The Securities and Exchange Board of India has also prescribed guidelines for listed companies with respect to presentation formats for quarterly and annual results and accounting for certain transactions, some of which are not in accordance with IFRS.

For example, Clause 41 of the listing agreements permits companies to publish and report only standalone quarterly financial results. However, IFRS considers only consolidated financial statements as the primary financial statements for reporting purpose;

It is common in India, for courts to approve accounting under amalgamation/restructuring schemes, which may not be as per the accounting standards.

As per the Indian accounting standards, if a particular accounting standard is found not be in conformity with a law or a court order, the provisions of the said law/court order will prevail. To achieve convergence with IFRS, several laws, regulations and guidelines would need to be amended to ensure that the financial statements do not deviate from IFRS.

The fundamental risk of converging with IFRS without fully addressing these issues is that financial statements prepared using the ‘converged’ Indian standards may still not fully comply with IFRS issued by the International Accounting Standards Board (IASB) due to the above issues.

This would be unfortunate as Indian companies that may be required to present IFRS compliant financial statements to stakeholders outside India (overseas stock exchanges, overseas regulators, investors and alliance partners) would still need to reconcile such ‘converged’ IFRS financial statements prepared using the Indian framework, with IFRS financial statements that are globally accepted. Accordingly, Indian companies would be unable to realise the full benefits of convergence with IFRS.

Entities covered The Convergence Paper proposes that convergence should be required for all listed entities, public interest entities such as banks and insurance companies and all other companies (including privately-held ones) that have revenues in excess of Rs 100 crore or borrowings in excess of Rs 25 crore. Further, it is proposed that the holding company and subsidiary companies of the covered entities should also be required to converge.

While accurate data is not currently available, it is likely that the above scope would require several thousand companies to converge by April 1, 2011. This may not be practical. Several countries/regions across the globe have adopted an approach whereby IFRS compliance is required only for listed entities.

For example, even though entities in the European Union (EU) are required to comply with IFRS since 2005, this requirement applies only to listed entities. Entities that are privately held and do not have securities listed on exchanges can continue to use local GAAP, in several of the EU member-states.

Similarly, even the proposed IFRS adoption plan proposed by the US Securities and Exchange Commission requires adoption only by entities that have listed securities. Further, the adoption plan in the US proposes different timelines for very large listed companies (2014), large listed companies (2015) and the smaller listed companies (2016). It is intended that the experience of the larger listed companies would enable a smoother and more cost-effective transition for the smaller listed companies.

Tax implications

There is a need to fully think through and clarify the proposed convergence plan in matters related to income taxes and indirect taxes. For example, several countries that have adopted IFRS still require that certain matters relating to income taxes continue to be governed using the historical cost principles previously applied under local GAAP. Consider unrealised losses and gains on derivatives that are required to be marked-to-market under IFRS. Different taxation frameworks are possible for the tax treatment of such unrealised losses and gains.

While several companies may seek to claim a current tax deduction for unrealised losses, they may not be comfortable with paying current taxes on unrealised gains that may or may not be realised in the future. Similarly, tax authorities may seek to tax all gains recorded in the profit and loss account, including unrealised gains, but may be sceptical of permitting unrealised ‘notional’ losses as a deduction. It is important that companies and tax authorities have full clarity on how the convergence plan will impact taxes.

Resource pool

Currently, India has an extremely limited pool of resources that have any form of training or experience in IFRS. In the medium-term, it is important that training in IFRS be incorporated into colleges, universities and professional accounting syllabus of the ICAI, to broaden the pool of trained resources.

The ICAI has started a certification programme that will enable chartered accountants and other professionals to be trained in IFRS. This is a good step and all stakeholders should fully support this programme by ensuring maximum participation.

In conclusion, urgent action on the implementation matters listed above is a pre-requisite to ensure that Indian companies can plan and manage the convergence successfully. If the regulators/standard setters believe that additional time is required to implement the above matters thoroughly, it may be useful to defer the convergence timelines.

This would be much more desirable than ‘converging’ without fully addressing the above matters. Correct implementation will ensure that IFRS convergence results in tangible benefits, whereby financial statements prepared using the converged Indian framework are useful to meet all relevant purposes within and outside India.