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IFRS: The magnificent obsession of ICAI

May 21, 2008 08:42 IST

The latest passion of the Institute of Chartered Accountants of India (ICAI) is not selling blazers. Nor is it inauguration of residential courses. It is IFRS, IFRS and IFRS. Or International Financial Reporting Standards.

Not just a passion, but an obsession. And much more. In fact, one can state with some authority that it has become the sole marketing agent of IFRS in India. In the process it has even influenced the ministry of corporate affairs to come out with a notification that bats for the IFRS.

The net effect of this posturing by ICAI has led chartered accountants to come to a conclusion that they cannot earn a dime in their profession from now on without a crash course on IFRS.

Consequently, the curriculum of the CA course henceforth will have IFRS as an integral part of the entire syllabus. No wonder, ICAI proudly sports any eulogizing article about IFRS published elsewhere, on its Web site, giving it a prime spot.

And all this euphoria is in spite of the fact that ICAI is the largest accounting body in the world. Yet, it does NOT have anything to do with the body that produces IFRSs. In fact it does not even have any token representation.

ICAI: Reduced to play cheerleader

One is not alone in this matter. ICAI past president T N Manoharan, in one of his interviews was candid enough to accept the following: '. . . what we should aspire to achieve is to secure position and role in the formulation of IFRS. We are 1.2 billion population, out of th e6.1 billion of the world, and thus have 1/6th of humanity, besides being one of the fastest growing economies. We cannot be merely adopting without a hand in the formulation. No doubt we have some representatives from the country but not nominated by ICAI.'

The ICAI not having any role in the IFRS, is not the only grouse. Is there anything that is conceptually problematic with IFRS? I shall address this a little later. Let us first try to know something about IFRS -- its origin, growth, constitution and other allied matters.

IFRS, as many of us know, is the product of International Accounting Standards Board (ASB), which is appointed, overseen, governed and funded by IASC Foundation. This foundation which was formed as a not-for-profit corporation (incorporated in the State of Delaware, US -- a virtual tax haven inside the United States).

It is run by a board of trustees which has members from European Union, ranging from a political heavyweight of the Netherlands to an official of a private finance organisation from Spain, six members drawn from North America with at least two with proven affiliations with the Big 4 accounting firms, two each from China and Japan, and one each from Australia, Brazil, and South Africa. None represents ICAI.

Infosys Technologies' Mohandas Pai is a member in his own right and not officially the representative of the ICAI.

IASB, which creates the IFRSs, is ONLY a self-appointed, privately-funded accounting standard-setter based in London, United Kingdom, not sponsored -- directly or indirectly -- by any internationally acclaimed accounting or regulatory body or any multilateral institution like the World Bank, the International Monetary Fund or the World Trade Organisation.

It may be noted that a majority of the members (8 out of 13) have some affiliations, past or present, with the multinational accounting firms, infamous for their Enron-type scandals and financial scams that rock the business community periodically.

ICAI draws a lot of consolation from the fact that the Standards Advisory Council -- another organ of the IASB -- has a 1/38th share for India (Sailesh Haribhakti, again not nominated by ICAI) among its members (including 7 representatives from organisations such as World Bank, Basel Committee, IFAC, UNCTAD, International Association of Insurance Supervisors, etc). The EU has 12 members, Africa has 2, Latin America has 3, the United States has 3, even Singapore has 2, while countries like Australia, China, Japan, Korea, Israel & Brazil have one each, like India.

If, in spite of such scant respect shown to the Indian accounting profession and conscious ignoring of India's premier accounting body, the ICAI, if the IASB is able to make ICAI simply dance to the tunes of IFRS (like cheerleaders), then what could be the motive?

What is the tearing hurry to have convergence by 2011? Who is exerting such great influence? Does it have anything to do with the stony silence adopted as the only strategy by ICAI, when a spirited group raised hue and cry over the MAFs in India and brought out a white paper? Who can unravel this mystery?

ICAI's ostrich-like approach

Now, I shall come back to the conceptual part of IFRS. For this, I will have to quote from my own letter to ICAI a few months back as a reply to a request (for my inputs on the structuring of an IFRS workshop, specific to the insurance industry). Although it pertains specifically to IFRS-4, it also has general applicability on IFRS. I would like to quote the relevant portions of that for the benefit of the reader:

'. . .  it is my humble submission that the whole idea of this particular workshop seems to presuppose adoption of IFRS-4 for the insurance industry, particularly the life industry, when the regulator has not taken any firm view (and, in my opinion, rightly so) on this yet.

In fact, it is also my humble opinion, IFRS is simply being thrust on us, without either Indian professionals represented by ICAI or the Indian industry being involved in the formulation of the same.

I am simply unable to fathom why the ASB of ICAI or for that matter the institute itself is bending backwards to display eagerness to adopt IFRS, which is the creation of a private body of individuals, who by no stretch of our imagination can be perceived to have knowledge of Indian commercial ethos, and fix unilateral deadlines (though recommendatory) for major business entities.

Forgive me for not being shy for articulating that people who are eager in lapping up IFRS, simply because it has been conceived in the western world, do not seem to understand that the bedrock of IFRS, which is fair value accounting, is not only unsuitable to us but also overrules the principles of prudence, going concern and conservatism, all of which are the hallmarks of good accounting that we have been taught all these years. Also, Indian business values are different and the Indian economy is more debt-driven than equity-driven.

While I strongly hold the view that IFRS is pretty unsuitable for Indian conditions and Indian business culture, deeply rooted in family-oriented ethical values, in general, I am more particularly revolted at the idea of adopting the same for insurance industry. And for two reasons:

Prudence, which should be more forcefully adopted in the insurance industry, which relies more on estimates and provisions than any other industry, will completely take a backseat, in the IFRS scenario.

The champions of IFRS always argue that IFRS, being the global accounting language, is needed to attract more FDI in to the country and that a non-IFRS-compliant nation would be perceived to be an additional risk factor by foreign investors. As everyone is aware, Indian Insurance industry does not need foreign investors but actually it is the other way around, of foreigners needing investment opportunity in the Indian insurance industry.

IFRS-4 is extant on embedded derivatives and futures, etc, which, even at a conceptual level is speculative transactions-savvy and not even permitted by the investment regulations of the regulator and any attempt to legitimise the use of such dangerous financial instruments, which will have the effect of putting the policyholders' money in deep peril, by adoption of such an IFRS, is reflective of total non-application of mind.

There is another lurking danger that is probably being overlooked. Our tax system and scheme, which is innovative enough to tax incomes which are deemed, perceived and 'not-ever-earned', might seek to tax the resultant 'revaluation surpluses' arising out of adopting IFRS, at a MAT-like scheme with promised credits at later dates. We can never take chances with our 'revenue-minded bureaucrats.' Can we?

It is my sincere opinion that the ASB and the Council should revisit the subject and resist any moves from any interested international community in the matter of adoption of any standard, be it on accounting or auditing, in which we had no role in formulation.

It is time we take a principled stand that we will be no more rule followers but rule-setters; that we will not be led but will only lead.'

As usual, my call for a debate on the subject has been met with stony silence from ICAI. Not that I expected anything different.

The author is a Chennai-based chartered accountant. The views expressed here are personal.

P S Prabhakar