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A plethora of issues in IFRS implementation | Advantage zyaada

I am beginning to like The Firm on Moneycontrol and CNBC TV18. The Saturday brunch program is perfectly suited to host the audit accounting and legal Champions from KPMG, E&Y and Amarchand Mangaldas Shroff. They presented a very incisive discussion on Private company valuations for PE investments and other FDI policy issues in May. In June I particularly liked the clarity and conciseness of KPMG partner, Jamil Khatri. I am also eligible for the Quaker oats downloadable product for a health check and the P&G consumer rollout though my child is older and Pampers is not what I need to buy. I will thus stay with matters in high finance for they made the weekend especially interesting.

We have already covered a lot of DTC on INDIA.ADVANTAGES.US and this post is strictly related to interesting turns for Indian companies in IFRS implementation. The April 11 rollout of IFRS Financial statements in India is restricted to companies with a turnover of In neighboring Malaysia for example FRS139 ( valuation of financial instruments) is already applicable from this year and full blown IFRS from FY12 financial statements. In Chile a very similar calendar was rolled out starting 2010 and similar dissections of companies by size have been made to obviate discussion on each national standard in other than the required jurisdictions or forums.

In Europe and the UK, implementation issues are being handled since 2005. Globally a complete IFRS implementation will be de rigeur by 2014 for companies of all size and ownership structures. Global corporations have found IFRS especially useful in obliterating discussions of local accounting glitches and ‘best practices’ and found it cost effective to move to full blown IFRS. Many emerging markets would share Indian experts’ circumspection with implementing the new standards without benefitting on Corporate Income tax treatments, usually a foregone conclusion. In many cases, though no restatement of prior periods is being called, the statements would need to be presented under the new standards for up to 5 years to allow for meaningful comparisons. The stepped roll out also causes a piquant situation in approaching CBDT for one time differences in treatment between those using IFRS and those employing older standards till required to migrate to the new IFRS.

IFRS is especially complex for banking finance and insurance companies and they would benefit most from the new dispensation.

The issues with IFRS manly relate to tax treatment for India corporations across three parameters:

  1. Treatment of Preference Dividend as an expense. The deduction is not available to Indian companies for tax booking aand while the processes are harmonized, the biggies going for IFRS will have to maintain an entirely different set of books for tax standards while the tax version of the books will pay taxes on preferred dividend, an anomaly with an in built conflict of interest with the Deptt of Revenue
  2. Expensing of Stock Options. Except at Infosys, expensing of the fair value of stock options on vestment is not a foregone conclusion and Indian standards have maintained ideological differences with this advanced accounting practice. IFRS implementation will force that expense to reduce profits as presented to investors while paying taxes on a higher number in the ‘tax books’
  3. Unrealised gains and losses on derivatives positions. In the Indian code and for tax purposes, companies are not expected to account for profits and losses on existing positions. However, while MTM is compulsory only for liquid securities , IFRS defines such securities and use of models for others obviating the Historical cost basis. FAS 133 under GAAP specifically deals with the hedging allowed for such positions to remove any volatile gains and losses within the unrealized MTM valuations from market or based on applicable pricing models. This unrealized gain would either have to be specifically treated as not transferred to income statements for tax purposes or otherwise tax will be payable on a position with no corresponding cash flow. This situation Is likely to be an internal debate if the larger indian firms can present a cogent case ads governments are notoriously understaffed and most IFRS information is available to practicing accountants and MBAs that work in the multifarious banks, PE firms and Corporate Finance shops in this $50bn investment destination ( $25bn as of June 30)

The issue is a non issue once firms agree to maintain two books for investor reporting and tax considerations which is the case in most Western Europe and US dispensations where IFRS is already implemented. All global banks and MNCs from Germany, Swiss, Dutch or US already follow the new IFRS standards globally.

5 comments on “A plethora of issues in IFRS implementation | Advantage zyaada

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This entry was posted on June 28, 2010 by in Financial Services, Global, India, Investments and tagged , , , .

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