Mohan R. Lavi

Mohan R. Lavi on the ongoing efforts at converging accounting standards

OVER the years, countries have been issuing different accounting standards for select areas in accounting. However, with the emergence of a global marketplace, varied standards of accounting in different geographical zones have meant reconciliation between different sets of accounts.

Talks commenced sometime back, calling for a global convergence of accounting standards. However, the tardy progress made on this front convinced many that US GAAP (Generally Accepted Accounting Principles) would be the de facto standard and International Financial Reporting Standards (IFRS) or International Accounting Standards (IAS) would be a sound set of principles to base national GAAP.

The US' insistence on US GAAP as the standard for companies keen on listing on the US bourses ensures that dichotomy would prevail in any case, rendering all talk of convergence futile. However, recent developments point to a positive sign.

Probably, the most heartening development is the European Commission's endorsement of IFRS and its agreed roadmap with the Securities and Exchange Commission (SEC) to remove by 2009 the requirement for foreign private issuers to reconcile financial statements prepared under IFRS to US GAAP.

The next logical goal for the International Accounting Standards Board (IASB) would be to converge US GAAP with IFRS. This has met with some validation, with the SEC stating that if the IASB-FASB convergence project results in a set of converged high-quality standards it would begin the process of insisting on reconciliation within the decade.

The convergence effort between the IASB and the Accounting Standards Board of Japan was already on in spite of the threat of an early walkout by the latter. China has asked the IASB to send out a team later this year to Beijing to discuss differences between Chinese accounting standards and the IFRS. China's standards, like India's, lean heavily on International Accounting Standards and have been in vogue since 1993.

The Canadian Accounting Standards Board has said that it would implement IFRS within five years. They are convinced that the whole of North America would not be an IFRS-friendly zone within this period but they are still going ahead.

The task of converging to one global standard is enormous.

Regulator's responsibility to varied parties — large, small and medium-sized companies, investors and other stakeholders — hampers their ability to move forward more decisively. The torrent of recent legislative and regulatory reforms — such as the Sarbanes Oxley Act — that have flooded countries have not helped matters a bit.

There is also a school of thought that subscribes to the view that local conditions differ from country to country and it would be difficult to prescribe a "one-size-fits-all" standards. While cost and inconvenience of the changes are seen as challenges by the critics, the votaries say that if you want to get to a better place, you would have to incur a certain cost and bear with some inconveniences. The critics also point to the short consultation period and lack of widespread public debate.

Indian accounting standards have by and large followed the International Accounting Standards. Indian companies listed on the US bourses have converted their accounts to meet with US GAAP requirements. However, the Institute of Chartered Accountants of India (ICAI) has given concessions to small and medium enterprises and banks to fine-tune accounting standards to meet certain situational contingencies. The request to converge Indian accounting standards to the global convergence model could come sooner than later. It would be worthwhile to make an attempt now; the loopholes can be plugged later.

Even if such an attempt is made, it would be well-nigh impossible to expect a global set of common accounting standards that would cater to all entities and situational issues.

However, it would help minimise the differences and make the task of reconciliation much easier.

(The author is a Hyderabad-based chartered accountant.)

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