IFRS: 6 months to go!
Only six months to go if India wants to meet the IFRS deadline. It is an uphill climb. The National Advisory Committee on Accounting Standards (NACAS) has yet to notify the standards, and the legislative changes to enable IFRS are still pending. First we pick convergence over adoption. And now with this last minute stuff—what are we going to end up with? Exactly the question CNBC-TV18's Menaka Doshi put to Tommaso Padoa-Schioppa, Chairman, IASB and TV Mohandas Pai, Trustee, IASB and Director and Head HR, Infosys.
Here is a verbatim transcript of the interview. Also watch the accompanying video.
Q: You believe that India is important for the international adoption of IFRS but India has picked convergence over adoption. Is it late in the day to ask this, but are you disappointed with that dilution?
Schioppa: We are basically satisfied because India has made an extraordinary effort to include the IFRS in its own legislation and we set this as an example in many respect.
In the meantime we know there are some areas in which there are still differences and the legislation is in the process of being passed in order to resolve those differences. Clearly in the end what is desirable is not just convergence but adoption of the standards and we think that the distinction between these two—they are somewhat arbitrage because what you call convergence is in many respects equivalent to other options. Where there are differences, we hope they will be removed.
Q: As head of one of the sub-committees tasked with enabling this convergence and as a leading representative of business what do you make of our choice to converge and not adopt, and therefore the dilution of standards? And also give me a comment on where we stand today on the road to IFRS because the delay seems never-ending!
Pai: India has made tremendous progress and the difference between IFRS and the Indian Accounting Standards (IAS) is very much less. There are very few differences. There could be 95-98% already there. There could be technical difference, which are small because of legislation. I am very satisfied with what India has done; it has given a roadmap. That means larger companies with a larger market capitalisation would be on IFRS from April 1, 2011 and then over the next two to three years the smaller companies and the banks come along.
Yes the legislative action has not taken place and I hope will take place in the next two to three months. Parliament is coming to session in the winter session. I hope it will happen but standards are being issued by the Institute and NACAS. Overall, I think extremely satisfactory considering the time limit.
The larger companies are more or less prepared. I made a survey with the top-50 companies and about 30 of them said they are perfectly ready and the balance said they would be ready. So I do not see a problem for the larger companies for convergence that India is doing right now.
Q: India INC maybe close to ready but the government is dragging there is no doubt about that? We have known of the April 1, 2011 deadline for several years now and yet there is no movement with regards to the legislative changes that are required for India to converge to IFRS. It has become a crisis situation if we do want to meet that April 1 deadline?
Pai: Right now the work is in process and it has identified the differences in the law and they have it all ironed out. I guess when the legislation is issued in parliament in December hopefully they will get the amendments through. In case they do not get the amendments there could be an ordinance maybe. But I am very confident at this point of time, the government has made a commitment and the government will honour this commitment. The industry is getting ready. I am positive. It is typical of India, many things happen in the last moment and until the last moment we have the palpitation of the heart. That is the way I guess we all work. But in the end it all comes through. You know all the things happen in the last moment.
Q: Maybe India will make it in through last-minute style but the plan for global adoption, if I may broaden this conversation a bit, does not seem to be progressing that well?
Schioppa: From the global perspective, I must say that my main concern right now is the way in which convergence will progress with United States and the decision that United States are going to take next year about adoption of the standards. This is for 2011. And in 2012, Japan will have to decide because as of now only large corporation have an option to adopt IFRS. If I look at this, I consider that India is a success story where work remains to be done is not so much as in other countries and there are odd signs that these remaining parts will be done.
Q: What do you make of recent grumblings against fair value accounting especially during the great recession of 2008-2009 in the last few years and therefore the reluctance on the parts of leading economies like the US to adopt IFRS. How international are these standards going to be if the world’s largest economies have not yet embraced them?
Schioppa: Certainly an initial problem that needs to be resolved is to find standards that while satisfying the requirements of the investor and of communication to the market are also considering sufficiently the need to preserve financial stability. This kind of discussion is now underway and I think there are good reasons to believe that will be resolved in a satisfactory way. But this is not a main problem of making IFRS adopted internationally. There are already about 100 countries in the world which either adopt IFRS or have standards which are based on IFRS. This is much wider acceptance of international rules than in many other fields like prudential rules or IOSCO rules. So I am very optimistic. Of course, there is a task still to be fulfilled but I think we are on the good way.
Q: Would you agree that the broader purpose of moving Indian business or aligning Indian business to an international accounting standard will get diluted if the world’s largest economy and the one inspirational market (the US) does not adopt it? Like I pointed out the most inspirational market, all companies want to be a part of that market.
Pai: In the United States, the ACC allows foreign filers to file in IFRS. It is okay and if you look at the global growth for the next 20 years the emerging markets and countries outside the OECD are going to grow the fastest. They are going to double the economy in the next 10-12 years. The US stays out, it is going to lose. The world is moving in a particular direction, the US is reluctant; it has to come along if it does not want to come along and sit out, then it is going to lose. The world is a very dynamic place and we are seeing such huge growth in emerging markets. The US has to come up in its own good.
Q: If India does meet the deadline—and let me add here that several experts are skeptical we will do so, they are definitely not as optimistic as you are—but if we do meet the deadline, do you anticipate that these initial few quarters next year will be full of confusion? It is a rough task to prepare the analyst community, the media to understand the changes due to a shift in accounting practices.
Pai: It will take a couple of years to stabilise but it will happen eventually. People will get educated, that is the way it is and we have to accept it. It is a very large-scale change but I am very confident that the change will go through. All the big companies have great accounting people and we have seen good development. We have a very transparent and open system, I am confident that the roadblock will be small.
Q: Have you already being working with analyst community at Infosys do be able to sort of ease them into this?
Pai: The differences are not marginal maybe 0.001% because we already produce a statement showing difference because we are already on IFRS. We have an Indian GAAP and the difference is very marginal. I think for most companies the difference will be hardly anything. The analysts are well read, as it is our standards are very less differences. I think I am very positive.