Corporates struggle to adopt the new IFRS accounting system

Corporates in India are facing a Darwinian challenge. “It is not the strongest of the species that survives nor the most intelligent, but the most responsive to change,” said Charles Darwin. In what could be termed as the biggest change in Indian accounting history, the country will adopt the International Financial Reporting Standards (IFRS) in three phases (see box). All financial statements will have to be prepared as per IFRS norms, as the existing Indian Accounting Standards are phased out.

The Institute of Chartered Accountants of India (ICAI) is the nodal agency for IFRS adoption. “In India we are not ‘adopting’ IFRS,” said Amarjit Chopra, president, ICAI. “We are in the process of finalising accounting standards in convergence with IFRS and they are expected to be ready by June 2010.” The IFRS-converged system will be called the new Indian Accounting Standards.

IFRS is a globally recognised accounting procedure prepared by the International Accounting Standard Board and is followed in 115 countries, including the neighbouring Pakistan. India, South Korea, Canada and Japan will start using IFRS by April 2011. Experts said it would help avoid confusion over different treatment of accounts in different countries. It becomes important for India because several Indian companies are multinational. Already, a dozen companies are reporting under IFRS.

Indian firms took IFRS seriously only after the Prime Minister committed to it at a G20 meeting last year. But adopting a new accounting standard is not easy and throws a huge challenge at accounting professionals.
IFRS and Indian Accounting Standards differ on several points. “IFRS is a principle-based system,” said Sunder V. Iyer, partner, PricewaterhouseCoopers. “And Indian Accounting Standards is a rule-based system.” The IFRS system emphasises on the fair value system. For example, if a building was bought last year, the Indian practice was to show the buying price as its current value. But IFRS works with the current market value of the building.

The direct tax code, which may also come into practice in 2011, will have a great bearing on IFRS. “IFRS concentrates on balance sheet, while here in India we concentrate on profit and loss account,” said Aseem Chawla, partner, Amarchand & Mangaldas & Suresh A. Shroff & Co. “Profit and loss account helps in determining the income to be taxed.”

Chawla is right. If accounts are prepared in a manner which does not help ascertain taxable income, the job will be tougher for the taxmen and the companies, too. Experts say the Cen-tre needs to take note of IFRS while framing the direct tax code and the new goods and services tax norms.

Already, real estate companies have asked for more time. Under the present system, once a customer books a flat, realtors show it under revenue. Under IFRS, revenue is recognised only when ownership is transferred to the customer. “This will result in less revenue in some quarters,” said S. Baaskaran, CFO, Shobha Developers.

However, developers will be required to pay a tax on flats under construction, if an agreement of sale is signed. The value of the flat will be calculated based on the percentage of work completed, and tax will be charged accordingly. Santosh Rungta, president, Confederation of Real Estate Developers Association of India (CREDAI), said: “It is strange that developers will be paying tax on a property which is not yet complete and revenue will come in the books only when the ownership is transferred.” But ICAI is determined not to leave out any sector. Said Chopra: “Is it not fair to recognise revenue only when the property is sold?”

There are also internal issues which require attention. Companies will have to change their information technology set-up. Naturally, IT companies see another big opportunity. Companies like SAP and Oracle, which are already serving clients in the other parts of the world, will have an edge over Indian IT companies.

“For Indian companies to develop an effective system within less than two years, one of the best options would be to introduce a solution that has been fully validated overseas,” said Surya Bhardwaj, vice president (applications), Oracle India.

However, the biggest challenge, according to Chawla, will be human resource. “Right from accounting staff, to top level guys and even investors, all need to be trained on IFRS,” he said. But Chopra does not find it a big challenge. “We had started training people two years ago and there are around 1,800 accountants ready for IFRS adoption,” he said.

Accounting firms are also gearing up to cash in on the opportunity. KPMG has hired around 100 professionals in the last 18 months to serve IFRS needs. The firm has also started an online institute where about 3,000 members are getting training material on IFRS. PricewaterhouseCoopers is serving 150 to 200 companies, including six PSUs.

Indeed, all this involves shelling out money. “There will be an overall increase by 20 to 30 per cent in the expenses of every company,” said Iyer. Others said it will vary from client to client. “It depends on the present system of the company and the amount of change required to be done,” said N. Venkatram, IFRS country leader, Deloitte Haskins & Sells India.

Said Bhardwaj: “The IT cost will not be too much for existing customers. However, if a company wants to get a complete new system, the cost will be a little higher.” Khatri expects the cost to be Rs 1 crore to Rs 2 crore for large organisations which do not have exposure to other countries.

How prepared are the companies? According to a survey by Ernst and Young, 79 per cent of the companies figuring in the first phase are ready. The experts at ICAI believe that others will start working seriously once they close their current year books of accounts. Since PSUs form a major chunk in the first lot, most of them have started working on IFRS.

The ministry of corporate affairs has formed a core committee of all stake-holders to discuss the after-effects. The Central Board of Direct Taxes, the ICAI, IRDA and other agencies are part of that committee. Chopra agrees that there will be some hiccups initially. “As a nodal agency, we will not fail in our duty,” he said. Now it is up to the Centre to handle the hue and cry and last moment rush.