IFRS does not recognise the adjustments that are prescribed through court schemes; consequently all such items will be recorded through the income statement. There are other areas, such as consolidation of special purpose vehicles and accounting for arrangements in the nature of a lease, that would require companies to record transactions on their books based on substance-over-form.

However, ultimately the success also depends on the rigour with which IFRS is implemented in India, changes in existing legislation, and the involvement of the regulatory oversight process.

On IFRS adoption vis-À-vis the taxman and the judiciary.

By and large, countries rely upon local or statutory GAAP as the starting point for tax calculations. Most of the jurisdictions that have adopted IFRS for financial statement reporting purposes require maintenance of local statutory books for tax purposes.

Some countries, such as Canada, are beginning to consider the tax impact of conversion to IFRS. However, the magnitude of the effect on the effective tax rate of a consolidated entity is initially difficult to evaluate. The concern is that, in India, we have not started the process of examining how to engage the tax authorities in conversation on IFRS.

We have historically looked to tax legal decisions while deciding on the accounting treatment in the books of account. You only have to refer to the number of court decisions in areas such as capital versus revenue expenditure, to realise the importance of the taxman in the Indian context.

With IFRS, we have increased complexity with the introduction of concepts such as present value and fair value. There are several recognition and measurement issues. Some of these would have cash tax liability or effective tax rate implications. A change in the definition of equity could result in the tax benefits of hybrid instruments, where ‘interest’ is treated as receiving a dividend.

Foreign exchange gains and losses and other transactions that are recorded in equity may become taxable. Amortisation deductions for intangibles have a material impact on tax rates. Would it be possible to ever succeed in settling a tax position relating to interest expenses on a hybrid financial instrument or the exchange gain on a transaction that is recorded in equity without a prolonged debate?

For companies with overseas subsidiaries, it is even more complicated. Cash repatriation strategies are affected by the tax characterisation of the distributions in the hands of the parent, example, dividend versus return of capital.

There could be changes to retained earnings in highly-leveraged subsidiaries in foreign jurisdictions that adopt IFRS for tax purposes that would trigger local interest deduction limitations, example, thin capitalisation rules. And to add to the complicated situation, different companies in overseas jurisdictions are moving to IFRS at different times.

In accounting, there are other areas such as fringe benefit tax, deferred tax, dividend distribution tax and Minimum Alternative Tax (MAT), which need to be carefully considered from a company perspective. Companies may not be happy to pay MAT based on an IFRS book profit, and need to examine whether this could be the new reality.

Do you foresee the possibility that Indian interpretation of IFRS falls out of sync with global practice?

Firstly, we need to understand whether India will adopt IFRS or converge to IFRS. This matter is still under discussion by the standard-setters. I think it does require courage to sign up to standards when you are not totally in control of standard-setting. If we were to adopt IFRS we would be compelled to accept whatever standards are prescribed internationally from the date of adoption of IFRS.

Secondly, no country can abandon its own laws. It will always check to see if the IFRS pronouncements are fit for application in the specific country environment. There will always be a call for an endorsement process. Hopefully, the economic imperative and the endorsement procedure will both push for not having differences. Therefore, if India does not have an active role in the standard-setting process internationally, converging to IFRS, using an endorsement process and possibly accepting temporary carve-outs and quirks, is a safer route to take.

To be realistic, I think there would be understandable departures from IFRS, particularly on disclosures. To illustrate, I would like to share an interesting experience in China, where the related party standard was altered to say that state control does not necessarily trigger related party disclosures. This meant that an entity was not related just because it is a state controlled entity.

In China so many companies are state owned — and therefore related — that disclosing them all would result in notes to the financial statements possibly leading to hundreds of pages. Interestingly, following the situation in China, the IASB has issued a December 2008 exposure draft, under which the standard would exempt such entities from providing full details about transactions with other state-controlled entities and the state. We could have similar situations in India, and should perhaps aspire to have the ability to influence the global standard-setters.

There are many areas in which differences would need to be ironed out, not necessarily due to regulatory and tax reasons, but given the sheer compulsion of practicality. I would however caution that the standard-setting process will have to be strong and independent to withstand political pressures that will surface.

In what ways would you suggest convergence with IFRS be made to fit the Indian scenario?

In its convergence paper, the ICAI has stated that IFRS should be adopted for the public-interest entities such as listed entities, banks and insurance entities and large-sized entities. I am sure that the decision will be taken after sufficient examination.

The ground reality is that small companies and small accounting firms will find the implementation of IFRS to be challenging. My view is that we should initially restrict the reporting to large-sized listed companies. Bear in mind that under IFRS, companies would be required to prepare consolidated financial statements, and this would therefore require their unlisted subsidiary companies to prepare financial information under IFRS.

There are other approaches that have be considered in other countries, such as phasing in the adoption of IFRS, whilst encouraging voluntary early compliance, that have merit. It is helpful to have two to three years to ease a company into the IFRS world.

How robust do you anticipate the monitoring of IFRS compliance to be in India?

IFRS is a principle-based approach with limited implementation and application guidance. In the initial years, there will be immense learning and subsequently, revisions would arise from the global implementation of IFRS, particularly in the US which will experience a rigorous SEC oversight.

In our situation, it would seem that auditing is the key element of enforcement of applicable financial reporting requirements, even though not enough has been done to ensure that the profession follows the same set of auditing standards globally. The extensive application of concepts such as fair value, and increased emphasis on management judgments in areas such as future cash flows would present challenges that have to be met.

Any other points of interest.

I see great merit in the Hong Kong approach to IFRS implementation. When Hong Kong first converged to IFRS, the financial statements for the year of adoption were effective from January 1, 2005; the majority of Hong Kong incorporated companies were required to adopt the new standard which potentially changed accounting policies used in their annual reports for the financial year ending on or after December 31, 2005. The financial statements for the financial years ending on or after December 31, 2006, therefore included comparative figures under IFRS.

This would be a practical approach in India, which has still not issued or amended all standards to make them convergent with IFRS. A plan that would require companies to publish IFRS financial statements effective from April 1, 2011, without the requirement to present IFRS comparative information for the previous year, would ease the economic burden of compliance.

Article by N. VENKATRAM, IFRS COUNTRY LEADER, DELOITTE HASKINS & SELLS, MUMBAI.