Peeling away financial reporting issues one layer at a time

India’s IFRS Carve-Outs and the Pipedream of Global Accounting Standards

It seems that I was not the first to report that IFRS adoption in India could be on the rocks. Compliance Week editor Matt Kelly posted a link to their short blurb headlined "India Could Abandon Mandatory IFRS" from February 18th. India's parliament was reportedly stalled on needed legislation, and that its Ministry of Company Affairs was considering delaying IFRS adoption, and even making it optional.

As to the sources of differences between IFRS and Indian accounting standards (Ind AS), Deloitte's website has an article that tabulates the many differences, large and small. And, another Deloitte article from last month states that IFRS adoption may never have been in the cards for India:

[T]he Ind AS are based on IFRSs, but include some changes which are noted in the appendix to each standard. Some of the modifications may prevent an entity following Ind AS from making an explicit and unreserved statement of compliance with IFRSs (Ind AS 1 … requires a statement of compliance with Ind AS, not IFRSs). [bolded italics added]

It appears from a quick review of all of this – the numerous differences, and the requirement to comply with Ind AS instead of IFRS – is that India is more focused on trying to converge their own standards where possible with IFRS rather than an outright adoption of IFRS. But, why India would want to do this, I don't know. Perhaps, the strategy is for issuers in India to continue to have the standards they desire, while doing everything they can to avoid being seen as an outlier by the rest of the world – at least on the big issues.

But, if that has been the strategy, India may have just come to the realization that it would fail.  From reading an interview with India's Chairman of its legally constituted National Advisory Committee on Accounting Standards, the mindset of India's accounting establishment reminds me more of the defunct reserve-oriented income statement smoothing approach once practiced and perfected by the Germans. The interview mentions four major carve-outs from IFRS; but one in particular, on foreign currency debt, best reflects the great divide that still exists after years of dickering back and forth with the IASB.

Ever since the mid-1970s, the U.S. has required that foreign currency-denominated debt instruments be measured at the balance sheet spot rate, with changes due to remeasurement recognized in income for the period. International standards eventually followed suit; but, Indian issuers, who obviously rely on foreign debt more heavily than their U.S. or European counterparts are unwilling to tolerate the income statement volatility. Hence, an IFRS carve-out permits the issuer to spread anyforeign exchange gain or loss over the life of the loan. The evident result: balance sheet, wrong; income statement, wrong; issuers, happy.

Also, it seems, that India would never be able to abide revenue recognition rules that would measure agricultural commodities at fair value — too much income statement volatility. Nor are they willing to deprive their booming construction industry of percentage-of-completion accounting.

These are all clearly fundamental differences, but the most important thing to contemplate is not whether the Indian accounting establishment's views have merit. Think instead about the difference in financial reporting mindsets, which could not possibly be bridged by a single set of global accounting standards.

If IFRS adoption was ever a goal worth pursuing, it has long since vanished, and the political motivations of its remaining supporters are now deprived of any pretense of legitimacy. It's time to let the rest of the world "countdown to IFRS" if they want to, but If the SEC were really serious about protecting investors, it would scrap the IFRS roadmap.  In its place, there should be a new plan for making U.S. GAAP unquestionably the pre-eminent financial reporting system in the world.

Could the U.S. create the best financial reporting system in the world while at the same time caring about IFRS convergence? No way. Let's stop the charade.


  1. Reply Dr. Santanu K. Ganguli March 14, 2011

    What is being demonestrated through this article is typical US mindset – we are great ! Our accounting practice is the best (despite Enron and Worldcom !!). All must follow us ! Just because there is some delay in implementing IFRS in India, it does not mean that the mission and need of one universally accepted accounting practice has vanished and lost relevance ! India is committed to follow IFRS. The most of the current Indian accounting standards are already IFRS complient (some of which are mere replica), India can afford little delay to remove the legislative bottleneck to become fully IFRS complient. If one is interested in knowing how much IFRS complient India is, one can refer to the website of the Instituteof Chartered Accountants of India (ICAI). Similarly by bowsing the said website one can come to know how seriously the steering committe established for the purpose (paving the way of convergence) is working to remove the bottleneck to become fully IFRS complient.

  2. Reply KPO'M March 16, 2011

    Dr. Ganguli, I think you are missing the point. It isn’t that the US standards are necessarily the best (and Tom’s critical about a LOT of US accounting standards). It’s that IFRS may not be the best for everyone, and it may not be possible to design a system that works for everyone.
    4 significant deviations from IFRS, and an unclear timeline on adoption of the others seems to be a pretty clear indication that India is not yet ready to comply fully with IFRS. Maybe they will be in a year, but who’s to say there won’t be a future standard that is carved out, just as there was in Europe? The fact that it is a convergence strategy (rather than an adoption strategy) also provides India a future “out” if that’s what they decide.
    China is another country that is only “converging” with IFRS. So what looks like will happen is that we’ll have EU GAAP (nearly 100% IFRS), Indian GAAP, Chinese GAAP, and US GAAP (all between 85-95% “converged” with IFRS), and possibly Japanese GAAP also “converged”. No matter how you slice and dice it, we won’t have a “single set of high quality standards.”

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