Indian Accounting Standards: Barriers and History

Indian bill Standards Barriers and History fundamentIn the year 2005, European Union make it mandatory for in either the companies which were listed arrive at to comply with global monetary Reporting Standards (IFRS) bearments when graveling their fiscal statements. This mark the beginning when Inter field of study report standard wit (ISAB) was professed as soundise. Ever since and then IFRS has spread swiftly crossways the world. Initi ally in that location were few hindrances like by the end of year 2004 full textual matter of endorsed IFRS was non even available in several EU languages. This query examines the evolution and obstacles to cont work onnce of Indian score Standards to IFRS starting 1st April 2011 when all the listed companies in India, leave alone be required to present their fiscal statements in accordance with IFRS regulations. This research as well talllights the need for the demesne like India, to run across their Local generally accept ed accounting principles to IFRS.Ameri spate Writer Mark Twain in one case commented onIndia and saidthe cradle of the gentlemans gentleman race ,the birthplace of human speech ,the mother of history ,the grandmother of legend, and the great grandmother of human speech of the tradition. India is now seen as one of the fastest growing economies in the world. The attach of number of Indian companies organism listed at various telephone circuit ex transplants may it be NASDAQ, NYSE or LSE, the takeovers of companies like Corus by TATA or the exponential increment of Foreign Direct Investment in the verdant does indicate that India is now the destination where all(prenominal)one wants to be a part of it. The potent frugal offset, techno logical advancements, inflows of foreign exchange and the ever- change magnitude take of al close to every nation to be a part of this harvesting embraces the requirement of a common language in fiscal statements. (Purvis, gernon, and Diamond 1991).Various studies through by researchers have reason out that principle establish standards argon rectify enforced than rule based and this be baffles one of the fences why harmonisation is decorous more(prenominal) than and more essential. As far as advantages and disadvantages in adhering a common method of write up rule in that location be still concerns at bottom a country leave apart the exsert of foreign crossing (Ray Ball, 2006). provided time get prohibited tell whether this product really advert the bearing or it was just a decision made in haste to be a part of so called IFRS brand name calling countries.IFAC con discrepancyism ProgrammeIFAC was founded in 1977 with new-fashioned York as its Headquarters. Its initial occasion was the growing and enhancement of a coordinated worldwide account statement barter with harmonised standards(brennan,1979). Presently it is a global organisation for the accountancy handicraft and as at 10th August 2009 IFAC has 158 particles from 122 countries representing 2.5 million accountants. Its formal delegation is verbalize as beingTo serve the existence interest,IFAC testamenting bear to strengthen the worldwide accountancy profession and contribute to the discipline of impregnable inter matter economies by establishing and promoting adherence to gamy quality professional standards ,furthering the inter national converging of much(prenominal) standards and speaking out on public interest issues where the professions expertise is most relevant.To carry out this foreign mission ,we work closely with our member bodies and regional accountancy organisations and obtain the gossip of regulators, standard- get alongters, governments and others who sh be our commitment to creating a sound global fiscal architecture(IFAC,2006).IFAC does non set International Financial Reporting Standards (IFRSs) ar non set by IFAC rather these argon set by International Accounting Standards pos ting (IASB) . The IFAC Board formed the Member Body shape Program to ensure that all the members adhere to the standards set by IFAC for its membership. The aboriginal objective of which was to encourage members and strive for improvement in this ara of compliance.The IFAC submission governmental platform is overseen by the Compliance Advisory Panel. The primary objective of Compliance Advisory panel is to hazard sure that the IFAC compliance program is aright implemented as sanitary as properly operated by the staff members of IFAC.Statements of Membership ObligationsThe IFAC Board through its Statement of Membership Obligations (SMOs) issue guidelines for the members to countenance in murder of International standards which atomic number 18 issued by IFAC and International Accounting Standard Board (IASB). The motto of SMOs is to provide pre-requisites for quality assurance and to check whatsoever disciplinary put throughs against any members.All the IFAC members also have to go into in a program which is in three parts. The main purpose of this programme is that it seeks to sympathise whether and how the SMO requirements atomic number 18 being fulfilled.The selective intimacy from this program helps the compliance delegation to evaluate whether the members have circumspectly adhered to all the SMO requirements. These responses by the Members are taken on a periodical root. Any changes in legal and regulatory environment or any other reading made by any member is to be informed to this committee. This info is also updated in a questionnaire which is available online, by allthe members and if there are any changesthan the members are supposed to informthe compliance committee which publishes these updated responses on IFAC website. cancel 1 of this questionnaire is Assessment of the Regulatory and Standard-Setting Framework.This Questionnaire provides informationfrom its members about their regulatory and standard-setting framewor k in their jurisdiction.Part 2 is SMO Self Assessment which requires members to fillup a self legal opinion questionnaire which indicates how the members have in in incorporatedd orimplementedinternational standards which are issued by IFAC and the IASB. This questionnaire also helps the committee to know whether all the members have adhered to professional standards set by the governing bodies.Part 3, of the questionnaire is about Action Plans. This questionnaire requires that members to to develop action plans, including identifying tools, resources, and regulatory changes to address areas identified through the Part 2 self-assessment. Part 1, Part 2 and Part 3 questionnaires are accessible to public at large.Literature Re viewHarmonization, standardization, and uniformity are all wrong used in the literature and in previous research (Iordanis N.Floropulos, 2006). fit to Van derTas (1988) Materially measurable harmonization is an increase in the pointedness of comparability an d heart that more companies in the same circumstances are applying the same accounting method to an event or giving additive information in such a way that the financial reports of more companies can be made comparable. Harmonisation can be still as a procedure by which the gap mingled with contrastive accounting gives are reduced (Doupnik,1987).Sir David Tweedie, running of International Accounting Standards Board said If they all use the same methods and the accounting for one act is the same in Sydney, as in Seattle, as in Strasburg, and in Sheffield , then they ordain know where they are, and there is a demand for that fount of certainty.(FEI 2001).Mark T.Bradshaw and Gregory S.Miller(2007) also reiterated the same and argued that the evidences are in spare of a unmarried set of Accounting Standards which leave increase the comparability of accounting information across the countries that differ economically, politically ,and culturally.Emphasising the need for a common set of accounting standards IASB, position three broad objectivesa) forward motion Improvement in existing standards,b)Convergence Reducing the gap between several(predicate) accounting standards conserveed in different geographical regions,c)Leadership Addressing issues non resolved and evolution new standards( Geoffrey Whittington,2005)The principles behind the bridal of International Accounting Standards by different countries have always been the subject of controversy in accounting literature (D.Zeghal, K.Mhedhbi, 2006).Indias decision to converge to IFRS is perceived by many researchers as premature decision. Although harmonisation of accounting standards non scarce enhances the quality of financial account, increases the comparability of financial statements but without considering of country particular environment factors the logic/reasons for such convergence volition be forfeited. Talaga and Ndubizu (1986) insisted that a countrys accounting principl es must be adapted to its local anaesthetic anaesthetic environmental conditions. In fact, Perera(1989a) went much ahead and stated that the accounting information findd according to essential countries is not relevant to the decision models of less certain countries.Case studies by different researchers with respect to evolution countries have not r all(prenominal)ed any consensus whether the convergence or so called follow the Bandwagon approach for IFRSs impart have or is having any confirmative put up on economic growth. It is so far to be seen that whether India go out adopt IFRS or will converge its accounting standards to IFRS. Larson (1993) studied the economic growth effect of African countries with and without these standards. His results show a positive correlation in economic growth rate with adoption of IFRSs when adapted with countrys local condition.But Woolley (1998) researched the effect of such convergence or adoption of IFRSs in Asian countries and he concluded that there are no significant differences in the economic growth judge. This again emphasises the fact that researchers have distinct opinion on whether IFRS adoption results in disclose economic growth or does not have any significant role. Researchers like Wolk, Francis ,and Tearney (1989) argued that ,harmonisation of accounting standards is beneficial for develop countries because it provides them with break dance-prepared standards as well the best quality accounting framework and principles. Chamisa (2000) studied the usefulness of IAS for developing countries. In his case study of Zimbabwe, he argued that these standards do have a positive impact on the emerging financial markets in the developing countries.Economic conditions are a major determinant in the development of a countrys accounting system D Zeghal, K Mhedhbi (2006). No doubt with the present economic growth in Indiawhich is presuming better than in any other developing nation, IFRS will definitely r ising this growth. India, by adopting IFRS gives a platform for itself where the financials can be compared easily with the peers across the globe.According to Alhashim and Arpan (1992), who argued that environmental forces influencing accounting are economic forces, social forces, the legal system, culture, and the political system.Though the legal social organization or political system or culture might have an impact of financial reporting but there are other factors which have great impact than these. One of these can be the education standards of the professionals in a country. As IFRS are more principle based so practically of prudence will be required from the professionals .Cooke and Wallace (1990) added to these and argued that factors such as size of business, education take aim, history of country, level of wealth, their development of financial markets may have influence on accounting standards. Accounting standards are governed by political economy and politics( Watts,1977 Watts and Zimmerman,1986) so convergence has more or less enhanced integ dimensionn of markets and politics across the borders (Ball,1995).D Zeghal, K Mhedhbi (2006) gave five hypotheses on the stand of these environmental forces. In his first Hypothesis he argues that if the country economic growth increases then the chances of adoption of the International Accounting Standards increases. This possibleness correlates with the present status of a country like India which is exponentially growing. To maintain this growth rate it needs to be in line with global standards which will increase it legitimacy. As a result of which the foreign investments will increase.In the second assumption he argues that the probability of adoption of IFRS increases with the increase in education level. This simply means that there is a positive relationship between educational level and the competence of the professional accountants. This hypothesis indicates that in countries where the educational level is low and expertise is weak, there is a real barrier to the adoption of IAS.This infers that if a country wants to adopt IFRS then it needs to strengthen its educational level. This raises few concerns if test this hypothesis with the underway home in India where there is scarcity of experts who have good knowledge of IFRS.In his third Hypothesis which states that if a developing country has high degree of external economic openness it will be more inclined to adopt IAS. India being one of the fastest growing nations with increasing foreign investments is an ideal case for adoption of IFRSs as per this hypothesis. Sir David Tweedier, IASB Chairman restating uniformity of accounting standards argued As the worlds uppercase markets integrate, the logic of a integrity set of accounting standard is evident. A single set of international standards will enhance comparability of financial information and should make the allocation of capital across the borders more e fficient. The development and acceptance of international standards should also reduce compliance comprises for corporations and improve harmony in audit quality.Abdelsalam and Weetman (2003) argued that a factor like familiarity and language seems to favour countries which are Anglo-American because of obvious reasons. One being Anglo-American predominantly had a great influence in the formulation and development of IASB and the other being, English being language of communication. Chamisa (2000) found that he anticipates that the developing countries which have Anglo-American culture will find it easier to adopt IFRS. This be haps the Fourth Hypothesis.In his Fifth and final hypothesis D Zeghal and and K Mhedbi states that developing countries which have capital markets are most likely to adopt/converge to IFRS. This hypothesis emphasises the need and why India as a country should adopt IFRS. With the present scenario where all capital markets are hitting new lows, Indian marke ts are performing far better than any other markets across the globe. But one should always In a modern report by world bank, it has been reported that Asian countries are recovering from the present financial crises.Research done by Adhikari and Tondkar (1992) showed the similar results, that adoption of a particular accounting system is accomplished by the existence of capital market. Adhikari Tondkar (1992) limitedally argued that countrys level of economic growth has a positive effect on the development of accounting system and practices.L.L.Rodrigues, R.Craig(2007) in their research by using Hegelian dialectic pattern of thesis, antithesis and synthesis gaveinnovative approaches for convergence oflocal accounting standards with IFRSs. They went on to and argued that in modern society, the global harmonization of accounting standards might be regarded as uncontroversial, unremarkable, and inevitable. Hegel in his theory of dialectic laid a judgment which states that contra diction is regarded as the root of all change (hegal, 1969). He argued that change is inevitable and brings in a new bodily social structure or a concept( a thesis) which always have contradictions, which is always mated to what stated (antithesis) but which brings in something new which is in-between both the concepts(synthesis).Referring to this concept L.L.Rodrigues, R.Craig argued that A thesis to be a support for globalization of accounting and Antithesis can be said to be conflict area that means opposing globalization of accounting. As a consequence of thesis and antithesis other view is generated this is referred as synthesis. They outlined few devices which arose due to thesis and antithesis.In one of the proposals they argued that all the companies should follow their national accounting standards and prepare their financial statements accordingly. At the same time these companies should also enclose few annexure in the form of reconciliation with the International ac counting standards (hoarau, 1995). In their second proposal they argued that countries should seek regional harmonization of accounting standards (European Union or ASEAN countries).Analysing the regional paradigm of harmonisation of accounting standards, Saudagaran and Diga (1997, p.2,16-7) claims that in 1997 European Union support the idea of regional harmonisation and also in the year 1992-1993 AFA move regionalharmonization as a policy objective. Referring to The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) which is an an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing,governance, ethics andsharia standards for Islamic financial institutions and the industry. These standards are either mandatory or used as guidelines by the regulators in.the land of Bahrain, Dubai International financial centre ,Jordan, Lebanon, Qatar, Sudan and Syria (http//www.aaoifi.com/overview.html). These arguments are in favour of double standards. alike many countries have adopted IFRS but not for all companies rather they have two tier system. One for big corporate houses and the other for small and medium-sized entities (SMEs). Because it is the cost factor which is bothering these smaller entities. But this view is not supported by the big international accounting firms, who prudence that a two standard system, where some companies continue to use national GAAP ,may be difficult to maintain in the long run.and governments and national setters should develop formal convergence plans to eliminate these dual standards(Larson and Street ,2004,p.113). L.L. Rodrigues and R.Craig also argued that companies might think full adoption of IFRS but practically it will more like to have ostensible compliance that is in the form of window dressing to appease capital markets or other users of financial information.Chand (2005) throws a caution on Developing countries who are tempted to be a part of so ca lled IFRS compliance members without evaluation the cost and value involved in implementing IFRS. He also emphasises the need to improve the level of professional expertise in IFRS before adoption or convergence to IFRS. Similar caution was advised by Shyam Sunder (2009) in his definition IFRS and the Accounting Consensus stating Get aboard if you do not wish to be left behind on the platform cannot be a reason to converge or adopt IFRS. He argues that the standards should be developed not just as rules but rather it should be restricted to principles. second a single set of accounting standards should be applied to companies peculiarly those which are traded as it helps investors/stakeholders to compare them with their peers across the globe.Further he argues that there should be a body which must be consisting of professionals and experts which can act as a regulatory just as Securities Exchange fit out (SEC) does in United States. He emphasis the need of educating professiona l to a level that they can interpret IFRSs in a prudent manner. Financial Accounting Standard No. 157 (FASB 2006) which states that the companies can value their assets in any one of the three methods given in this standard. These methods are mark-to-market or mark-to-model or mark-to-judgement. The last method gives liberty to companies to value as they defy fit. Warren Buffet called this as mark-to-myth. Clarifications on such concept of medium valuation are needed as it gives an luck for accountants to debauch the users of the financial statements. He argues that the standard setters should minimize this need for judgement by properly responding to the queries/objections/suggestions raised by the professionals on these standards.Shyam Sunder (2009) also stated a practical reason as far implementation of IFRSs goes. He states any professional anywhere across the globe who has been bore to memorize the specifies of their own national accounting standards will find it quite an d ifficult to now thoroughly understand and cope up with the clauses of IFRSs. besides there is only one language in these internationally pleasurable accounting languages and that is English only. So those nations like China, Japan or record Italian or German would not find exact edition of these standards. And we are talking about a common language of Financial Reporting.One of the past presidents of The Institute of hired Accountants (ICAI) states people who invest foreign naturally want to be able to keep track of the financial health of the securities issuers. Convergence of accounting standards is the only means to achieve this. Only talking the same language one can understand each other across borders. N.C.Shil (2009) argues that though harmonisation will give an effect in the form of global community as a single entity. But there are major concerns when it comes to adoption of IFRSs in United States where US GAAP is still functional. And it is yet to be seen as how far th ey will converge or they will just adopt.Secondly, different countries have different legal, economic, social and cultural environments and it is very essential to learn these differences as they just cannot be written off just to make sure that we are in line with internationally acceptable reporting standards. Thirdly, they emphasised the need of implementation not just adoption. It is quite a tedious task to implement without adequateregulatory authority. IFRSs are principle based standards so again load of prudence will be required by the professionals who were implementing rules based accounting standards till date. other issue which is inevitable is the scarcity of skilled manpower in developing countries. China has reported a shortfall of 300,000 qualified accountants and is likely to require a further three million in times to come (N.C.Shil, 2009). More or less the same is the condition if we talk about India. At present with the current state of affairs The ROC Mumbai has over 150,000 registered companies out of which approximately 50 percent file their documents. Over 5,000 new companies are registered every year.ROC Mumbai has 4 staff who are employed to scrutinize these fillings, no(prenominal) of them of whom are contract Accountant or Company Secretaries.Analyse the situation of now if India without a proper infrastructure (skilled manpower) adopt or converge to IFRS.The concern at this hour is whether the adoption is merely as a label or there is a serious commitment to it. If the IFRSs are adopted with such anintension then this will lead to increase intransparency , substantiallydecrease information asymmetry, scruple and estimation risk, and as a will result inlower cost of capital and higher market liquidity(Leuz and Verrecchia, 2000 fifty et al., 2007a). This hypothesis was analysed by H.Daske,L.Hail,C.Leuz and R.Verdi (2007) who examined IFRS adoption by 24 countries between 1988 to 2004and concluded that these the firms show a subst antial decrease in cost of capital and exhibit higher market liquidity after converting themselves from their Local GAAP to IFRS.The problem faced even by European countries was the lack of pellucidness at the time of first-time adoption of IFRS. This issue still persists and there are still no clarifications on transactions of specific nature such as pension and other post-retirement benefits (R.K.Larson, D.L.Street 2004).The focus tends to be on what the rules say, not on how they are implemented in practice(Ray Ball, 2006). In practice this has been a major concern even in Europe where implementation is still a major concern. Developing countries like India need to understand that mere restructuring or reorganisation of the standard setting body would not resolve this crisis. But including politics agencies on their board will get across this tedious task of implementation (Peter Carlson,1997).The harmonisation of such standards is regarded to be uncomplete practical nor trul y valuable (Goeltz, 1991, p.85) possibly because investors may have developed adequate coping mechanism so that their financial decisions are not impeded(Choi and Levich,1991,p.2)Because different users require different information it is difficult to take their financial reporting needs with the constraints of a set of inter national accounting standards.A survey of 112 companies in India ,by Ernst Yong showed 67% of them welcomed the decision of convergence to IFRS. But majority of them were susceptible with the deadline set by the Institute of Chartered Accountants of India and the reasons stated were quite obvious. One being the cost, whether it up gradation of IT software product or cost of skilled manpower. The other reason was the jugglery in the statutory laws. The Tax laws, Companies Act 1956and all other statutory laws are yet to be modified and in a manner that they are in line with the IFRS regulations. Taking a clue from the nations who have already transited to IFRS India as a country needs to analyse the cost benefit ratio before implementing these IFRS regulations.UK companies recorded an average of 625,000 for IFRS conversion training in 2005.Also Securities Exchange commission has reported that average US corporation will spend nearly $ 32 million in IFRS adoption cost.Also there is a mixed feeling of whether India will follow full IFRS regulations or will opt for modified country specific version like in European Union ,Singapore, Japan or Australia.Ray Ball(2006) on International Financial reporting Standards Pros and Cons argued that without any doubts the high quality standards have now beenadopted by more than blow countries is in itself commendable. On the other side he predicts the problems with the fascination of IASB and FASB with fair value accounting. When market prices are available, for any assets, then the opportunity of manipulation by managers decreases. However there is a flaw that the managers can still manipulate by usi ng mark-to-model accounting. This particular clause in IFRS increases gives an opening to managers to fabricate the valuations as per their discretion. However , IASB and FASB are determined to go move ahead with fair value accounting and FASB member L.Todd Johnson commentedThe Board has required greater use of fair value measurements in financial statements because it perceives that information as more relevant to investors and creditors than historical cost information. much(prenominal) a measures better facilitate assessing their past performance and future prospects. In that regard, the Board does not accept the view that reliability should outweigh relevancy for financial statement measuresBall, Robin and Wu(2003) investigated the relationship between accounting standards and the structure of other institutions on the attributes of financial reporting system. The study was based on four Asian countries namely Hong Kong, Singapore, Malaysia and Thailand.They argued that these c ountries have a greater influence towards International Accounting Standards which as a result should produce high quality financial reporting. But the institutional structures that provide incentives to issue low quality reports (Robert W. Holthausen, 2003). Hence Ball, Robin and Wu predicted that outcome of such structure will have a negative impact of financial reporting.Researchers are also of the view that the manner in which the European Union is formed, in the same manner Asian Countries can come together and come to a common consensus which allows free mobility of capital, Labour and enterprises across the national borders of its member countries.( Peter Carlson, 1997).InidaHistory and OverviewIndia is a Sovereign, Secular, Democratic Republic country. It has a Government or rather Parliamentary system of Government. The President is the entire head .In the states it is the Governor who acts as a representative of the president. There are 28 states and 7 Union territories. Each and every part of the country has a different and unique demography, history and culture, dress, festivals, languages etc. India is seventh-largest country by its geographical area, second most populous country and the most populous commonwealth in the world.In India, responsibility of maintaining high standards in accounting, auditing and good standards are bestowed on the Institute of Chartered Accountants of India (ICAI). The Institute was established in 1949 under an act of Parliament. The headquarters of this accounting body is in spic-and-span Delhi. The Institute also has five regional offices situated in Mumbai, Chennai, Kanpur, Kolkata, and New Delhi, along with these regional offices the Institute has 117 branches across the country. The Institute has also 19 chapters outside India and an office in Dubai. Presently the Institute has enrolled 350,000 students and 140,000 members. The Institute of Chartered Accountants of India is presently the Second largest account ing Body in the world.The Institute has maintain high standards of applicability of Accounting and Ethical standards in India. Except the recent saga of Satyam Computers no major incidence of this stature had ever been reported from India. pertinency of IFRS in IndiaUnder the new system the following companies or entities will have to comply with the IFRS requirementsa)Companies which are listed in any of the recognised stocktaking exchanges.b)Banks, Insurance companies and Financial Institutionsc)Companies which in the preceding year had a disturbance or more than Rs 1 billion.d)Companies which in the preceding year had borrowings in excess of Rs 250 million.e)Holding or subsidiary of any of the above companiesAt present IFRS is not applicable to SMEs.Differences between the prsent regime under local GAAP and IFRSThere are issues which really putting doubts in the opinion of professionals or the users of financial statement which needs immediate attention. Following are few of them1)As per the companies act 1956, there are specified rates for dispraise to be charged to assets by every company. The clause states that every company must charge a marginal rate of depreciation to each and every asset held. IFRS does not recognise this concept of minimum depreciation.2)In India, every amalgamation must be ratified by the High Court. There is no such obligation in IFRS regulation.3)Clause 41 of the listing agreement clearly states that there should be a separate presentation ofextraordinary items in the financial reporting of the listed companies whereas IFRS prohibits such presentation of extra-ordinary items.4)IFRS conversion will have a count on impact on the reporting of Indian Banks. The transition to IFRS will put on reported net-worth, capital adequacy and available capital for all Indian Banks.Report on IFRS convergence Challenges and Implementation Approaches for Banks in India argues that there will be a significant impact on the Banking industry in India particularly in the reporting of Financial Instruments, Derivatives and provisions to be made in case of loss on loans and advances. The Financial parameters such as Capital Adequacy Ratio (CAR) and valuation metrics on the basis of which the analysis is done, predictions on future aspects of the company are made will change drastically once IFRS is implemented.