies that seek to raise capital and list securities in the US capital markets or other exchanges, like the London Stock Exchange or the Alternative Investment Market in London, may be required to convert their financial statements to IFRS to meet with the regulatory requirements or to meet with the expectations of the investment bankers and investors.
In such cases, unless the entity has previously adopted IFRS, it would be required to convert its historical financial statements to IFRS for the purpose of the listing, which may result in delays and additional costs relating to a dual set of financial statements. Thus, adoption of IFRS is likely to make access to global capital markets more seamless.
But Indian companies have previously raised money abroad. How did they do it?
Even in cases where listing on overseas exchanges is currently permitted using local (Indian) GAAP, international investors generally ascribe an additional risk premium if the underlying financial information is not prepared in accordance with international standards. Thus, adoption of global standards such as IFRS may reduce the risk premium and consequently the cost of capital.
You were mentioning something on the lines of IFRS adoption could effectively compare Indian companies with global peers
Yes. IFRS provides more comparability among sectors, countries and companies. It has universal appeal and cuts across borders. IFRS will facilitate better comparability of performance with other businesses and may also result in greater transparency in a company's activities to outsiders such as investors, customers and other business partners. As Indian businesses become more global in terms of their operations and investor base, IFRS would enable a comparison of Indian companies with global peers.
Can IFRS spur economic activity?
IFRS reporting provides an impetus to cross-border acquisitions, enables partnerships and alliances with foreign entities, and lowers the costs of integration in post-acquisition periods. Recent surveys have indicated that adoption of international standards provides an impetus to overall economic activity.
They say nothing comes without a cost. What are the challenges for India Inc. that adoption of IFRS may throw up?
While adoption of IFRS will have its benefits, it will pose several challenges for corporate India. Impact on profitability and net worth of most companies, likelihood of financial statements getting more complicated, and training of internal resources in IFRS are some of the challenges.
Could you elaborate on the 'impact on net worth' part?
Sure. Adoption of IFRS will have an impact on the profitability and net worth of most companies. Key areas of impact include accounting for acquisitions, stock options, derivatives and other financial instruments. Additionally, even though the principles under Indian GAAP in other areas may be similar to IFRS, several implementation differences exist in applying these principles in India.
Are there any other areas where Indian companies could see some density?
I don't know whether you could term it as dense. But use of IFRS would result in greater use of judgment and use of fair value concepts. This will increase the complexity of the financial statements.
Similarly, use of fair value measures would bring greater volatility into the financial statements. As I mentioned earlier, the impact on profitability and net worth and now the increase in complexity and greater volatility would need to be communicated in advance to various market participants including analysts and local institutional shareholders.
Wouldn't letting the markets and its participants know in advance mean having robust reporting systems?
Yes. The impact on profitability would need to be factored into internal business performance management and incentive systems, to align the internal reporting with external reporting. Internal resources would also need to be trained in IFRS and internal processes and systems (including IT systems) would need to be modified, to meet the new reporting requirements.
You make it sound quite tricky. What Indian companies would like to know is whether adoption of IFRS is worth all the effort?
Truly, the transition to IFRS is likely to be challenging for corporate India. However, if the transitioned is planned and managed successfully, it will generally be positive for financial reporting in India. This will improve the quality and transparency of the financial reporting process and further align corporate India to the global economy and the global capital markets.