Growing international transactions and cross-border investments underline the need for a common financial language
The modern world has become a global village with increased international transactions besidesever-increasing cross-border investments. It leads to the need for a common financial language, particularly in the form of reporting of financial statements. And why is this standardization important? The foremost reason is to bring the financial accounting and reporting practices around the globe to a common platform so they could be comparable, reliable and transparent. Common financial reporting practices also boost industrial growth by increasing foreign investment by eliminating information barriers.
Cross border transactions make one-third of all financial transactions that take place in the worldand are expected to increase by leaps and bounds. International operations like subsidiaries in different countries, raising capital across several stock exchanges and investments in various nations get complicated as all countries have their own financial transactions reporting standards. Trying to work around these diverse accounting standards often add to costs and may not be useful to all stakeholders for decision making purposes.
To address these issues, International Accounting Standards Board (IASB)has developed International Financial Reporting Standards (IFRS), which are accounting rules thatare a set of principle-based standards for developing financial statements of public companies that are intended to make them consistent, transparent, and easily comparable around the world, with a distinct advantage of not being easily manipulated. The IFRS standards are based on the pillars of transparency, accountability and efficiency. Transparency is achieved by improving the comparability ofreports which in turn enhances the quality of financial information facilitating accurate decision making by investors. Reduction of information gap between providers and users of capital strengthens accountability, which in turn helps investors in allocation of capital across various opportunities thereby enhancing economic efficiency. Therefore, as a source of globally comparable information, IFRS standards are of high relevance to regulators worldwide.
Notwithstanding the importance of IFRS in this globalised and integrated economies, several countries have developed their accounting standards with some degree of variation from IFRS. There are several reasons for it. Firstly, the different legal and regulatory environment prevailing countries. For example, in India, terminology such as, ‘balance sheet’ instead of ‘Statement of financial position’. Secondly, dissimilar economic environment within a country. Thirdly, industry preparedness and practices in country may vary. For example, in some emerging countries recognition of inflation is higher than in other nations. Fourthly, some countries choose the facility available in IFRS to remove alternative treatments, like, India has removed the option to use fair value model to measure investment property in the relevant Ind AS, it only uses cost model. And lastly, difference in conceptual issues in recognition of hybrid securities may lead to nations not adopting IFRS in totality. As far as India is concerned, we have not fully adopted IFRS, but officially decided in 2007 to converge with IFRS through the Indian Accounting Standards (Ind AS).
To formulate IFRS-converged IND AS, ICAI reviews the relevant IFRS standards. Changes are made by removing optional treatments outlined under IFRS, in case they are entirely necessary keeping in mind the Indian environment. On identification, these issues are taken up with the IASB. Having decided to converge with IFRS, the initial target period was set as April 2011 but the implementation as delayed due to bureaucratic and operational constraints. These standards were finally implemented effective from 1st April 2016 initially for listed companies with more than 500 crores of net worth. From April 1, 2017, companies with networth of more than 250 crores came under the ambit. The regulatory requirement has been extended to banks, insurance and financial service companies from April 1, 2019 onwards.
So, for India is convergence better than adoption? A global standard like IFRS, by virtue of its requirement to be standard across the world, cannot take into account environment and capabilities available in each country. Indian Accounting Standards developed by ICAI totally reflects Indian position. However, the deviation from global reporting standard should be minimal as India is one of the key nations with positive economic interest by developed nations and operations of several MNCs in its territory. Therefore, a policy of carving out of and carving in IFRS in formulating Indian accounting standards convergence, while keeping the deviations from IFRS at the minimum, is a better option than adoption.
(The writer is Associate Professor at Amity University, Noida. The views expressed are personal.)
