22 July 2010

Assessing the future of IFRS


It is well-nigh impossible to mandate a one-size-fits-all policy regarding IFRS

Albert Einstein said, "I never think of the future — it comes soon enough."

The future of International Financial Reporting Standards (IFRS) has been debated recently since the US seems to be leaden-footed over moving over to IFRS.

Though IFRS statements are permitted for non-US filers now, the true test of IFRS would come when it is accepted for US filers too.

In India, there have been statements from the powers-that-decide that IFRS would be tuned to Indian conditions. The much discussed and derided fair value may be one of the areas that India could decide to give a go-by to.

The US and IFRS

Since the Norwalk Agreement, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working together to attempt and issue accounting standards using the same criteria and concepts.

However, the much-maligned IAS 39 on Financial Instruments and its subsequent avatars (IFRS 7 and 9) have been a bone of contention. The US Securities and Exchange Commission (SEC) hopes to give companies plenty of time to adjust to IFRS. In November, the SEC issued a "roadmap" that could lead to regulations requiring US businesses to file their financial statements using IFRS by 2014, or by 2011 for companies that volunteer.

One of the hurdles that is being bandied about is the high costs of moving over to IFRS.

A similar argument was raised when the Sarbanes Oxley Act was passed but the regulators did not relent.

Costs have never ever been an issue in an economy such as the US which anyway thrives on borrowed money. It may not be an aberration to state that the rule-bound and industry-specific US GAAP has failed to pass the "stress test" — stressing on entities to disclose their deeds. Enron, WorldCom, Lehman Brothers, AIG and Goldman Sachs would never get an award for best-presented accounts.

Goldman allegedly failed to disclose to investors that it was betting against subprime mortgage investments it pushed on clients — it was pushing a product which it knew ab initio would fail. They got away with a considerable fine and a tarnished image.

In accounting, entities can falter either by failing to account for a transaction, accounting it incorrectly or failing to disclose the what, why and when of accounting that transaction.

The former two may not get the nod from the auditor while the latter possibly could. IFRS thrives on detailed disclosures which mark a welcome departure from differing rules for differing industries.

It is time for the US to accept the generous gaps in its GAAP and consider IFRS as an acceptable alternative.

Indian Standards?

After recently issuing Ind-AS 41 — First time adoption of International Financial Reporting Standards — the ICAI completed its wish-list of issuing IFRS-compliant standards. The ball is now in the court of the regulators — SEBI, the RBI and the MCA — to tweak their legislation to accommodate IFRS.

Ind-AS 41 made a significant departure from its international equivalent IFRS-1 in not mandating companies to present their comparatives as per IFRS but keeping it as an option. One of the sine qua nons of the IASB is that entities make a full and unreserved compliance with IFRS which may not be met with in case the option is opted for.

As long as this treatment is enshrined in the statutory laws, it may not appear in red ink in the auditors' report as a qualification but the IASB may not consider them to be IFRS-compliant. This could lead to different accounting treatment between a fully-compliant controlling office and an Indian-compliant subsidiary or vice-versa rekindling interest in preparing a reco statement.

China objected to the stringent norms for disclosure of related parties in IFRS which adds further evidence to the fact that it is well-nigh impossible to mandate a one-size-fits-all policy regarding IFRS.

The IASB could do well to provide broad benchmarks for their standards and permit countries to frame their standards within these benchmarks. There can be no doubt that IFRS would remain in India — even if it is a desi version.

(The author is a Bangalore-based chartered accountant.)

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