The economic history of India, which led to the change from the era of erstwhile Accounting Standards (AS) to the current Indian Accounting Standards (Ind AS) dates back to the late 1980s. Indian economy’s biggest highlight during the past three decades has been its ‘economic reforms’.
After independence and till the late 1980s, the country was groping with its economic problems that had its roots in the colonial drain of wealth and resources. It was in the late 80s that the Indian government decided in favour of economic reforms. The first economic reforms were introduced in 1991.
Before 1991, public enterprises dominated the economic spectrum of India. Preventing concentration of economic power in the hands of private enterprises was the guiding principle. Consequently multinational companies (MNCs) did not come in as major players. However things changed post liberalisation.
India was hesitant in opening up to foreign capital. Since induction of foreign capital would necessarily mean inviting MNCs and other institutional funds to invest in India through varied routes of FDI, FPI and FII, the government decided to allow them to enter the country but subjected them to strict rules and regulations.
In pre-liberalisation days, the AS and reporting framework, devised by the Institute of Chartered Accountants of India (ICAI) were specifically designed to suit India’s then industrial scenario dominated by PSUs and a few big corporate houses. However, with the incoming of new MNCs and other institutions, the Indian economy truly went global in both manufacturing and services sectors. The MNCs were from big economies like the US, UK, France, Germany, Japan, and Korea among others. Consequently, the MNCs needed to be reported on financial results of investments in their Indian associates in the form and concept that the entire international community could interpret and understand. In those times, the developed countries were in the process of drawing up a common set of accounting standards which were named as the International Financial Reporting Standards (IFRS). Hence India felt that in order to encourage global conglomerates to set up shops in the country and also to facilitate India’s big corporates to go offshore, it was essential that India should also shift to a financial reporting structure which would be in line with the IFRS.
Initially, India’s policy makers thought that adoption of IFRS could be an appropriate measure. The Ministry of Corporate Affairs (MCA) in 2008 confirmed that India would take the path of transition to IFRS.
However, there were many strategic issues. The government had in mind that regarding points of disagreement between the IFRS and provisions of law, law would always naturally overrule the accounting standards. Hence adoption of IFRS would be futile unless those conflicting laws were modified. Considering these aspects the government decided not to adopt the IFRS in verbatim but to formulate a new set of accounting standards which would keep in mind the unique case of the Indian economy vis-à-vis the specific requirements of Indian business entities and will also converge with the requirements of IFRS. As was earlier, this task was entrusted to ICAI. This gave birth to the new accounting standards called Indian Accounting Standards (Ind AS).
As things stand today, by a Notification of the MCA dated February 16, 2015, the Ind AS came into force from April 1, 2015. Adoption of a new framework involving many rules and statutes does come with initial teething challenges, which, if taken care of in a time-bound manner will produce the desired effect.