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Take IFRS convergence challenge head-on
July, 26th 2007

Could IFRS

convergence be the next big thing for the BPO/KPO business in India?

For a safe landing.

International Financial Reporting Standards (IFRS) came into prominence when the EU (European Union) decided to adopt it for all its members starting 2005. Since then, IFRS has spread rapidly across the world.

There are now more than 100 countries where IFRS is required or permitted. Last week, the Institute of Chartered Accountants of India (ICAI) decided that Indian Accounting Standards will be fully in line with the IFRS from April 1, 2011, for public listed companies and extended to other entities in a phased manner. How do accounting professionals react to this development? Business Line sought to find out.

The decision was expected given the number of countries currently following IFRS, says Mr Dolphy DSouza, Partner, Ernst & Young. In the US, the Securities and Exchange Commission (SEC) is proposing to eliminate, for IFRS foreign filers, the reconciliation requirement to US GAAP (Generally Accepted Accounting Principles), he adds. Under such circumstances, the decision to follow IFRS in India was inevitable.

Mr Ashesh Jani, Partner, Deloitte Haskins & Sells, Mumbai, sees the convergence of Indian Accounting Standards with those of the IFRS as part of a kind of globalisation of accounting pronouncements. Gradually, the world will see one set of accounting rules, which are seamlessly adopted by majority of the countries if not all. Today, even our neighbour Pakistan has adopted IFRS and the business entities there issue financial statements which are fully compliant with IFRS.

The necessity of convergence of Indian GAAP with IFRS to enjoy the benefits of a global economy has already gained wide acceptability, says Mr Rajesh Arora, Partner, BSR & Co. Convergence no longer is an option or an alternative but a requirement.

The CFO of today is confronted with the challenge of multitude of reporting under different accounting frameworks, points out Mr Sanjay Hegde, executive director, PricewaterhouseCoopers. A single set of robust and well-understood standards is far more effective in promoting high-quality financial reporting than a complex body of accounting literature, he adds.

The ICAIs roadmap to convergence with IFRS would not only save companies undertaking significant reconciliation procedures, which otherwise results in additional costs and the risk of being exposed to errors in reporting under the different accounting frameworks, but also significantly enhances the quality of financial reporting.

The convergence to IFRS, according to Mr DSouza, will greatly enhance the ability of Indian entities to raise and attract foreign capital at low cost. It will also mean escape from multiple reports for Indian multi-national companies that have to prepare their financial statements under multiple GAAPs.

New opportunities

The Indian professional now trained under IFRS could well become a globe trotter. Even if a home bird, he still would be sought after by accounting firms and Indian entities converging to IFRS, foresees Mr DSouza. With the world changing to IFRS, BPO/KPO businesses in India would have a massive requirement for IFRS resources, and Indian IFRS literate resources could feed this appetite and provide a huge fillip to this sector.

Could IFRS convergence be the next big thing for the BPO/KPO business in India?

Indian IFRS professionals will not only stoke the growth of Indian economy, but also of other economies. The opportunities are tempting, but they come with some huge challenges.

The adoption of IFRS in India, according to Mr Hegde, would be a landmark achievement and a significant step towards global acceptability of Indian corporates and professionals.

However, every change brings along with it a degree of apprehension and, therefore, it needs to be ensured that these apprehensions are addressed early to ensure an effective and efficient transition.

Needed, new priorities

IFRSs adoption by 2011 is expected to have a significant impact on all stakeholders, such as the ICAI, chartered accountants, regulators, preparers of financial statements, analysts, users of financial information, and so on.

First, the ICAI will have to give up its function of drafting and issuing Accounting Standards, insists Mr DSouza.

Instead its focus would shift to ensuring that Indias interest is protected at the International Accounting Standards Board (IASB) level. Given that India is such a huge economy, it will have to ensure adequate representation at the IASB level.

The second priority, he says, should be for the ICAI to set up a formal accreditation process and impart IFRS training to existing as well as prospective members before 2011. That is not going to be an easy task.

The importance of accounting literature and the changes that are occurring in the same due to the convergence projects cannot be undermined as these will now play an even greater part in the structuring of businesses, acquisitions, amalgamations, etc., and will also be a major agenda in audit committees and board meetings henceforth, says Mr Jani.

The focus now has to be effective implementation of the strategy, according to Mr Arora. Convergence will have to be accompanied by relevant changes in the financial reporting systems, he says.

This will also require sufficient time to deal with related change-management issues. Availability of adequate and trained IFRS experts is another area which requires immediate attention. This will require support from ICAI as an educator/trainer.

Though convergence may be facilitated by the fact that historically Indian standards have been based on IFRSs (which are principle based as against US GAAP which are rule-based), given the nature of accounting and peculiarities of the Indian economic environment, implementation of convergence can have its own set of teething problems, says Mr Arora.

With 2011 as the target date of IFRS adoption, preparers and regulators have four years to deliberate, apply and appreciate the consequences of these standards, which would ensure a smooth transition to IFRS, says Mr Hegde. Therefore, it is advisable to adopt IFRS in phases, wherein listed entities may be required to adopt earlier than the non-listed entities.

Going ahead, the challenge is not only for India, but also for the IASB. Because the Board will have to keep in mind the interests of all member-countries when issuing IFRS, bring stability in the entire framework, provide clarity on confusing issues, address appropriately the fair value criticisms, and most importantly ensure that the standards are interpreted and applied consistently, be it in Asia, Africa or America, notes Mr DSouza.

Long and arduous?

Though the road to convergence seems long and arduous, many companies in India may already be preparing reporting packs under IFRS to meet the reporting requirements of their foreign parent or to meet their individual listing requirements in international markets, Mr Hedge avers. Therefore, the job may already be half done and road ahead may not be as long as it may seem.

But there are differences, though Indian standards are basically modelled on the basis of IFRS. Significant differences exist between the two since Indian GAAP has not been able to keep pace with the changes that have taken place in IFRS, rues Mr Arora. An example is accounting for amalgamations and mergers. Indian GAAP is very liberal. Another area of major difference is preparation of consolidated financial statements.

Despite its several advantages, he feels that convergence would be a challenge in view of the conflicting legal and regulatory requirements related to financial statements, the technical preparedness of industry and accounting professionals and economic environment prevailing in the country. Another concept which will have a major impact is the greater use of fair-value measurement in international standards. Do markets in India possess the necessary depth and breadth for providing reliable fair values on measurement of various assets and liabilities, asks Mr Arora? This would require availability of valuation experts and comprehensive guidance on fair-value measurements under different situations and on the basis of relatively objective criteria.

He feels that the role of the ICAI would be crucial in view of areas requiring significant judgments, availability of alternative treatments and absence of industry-best practices. The direction towards convergence is clear and perhaps irreversible. It is time to increase our pace and meet the challenge head-on.



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