Accounting, supposedly, speaks the language of business. With business becoming increasingly globalised, it is logical to expect that accounting, too, goes global. The International Accounting Standards Board (IASB) through a combo offering of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) has taken upon itself the task of globalising accounting. Indian companies gobbling up companies globally and private equity investing in Indian companies complete the picture of a global business.
One of the latest attempts by the IASB to globalise accounting standards is the revision in September 2007 of its flag-bearer accounting standard IAS 1 Presentation of Financial Statements. One of the cosmetic changes made is to rename balance-sheet as statement of changes in financial position and cash flow statement as statement of cash flows.
While it is common knowledge that two years financial statements are presented for comparison purposes, the revised IAS 1 introduces a requirement to include in a complete set of financial statements a statement of financial position as at the beginning of the earliest comparative period whenever the entity retrospectively applies an accounting policy or makes a retrospective restatement of items in its financial statements or when it reclassifies items in its financial statements.
Another disclosure requirement is that all changes in equity with owners in their capacity as owners are to be presented separately from non-owner changes in equity.
In spite of these changes, there are differences between IAS 1 and SFAS 130 Reporting Comprehensive Income issued by the Financial Accounting Standard Board (FASB) as a part of US GAAP. While SFAS 130 gives an option to present comprehensive income in statement of changes in equity, IAS 1 expressly prohibits it. SFAS 130 also mandates that the total of other comprehensive income is reported separately from retained earnings and additional paid-in capital in a statement of financial position which requirement is not found in IAS 1.
An investors share of the investees other comprehensive income needs to be displayed in the statement of comprehensive income. Such a specific requirement is not found in SFAS 130 disclosure of an aggregate amount appears permissible.
Presumably, since it is assumed that every business transaction would be accounted, the IASB has decided to christen its new standards International Financial Reporting Standards with the focus on reporting and disclosure rather than basic accounting.
To converge with the mammoth US GAAP, the IASB and FASB are working together to revise standards and interpretations to ensure that both are more or less on the same page. With a target of 2011 for convergence, it seems that a two-pronged strategy would suit India well one statement to make all changes necessary to meet IFRS requirements as on, say, December 31, 2007, and updates to standards whenever there are changes in the international scenario.
(The author is a Hyderabad-based chartered accountant.)