Regulators should conform to new global accounting standards

International Financial Reporting Standards (IFRS) is gathering storm and most countries barring the US and a few others have either adopted IFRS or their national generally accepted accounting principles (GAAP) are converging to IFRS.

Australia, New Zealand, China, Singapore, Japan, Middle East, Africa & European Union have either adopted or are converging to IFRS. The eminent status to IFRS came about after EU made it mandatory for all its listed companies starting 2005. Consequently, more than 8,000 EU-listed companies adopted IFRS in one go. US capital markets are losing their attractiveness as a result of what many view as excessive regulation. As a consequence, many believe that the predominance of US GAAP as a standard may be coming to an end. This could make large companies look at other capital markets, and in many of those capital markets IFRS are accepted.

More than 1,100 Chinese companies have recently switched over to new accounting standards bringing their books in line with international norms. India follows Indian GAAP, which is inspired by International Accounting Standards (IAS).

However, Indian GAAP has not kept pace with the changes that followed IAS’ metamorphosis to IFRS. The most important change in IFRS is the application of fair valuation principles. Key standards based on fair valuation principles that have not yet been rolled out under Indian GAAP relate to business combinations, financial instruments and investment properties. There are also several areas where there are critical differences between Indian GAAP and IFRS.

The key questions for India are:

* Should Indian GAAP be converged with IFRS?
* What are the pros and cons?
* What are the hurdles and impediments in fully converging with IFRS?
* What are the precautions that need to be taken?
* Whether Indian GAAP should be converged with IFRS?
* Is there an option or alternative?

IOSCO requires all its constituents to converge to IFRS and therefore departing from IFRS is not a solution. Besides, India has globalised and if it has to invest abroad or attract inbound investments it must follow global standards. Seen from this perspective, the sooner we converge to IFRS the better. When most of the developed world follows IFRS, can we lag behind?

The accounting framework in India has been characterised by relatively less complex accounting guidance with a bias towards historical cost accounting and focus on the contractual form of the arrangement. Therefore, audit committee awareness of concepts around fair value recognition and measurement, reflecting the substance of the arrangement and applying relatively more complex accounting concepts and models is likely to be low.

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Regulators should conform to new global accounting standards