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Indian Accounting Standards: Get, Set, Go…?

Published on Mon, Jan 05,2015 | 17:50, Updated at Mon, Jan 05 at 17:55Source : 

By: Ashish Gupta, Partner, Walker Chandiok & Co.

In the last few years, the regulatory framework for financial reporting in India has evolved significantly and the movement towards adoption of globally accepted financial reporting standards, referred to as International Financial Reporting Standards (IFRS) has gathered pace. India is among those developing economies that have voiced their commitment for adoption of standards converged with IFRS.

In line with India’s commitment at the G-20 forum, the Institute of Chartered Accountants of India (ICAI) in 2011 issued IFRS-converged standards, referred to as Indian Accounting Standards or Ind AS.  The adoption of Ind AS was delayed due to certain challenges on the tax and regulatory front.

In March 2014, the ICAI issued a road map recommending adoption of Ind AS for preparing consolidated financial statements (to address taxation related matters) for accounting year beginning on or after 1 April 2016, along with comparatives for previous financial year.

On 2 January 2015, the Ministry of Corporate Affairs (MCA) announced the final road map for implementation of Ind AS in India, paving the way for reforms in the accounting regime, which were pending for long.. The implementation of new standards will boost investorconfidence in the Indian regulatory environment and increase the flow of foreign capital into India.Although Ind-AS are not IFRS, as per the International Accounting Standards Board (IASB), and only an adaptation of those principles, but they are indeed closer to these international standards with limited carve-outs/carve-ins

The roadmap for Ind AS implementation announced by the MCA is as follows:


First period of reporting

Comparative information

All companies with net worth of Rs. 500 crore or more (whether listed or unlisted)*

Financial year beginning on or after 1 April 2016

Opening balance sheet as on or after 1 April 2015 and financial year ending on or after 31 March 2016

Other companies whose equity and/or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India *

Financial year beginning on or after 1 April 2017

Opening balance sheet as on or after 1 April 2016 and financial year ending on or after 31 March 2017

Unlisted companies having net worth of Rs. 250 crore or more but less than Rs. 500crore*

Financial year beginning on or after 1 April 2017

Opening balance sheet as on or after 1 April 2016 and financial year ending on or after 31 March 2017

* Including holding, subsidiary, joint venture or associate companies of such companies. Further information, regarding measurement date of the networth, whether the road map is applicable for both standalone and consolidated financial statements is awaited.  

A study of the provisions of Ind AS and outcome of similar transition processes (to IFRS) across the globehighlights the  following top five points to be considered by companies planning similar transition:

1.    Accounting for financial instruments, will undergo a comprehensive change, which on the one hand affects the balance sheet ratios due to changes in classification of instruments as liability or equity and fair valuation of financial instruments, and on the other hand affects the operational performance measures, due to accounting for fair value changes and interest and other transaction costs on effective interest rate method. Companies will need to be extremely cautious while drafting their financing contracts in order to avoid undesirable accounting implications.

2.    Group structures are likely to include more entities, which were hitherto not consolidated. The definition of ‘control’ will go through a paradigm shift, making the evaluation of holding-subsidiary relationships more judgmental than ever before. Terms of loans and guarantees given for financing businesses as well as existence of potential voting rights in equity/preference share instruments will need to be monitored to determine whether or not such businesses get consolidated.

3.    Use of fair values is going to be extensive and complex. There are numerous instances in the new accounting literature where fair valuation is mandated. This will not only involve huge expenditure in determining fair values, it will also bring a great degree of volatility to the income statements and subjectivity to the financial statements as a whole. Besides, Ind AS financial statements will have massive disclosures around use of fair values (with a separate standard on fair value disclosures in Ind AS, the efforts involved in preparing financial statements cannot be over-emphasised).

4.    Accounting for business acquisitions will become more challenging as Indian business houses become more global and explore acquisition opportunities outside India. Unlike present accounting practices, which involve the use of book values, Ind AS mandates recognition of assets acquired and liabilities assumed at fair values on acquisition date. Further, the new accounting standards will require seeing through an acquisition transaction to identify hidden or unsaid elements therein which may further complicate accounting.

5.    Revenue recognition will witness certain high-impact changes. Whether it is accounting for multiple element arrangements or identification of principal-agent relationships, both of which are likely to be  rollercoaster rides for companies, revenue contracts will need to be carefully drafted to avoid unintended negative impacts on the income statements. Business development teams will have to work in tandem with the accounting and financial planning teams to ensure that there are no loose ends which could land their companies in judgmental territories.

The dynamic business landscape and growing business complexities pose significant challenges in converging to changing financial reporting framework for Indian corporates. The drivers of these challenges are diverse, inter-alia:

•    increasing size and complexity of business transactions
•    increasing pressure to publish financial information quickly
•    continuously evolving accounting standards, guidance and references
•    multiplicity of accounting practices and standards across subsidiaries and segments
•    quality of accountants for data processing and validation

Accordingly, it is imperative for a company to define a process whereby the following is achieved:

•    choice of appropriate accounting policies and consistency in application thereof across subsidiaries, segments, jurisdictions and sectors
•    well defined systems for timely and accurate financial reporting
•    reliance on processes rather than on people

It is worth mentioning that the finance teams of “in-scope” companies might require maintaining multiple sets of accounts viz. existing Indian GAAP for tax purposes, Ind AS for statutory reporting and IFRS as issued by IASB/US GAAP for the use of foreign stakeholders, if any.


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