G.Srinivas
SAI-India
This article attempts to explore the myriad of Accounting Standards or Generally Accepted Accounting Practices (GAAP) issued across the nations and proposes a case for harmonization world with specific reference to India from the auditor’s perspective.
Harmonization is an essential to facilitate comparability of financial statements. With globalization financial statements of national entity/organisation are no longer the requirement of domestic users. The clientele for financial statements has crossed the boundaries of nation states. This is more pronounced in case of business houses from one country expanding to other countries for all their activities of operations, investing and financing. The problem that occurs in that scenario is that the financial statements prepared using Accounting Standards of one country may not be understood in the same sense in another country, which would require drawing up of financial statements in a different frame work. In the case of Government Accounts on the other hand needs comparability amongst provinces and federal government and provinces. International agencies like the World Bank in conducting Financial Accountability Assessment of the client governments are increasingly looking upon Government Accounts as a source of relevant financial and performance information.
The need for Accounting Standards arises from following reasons
Facilitate transparent and meaningful reporting of financial information
Reduce accounting alternatives to reasonable and practical level
Enhance comparability of financial statements in time and space
Encourage consistency in accounting practices
Accounting Standards have evolved primarily with to cater to the entities within the geographic boundaries of a country. Local customs, laws, practices etc significantly influence their development. Today we are faced with a plethora of Accounting Standards. Accounting Standards are different for commercial undertakings and the government. For example, an Auditor or Accountant in India is faced with the following Accounting Standards:
AS issued by ICAI: The leading Accounting body of India, the Institute of Chartered Accountant of India (ICAI) is the primary Accounting Standards (AS) setting body for all entities except government. ICAI has so far issued 29 Accounting Standards. ICAI established the Accounting Standards Board in 1977 for issuing AS. Since 1988, the Companies Act has recognized the Accounting Standards of ICAI by making compliance with them mandatory for all companies. Government owned commercial undertakings (popularly known as Public Sector Undertakings in India) also have to comply with these Accounting Standards.
IFRS: Efforts towards harmonization of AS received momentum with the constitution of International Accounting Standards Committee in 1973, which was subsequently renamed as International Accounting Standards Board (IASB). The IASB issues International Accounting Standards (IAS). The Board has so far issued 41 IAS. The latest standards issued by IASB are called International Financial Reporting Standards (IFRS). IASB has so far issued 5 IFRS. The 41 IAS and 5 IFRS together constitute compliance with IFRS, the global accounting standards.
US GAAPs: United States accounting for lion’s share of global economy has its impact on accounting systems followed across the world. The Financial Accounting Standards Board (FASB) is the principle rule making body for financial reporting. The set of rules followed for financial reporting in USA are known by the generic term ‘US GAAPs’. An entity planning to enter US markets may have to recast its accounts using US GAAPs.
IPSAS issued by IFAC: International Federation of Accountants (IFAC) founded in 1977 issued framework to harmonize practices in public sector (i.e. the government) and businesses. IFAC issues International Public Sector Accounting Standards (IPSAS) applicable to governments across the world. IFAC has so far issued 20 IPSAS on accrual basis of accounting and one on cash basis of accounting.
GASAB Standards: In order to harmonize the accounting practices in the provinces and at federal level, the Government Accounting Standards Board (GASAB) was set up by Government of India. GASAB so far issued 5 draft standards, for comments and suggestions from professional community and public after which they will be declared as standards.
The primary concern regarding multiplicity of standards is not their numbers but the different and contradictory practices that they may recommend. A situation may exist where a company following, say German GAAPs making huge profits may end up reporting losses if it has to recast its accounts using US GAAPs to raise capital in US markets. This leads to a paradoxical situation where ‘true and fair state of affairs’ reporting becoming different depending on the standards that the entity follows.
Another issue of concern for harmonization is the contradiction between ‘Rule Based Standards’ and ‘Principle Based Standards’. US GAAPs are essentially understood to be rule based with codified array of details of accounting procedure to be followed. In contrast IFRS is essentially an attempt to develop principle-based standards.
International experience indicated that principle based standards are better enforced than rule based ones. The need for harmonization is in the direction of principle based standards.
The auditor while performing his attest function expresses his view on the state of affairs. Essentially it is an expression of true and fair view subject to qualifications if any. The auditor while forming his opinion examines the books of original entry (cash book, journal), ledgers etc and supporting documents like the vouchers. This enables him to go to the root of the transactions and form his opinion thereon. The examination of books of accounts enables him to form an opinion on the state of affairs, which he needs to communicate to various stakeholders. The communication between auditor and stakeholders is through the opinion and financial statements and Accounting Standards form the basic rules for preparation of these financial statements. Multiplicity of AS could require the management to draw up different sets of financial statements based on different AS to operate at an international level. This would put the auditor in an unenviable position of having to accept a particular practice in one set of accounts and objecting to the same in another for the same period.
The Indian GAAP for commercial undertakings (businesses etc) including those that are owned by government essentially consists of the Accounting Standards issued by ICAI. India develops its own accounting standards to cater to the local laws, customs and traditions. During the period 1977-1998, the AS issued by ICAI differed with the IAS in many respects. Since 1998, ASB of ICAI has revised many of its AS and issued new AS essentially harmonizing with IFRS/IAS. Today, AS standards are nearly 100% harmonized with IFRS.
The Government Accounting system in India, as in many other countries, is not based on commercial system of book keeping. Government Accounting in India is essentially understood to be cash based system using single entry book keeping. Government’s financial statements differ from those of commercial undertaking on account of its sovereign functions and depiction of actual expenditure and revenues with reference to the budget rather than the results of operations in form of Profit or Loss in case of commercial entities. The budget focus of accounting is specific to government accounting. GASAB standards seeking to harmonize practices in governments within the country, also harmonize with IPSAS to a significant extent.
Another question that may arise is whether we need different sets of Accounting Standards for commercial entities and public sector (i.e., the government). Some countries like Australia have a single set of Accounting Standards applicable for government and commercial entities. The cash basis of accounting in India under single entry system makes it difficult for government to adapt AS applicable to commercial entities. Therefore GASAB is formed to issue AS for the government. It is now appreciated that cash basis accounting followed in many countries have limitations on the depiction of financial position (like inadequate depiction of assets and liabilities, accruals etc) and governments a moving from cash system to accrual system. Accrual accounting will improve the accountability and transparency in governance. The SAI, India is embarking on a road map for changing the government accounting system to accrual basis of accounting. With the shift from cash to accrual, there exists no reason for separate sets of AS for government and commercial undertakings. Ideally, GASAB and ASB (ICAI) in the long run should merge and adopt IFRS as the AS for the country with a power to prescribe deviations from IFRS based on the local requirement of laws and customs.
Financial transactions are essentially the same whether in India or USA. Inventories remain inventories and financial instruments remain financial instruments whether in government or commercial entities. Users of the financial statement expect similar information across sectors (commercial and government) and countries. In ideal circumstances, there is a strong case for a single set of AS applicable through out the world. Today, many of the countries are either adopting IFRS directly or adapting them by issuing domestic Accounting Standards in harmony with IFRS. There is also an attempt to harmonize US GAAPs with IFRS. On the government accounts side, IFAC is issuing IPSAS to harmonize with IFRS. With IFRS emerging as the global standards for businesses and IPSAS its equivalent for governments, harmonization between these two sets of standards would be the precursor for Global Reporting Standards. Governments are also seeking to move from cash system of accounting to modified accrual or accrual system of accounting (Eg: New Zealand experience with change over). With IFRS and IPSAS increasingly mandating identical practices for most transactions, a time may not be far when we see a single unified set of Global Accounting Standards applicable to businesses and government as well.
Some useful links:
SAI, India: www.cag.gov.in
Institute of Chartered Accountants of India: www.icai.org
GASAB, India: www.gasab.gov.in
International Federation of Accountants: www.ifac.org
International Accounting Standards Board: www.iasb.org