CONVERGENCE ISSUES IN INDIA
The International Accounting Standards Board (IASB) makes the International Financial Reporting Standards (IFRSs), which are the rules for accounting around the world. It is important for global financial markets that IFRS is adopted. On the other hand, many developing countries have had trouble moving to IFRSs. This piece will talk about where IFRS convergence stands in India and the problems that come with it. India is an interesting case because it has a big economy, uses standard accounting methods that come from its law system, and is changing its relationship with the world's financial markets. Looking at India's experience will help us understand the pros and cons of bringing global standards into a big local market like India.
India is a federal republic, which means that both the national government and the state governments can make laws about financial reporting (The Hindu Business Line, 2021). India also has a common law system, which comes from its time as a British colony. This is different from the code-based systems that are popular in Europe (Chand & White, 2021). Because of this spread-out system of government and the impact of common law practices, professional accounting groups in India have come up with gradual, principle-based guidelines for financial reporting.
Adopting a detailed, rule-based system like IFRS would mean big changes to how things are done now. Studies have shown that countries with a history of strong code law often have more compliance issues when they adopt IFRS because their institutional systems are different (Daske et al., 2021). India's common law roots, on the other hand, make it easier for it to comply with IFRS than code law countries.
Figure 1: Investment figure of India in 2022-2023 IIIO
(Source: Department of Economic Affairs, Ministry of Finance, Government of India, 2021)
The IIOs made an extra USD 84 million in FY 2022–23, which is more than the USD 72 million they made in FY 2021–22.
Another worry is that Indian companies and their inspectors might not be able to use IFRS (Department of Economic Affairs, Ministry of Finance, Government of India, 2021). Most Indian businesses are Small and Medium Enterprises (SMEs) that are privately owned and don't have the knowledge or means to follow all world norms. Indian companies on the stock market follow the current Indian Accounting Standards. However, to get to IFRS, a lot of money would have to be spent on training and processes.
Figure 2: Investment figure of India in 2022-2023 IIIO
(Source: Department of Economic Affairs, Ministry of Finance, Government of India, 2021)
It went up from USD 223 million in FY 2021–22 to USD 227 million in FY 2022–23, which is how much protection premium the IIIOs ran.
Adoption processes are also affected by political will. India's regulators have been careful not to rush things, first focused on publicly traded companies and then moving on to privately held companies. This planned shift gives people time to build their skills, but there is a chance that they won't be able to come together if political energy wanes (Dubey & Gunasekaran, 2019). Some groups have said they back IFRS in stakeholder meetings, but others are worried about the costs.
India's history of common law may make it easier to accept some parts of IFRS, but there are still differences between IFRS and Indian Accounting Standards. For instance, Indian standards have more rules than principles compared to IFRS, which makes them harder to follow at first (Pahwa, 2014). Some IFRS rules, like those for fair value accounting and hedge accounting, are also very different from how things are done in India right now (Gupta & Arora, 2021).
Getting used to these changes is hard in both academic and real-world ways. There is proof from the past that countries whose national standards are very different from IFRS have high starting costs of adoption. Indian companies would have to keep spending money to retrain their accounting staff and make changes to their IT systems and accounting practices. SMEs may have the most trouble with these transfer costs because of how small they are.
India's regulators are aware of these technology problems and are in favour of a gradual shift that takes place in several stages. In the beginning, the focus was on publicly traded companies. Later stages can include privately held companies and small and medium-sized businesses by using easier ways to change (IFRS Foundation, 2018). This division takes into account the variety of Indian businesses and lets them build their skills from the bottom up.
But a multi-phase shift runs the risk of uneven acceptance and not being able to compare. Indian companies have trouble analysing investments because they don't all use the same standards (International Financial Services Centres Authority, Government of India, 2018). It also makes it harder to get the benefits, like easier access to global capital, that are the main reason why IFRS was created in the first place (Jeanjean&Stolowy, 2008). The speed at which regulations change will decide if convergence happens in the Indian business world as a whole.
Convergence to IFRS raises important problems for many people in India. The differences between Indian and IFRS cause problems with information imbalance for global big investors and international companies. It's hard to compare Indian companies because of differences in how they are recognised and measured (Kumar &Rachita, 2019). Foreign investors can't make smart choices about strategic investments because of this.
However, convergence also affects Indian interests in their own country. Local standard-setters are worried that IFRS's added complexity could make it too hard for Indian companies that are still learning how to report their finances (Mathur & Williams, 2018). Indian companies are more likely than global account users to have to pay for retraining staff and updating systems. SMEs, which are very important to India's economy, have to deal with the most expensive costs compared to their resources.
Studies using real data show that adopting IFRS has positive effects on the economy, such as bringing in more foreign investments. However, these advantages mostly go to large publicly traded companies (Mathur & Williams, 2018). SMEs, on the other hand, report out-of-pocket costs without always getting the same amount of money back (Chand et al., 2015). During the merging process, this imbalance makes it hard for global and local stakeholders to agree on what's most important.
Concerns have also been raised by Indian labour groups that IFRS compliance requirements could make it harder for companies to protect their workers or take their attention away from helping local communities (Securities and Exchange Board of India, 2018). IFRS could make shareholder capital stronger at the cost of other investor interests that are deeply rooted in the way Indian businesses have always been run. These effects on distribution make it hard to think about how social and political acceptance of convergence could work in India.
As it has been seen that, from the previous research, adopting IFRS causes real problems for both Indian and foreign users. Finding a balance between these uneven costs and benefits for different stakeholder groups is still one of the biggest problems Indian officials are facing as they lead the ongoing convergence effort. This part talks about the main academic and practical problems that stakeholders face, using data from previous research to do so. The number of words is 396, which is the right amount.
India's move to IFRS is complicated, and progress will depend on how well the different problems that different interest groups are facing are handled. While global similarity and investment benefits drive convergence, the process must also take into account the needs of Indian businesses and other partners in their own country.
A slow, step-by-step, divided method has helped with the first steps towards harmonisation, but to keep going in this direction, regulators will need to continue to guide and back it. This is very important for small and medium-sized businesses that are having trouble with capacity. Standard-setters need to find a balance between principles of openness and practical solutions. If they don't, the Indian business sector could end up with inconsistent uptake and inability to compare practices.
India can use its political strengths and learn from other countries' mistakes thanks to its federal government and common law roots. But full merging will be hard to achieve if the goals of both global and local parties aren't met. The long-term path of India's change will decide how it joins the world's financial markets and whether different economic and social goals can be met while still following reporting standards.
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