6 Common Ind AS Non-Compliance Mistakes Companies Make (and How to Avoid Them)

Ind AS non-compliance is not limited to incorrect accounting entries. Companies can get into trouble by misclassifying financial instruments, recognising revenue at the wrong time, mismeasuring leases or impairment, calculating deferred tax incorrectly or missing required Ind AS disclosures.

This article covers six common Ind AS compliance mistakes across Ind AS 109, 115, 116, 36, 12 and 16, explains why they happen in India and shows how finance departments can identify and fix them before entering non-compliance red zone.

With years of experience advising businesses on Ind AS matters, Master Brains brings a practical perspective to the accounting, Ind AS implementation and compliance challenges companies face under Ind AS.

KEY TAKEAWAYS

• Ind AS compliance requires assessing recognition, classification, measurement, estimates, judgements and disclosures. 
• Financial instruments: incorrect classification, SPPI assessments and ECL models can materially affect reported results. 
• Revenue: bundled contracts, advances, rebates, returns and variable consideration can lead to incorrect revenue recognition. 
• Leases: lease terms, renewal options, discount rates and modifications require careful assessment under Ind AS 116. 
• Impairment and deferred tax: CGU assessments, recoverable amounts, temporary differences and DTA recognition require significant judgement. 
• PPE and disclosures: component accounting, depreciation, capitalisation and financial statement disclosures can create compliance gaps even when the underlying accounting appears correct. 
• An independent Ind AS health check can help identify technical, calculation, documentation and disclosure gaps before the statutory audit.

What is Ind AS Non-Compliance?

Ind AS non-compliance occurs when a company misinterprets transaction substance, uses improper measurement basis or fails to provide required disclosures under Indian Accounting Standards.

Compared with Indian GAAP, Ind AS places greater emphasis on economic substance, fair value measurement, management estimates and detailed Ind AS disclosures.

Complete Ind AS guide: applicability & standards

Ind AS are notified by the Ministry of Corporate Affairs (MCA) under the Companies Act, 2013, while ICAI provides the Ind AS compendium and related implementation guidance.

The Ind AS Transition Trap: Why Moving to Ind AS Causes Friction

Transitioning to Ind AS creates company-wide operational changes. After discovering Ind AS Applicability, compliance is another challenging step. 

We keep seeing the same three fundamental issues:

1. The old accounting mindset doesn’t go away on its own.

Teams may learn Ind AS rules but continue thinking in the old way focusing on legal form rather than economic substance. Ind AS requires a deeper assessment of what a transaction actually represents.

2. ERP Systems Lack Built-In Ind AS Functionality 

Many standard ERP platforms are not configured with Ind AS, e.g. not able to calculate amortized costs via the Effective Interest Rate (EIR). As a result, finance teams depend upon Excel spreadsheets, introducing manual error risks into financial reporting.

3. Misunderstanding the Role of Statutory Auditors

An auditor’s job is to independently evaluate the financial statements. But the auditor is not a substitute for the company’s own Ind AS review, accounting controls or Ind AS implementation process. It is a mistake to depend on them to flag Ind AS mistakes and help fix it along the way. However, an experienced Ind AS consultant can support your company while taking responsibility as a part of your own extended finance team.

6 Common Ind AS Non-Compliance Mistakes Companies Make (And How to Fix Them)

Ind AS Standard	Common Mistake	Quick Fix
Ind AS 109 & 32: Financial Instruments	Incorrect classification, SPPI assessment or ECL provisioning.	Review contractual terms, business model, SPPI assessment, complete customer profile for ECL.
Ind AS 115: Revenue	Incorrect performance obligations, revenue timing – contract liabilities, variable consideration.	Examine customer contracts, performance obligations, transaction price and contract liabilities.
Ind AS 116: Leases	Incorrect lease term, discount rate, lease liability or modification accounting.	Review lease terms, renewal options, ROU assets, lease liabilities and modifications.
Ind AS 36: Impairment	Incorrect CGU identification and missing reversal of impairment loss.	Assess CGUs, add corporate assets to the appropriate CGU and test impairment indicators.
Ind AS 12: Income Taxes	Missing temporary differences in specialised transactions or incorrect tax effects in OCI/equity.	Carefully calculate temporary differences and tax effects in OCI/Equity.
Ind AS 16: PPE	Incorrect capitalisation, component accounting and missing decommissioning cost.	Identify asset components, decommissioning expenditure, useful lives and residual values.

1. Financial Instruments: Misclassification, Business Model, SPPI & ECL (Ind AS 109 & Ind AS 32)

Incorrect classification of financial instruments without analyzing the underlying contract is one of the biggest mistakes in corporate finance.

Ind AS Failure Points

• Incorrect classification: Companies may classify financial assets without properly assessing the contractual cash-flow characteristics and business model, resulting in incorrect measurement under Ind AS 109.
• Failing the SPPI Test: Financial assets that fail the SPPI criterion cannot qualify for amortised-cost measurement. For example, instruments with returns linked to equity prices and profit-sharing features fail the SPPI assessment and may therefore require measurement at Fair Value Through Profit or Loss (FVTPL).
• Behind ECL Models & Provisioning: Companies may use one ECL percentage for all receivables without considering customer risk, ageing, payment history and credit quality.

How to Fix It

Conduct a legal contract review of all hybrid debt instruments, preference shares and intercompany agreements against Ind AS 32 and Ind AS 109 classification criteria.  Update your ECL provision matrix to include current economic conditions and risk profiles alongside historical default rates.

2. Revenue Recognition: Bundling Performance Obligations, Variable Consideration & Contract Liabilities (Ind AS 115)

Ind AS 115 uses a 5-step model to recognize revenue. The biggest issue is when companies bundle distinct products and services together or misjudge when control passes to the customer.

Ind AS Failure Points

• Bundled Contracts: Selling a machine with two years of “free” maintenance and booking 100% of the invoice as revenue on delivery day is an incorrect Ind AS treatment. Under Ind AS 115, you must split the maintenance service, use its standalone price and spread that revenue over the service period.
• Customer Advances and Deposits Incorrectly Recorded as Revenue: Amounts received from customers before goods or services are delivered are directly credited to revenue instead of being recorded as a contract liability. This can overstate revenue and profit at year-end.
• Sales Returns, Rebates and Credit Notes Not Accrued at Year-End: Companies recognise revenue at the gross invoice value but fails to estimate expected product returns, rebates, volume discounts and other concessions. As a result, revenue is inflated because the transaction price is not adjusted for expected variable consideration.

How to Fix It

Review major customer contracts to correctly identify performance obligations, determine when control transfers and allocate the transaction price appropriately. Rebates, returns, discounts and contract modifications should be taken into account before recognising revenue.

3. Lease Accounting: Lease Modifications, Lease Discount Rates (Ind AS 116)

Ind AS 116 brings non-exempted leases on the balance sheet as Right-of-Use (ROU) Assets and Lease Liabilities. However, errors happen after the initial setup.

Ind AS Failure Points

• Not considering Renewal Options: Calculating the lease term including the non-cancellable period {e.g., 5 years} while ignoring 3-year extension options that the company is almost certain to exercise is incorrect.
• Use of Discount Rates: Calculate the present value of lease payments using Implicit Interest Rate (IIR) or Incremental Borrowing Rate (IBR). Do not directly jump to use IBR when IIR can be readily determined.
• Missing Lease Modifications: Changes in lease scope, consideration or lease terms require remeasurement or modification of the lease liability. The appropriate discount rate (original or revised) depends on the type of modification. Companies should not automatically continue using the original rate.

How to Fix It

Review lease contracts thoroughly for certain renewal/termination options, use of appropriate discount rate based on availability and reassess the lease liability whenever terms are modified.

Maintain a central lease register with controls for renewals, rent changes, extensions and modifications to update ROU assets and lease liabilities on time as per Ind AS 116 Accounting.

4. Asset Impairment Testing: CGU, Corporate Assets & Reversal of Impairment Loss (Ind AS 36)

The purpose of Ind AS 36 is that your assets are not carried at a value higher than what they can actually recover through use or sale.

Ind AS Failure Points

• Incorrect CGU aggregation: Companies may group assets too broadly, resulting in an inappropriate CGU assessment. The CGU should reflect the smallest group of assets generating largely independent cash inflows.
• Failure to Include Corporate Assets: Corporate assets such as shared IT infrastructure, head office assets or central facilities, are left excluded from the impairment assessment or not allocated to CGUs on a reasonable and consistent basis, resulting in an understated impairment loss.
• Not Reversing Impairment: Companies may forget reversal of impairment loss for an asset when its recoverable amount increases, subject to the amount limits. In contrast, they mistakenly reverse the impairment losses recognised for goodwill which is not allowed. 

How to Fix It

Perform CGU assessment. Corporate assets must be allocated to the appropriate CGUs on a reasonable and consistent basis. At each reporting date, reassess indicators of impairment and reversal, while keeping in mind that goodwill impairment is never reversed.

5. Deferred Tax Errors: Temporary Differences, Lease Accounting & OCI (Ind AS 12)

Ind AS 12 follows the balance sheet approach, meaning deferred tax is recognised based on temporary differences between the carrying amount of an asset or liability and its tax base. Grave Ind AS mistakes happen when companies fail to trace the tax impact of special transactions.

Ind AS Failure Points

• Lease-Related Deferred Tax Not Properly Recognised: Companies fail to recognise the deferred tax impact arising from the Right-of-Use (ROU) asset and lease liability under Ind AS 116, resulting in incorrect deferred tax balances. These specialized transactions need special attention.
• Recognising DTA Without Sufficient Evidence: A company may recognise deferred tax assets on carried-forward tax losses or deductible temporary differences without sufficient evidence that taxable profits will be available against which they can be utilised. This can overstate assets and profit.
• Incorrect treatment of OCI/equity tax effects: A common error is putting all deferred tax through P&L. If the underlying transaction is recognised in OCI or directly in equity, the related tax effect generally follows the same location.

How to Fix It

Companies should carefully calculate temporary differences, including those arising from leases and recognise DTA only when future taxable profits are reasonably supported. Tax effects related to OCI or equity should also be recorded in the same place as the underlying transaction.

6. Property, Plant and Equipment: (Ind AS 16)

Ind AS 16 dictates the recognition, measurement and depreciation of tangible assets such as machinery, buildings and factories.

• Ignoring component accounting: Companies may depreciate a major asset as one unit instead of separately depreciating significant components with different useful lives.
• Incorrect treatment of decommissioning costs: Companies may fail to recognise the present value of restoration or dismantling obligations as part of the asset’s initial cost.
• Incorrect capitalisation of costs: Companies may capitalise expenses that do not meet the recognition criteria for PPE, such as general administrative costs, repairs or abnormal wastage, thereby inflating the asset’s carrying amount.

How to Fix It

Companies should identify significant components separately, correctly recognise decommissioning provision and use appropriate useful lives, residual values and depreciation methods. These estimates should also be reviewed regularly to ensure the PPE carrying amount is accurate and compliant with Ind AS 16.

Ind AS 117: Insurance Contracts applicability and accounting principles

Ind AS Compliance FAQs

1. What are the most common mistakes companies make when transitioning to Ind AS?

The most common mistakes include incorrect opening balance-sheet adjustments, wrong classification of financial instruments, improper use of Ind AS 101 exemptions and incomplete transition disclosures. Companies may also fail to identify all required adjustments from previous GAAP to Ind AS.

2. Why do companies frequently get revenue recognition wrong under Ind AS 115?

Revenue recognition frequently gets wrong because companies fail to properly identify performance obligations, determine the transaction price, allocate consideration and assess when control transfers to the customer. Complex contracts and variable consideration have higher risk of errors.

3. What disclosure requirements do companies most often miss under Ind AS?

Companies often miss or inadequately present disclosures relating to significant accounting judgements, estimates, financial instruments, related parties, revenue, leases and deferred tax. In many cases, the accounting is correct but the required disclosure is incomplete.

4. Can auditors qualify financial statements for material Ind AS non-compliance?

Yes, auditors can qualify financial statements for material Ind AS non-compliance under SA 705 if management doesn’t correct it. Statutory auditor can issue an audit report with a qualified opinion or adverse opinion as per SA 705, depending on the nature and pervasiveness of the misstatement.

5. How can a company identify Ind AS non-compliance before its statutory auditor does?

Companies can conduct an Ind AS health check covering Ind AS recognition, measurement, presentation and disclosures. Reviewing high-risk areas such as revenue, financial instruments, leases, deferred tax, PPE and related-party transactions can identify issues before the statutory audit.

6. What is the value of an independent Ind AS health-check review for a company’s finance team?

An independent Ind AS health-check gives the finance team an objective view of accounting gaps before they become big issues. It helps identify non-compliance, weak documentation, incorrect estimates and disclosure gaps early. It reduces surprises, audit adjustments and compliance risk. Most importantly, it gives management a clear & actionable roadmap to Ind AS reporting.

7. What are the penalties for Ind AS non-compliance in India?

There is no single penalty for Ind AS non-compliance. Under Section 129 (7) of the Companies Act 2013, penalty of up to ₹ 5 lakh and/or imprisonment up to one year can be imposed on responsible officers. If the conduct involves fraud, Section 447 can impose imprisonment of 6 months to 10 years and a fine of 1-3 times the amount involved, subject to other conditions. Listed companies can face SEBI actions.

8. Is Ind AS applicable to private or unlisted companies?

Yes, Ind AS can apply to private and unlisted companies with net worth of ₹ 250 crore or more. It also applies to their holding, subsidiary, associate and joint-venture companies. 

Your Books May Be Working. But Is Your Ind AS Right?

The real Ind AS non-compliance gaps usually hide in small accounting details.

At Master Brains, our Ind AS review is solid. We examine accounting policies, recognition and measurement, estimates, calculations, disclosures and supporting documentation to identify potential gaps.

Our Ind AS compliance health-check and review services help finance teams strengthen financial reporting, improve Ind AS disclosures and documentation and deal with technical accounting issues.

Connect with Master Brains for an independent Ind AS health check.

About the Founder

CA Neha Agarwal, Founder of Master Brains, is a Chartered Accountant with experience in Ind AS compliance, Ind AS health checkup and Ind AS accounting advisory. Through Master Brains, she works with businesses on Ind AS accounting and compliance matters, helping finance teams comply with complex accounting requirements.