Indian Accounting Standards: Barriers and History

Indian story trites Barriers and HistoryIntroductionIn the division 2005, European essence do it mandatory for both the companies which were listed dumbfound to comply with International fiscal Reporting Standards (IFRS) requirements when presenting their pecuniary statements. This marked the beginning when International Accounting sample Board (ISAB) was professed as legitimate. Ever since then IFRS has spread swiftly across the world. Initially in that respect were few hindrances alike by the end of year 2004 full text of endorsed IFRS was not even available in several EU languages. This research examines the evolution and obstacles to touchnce of Indian Accounting Standards to IFRS starting inaugural April 2011 when all the listed companies in India, volition be required to present their financial statements in accordance with IFRS regulations. This research besides highlights the deal for the bucolic like India, to converge their Local GAAP to IFRS.American Wri ter Mark Twain once commented onIndia and saidthe cradle of the human race ,the birthplace of human vernacular ,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 increase of function of Indian companies being listed at various stock commutations may it be NASDAQ, NYSE or LSE, the takeovers of companies like Corus by TATA or the exponential increment of unusual Direct Investment in the country does indicate that India is now the destination where everyone wants to be a part of it. The strong scotch harvest-time, technological advancements, inflows of foreign exchange and the ever-increasing interest of almost every nation to be a part of this yield embraces the requirement of a common language in financial statements. (Purvis, gernon, and baseball diamond 1991).Various studies done by researchers have concluded that principle based standards ar better enforced than rule based and this becomes one of the reasons why harmonization is becoming to a greater extent and more essential. As far as advantages and disadvantages in adhering a common report rule there are still concerns at heart a country leave apart the issue of internationalist convergence (Ray Ball, 2006). Only time depart tell whether this convergence really dish up the end or it was just a decision made in haste to be a part of so called IFRS brand names countries.IFAC Compliance course of instructionIFAC was founded in 1977 with New York as its Headquarters. Its initial purpose was the phylogeny and enhancement of a coordinated worldwide accounting profession with harmonised standards(brennan,1979). Presently it is a global organisation for the accountancy profession and as at 10th August 2009 IFAC has 158 components from 122 countries representing 2.5 million accountants. Its variety showal mission is stated as beingTo serve the public interest,I FAC volition continue to strengthen the worldwide accountancy profession and contri exactlye to the drivement of strong international economies by establishing and promoting adherence to high property professional standards ,furthering the international convergence of such(prenominal) standards and speaking erupt on public interest issues where the professions expertise is most relevant.To carry out this mission ,we work closely with our member bodies and regional accountancy organisations and obtain the input of regulators, standard-setters, governments and others who share our commitment to creating a sound global financial computer architecture(IFAC,2006).IFAC does not set International Financial Reporting Standards (IFRSs) are not set by IFAC rather these are set by International Accounting Standards Board (IASB) . The IFAC Board formed the Member Body Compliance Program to en confident(predicate) that all the members adhere to the standards set by IFAC for its membership. T he primary objective of which was to throw out members and strive for improvement in this eye socket of compliance.The IFAC Compliance program is overseen by the Compliance Advisory Panel. The primary objective of Compliance Advisory panel is to lay down sure that the IFAC compliance program is properly implemented as well as properly operated by the staff members of IFAC. relations of Membership ObligationsThe IFAC Board through its Statement of Membership Obligations (SMOs) issue guidelines for the members to assist in implementation of International standards which are issued by IFAC and International Accounting Standard Board (IASB). The motto of SMOs is to provide pre-requisites for character reference assurance and to investigate either disciplinary actions against any members.All the IFAC members besides have to participate in a program which is in three parts. The important purpose of this programme is that it seeks to understand whether and how the SMO requirements ar e being fulfilled.The randomness from this program helps the compliance committee to evaluate whether the members have prudently adhered to all the SMO requirements. These responses by the Members are taken on a periodical basis. Any changes in legal and regulatory environment or any other development made by any member is to be informed to this committee. This information 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.Part 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 fabric in their jurisdiction.Part 2 is SMO Self Assessment which requires members to fillup a self assessment questionnaire which indicates how the members have incorporated orimplementedinternation al 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 reach 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 social to public at large.Literature ReviewHarmonization, standardization, and uniformity are all terms used in the literature and in previous research (Iordanis N.Floropulos, 2006). consort to Van derTas (1988) Materially measurable harmonization is an increase in the degree of comparability and means that more companies in the kindred circumstances are applying the same accounting method to an event or giving additional information in such a way that the financial reports of more companies can be ma de comparable. Harmonisation can be understood as a procedure by which the gap among antithetic accounting institutionalizes are fall downd (Doupnik,1987).Sir David Tweedie, Chairman of International Accounting Standards Board said If they all use the same methods and the accounting for one transaction is the same in Sydney, as in Seattle, as in Strasburg, and in Sheffield , then they will know where they are, and there is a demand for that type of certainty.(FEI 2001).Mark T.Bradshaw and Gregory S.Miller(2007) also reiterated the same and argued that the evidences are in favour of a single(a) set of Accounting Standards which will increase the comparability of accounting information across the countries that differ economically, governmentally ,and culturally.Emphasising the need for a common set of accounting standards IASB, laid three broad objectivesa)Improvement Improvement in existing standards,b)Convergence Reducing the gap amongst diametrical accounting standards followed in different geographical regions,c)Leadership Addressing issues not resolved and ontogenesis vernal standards( Geoffrey Whittington,2005)The principles behind the bankers acceptance of International Accounting Standards by different countries have of all time 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 not scarce enhances the quality of financial reporting, increases the comparability of financial statements but without considering of country specific environment factors the logic/reasons for such convergence will be forfeited. Talaga and Ndubizu (1986) insisted that a countrys accounting principles must be adapted to its local environmental narrows. In fact, Perera(1989a) went much onwards and stated that the accounting information produced according to developed countries is not relevan t to the decision models of less(prenominal) developed countries.Case studies by different researchers with respect to developing countries have not reached any consensus whether the convergence or so called follow the Bandwagon approach for IFRSs will have or is having any positive take on economic growth. It is yet to be seen that whether India will 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 narrow down.But Woolley (1998) researched the effect of such convergence or adoption of IFRSs in Asian countries and he concluded that there are no epoch-making differences in the economic growth rates. This again emphasises the fact that researchers have distinct opinion on whether IFRS adoption results in better economic growth or does not have any s ignificant role. Researchers like Wolk, Francis ,and Tearney (1989) argued that ,harmonisation of accounting standards is beneficial for developing countries because it provides them with better-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 electrical shock 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 throw out 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 inf luencing accounting are economic forces, social forces, the legal system, culture, and the political system.Though the legal structure or political system or culture might have an impact of financial reporting but there are other factors which have greater impact than these. One of these can be the education standards of the professionals in a country. As IFRS are more principle based so lots 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 level, history of country, level of wealth, their development of financial markets may have influence on accounting standards. Accounting standards are governed by economics and politics( Watts,1977 Watts and Zimmerman,1986) so convergence has more or less enhanced integration of markets and politics across the borders (Ball,1995).D Zeghal, K Mhedhbi (2006) gave five hypotheses on the basis of these environmental forces. In his first Hypothesi s he argues that if the country economic growth increases then the chances of adoption of the International Accounting Standards increases. This hypothesis 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 hypothesis 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 current stead i n 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 smashing markets integrate, the logic of a single 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 efficient. The development and acceptance of international standards should also reduce compliance costs for corporations and improve consistency in audit quality.Abdelsalam and Weetman (2003) argued that a factor like familiarity and language seems to favour countries which a re Anglo-American because of unadorned reasons. One being Anglo-American predominantly had a greater 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 becomes 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 markets are performing far better than any other markets across the globe. But one should always In a recent 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 s imilar results, that adoption of a particular accounting system is effected by the existence of capital market. Adhikari Tondkar (1992) specifically 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 invention 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 needed. Hegel in his theory of dialectic laid a concept which states that contradiction is regarded as the root of all change (hegal, 1969). He argued that change is inevitable and brings in a new structure or a concept( a thesis) which always have contradictions, which is always opposite to what stated (antithesis) but which brings in something new which is i ntermediate 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 another view is generated this is referred as synthesis. They outlined few proposals 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 accounting 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 supported the idea of regional harmonisation and also in the year 1992-1993 AFA pursued regionalharmonization as a policy objective. Referring to The Accounting and Auditing Organization for Moslem 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 kingdom of Bahrain, Dubai International financial centre ,Jordan, Lebanon, Qatar, Sudan and Syria (http//www.aaoifi.com/overview.html). These arguments are in favour of dual standards.Also many countries have adopted IFRS but not for all companies rather they have two tier system. One for colossal corporate houses and the other for small and medium-sized entities (SMEs). Because it is the cost factor which is bothering these smaller ent ities. But this view is not supported by the big international accounting firms, who safeguard 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 safeguard on Developing countries who are tempted to be a part of so called IFRS compliance members without e military rank the cost and benefit involved in implementing IFRS. He also emphasises the need to improve the level of professional expertise in IFRS in front adoption or convergence to IFRS. Similar caution was advised by Shyam smash (2009) in his commentary 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. secondly a single set of accounting standards should be applied to companies especially 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 Commission (SEC) does in joined States. He emphasis the need of educating professional 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 emancipation to companies to value as they deem fit. Warren Buffet called this as mark-to-myth. Clarifications on such concept of fair valuation are needed as it gives an opportunity for accountants to mislead 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 drill to memorize the specifies of their own national accounting standards will find it quite difficult to now thoroughly understand and cope up with the clauses of IFRSs. Also there is only one language in these internationally acceptable accounting languages and that is English only. So those nations like China, Japan or say Italian or German would not f ind exact version of these standards. And we are talking about a common language of Financial Reporting.One of the past presidents of The lend of Chartered Accountants (ICAI) states people who invest overseas 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 they will converge or they will just adopt.Secondly, different countries have different legal, economic, social and cultural environments and it is very essential to analyse these differences as they just cannot be written off just to make sure that we are in line with inter nationally acceptable reporting standards. Thirdly, they emphasised the need of implementation not just adoption. It is quite a tedious undertaking 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.Another 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, none of them of whom are Chartered Accountant o r 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 untaintedly as a check off 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, uncertainty and estimation risk, and as a will result inlower cost of capital and higher market liquidity(Leuz and Verrecchia, 2000 Lambert 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 substantial 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 clarity at the time of first-time adoption of IFRS. This issue still persists and there are still no clarifications on transactions of specific temperament 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 Government agencies on their board will overcome this tedious line of work of implementation (Peter Carlson,1997).The harmonisation of such standards is regarded to be neither practical nor truly 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 sat isfy 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 instal of Chartered Accountants of India and the reasons stated were quite obvious. One being the cost, whether it up gradation of IT software 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 wi ll spend well-nigh $ 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 100 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 disgrace that the managers can still manipulate by using 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 a judgement 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. Such 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 relevance 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 countries 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). Henc e Ball, Robin and Wu predicted that progeny 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 constitutional 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 democracy in the w orld.In India, responsibility of maintaining high standards in accounting, auditing and ethical standards are bestowed on the add 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 New 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 accounting Body in the world.The Institute has maintained 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.pertinence 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 stock exchanges.b)Banks, amends companies and Financial Institutionsc)Companies which in the preceding year had a turnover or more than Rs 1 billion.d)Companies which in the preceding year had borrowings in excess of Rs 250 million.e) belongings 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 mind 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 depreciation to be charged to assets by every company. The clause states that every company must charge a minimal rate of depreciation to each and every asset held. IFRS does not recognise this concept of minimum deprec iation.2)In India, every amalgamation must be approved 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 direct impact on the reporting of Indian Banks. The transition to IFRS will affect 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 futur e aspects of the company are made will change drastically once IFRS is implemented.