How to Smooth Transition from Indian GAAP to Ind AS 101

Before you reap the benefits of Ind AS (Indian Accounting Standards), there is a challenging task of switching from Indian GAAP to Ind AS. But what does this walk of Transition from Indian GAAP to Ind AS feel like. It’s a significant shift, but rest assured, you’re not alone in this journey. The good news we need? We have the support of Ind AS 101 – “First-time Adoption of Indian Accounting Standards”.

The standard ensures that the first-time adoption of Ind AS does not create confusion and that the financial statements of the first-time adopter reflect the financial position fairly and consistently.

Ind AS 101: Your Guide to First-Time Adoption of Indian Accounting Standards

Ind AS 101 is specifically designed by MCA to act as a compass for entities adopting Ind AS for the first time. It applies to their first annual financial statements and interim financial reports during the transition period. Importantly, it does not cover changes to accounting policies for entities already following Ind AS, which are dealt with under other Ind AS standards. It is our first chapter in the world of Indian Accounting Standards as per Ind AS guide.

The Big Goal of Ind AS 101

There are significant differences between Ind AS and Indian GAAP, a shift from rule-based accounting to principle-based system in line with IFRS.

The purpose of Ind AS 101 is to ensure that when your organisation adopts Ind AS for the first time, it results in high-quality financial information that is:

1. Transparent and Comparable:

• The financial statements should be transparent and easy to comprehend;
• Comparisons across periods should be straightforward, helping stakeholders assess your financial performance and position over time.

2. Suitable Starting Point for IND AS Accounting:

The opening balance sheet at the transition date (we will discuss in a while) should be appropriate. It must provide a proper foundation for accounting under IND AS.

3. Cost-effective:

Transitioning from Indian GAAP to Ind AS can be costly, but the idea is to strike a balance. The transition should deliver high-quality financial reporting, but without breaking the bank.

Important Terms to Know

Before we dive into the transition steps, it’s crucial to understand some key terms that will come up often:

1. First-time Adoption: Refers to the first set of annual financial statements you will prepare in accordance with Ind AS, with an explicit and unreserved statement of compliance.
2. Transition Date: The date when an entity first applies Ind AS. It marks the beginning of the earliest period for which the entity presents its financial statements under Ind AS.
3. Opening Ind AS Balance Sheet: The balance sheet prepared at the transition date, reflecting its financial position as if it had always applied Ind AS.
4. Reconciliation Statement: A statement showing the differences between an entity’s equity and profit or loss under previous GAAP and under Ind AS.
5. Exemptions: Special rules that allow companies to avoid full retrospective application of certain Indian Accounting Standards requirements when transitioning from the previous accounting framework (e.g., business combinations, employee benefits).
6. Retrospective Application: The process of applying Ind AS as if the standards had always been in place, adjusting past financial statements and transactions to align with Ind AS.

Let’s make it clearer with an illustration: Imagine Company Star’s first Ind AS reporting period ends on 31 March 2025, with comparative information for 31 March 2024.

Application: In this case, the transition date to Ind AS is 1 April 2023. Company Star must implement the Ind AS standards applicable for periods ending on 31 March 2025, while:

• Its opening balance sheet is at the date of 1^st April 2023.
• Its financial statements for the year ending 31 March 2025, including comparative amounts for 31 March 2024.

Steps for Preparing the Opening Balance Sheet

The opening balance sheet should be created following the Ind AS as of the transition date. These are the core principle of the preparation:

• Recognition of all assets and liabilities: Ensure that all assets and liabilities are recognized as per Ind AS, including adjustments for fair value, impairment, and reclassification (e.g., financial instruments or investment properties).

• Retrospective application of Ind AS: Apply Ind AS standards to the maximum extent possible, using data available at the transition date. The purpose of this rule is to ensure that stakeholders can view the company’s financial performance and position as if Ind AS had been applied from the outset.

As a general principal of Ind AS 101, Ind AS application should be on the opening balance sheet as well as all the period present in the first Ind AS financial statements. However, there are certain exceptions and exemption that Ind AS 101 provides. Let’s take a look on those.

Exemptions as per Ind AS 101

Ind AS 101 provides companies with the option to use specific exemptions during the transition from Indian GAAP to Ind AS. Any adjustments resulting from the adoption of Ind AS should be recorded directly in retained earnings or another equity category.

These Ind AS exemptions are intended to reduce the complexity and burden from first-time adoption of Ind AS, and some of the most common ones are listed below:

A. Business Combinations (Ind AS 103):

A company can choose not to apply Ind AS 103 to business combinations that occurred before the transition date. However, it can also decide to apply Ind AS 103 to past business combinations if preferred.

B. Deemed Cost for Property, Plant, and Equipment (Ind AS 16):

For property, plant, and equipment (PPE), companies can opt to use the deemed cost method, which allows them to revalue these assets at the transition date. The same fair value or revaluation options are available for investment property (under Ind AS 40) and certain intangible assets (under Ind AS 38) if they meet specific criteria.

C. Leases (Ind AS 116):

Companies can choose to apply the new lease standard prospectively from the transition date, bypassing retrospective application.

D. Employee Benefits (Ind AS 19):

A company may apply Ind AS 19 retrospectively or choose not to apply the standard to employee benefits that existed before the transition date. However, it must still apply the recognition and measurement criteria for post-employment benefits going forward.

E. Cumulative Translation Differences (Ind AS 21):

Cumulative translation differences (arising from translating foreign operations) can be reset to zero at the transition date, and the company need not restate the translation differences for periods prior to the transition.

F. Fair Value Option for Financial Instruments (Ind AS 109):

Under Ind AS 109, companies are permitted to apply fair value measurement for financial instruments only at the transition date. They do not need to retrospectively adjust financial instruments for prior periods.

G. Share-based Payments (Ind AS 102): 

Under Ind AS 102 (Share-based Payments), an entity is not required to restate share-based payment arrangements that were vested before the transition date. This exemption allows entities to apply the standard only to share-based payment arrangements that are granted after the transition date.

H. Decommissioning Liabilities (Ind AS 37):

For decommissioning liabilities (e.g., asset retirement obligations), an entity may elect to not apply the requirement for recognizing these liabilities retrospectively. If the liability was not recognized under Indian GAAP, the entity can recognize the liability at the transition date.

Exceptions under per Ind AS 101

Exceptions are specific conditions where entities may need to apply certain standards differently or only after the transition date:

A. Estimates (Ind AS 8):

Estimates made under the previous GAAP must align with Ind AS, unless there is proof that the prior estimates were incorrect. If new information arises after the transition date that requires adjustment to estimates, that information should be treated as “non-adjusting events” under Ind AS 10.

B. Hedge Accounting (Ind AS 109):

Hedge accounting cannot be applied retrospectively for relationships that don’t meet Ind AS 109’s criteria, but entities can designate certain hedged items if they meet specific requirements at transition.

C. Non-controlling Interests:

When adopting Ind AS for the first time, a company must apply rules for non-controlling interests, including attribution of income, changes in ownership, and loss of control over subsidiaries, from the transition date.

D. Classification and Measurement of Financial Assets:

Financial assets must be assessed based on the facts and circumstances at the transition date. Exceptions are provided when it’s impracticable to assess specific characteristics, like modified time value of money or prepayment features.

E. Government Loans:

When adopting Ind AS, a company must classify government loans as financial liabilities or equity and apply new rules prospectively. However, it can use the old loan value at the transition date and apply the new rules to past loans if the necessary information was available.

Disclosures Under Ind AS 101

Upon transitioning from Indian GAAP to Ind AS, the company is required to disclose certain information to help stakeholders understand the impact of the transition.

Key disclosures include:

1. Three Balance Sheets: First Ind AS financial reporting must include at least three Ind AS balance sheets, two profit and loss, cash flow, and changes in equity statements, with comparative data.
2. Reconciliation of Equity: A reconciliation showing differences in equity under Indian GAAP versus Ind AS as of the transition date. This reconciliation should highlight the major differences, such as the impact of new standards on assets, liabilities, income, and expenses.
3. Reconciliation of Comprehensive Income: A reconciliation of comprehensive income under both accounting frameworks for the most recent period.
4. Explanation of Adjustments: Any significant adjustments made as part of the transition must be disclosed, along with their reasons, such as, changes in accounting policies, as well as the effects of applying specific exemptions or exceptions.

Practical Transition from Indian GAAP under Ind AS 101

Once you are under the obligation of implementation of Ind AS or you are voluntary applying these international standards, the journey is exiting as well as stormy. Then, these are Ind AS transition steps you should follow:

1. Setting up a Transition Team: You’ll need a group of experts from various areas including accounting professionals, IT specialists, external advisors, and legal consultants to ensure all aspects of the transition from Indian GAAP to Ind AS are handled effectively.
2. Gap Analysis and Impact Assessment: As there are major difference between the Indian GAAP and Ind AS, there is a requirement of a case specific gap analysis on accounting policies and treatment of different accounting aspects. Furthermore, an intensive impact assessment is requisite to estimate the possible financial and operational effects of adopting Ind AS.
3. Assess Tax Implications: The transition can affect deferred taxes and other tax liabilities. Understanding these changes early will help manage any adjustments to the tax rate or liabilities, which could arise from new Indian Accounting Standards.
4. Engage External Experts: Consult with Ind AS advisors to review the transition process and ensure compliance.
5. Updated Financial Reporting Systems: Ensure that your IT and ERP systems are updated to support Ind AS recognition, measurement, and disclosure requirements. Give you special care to:

• Lease accounting (Ind AS 116);
• Financial instrument classification (Ind AS 109);
• Revenue recognition and contract management (Ind AS 115).

Conclusion

Transitioning from Indian GAAP to Ind AS is a significant change, but with the right planning and guidance, it can be managed effectively. By understanding key concepts such as Ind AS 101, preparing for the necessary adjustments, and ensuring proper disclosures, businesses can ensure a smooth transition. Keep in mind that the process will involve time and resources, but the long-term benefits of complying with internationally recognized accounting standards make the effort worthwhile.

We hope this guide has been helpful! However, we understand that this process can be a burnout. No worries! Contact our experts for understanding the full impact on your business and be right track.