Fair valuation basis must be adopted universally, even by smaller firms says former ICAI President

Amarjit Chopra

With more than 45 years of experience as a Chartered Accountant, Amarjit Chopra is an inevitable addition to policy-setting panels on accounting and auditing.

Despite a string of significant advisory positions, often in the government or the financial sector regulators, he insists on being known largely in his capacity as a past president of the Institute of Chartered Accountants of India (ICAI), the national professional accounting body of India.

As Chairman of National Advisory Committee on Accounting Standards (NACAS) under Companies Act, Chopra was intimately involved in charting the transition to the new set of accounting standards (Ind-AS) which are closely aligned with IFRS. On boards of numerous Indian and global organisations, Chopra pulls no punches when he speaks his mind on the most fraught topics of the day.

Here in the first of a two-part interview, he talks to Shalini S. Dagar about the challenges that COVID-19 presents.

Edited excerpts:

Q: Right now the implementation of Ind AS is rather piecemeal. Would you agree?

A: I don’t think so. Apart from banks and insurance companies and companies with networth lower than Rs 250 crore, Ind AS is applicable to all companies. And for listed entities there are no exceptions.  So I think a major chunk of the universe has already been covered. There was a lot of argument against bringing in the NBFCs within the Ind AS framework, but we managed it on April 1, 2018. Banks and insurance companies are still left, but I hope that they too will transition soon.

Q: Are you happy with the roll-out, given that you were deeply involved in the adoption process?

A: I am happy that India adopted Ind-AS when we did. We were supposed to converge with IFRS in 2011, but then the government backed out. The institute (ICAI) had done its job in 2010-11. We finally went ahead from April 1, 2016.

However, I am unhappy that the insurance regulator, IRDAI has not responded positively.The IRDAI showed reluctance right from the start. RBI at least was willing to do so, but the government figured that if the expected credit loss model kicks in then there will be massive erosion of capital of banks and hence, the deadline for banks had to be postponed.

As regards, insurance companies I have not been able to comprehend exactly why the IRDAI has been so reluctant. Most of the banks have joint ventures and subsidiaries in the insurance space, so by default many insurance companies will have to follow the new standards. Now this is between the government and the two regulators. I now hope that the RBI and IRDAI decide to implement Ind AS by April 1, 2022.

Q: What about the small and medium Indian enterprises? Globally, many are already moving.

A: We have not made it mandatory for them. I don't think it will be made mandatory (in the near term). Internationally, recognition and measurement (concepts) for smaller enterprises are not different. What is different is the requirement for disclosures. I think, in India also it will be the same.

However, sooner or later, one thing has to happen. The entire Ind AS are based on the fair valuation whereas the earlier Indian standards were on cost construct basis. In the same country, you cannot have two kinds of frameworks. The smaller enterprises too will have to shift to the fair value construct very soon (although) with minimal disclosures.

Q: Do you think the quality of financial statements has improved with the adoption of Ind-AS?

A: Accounting standards are neutral. They neither help you, nor impede you. They are designed to help you report financial information. It is true that Ind-AS requires more disclosures and is more judgment-based or subjective than US GAAP which is more rule-based.

And yes, we all know that when it comes to subjectivity, people can play around. I wish that it wasn’t so. Against each standard, it has been laid out how to arrive at the judgments.

(This will be tested in the COVID-19 scenario.)

One of the major challenges of COVID-19 will be the impairment of the assets. For that we will need to get into the projections for subsequent periods. It will be one of the major challenges of Covid-19 will be impairment of assets. Now, to what extent those projections are going to be realistic for the management will be a challenge. And for the auditors too to verify the authenticity of the projections.

Q: So broadly we have settled in well with Ind-AS...

A: There are no major complaints except for some minor interpretation issues which are being looked at through the Ind AS Technical Facilitation Group (ITFG), the interpretations committee of ICAI. Overall, it seems to have been settled. But then to what extent the judgements are subjective will be known as we move on when the Financial Review Board (FRRB) undertakes a review or the peer review takes place. Or the Quality Review Board does an assessment. Now the National Financial Reporting Authority (NFRA) will also be undertaking a review.

Certainly, the matters of judgement are in the future, but as of now, so far as implementation is concerned, on an overall basis there are no major complaints from the industry.

Q: Do we expect a lot of close cooperation between the NFRA and ICAI?

A: There is no choice. There has to be cooperation. NFRA is here to stay. It will be foolhardy on anybody’s part not to cooperate with NFRA. I think we have to strengthen the system. There should be clear demarcation of what kind of cases should be taken up by NFRA and what kind of cases should be taken by the Institute. That mutual cooperation will help both the sides. It will also be in the overall interest of the profession.

Q: You mentioned COVID-19 and associated issues. What are the unique challenges that COVID-19 is presenting for auditors?

A: Today, one of the biggest challenges that the auditor has to face and the management has to reply is whether a particular business continues to be a going concern especially in the case of hotels, aviation and travel companies.

Inventory valuation is another issue. For example, global crude oil prices have gone down post-COVID-19 though Indian consumer prices remain high. The principle is very simple that you will have to value the inventory at the lower of cost or the net realisable value. The oil marketing companies valuation will be hit. Accountants will have to come to terms with it and auditors will have to put their foot down.

Due to the suspension of activities in projects, the borrowing costs incurred during these periods will have to be suspended. These will have to be charged off to the profit and loss account.

Another key issue will be the consolidation of the performance of subsidiaries and joint ventures overseas (especially in countries like the U.S., Italy and Brazil) which are hard hit due to COVID-19. Their first priority will not be the finalisation of the audit. In the absence of audited results, consolidation will be a problem.

Calculation of retirement benefits, gratuity and leave encashments will also be a challenge. All these will have to be evaluated. Further, most leases along with their liabilities will have to be rewritten. So there are a number of issues. But the audits are still going on. TCS put out its audited results for March 31 on April 16. While a deadline extension (for regulatory compliances) was provided for the previous quarter, it needs to be done for the June quarter too.

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