It is common sense that for any reform to succeed, the call for it should come from the market. The need should precede the deed. Looked at from this angle, it does appear that the International Financial Reporting Standards, or IFRS, which some 1,500 Indian companies should begin to follow from April 1, 2011, is an idea whose time has not yet come.
It does appear as though Corporate India is being hustled into adopting accounting standards that it neither knows nor needs.
The ushering in of IFRS, at least in India, is founded on a heap of myths: That all the countries in the world are following IFRS and India should not isolate itself. That IFRS will facilitate capital inflows. That it is transparent and, hence, investor-friendly.
But if you look at these closely, there are serious flaws in each line of argument. For instance, that over a hundred countries (including China and Pakistan) are on board is of little relevance.
The economic world cleaves into three major blocks — the US, the EU and Japan. Two of the three — the US and Japan — have not adopted IFRS. The US has said it would get on board only in 2015 and Japan is not sure if it wants to. For the same reason, the argument about more capital inflows does not hold water. First of all, it is a moot point whether the kind of ephemeral capital that flows into the stock markets, creating headaches for the monetary authorities, is desirable or not. More fundamentally, there is no evidence of anybody — either an FII or an FDI investor — having said, "the potential investee company's accounts are not IFRS-compliant, so I do not want to put my money in it."
Nor does there seem to be any call from the domestic market. Indian companies never said they were handicapped in raising funds because their accounts are drawn up according to the principles of Indian GAAP.
On the contrary, funds seem to be flowing in — only a couple of days ago, the Economic Advisory Council to the Prime Minister said that India will attract $73 billion of capital in the current year, which is $53 billion more than what the country got last year.
Notably, the Chairman of the EAC, Dr C. Rangarajan, feels that $30 billion of the inflows will be foreign direct investment. Clearly, nobody is waiting for IFRS to bring money into India. The transparency argument is equally porous. There is no evidence that disclosures have either prevented fraud or helped investors make informed decisions.
On the contrary, we Indians are conservative by nature and most accountants frown at the fair value and income recognition provisions. It is never wise to count your chickens before they are hatched and, if you are a construction company (for instance), it is prudent to book in your incomes only after the contract is over and payment received.
Lot of work left
Even if we have to 'converge' (which should be understood in contrast with 'adopt', says the Government), there is still a lot of work to do, such as bringing the tax and company law regimes in alignment with the accounting standards. The absence of such alignment, especially on the tax front, is a major source of disappointment to Indian companies today.
In a recent interview to this correspondent, the Union Minister for Corporate Affairs, Mr Salman Khurshid, cautioned that we should not get trapped into some "spurious idea of sovereignty". More than not being an isolationist, India should be seen as a leading contributor in the evolution of ideas and, he said, even Japan consults us (on IFRS).
Just as it is important not to get trapped into any spurious idea of sovereignty, it is also necessary not to turn into self-congratulating mode in the name of 'leadership'. In the case of IFRS, leading is bleeding, and if the Companies Bill can wait for a decade for finest-tuning, so can IFRS — at least until the US and Japan do it first.