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IFRS: April Fools Day Joke?

Published on Sat, Apr 02,2011 | 17:08, Updated at Wed, Apr 06 at 17:05Source : CNBC-TV18 |   Watch Video :

Itís April Fools Day and today we are going to discuss the biggest joke that government has played on India Inc, except this one is not funny at all.  We are talking about International Financial Reporting Standards (IFRS). Is it ON or is it OFF?

Now for months India Inc has been on tenterhooks, wondering if we would meet our commitment of convergent to IFRS on April 1, 2011. The government committed to this date years ago but has since then dragged its feet. The final accounting standards, Ind-AS, were in fact notified as latest February 25 this year and with that the Ministry of Corporate Affairs nicely lobbed the ball in the Finance Ministryís court by saying that Ind-AS will be implemented after various issues including tax related issues are resolved with other relevant government departments. Thereafter all we have got from the Finance Ministry is deafening silence.

Now the lack of any official guidance whatsoever has prompted corporate India to believe that IFRS has been deferred.

But for how long? One year, two year or maybe till the Direct Tax Code becomes effective and offer some tax clarity? When we do converge will it still be in a phased manner or applicable to all companies and what happens in the interim? Will the government suggest voluntary compliance? What impacts will that have on India Inc?

To discuss all of these issues CNBC-TV18's Menaka Doshi caught up with two IFRS experts Jamil Khatri, Partner of KPMG and N Venkatram, National Audit Leader at Deloitte. We will also be joined through the course of the show by some leading voices of India Inc TV Mohandas Pai, Director-HR at Infosys & Head-SEBI sub-group on IFRS; Keki Mistry, Vice Chairman & CEO of HDFC; A Subba Rao, Group CFO of GMR Infrastructure and Koushik Chatterjee, Group CFO of Tata Steel.

Below is a verbatim transcript of the interview. Also watch the video.

Doshi: Starting with you Jamil, I know that I said it in jest, itís April Foolsí Day and this seems to be a joke but I do mean it, this is not funny at all?

Khatri: The key question what corporate India wants to know is certainty around this. Nobody is saying it should be April 1, 2011 or April 1, 2012 or later but I guess people desperately want a communication to clarify how we are going to be on this.

Doshi: And the finance ministry has been hugely disappointing. There were several occasions in the last month itself when the finance ministry has had or the Finance Minister has had the opportunity to address this through a simple one-line statement and offer some guidance but they have missed all those opportunities?

Khatri: I think that it is also because the finance ministry is working through some of these issues right now. Now you may say that they should have worked through this earlier. The Ministry of Corporate Affairs (MCA) and Ministry of Finance (MoF) should have looked at it earlier but I completely agree with you. I think what we really need is communication to say how do we take this forward from here.

Doshi: Not only do we need clear communication, we need some less confusion. The MCA, a few weeks ago, sort of notified a changed Schedule VI that said it would be applicable 31st March that put all companies in panic. Thankfully, they have now corrected the situation and said its applicable 1st April and therefore giving companies the relief that they donít have to scramble and try and meet this deadline. This whole process of converging to IFRS, whenever it happens, has been marked with this delay, confusion, lack of clarity?

Venkatram: Absolutely. But on the specific point of whether it should be delayed or not, I think that possibly it was a blessing in disguise. I think if you introspect, India Inc. was not fully ready. You would have had to do it from the first quarter and if you look even from the global perspective, I mean there are bigger daddies out there who havenít committed themselves to IFRS. The United States for e.g.

Doshi: How long are we going to use that as an excuse? If we donít want to converge, we should say so in as many words. If we wanted to defer it by three years, say so in as many words. Stop playing these games.

Venkatram: I am not disputing the fact that they should have offered clarity; all that I am saying is that merely because they have postponed, they donít need to be crucified.

Doshi: No, I am not crucifying them for a postponement. You are saying itís a blessing in disguise. Let me put that corporate India. Mr Mistry, do you believe this is a blessing in disguise and that even though we have lacked clarity, the fact that itís been postponed makes up for it?

Mistry: I definitely agree that there must be clarity on when the implementation has to take place but there was a phased process through which the IFRS was to be implemented and I thought people have enough time to prepare for it. Now the problem really is on the taxation side because on tax you have to prepare accounts on the Indian GAAP and the IFRS profit numbers will be very different from the profit numbers on India GAAP. The Ministry of Finance and the Corporate Affairs Ministry have to sit together and sort that out.    

Doshi: But is it now taken for granted that it is not going to be applied for at least FY12?

Mistry: I would think that without clear clarification at the beginning of the year, it is extremely difficult for a company to switch from Indian GAAP to IFRS straight away. So you need a bit of a time before you can adjust your accounts, adjust your books, adjust your systems to reflect new method of accounting.

Doshi: Putting this question of deferral to you because I know you are working currently on the committee appointed by the finance ministry to resolve the tax issues which seems to be the biggest hurdle at this point in time. Is this likely to be deferred by a year, two years? Will we have to wait for the Direct Tax Code to come into effect for us to get clarity on tax and therefore smoothen the way for the implementation of a converged IFRS?

Khatri: I think in terms of implementing the new Standards in India, there are three parts to it.  One is the issuance of the Standards which has been done by National Advisory Committee on Accounting Standards (NACAS) and the Ministry of Corporate Affairs. The second part is the amendments to the Companies Act and the third part is the taxation framework. My view is I donít think we are sufficiently close either to number two or number three in terms of Companies Act amendments and more importantly on the tax side for this to be implemented from 1st April, 2011.

So where I see it, I believe, there is still a lot of work to be done for a mandatory adoption of the Ind-AS Standard in India as far as the standalone accounts are concerned. Having said that, I do want to say that there is nothing stopping us from adopting the new Standards as far as the consolidated accounts are concerned and I know for a fact that is where the debate has moved right now.

Doshi: So which means operationally if we were to adopt it, letís say for FY12 for consolidated accounts, companies would have to reflect that in the books only at the end of the year. Would that be the case or would that have to be on a quarterly or half yearly basis?

Khatri: I think those are again choices that we have. Just to put things in perspective, even today under a SEBI circular, companies can choose to do IFRS financial statements for their consolidated accounts because that is what SEBI regulates and there are companies like Infosys, like Bharti which have already been doing that. The question is why you should not give that same extension to Ind-AS financial statement. So if companies want to do it on a voluntary basis, they should be given a choice as far as the consolidated accounts are concerned. I think that is where the debate is moving to and that would equally apply to the quarterly accounts.  

Doshi: And the convergence to IFRS, is that gone by a year, two years, three years, four?

Khatri: As far as the statutory financial statements are concerned, which is what is required by the Companies Act, my sense is that it would definitely not happen for 2011-12. Would it happen for 2012-13? I think there is a good fighting chance, but it all depends on whether we can get our process right for getting it done. I know a lot of effort has gone in but has that effort really translated into a commensurate output? I don't think so.

Doshi: Would you agree? Fighting chance for 2012-13?

Venkatram: I would think that it is desirable that it should be 2012-13. And when you do it in 2012-13, I would also believe that you should then say that you will have comparatives for 2011-12, so that then you really present full financial statements under the IFRS.

Doshi: Are you disappointed that we have missed the date? Is your disappointment sort of further enhanced because of the lack of clarity? Do you think this is a blessing in disguise, or do you now believe that this will happen only in FY12-13, or even later?

Pai: I have been a party to all the decision making. I tell you that a lot of work has been done by the Ministry of Corporate Affairs (MCA) on this and a lot of debate has taken place. What has obviously gone wrong is that parliament has been dysfunctional. The Companies Act was supposed to be into use possibly and the Companies Act amendment was supposed to take place, there were discussions on the finance ministry on the new taxation code. The taxation code has been deferred. So I think lot of things have happened, and to blame the government today and to say blessing in disguise, to say it as a joke today, I think we should not underestimate the challenges that we have faced; there are  too many moving parts.

Doshi: Forgive me for interrupting you, but the last time we met, which was not very long ago, you were in this studio with the IASB Head David Tweedie. At that point you seemed to believe that we could surmount all these issues including the tax ones, if only the finance ministry put their mind to it. So I am a little surprised that you seem so sanguine, not just about the delay which is fine, but also about the lack of clarity?

Pai: Let me finish, you did not hear me out. We had expected in the Budget that the finance ministry will talk about some tax changes to ensure that whatever is taken to the Profit and Loss (P&L) account, because a fair value will not be taxed unless realized. It did not come through for whatever reason. It is happened, and we have passed the date, so that is one thing that did not come through.

The second important thing is about the Companies Act being amended in parliament. Both things did not happen, parliament did not work this full time. So I think they have to yet recognize these challenges. But we have to find a way out. And I think the best way out is to say, one, we have an international commitment to honour and the commitment can be honoured by asking people presenting the consolidated accounts to follow Ind-AS IFRS and I will talk about that later.

Two, bring in amendments for the tax code for the next year and say for standalone accounts you roll up the two years out of the three year roadmap into one single year from the next year, so the tax law should be changed next year and government should say that is what they are going to do. So may be by June-July, there will be certainty in terms of the amendments and right now in this month, April possibly, they will announce it.

Third, which is a very important thing that you need to do, we should sit and re-examine again the carve-outs that India had between Ind-AS and IRFS and I think in all fairness, there are sets of companies which are very global; may be the carve-outs can be made optional as in AS 11. The carve-outs have put in ostensibly to protect Indian industry and give them a choice. Now many companies may not want this choice, because they are global companies, they prefer to adopt this. In that case, I think it is important for the regulator to look at it and just like in AS 11, there is a choice to give a choice to the carve-outs.

Doshi: Are you encouraged by what you hear from both our IFRS experts here including what Mr Pai has to say with regards to possibly a new roadmap?

Chatterjee: I think when SEBI and the MCA got  together and set up committees, Mohan headed one and Mr Malegam headed the other, the roadmap was seemingly very clear. The issue is that we are facing birth pangs on the convergence and I think some of it is in our hands; some of it is not; Mohan talked about the parliamentary process and so on. I think the process leading up to the Standards and the notification was certainly commendable, the process was consultative in nature, so I think there have been a lot of positives. But the fact is it was never certain and clear that whether it will finally get delivered. And as we stand on the date when it is to be coming into effect, we are finding that we have not met the milestones.

I think the issue on taxation started pretty late compared to the normal requirement of what it requires to change the tax laws. The Companies Act still hangs in a balance and I think what I was most concerned, if you remember in the earlier conversation, was that the certainty of this must come to the Indian companies well before the 1st April deadline so that people can prepare and go start the year with the converged IFRS or Ind-AS. If you miss the 1st April, 2011, the only time you can earliest start this is April 2012 because I think to change midway in the year is going to be very difficult, if at all.

I am certainly disappointed because the entire country and at least the finance committees all across were gearing up to this convergence. There were lot of problems but I think we should have still made it but we haven't and I think that is the big disappointment as far as I am concerned. I wouldn't say it is an April fool because we are genuinely struggling, but I think as Indians, we are always dealing with ambiguity, where this one was stretching up too far.

Doshi: Yours is one of the several companies that has been raising money internationally for the past several months. How do you think this is going to impact the ability of your company and others to be able to raise money because one of the rationales for why we wanted to converge to IFRS was to be able to present a commonly identifiable set of results or earnings to analysts and investors across the world? So is this going to operationally hurt you, are you hearing anything from investors which puts us in further bad light?

Chatterjee: I think it could have generally lifted the transparency and the alignment of Indian companiesí financial reporting standards to the global standards. I do agree with Mohan when we talk about carve-outs, the lesser the carve-out the better because then you become more true blood IFRS than an Indian version of IFRS though there are many protagonist on both sides of that view. As far as raising capital is concerned, I donít think that would be an immediate issue. It is more a long-term issue.

Doshi: Not only are we going to be late which is fine, if it serves our interest to delay on a commitment that is absolutely fine. I am more worried about the lack of clarity but that aside not only are we going to get late, we are now already, having not met this first deadline, discussing changes with regards to carve-outs, with regards to-maybe Jamilís Committee will come up with several issues with regards to reconciling the tax treatment. So this is many moving parts continuing to move even whilst we are readjusting the roadmap to constantly meet with the deficiencies of the Indian system. I find it astounding that we are still trying to change this between now and whenever it becomes effective?

Venkatram: Yes, this is a concern because while we say that these Standards are notified, technically, the gazette notification is not out. So people can still make changes to these Standards until such time as they get baked into the Accounting Standard Rules.  While some good things may happen in terms of whether people review carve-outs or whatever, you also have the risk that people may look whether you need further carve-outs because you have more time to apply your mind to it.

Doshi: Then this could be potentially under consideration for a very long time because that is the whole other debate that you have got to reconcile in some fashion right?

Venkatram: Yes, the second thing is that International Standards are changing as we speak.

Doshi: Could that also contribute to some part of the delay in deciding whether we now adopt it next year or the financial year thereafter because there is talk of change on some of the treatments for financial instruments etc, do we have to wait for that to stabilize before we implement IFRS?

Venkatram: I think we shouldnít say we have to wait for that but the fact remains that by the time we notify our Standards, if changes come through, we would also have to look in terms of incorporating those changes in our Standards.

Doshi: What happens to the phased implementation because we had a whole set of companies defined by net worth criteria etc. That would help convergence in the first bunch, then we had the banking and the financial institutions and then in the third phase the smaller ones. Now when we converge, does everybody converge at the same time?

Khatri: So, this is where as Mohan said, I think we need a roadmap.

Doshi: We had one, we deviated from it.

Khatri: I agree, now probably come up with a more realistic timeline with which we are going to deal with.

Doshi: But last one was realistic as well, we have been preparing for this except that we kept everything up to the last minute?

Khatri: So I think there are lessons which everyone has learned through this process.

Doshi:  The biggest issue seems to be tax and the last version that we saw of the Direct Tax Code before it was referred to the Parliamentary Standing Committee, I donít think had any mention of IFRS compatibility or compliance or whatever the technical term is.  We have crafted two new laws in the last four years- the Companyís Bill and the DTC and they donít mention IFRS at all, so we havenít prepared for this?

Khatri: Correct, so I think we know what we need to prepare for, we didnít get that but that is where we are.

Doshi: Maybe we will get it right the second time around.

Pai: I think we should accept that things have gone wrong and see what can be done to make sure that we are able to meet industryís requirement and remove all the fears and bring in some kind of congruence in the next one quarter. I think discussions are going on right now with Ministry of Corporate Affairs (MCA) and I think we have to put all our shows together to make things work. The last point I want to make is please remember the extraordinary circumstances - parliament is not functioning; laws are not being made.

Doshi: We left everything up to the last minute, we notified Standards on February 25th, we could have done this 3-4 months in advance, the Standards were being examined and were exposed through for a better part of the last calendar year?

Pai: We have such tortuous way of doing things in this country. You have the NACAS, you have the Institute doing something, then you have a group of 4 or something, then it has to be notified, then it has to be gazetted, I think we should just use the opportunity to simplify everything and say that okay there will be a body, they will issue the Standards and they can change the Standards to a due process.Ē

Doshi: I am glad all of you are looking at this silver lining in this cloud. I must also be very fair and say that part of this blame does lie on the back of Corporate India because there has been intense lobbying in the last 3-4 months by several companies who didnít want IFRS to be implemented on April 1st. So I am not blaming the government nor am I knocking the efforts of those who have attempted to bring this on time.

Mr Subba Rao, from all the conversations that we had till now, it seems that IFRS will come into effect, maybe a year down the line if we want to be really hopeful. If you want to be realistic, two years down the line and it could be in a very different form from what we were anticipating on April 1 2011. Does that worry you even more?

Rao: As of now, we are all delighted that our prayers have worked. India Inc hasnít been ready to implement and there have been lot of problems. So how many balance sheets you struggle to prepare is one issue. On IFRS basis, you have to prepare one balance sheet, on tax basis you have to prepare I-GAAP accounts. So there is going to be lot of work the way things have been working out. At least we were pretty much sure that the way things have been working, itís not going to be mandatory from April 1st.

Preparations have begun pretty late. We are not discounting the effort, the enormous effort that has been showed- the government agencies, the NACAS, everyone has put in but the whole effort has been begun pretty late and at the end of it we are pretty happy about the outcome.

We are not ready, that is the result and how is it going to be a year or two years later when it gets implemented, we would be better ready whichever be the way. I think we will all be better prepared to implement, in whatever form it is going to come in.

Particularly for infra companies, there is one laborious Standard that would have put enormous burden on infra companies to be prepared for this kind of situation.

Doshi: What do you make of in the interim -whether there will be some form of international push back, whether there will be some form of oh you didnít live up to the commitments or some form of image rubbishing?

Pai: I am right now in London in an international forum, I donít want to say where I am but everybody is asking me what India is going to do? And the reason is India is a member of G20. Our Prime Minister signed a document, along with others, to strive for a single set of high quality accounting standards as a part of G20 declaration and in that the Government of India has made a commitment and everybody expects internationally that India will honor its commitment. The regulatory community is effectively disappointed that India appears not to have led up to its promise because there is still some time.

So, I think, itís very important for all of us to sit back and see how you make sure, as part of G20, that we discharge our duties and we are seen to be part of the international community on this and I think the way to do this is to say- alright we have challenged our tax laws, we could not amend them but for consolidated accounts, we would like them to follow either IFRS or Ind-AS, with or without carve-outs, so that lets get along.

Doshi: Is that what we are going to end up with as the most doable solution over the course of at least the next 12 months or this fiscal year and that is that we apply to consolidated account, it has no impact on tax and broadly we have at least met part of our commitment?

Venkatram: I have always held the view that we have to think it in terms of consolidated IFRS accounts; in fact if you look at meaningful IFRS account, they are the consolidated accounts.

Doshi: I think that is what large part of Europe does?

Venkatram: The only constraint that we have in our system is one that dividends are not paid on the consolidated accounts; itís based on standalone accounts. So you still have a bit of a mismatch in terms of dividend payouts.

Doshi: Mr Chatterjee, your disappointment and my criticism aside, does that sound like a doable solution?

Chatterjee: This is like half way house but I agree with what Venkatram was saying that the consolidated account is actually the kind of financial reporting standard that investors look at and so far as we can converge to that quickly rather than later, it would at least give the first step- whether itís from an image perspective or from reflecting our financial statements on same basis as international standards are concerned.  But it is something that we had not set out earlier that we are going to achieve.

And I think eventually, I have this view that at the end of the day, India stands in a position where it needs to lead the entire IFRS process globally because of its potential economic position in the coming decade or so. I donít think we should be imperfect in doing this but we may willy-nilly land up in a compromise answer rather than getting it perfectly right the first time around.

Doshi: I am giving the last word on this discussion to Mohandas Pai because he has been championing the cause even though he has been lot more muted today in criticism. Two years down the line, are we going to end up with may be an implemented IFRS but a Khichidi IFRS after all these several changes are made and it continues to be work in progress?

Pai: I am very confident that India will comply with its commitment.

Doshi: You said that you me 5 months ago, 4 months ago, 3 months ago?

Pai: I am confident and I will keep saying it because we all need to understand that we do have a global responsibility. In India you have to be optimistic, you cannot be otherwise because hope is the only thing we have in the end.

Doshi: If the two of you were betting people, would you bet on IFRS April 1, 2012, or April 1, 2013?

Khatri: April 1, 2012 for me.

Venkatram: Hope floats, I think it will be 2012, but the big question is will banks go 2013 or not because they should keep their commitment.

Mistry: I think the financial sector would be.

Doshi: You think the financial sector will be ready 2013 or 2012?

Mistry: Whatever was the original date which is April 1, 2013, I think the financial sector will be ready by then.

Doshi: So we have got hope, we have got luck and finally we will just leave it up to fate.

 
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