India to follow global accounting standards

Indian GAAP (generally accepted Accounting Principles), which is still rooted in the pre-convergence era and based on the historical cost model-while the world is moving towards the more contemporary fair value system-will fall in line with International Financial Reporting Standards (IFRS) by 2009. The Institute of Chartered Accountants of India (ICAI) has already taken an in-principle decision in this regard and is now lobbying with the Department of Company Affairs for its nod, says R.K. Agrawal, Director, Ernst & Young India, and a prominent member of ICAI. Says the ICAI spokesman: "By 2011, corporate accounts in 150 countries will follow the same standards. We are working with the government, RBI and SEBI to bring in required changes."

An E&Y India CFO Survey (of 125 companies in India) shows that 95 per cent of CFOs want India to follow Global Accounting Standards. Of this, 64 per cent of respondents favoured IFRS and 31 per cent supported us GAAP.

A key concern among these CFOs is that depreciation norms under the Companies Act 1956, disclosures of FBT as income tax and other current accounting standards are different from standards followed in the rest of the world and result in significant differences in financial results. Says Agrawal: "Convergence (between Indian and globally accepted accounting standards) is a necessity. The twin engines driving corporate expansion are inorganic growth via mergers and acquisitions (often cross-border) and seamless access to global capital markets. Any delay in converging with global standards will be an impediment to the growth of the Indian corporate sector."

Five advantages of following global standards 
 

• It will allow for easy comparison of the financial statements of companies across countries
  
• Indian companies will have to present only a single set of figures while mobilizing resources abroad and while declaring results
  
• Investors, regulators, financial market intermediaries, analysts, governments and all stakeholders will have a common yardstick to judge performance
  
• Accounting for amalgamations (AS14) and valuation of inventories (AS2) will become much simpler
  
• It will make the accounts of Indian companies more transparent