All about Indian accounting standards (Ind AS)

[ecis2016.org] Explained in this article is everything you ought to know about accounting standards in India

Corporate entities and their auditors in India are mandated by the law, to follow a standardised set of rules while preparing and reviewing financial statements. The main objective of this, is to remove variations in the treatment and presentation of financial statements by business entities by standardising the process. This harmonisation of data also facilitates easy intra-firm and inter-firm comparison. Another key aim of this standardisation, is to ensure that transactions are recorded such that the readers can draw fair conclusions about the financial state of an entity.

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Objective of accounting standards

By providing a standard template to represent vast sets of numbers, an ideal accounting system attempts to provide a fair presentation of financial statements. It also sets the path for recognition of financial events and measurement of financial transactions. A standardised format also enables comparability between companies.

The objective of general purpose financial reporting is to provide information about the reporting entity that can be used by existing and potential investors, creditors and other lenders, to make decisions pertaining to the provision of resources to the entity. These decisions may include:

(a) Buying, holding or selling equity and debt instruments.

(b) Providing or settling loans and other credit.

(c) Exercising the right to vote on or influence the actions of the management that affect the use of the entity’s economic resources.

Accounting standards in India

India currently has two sets of accounting standards – the accounting standards under the Companies (Accounting Standard) Rules, 2006 and the Indian Accounting Standards (Ind-AS).

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With the need to provide India with a globally aligned financial reporting system, which is comprehended by foreign investors and multi-national companies operating in the country as well, the Corporate Affairs Ministry notified the Indian Accounting Standards, abbreviated as Ind-AS, in line with the International Financial Reporting Standards (IFRS).

Such is the similarity between the Ind AS and the IFRS is that the standards in the former are named and numbered in the same manner as those in the IFRS.

Date of notification of the Ind-AS

The Corporate Affairs Ministry notified the Ind AS in 2015, without notifying the date of implementation for all its provisions. While the standards for the computation of tax were notified as ICDS in February 2015, the respective regulators for banks, insurance companies, etc., will separately notify the date of implementation of the Ind-AS, in a phased manner.

List of Indian Accounting Standards

Who sets the accounting standard in India?

While the Ministry of Corporate Affairs notifies the detailed standards for corporate companies on the recommendations made by the National Financial Reporting Authority (NFRA), the accounting standards in India are formulated by the Institute of Chartered Accountants of India (ICAI) and supervised by the Accounting Standards Board (ASB), a committee that works under the ICAI.

It is pertinent to mention here that in case of a conflict between the provisions of the Companies Act, 2006 and the Indian Accounting Standards, the provisions of the former will prevail.

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Applicability of Ind-AS

Sub-section 3(A) to 211 under the Companies Act, 1956, requires all profit-and-loss accounts and balance sheets to be compiled, in line with the accounting standards in India. While any company can voluntarily apply the accounting standards out of its own choice, some companies have to do so mandatorily. These include:

• Listed companies in India, as well as abroad.
• Companies that are in the process of being listed and have a net worth of less than Rs 500 crores.
• Holding companies, subsidiaries, joint ventures or associates of listed companies and unlisted companies with a net worth of above Rs 250 crores.
• Unlisted companies having net worth of over Rs 250 crores.
• Non-Bank Financial Companies (NBFC) with a net worth above Rs 500 million.
• Holding companies, subsidiaries, joint ventures or associates of companies of NBFCs, with a net worth above Rs 500 million.
• Unlisted NBFCs with a net worth between Rs 250 crores and Rs 500 crores.
• Holding companies, subsidiaries, joint ventures or associates of unlisted NBFCs with a net worth between Rs 250 crores and Rs 500 crores.

While some corporate entities in the country are mandated to follow the Indian Accounting Standards, companies are given the choice to formulate their own notified rules, while preparing their financial statements under Section 129 of the Companies Act, 2013.

Note here that once a company chooses to follow the Indian AS, it cannot go back to using prior methods of accounting.

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Also, once the Ind-AS is applied by a company, it is automatically applicable to all its holding companies, subsidiaries, associated companies and joint ventures, irrespective of the individual companies’ qualification. For Indian companies that have foreign operations, the stand-alone financial statements may be made, with the jurisdictional requirements in the country of its operation. However, these entities still have to report their Ind-AS adjusted numbers, for their Indian parent company.

Phases of adoption of Ind-AS

The ministry has notified a phase-wise convergence to the Ind-AS from the current accounting standards.

Phase-I

Mandatory applicability of the IND-AS to all companies from April 1, 2016, if:

• It is a listed or unlisted company.
• Its net-worth is Rs 500 crores and more.

Phase-II

Mandatory applicability of the Ind-AS to all companies from April 1, 2017, if:

• It is a listed company or is in the process of listing, as on March 31, 2016.
• Its net-worth is Rs 250 crores but less than Rs 500 crores.

Phase-III

Mandatory applicability of the Ind-AS to all banks, NBFCs and insurance companies from April 1, 2018, if:

• Their net-worth is Rs 500 crores on April 1, 2018.

Phase-IV

All NBFCs with net-worth of Rs 250 crores and more but less than Rs 500 crores, have to apply the rules from April 1, 2019.

How Ind-AS helps businesses?

Aside from providing them with acceptability, comparability and readability, thereby, attracting foreign investments, standardised norms Ind-AS norms also help businesses to make necessary changes in case of adverse economic situations. Ind AS 29, for example, deals with financial reporting in hyper-inflationary economies and provides for companies to go for modifications in rules in adverse circumstances.

By providing streamlined methodologies, the Ind-AS also ensures that company managements do not misrepresent or manipulate crucial financial information, leading to monetary frauds.

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