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September 1, 1997


The foreign account

Infosys switches to US bookkeeping methods. Will others follow?

Infosys Technologies Limited, whose innovative financial reporting measures have been regarded by accounting circles as exemplary, has preferred the 'Generally Accepted Accounting Principles' of the US to the 'International Accounting Standards', even though the former implies higher costs for the company.

This claim, based on the company's 'internal documents', has been mentioned in a study prepared by the Indian Institute of Management, Bangalore.

The paper, accepted for publication in the Journal of International Financial Management and Accountancy, has observed that Infosys, which last month became the country's first company to announce quarterly audited results (for March-June of 1997-98), has finally preferred the US GAAP because it represented the best disclosure system.

Infosys, set up in 1981, as a private limited outfit, made its initial public offer in 1993 to become one of India's first widely-held software companies. In the past, its annual reports contained innovations such as funds flow statements, data on earnings per share and 'management discussion and analysis'. It was also the first Indian corporation to voluntarily publish statements based on US accounting norms.

According to R Narayanaswamy, professor of finance and control at IIM and the author of the paper, the acceptance of US GAAP is not without a price: The hefty fee that has to be paid to any of the 'Big Six' audit firms.

The paper has also pointed out that Infosys' decision to prepare US GAAP statements has highlighted some of the major accounting differences between the two systems.

One such difference pertains to deferred tax liability, accounting for which is not required in India. Others relate to depreciation and gains on short-term investments. There are major differences in formats of Indian and US financial statements as well.

It further lists three reasons why IAS should appeal to an Indian company that wishes to produce financial statements for international investors. First, Indian accounting norms are overwhelmingly inspired by IAS, and it is easier for a domestic corporation to switch over to IAS rather than any other accounting standard.

Secondly, the Indian accounting professional is a member of the International Accounting Standards Committee. An Indian company, therefore, can hope to have better lobbying powers at IASC. Thirdly, the measurement and disclosure requirements of IAS represent a "reasonable trade-off in terms of costs and benefits between Indian GAAP and US GAAP".

The paper also dwells on the specific reasons why Infosys decided to take this particular step. The company's action seems to be a result of the growing internationalisation of its operations. Moreover, foreign mutual funds have invested in the company's equity. Infosys has also set its sights on a listing on NASDAQ, the American stock exchange in the near future.

In conclusion, the paper states that since the US is the most important capital market, companies in other countries are willing to "speak in the language of US GAAP".

Its implication (for national GAAPs and IAS) would be of particular interest to IASC, which has been lobbying for acceptance of IAS by the International Organisation of Securities Commissions, and to the European Community, which is planning to develop a European GAAP.

- Compiled from the Indian media

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