Credible financial statements

When the phased implementation of the International Financial Reporting Standards (IFRS) begins next year, the small and medium enterprises (SME) will be exempt. But large Indian companies will have to compulsorily prepare their financial statements in compliance with IFRS. By 2014, listed companies across all sectors including banking and non-banking financial services will have to cast their accounts as per the IFRS requirement.

The roadmap notified by the government states that the globally-accepted, and rigorous, accounting standards may be adopted by smaller businesses on an optional basis. Given the complexities and costs involved in implementing the new standard, the natural response of the SME sector would be to delay its adoption till it becomes compulsory.

Besides, there is no apparent incentive to adopt IFRS, especially when it involves huge expenditure in training people and overhauling the company's operational and information technology processes. That apart, there are concerns that new accounting standards would depress valuation of businesses.

Yet, that should not deter the SME sector from embracing an accounting standard that is globally accepted and is more rigorous than those followed now. In any case, the International Accounting Standards Board has prescribed a lighter version of IFRS for the SME sector, mostly companies that do not have capital market exposure but need to give users, such as lenders, of their financial statement a fair view of the company's short-term cash flows, liquidity and solvency.

Voluntary adoption of the new accounting standard would make financial statements of the SME sector comparable with those of similar entities elsewhere and more transparent. This would be particularly useful when partnerships are sought to be forged with entities overseas or when businesses need to raise funds.

The rigorous requirements of the IFRS, both the full and lighter version, would also serve to improve a company's credibility, and that could help them access funds at lower cost. Rather than wait for the government to take a view, small businesses with big ambitions should follow the larger companies in adopting the new accounting standard.