India will explore whether it could bridge the gaps between its Indian accounting standards (IndAS) and the International Financial Reporting Standards (IFRS) by removing some of the carve-outs introduced while adopting the global norms five years ago.
India began adopting IndAS gradually from 1 April 2016, replacing the earlier Generally Accepted Accounting Principles (GAAP). IndAS is mostly based on IFRS; however, given India’s legal framework and the practices followed in different sectors, some variations, called carve-outs, were introduced.
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Bridging these gaps by removing the carve-outs will make comparisons of Indian and non-resident companies easier.
“Retaining the carve-outs could give rise to a doubt in the minds of foreign investors whether the manner of preparing financial statements of Indian businesses are at par with those in countries that fully follow IFRS," a person informed about the development said. The move comes at a time India is seeking more foreign investments in manufacturing and infrastructure to steer the economy out of the devastating impact dealt by the pandemic. India is pursuing long-term capital from pension and sovereign wealth funds into infrastructure by offering tax incentives, given that banks are not in a position to offer long-term financing to projects with a long gestation period.
The implementation of IFRS is a work in progress, as banks and insurers are yet to adopt it.
Experts said some carve-outs may have outlived their utility and, hence, may be reviewed. These include the flexibility in IndAS not to re-classify a liability from non-current to current category in the balance sheet in the event of a loan covenant breach, the flexibility to show foreign currency convertible bonds as equity in certain circumstances, and measurement of the carrying value of property, plant and equipment acquired before FY16 as per the previous accounting regime, said Siddharth Talwar, partner, CFO services, Grant Thornton Bharat LLP.
“A further alignment will, on the one hand, enhance comparability and consistency in financial reporting, and on the other hand, may also require corporates to exercise more judgement and, hence, the resultant complexity and additional disclosures," Talwar said.
The full adoption of IFRS for financial statements would bring several additional benefits, especially for companies that look to list overseas, as well as global mergers and acquisitions, said Madhu Sudan Kankani, partner at Deloitte India.
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“It would be a welcome move if regulators consider elimination of differences between Ind-AS and IFRS. Currently, differences exist in the treatment of bargain purchase in business combinations, treatment of actuarial gains/losses for staff benefits, usage of discount rates, investment properties and in options provided in certain cases at the time of initial adoption of Ind-AS such as property, plant and equipment, etc.," Kankani said.
According to Amarjit Chopra, former president of the Institute of Chartered Accountants of India (ICAI), it is alright to have some degree of divergence.
“It needs to be appreciated that we are a sovereign nation with our own accounting and oversight bodies. We need not copy any standard pronounced by the International Accounting Standards Board word to word," Chopra said.
IndAs was supposed to be implemented in banking from 1 April 2018, but various considerations, including the need for additional capital that implementation of Ind AS109 (financial instruments) may bring in its wake, have led to its postponement, he said.
An email sent to the spokesperson for the corporate affairs ministry seeking comments remained unanswered at the time of publishing.
“No financial institution or corporate house invests in India merely on accounting standards considerations. FDI has a direct relationship with investor expectations of a return from such investments. India offers them the best of opportunities," Chopra added.
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