IFRS in India
India is trying to converge with the IFRS standard like many other developing countries while ensuring minimal modifications in the domestic reporting standards used for financial reporting. In wake of this, ICAI, the Accounting Standards setting body in India, has identified the immediate requirement of convergence with IFRS to achieve global financial reporting sustainability. However, the ICAI has not adopted the IFRS standards but integrated them with the current accounting standards in India to the best extent possible, leading to the formation of new Indian Accounting Standards alias Ind AS. The substantial convergence of Ind AS with IFRS takes into effect the explanation of any major difference (if any) between the two accounting standards. This ensures sustainability in financial reporting of the companies while disclosing appropriately the variations that are important for the stakeholders.
All the publicly listed companies are required to follow the SEBI guidelines of preparing the financial reports in India. SEBI has given a free hand to the companies of using even IFRS standards for reporting as they are in conformity with the IASB guidelines. This helped the internationally listed companies to prepare an only single report following IFRS. However, ICAI has not adopted the IFRS but has integrated with the accounting standards to form Ind AS. It has in accordance revised the Companies Act that requires all the companies (public and large) to conform to the Ind AS accounting standards for reporting purpose. The authority has not allowed SEBI to approve IFRS-based financial reports – consequently, all the publicly listed companies are mandatorily required to prepare financial reports in compliance with Ind AS. The companies may also prepare financial reports using IFRS but for India, the report necessarily has to follow Ind AS. The rule exempts compulsion for SMEs, banking sector and insurance and non- banking financial companies.
Many companies domiciled in India have their Global Directory Receipts across the globe. Over 350 organisations are reported to have GDRs only in European nations. The companies belong to varying sectors like banking, retailing, steel, telecom, etc. However, not all have adopted IFRS. EU has mandated the companies to apply IFRS. The shift to IFRS sooner will benefit the Indian economy by and large. The MCA has notified the adoption of Ind AS effectively from April 1, 2015. It has proposed a shift to IFRS based Ind AS in phases based on the net worth of the companies.
The transition will result in an initial disturbance in the real value of the companies. Currently, only the companies with international presence follow international standards for reporting. The usefulness of such shift in sustainable reporting should be taken into account. The change is not merely a shift in the accounting technique but it tries to achieve a broader objective of sustainable reporting. The companies are required to report both stand-alone and consolidated reports using Ind AS. There is no option to use IFRS for reporting now. If there is conflict, the law per the ICAI prevails. This enforcement is to ensure sustainable financial reporting to be achieved in India for publicly listed companies.
Current or Potential Use of Accounting Standards for Sustainable Reporting in India
Currently, the laws and regulations of the accounting standard in India delimit the usefulness of sustainable reporting. While adopting IFRS would potentially lead to sustainable reporting by meeting the global standards, the costs would be high to implement the change. The IFRS adoption as is would not only require changes in the accounting standards of India but also a change in the related law, rules and regulations. The shift to Ind AS is in phases. The phase-wise roadmap to implement IFRS is progressing slowly. The figure 1 shows that by April 1, 2018, Ind AS should be effectively rolled out and applicable to all the listed companies in India. This implies that by 2018, all the listed companies in India would meet the sustainable financial reporting norms per Ind AS. At least at the national level, sustainability of reports will be achieved in terms of financial performance.
The SMEs are exempted from adopting the Ind AS as per the roadmap. However, their contribution to the GDP is high and therefore, MCA should re-consider their inclusion in the adoption of Ind AS down the line. Besides, the banking and non- banking financial sector are exempted to apply Ind AS either voluntarily or mandatorily unless they have a subsidiary or joint venture with a company that is listed and meets the criteria per the roadmap. This sector is influential and investment option for many stakeholders. Therefore, it is important that this sector should as well be included in the purview of Ind AS application. The authority should take into consideration the failure of non- banking financial companies like Lehman Brothers that has led to a global economic breakdown in 2008. This was due to lack of sustainable reporting and corporate governance per the bankruptcy reports. Thus, while ICAI prescribes Ind AS for the publicly listed companies with an objective of sustainable, uniform, cost- effective and verifiable reporting, it should also prescribe norms that ensure sustainability of banking, insurance and non- banking financial companies in India. Only then the sustainability objective of financial reporting can be achieved holistically.
The Ind AS has been able to address many ambiguities and confusions in the earlier standards. It has addressed the two most important standards of revenue recognition and that of financial instruments and notified their strict application effectively from April 1, 2015.This makes India globally, one of the first movers in adopting the accounting standards for these two aspects. Other countries intend to follow suit from 2017. These two standards significantly impact business and catalyse organisational changes. This further influences the double-bottom line of the financial reports. With the adoption of these standards, Indian accounting standards have taken a step ahead in conforming to the international standards of revenue recognition and financial instruments. This will also increase the sustainability of the financial reports.
Having a unanimously chosen accounting standard is very important to provide a common base for decision making. It is useful for both the internal and external stakeholders. In the absence of a unified accounting standard, the choice of accounting standard and presentation of financial information is at the discretion of the management. It is important that the controlling authorities take care that there is no ambiguity or variations present in the adoption of accounting standard within a given economy. By doing so, if not globally, sustainability of financial reports is at least attainable at the national level.
India had its own GAAP for financial reporting which was a rule- based approach. But, there was biases, ambiguities and confusion in presenting certain financial information. Besides, the lack of sustainability in financial reporting has lowered the attraction of India as an investment centre. In such cases, the ICAI saw the immediate adoption of sustainable reporting framework to be the solution. Therefore Ind AS was notified covering 35 accounting standards. This is derived from the IFRS and follows a principle- based approach in setting accounting standard.
In India, per the report by GIZ more than 80 companies belonging to the private and public sector have voluntarily opted for the sustainability reporting of CSR along with the financial reporting. The structure for CSR is derived from the GRI guidelines. Extending the financial reporting to also include CSR report strengthens the sustainability of the corporation. The companies adopting this holistic approach realise that including the sustainability report adds value to the company while mitigating the risks. Therefore, companies readily dedicate resources to comply with the CSR reporting. The importance of grading the firm’s performance on the basis of non- financial parameters has increasingly gained momentum in the country. The stakeholders are therefore interested to know both the financial and non- financial performance of the company.
In wake of this, more companies in India are opting to disclose their non-financial performance in their annual reports. There is an increase in the number of companies opting for sustainability reporting. In fact, sustainable reporting has become a key performance indicator of the company. Often the decision-making takes into account the social and environmental impacts of the organisations. Therefore, companies are working hard to enhance their non- financial performance too. This has benefitted both the society and the environment. Thus, if more firms in India opt for GRI compliance for CSR reporting, then with Ind AS being compulsory for financial reporting, the companies will become sustainable holistically.
Potentially, complete integration of IFRS in India will enhance the opportunities of partnering globally. As mentioned in the earlier section, IFRS along with CSR compliance per GRI guidelines will fully equip the financial reports’ sustainability. This will enable the sustainability of Indian firms at par with that of the other firms across different countries. It will lower the borrowing costs for the economy thereby. IFRS will make the reports more universal, transparent and sustainable than the Ind AS. It will enhance the objectivity of the reports. The investors are realising the importance of sustenance in reporting the failure cases of organisations are increasing. Thus, IFRS would better the disclosure norms, the scope of financial reports, refine processes by targeting sustainability and improve metrics used for evaluating the financial reports and the skills of the people to deploy their responsibilities appropriately.
The current and potential uses of IFRS are evident in the different theoretical studies as well as in practice. IFRS along with GRI will help in achieving holistic sustainability of financial reporting of the companies across the globe. This is possible if more nations actively adopt IFRS considering it to the universal financial language. However, this will take time and therefore, despite the universal language, there are many dialects that reduce the sustainability objective of adopting IFRS. Therefore, countries should compulsorily apply IFRS or at least move towards the IASB standard framework while taking into account its effectiveness in progressing towards sustainability.