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The Ultimate Ind AS Guide: Unlocking the Future of Indian Accounting Standards
As India’s tech giants, such as Zomato, Nykaa, and Paytm, are taking the world by storm with international recognition, the importance of adopting international financial reporting standards has become undeniable. These companies are not just disrupting industries—they’re showing the world how Indian businesses can grow, scale, and succeed on the global stage. But what’s fueling this shift? Definitely the power of Ind AS (Indian Accounting Standards).
It has been a vital step in attracting foreign investment, improving corporate governance, and positioning Indian companies globally. So, what exactly is Ind AS, and how does it benefit your business? This guide takes you through everything you need to know about Ind AS, from its inception to its future role in the world of finance.
1. What Are Indian Accounting Standards (Ind AS)?
Simply put, Indian Accounting Standards (Ind AS) are a collection of 41 guidelines on different accounting aspects designed to bring India’s financial reporting practices in line with International Financial Reporting Standards (IFRS).
The Ministry of Corporate Affairs (MCA) introduced Ind AS, a game-changing move, to ensure that Indian companies follow a uniform set of standards, increasing the transparency, comparability, and reliability of financial statements.
With better alignment to international standards, companies in India can easily attract foreign investments and appeal to global markets with optimal accounting guidelines. It’s a step toward making Indian financial reporting more transparent and reliable.
2. Evolution of Ind AS: A Brief History
In the late 20th century, as the world faced a series of economic crises, such as Eurozone crisis, the apparent need for standardization and financial transparency was exposed. This resulted in establishment of the International Accounting Standards Committee (IASC) in 1973, which laid the groundwork for the rolling out of International Accounting Standards (IAS) by IASC in 1975 and subsequent development of IFRS by the International Accounting Standards Board (IASB), the IASC’s successor, in 2001.
In 1977, the Institute of Chartered Accountants of India (ICAI) established the Accounting Standards Board (ASB) to develop national accounting standards.
Meanwhile, India’s economic landscape began to transform following the liberalization, privatization, and globalization (LPG) reforms of the 1990s, which opened up the economy to the global market.
The initial phase of this evolution started in the early 2000s when India recognized the importance of adopting IFRS to enhance the credibility of its financial markets. The ICAI began studying the possibility of aligning Indian accounting practices with IFRS, and in 2007, the ICAI set up a committee to examine the feasibility of convergence, leading to the creation of Ind AS, officially rolled out in 2015.
3. Key Features of Ind AS
1. Convergence with IFRS
Ind AS is structured to be in harmony with IFRS, meaning it’s based on global standards. But, it’s adapted to the Indian context. Though aligned with IFRS, Ind AS includes some India-specific adjustments to suit local needs. Think of it like learning English with a local accent—it keeps the global essence but speaks the language in a way that works better for Indian businesses.
2. Key Principles of Ind AS
Ind AS follows several important principles:
- Substance over Form: One of the key principles of Ind AS is that companies have to report the real economic impact of transactions, not just their legal form.
- Fair Value Accounting: Instead of using outdated book values, Ind AS encourages companies to measure their assets and liabilities at current market prices.
- Transparency and Comparability: Ind AS promotes clearer, more consistent financial statements, making it easier to compare companies and assess their financial health.
3. Disclosure Requirements
Ind AS encourages detailed financial disclosures. Companies are required to share more information about their accounting policies, segment performance, and risks, ensuring that investors have a complete picture of the company’s financial health.
4. Who Needs to Adopt Ind AS?
So, when do you need to adopt Ind AS? Well, it really depends on the size of your business, whether you’re listed, and a few other factors. The official adoption of these standards in India has been implemented in phases (as shown in the flow chart).
1. Mandatory Application:
I. Listed Companies: All listed companies, both in India and abroad, are required to adopt Ind AS, irrespective of their size or market capitalization. This ensures transparency and consistency in financial reporting for companies that have access to public capital markets. SME exchange are not included in this criterion.
II. Unlisted Public Companies: Unlisted public companies with a net worth of ₹ 250 crore or more are required to implement Ind AS. This includes companies that may not be listed but have a significant size or public interest, ensuring that they follow internationally recognized accounting standards.
Here, net worth represents the total value owned by a company and is determined by adding the equity share capital, preference share capital, free reserves, and securities premium, while subtracting accumulated losses and deferred expenditure.
{NW = ESC + PSC + FR + SP – AL – DE}
III. Private Companies: Private companies are also required to follow Ind AS if they meet specific criteria:
- Net worth of ₹ 250 crore or more, or;
- Companies that are publicly listed or in the process of being listed on a stock exchange.
IV. Banks & Insurance Companies: The application of Ind AS is deferred by RBI & IRDAI, the regulatory bodies of banking and insurance companies respectively and are anticipated to be implemented in future. It cannot be voluntary adopted.
V. NBFCs:
Phase I: NBFCs listed and unlisted, with a net worth of ₹ 500 crores or more adopted Ind AS from 1st April 2018.
Phase II: All listed NBFCs or those in process of listing as well as unlisted NBFCs with a net worth between ₹ 250 crores and ₹ 500 crores adopted it from 1st April 2019.
Here also, it cannot be voluntary adopted.
VI. Mutual Funds:
As per the circular dated 04th February 2022, SEBI has mandated all Asset Management Companies (AMCs) to adopt Ind AS with effect from 01st April 2023.
VII. Companies that are holding, subsidiary, joint venture, or associate:
These entities as defined by Ind AS must also comply with the same adoption timeline of the parent company adopting Ind AS.
2. Exemptions and Relaxations:
SMEs that do not meet the specified thresholds are generally exempt from adopting Ind AS, although they can voluntarily adopt it to align with international practices and better financial reporting standards.
3. Transition with Ind AS 101: What’s Involved?
The transition is facilitated by Ind AS 101, which guides companies on moving from the previous Indian GAAP to Ind AS. This process includes adjusting the financial statements and adopting new valuation methods.
5. Ind AS vs. IFRS: Key Differences
Both Ind AS and IFRS are based on the same core principles, ensuring transparency, consistency, and comparability in financial reporting.
However, Ind AS are converged with IFRS but contain specific differences due to India’s legal and economic context known as carve-outs (deviations) and carve-ins (additions).
1. Terminology:
Ind AS: Terms in Ind AS may differ slightly from IFRS due to India’s legal framework, such as “Balance Sheet” and “Statement of Profit and Loss”.
IFRS: IFRS uses globally recognized terms like “Statement of Financial Position” and “Statement of Comprehensive Income”.
2. Presentation of Financial Statements
Ind AS: The format and presentation of financial statements under Ind AS 1 largely follow IFRS but entities must present a single statement that includes both the profit and loss and other comprehensive income (OCI) for the period. There is no option to separate the profit or loss and OCI into two different statements.
IFRS: As per IFRS 18 (IAS 1), companies have option to choose between presenting a single statement or two separate statements (profit/loss and OCI).
3. Leases:
Ind AS: Ind AS 116 is aligned with IFRS 16, but it provides recognition exemptions for specific cases, such as short-term leases and leases of low-value assets.
IFRS: IFRS 16 mandates a single lease model, requiring most leases to be recognized on the balance sheet as a right-of-use asset and liability with exemption of clearly defined lease term of 12 months or less.
4. Amalgamation:
Ind AS: Ind AS 103 provides specific carve-in on accounting for common control transactions, reflecting the economic substance of the transaction. This approach aligns with common business practices in India.
IFRS: IFRS 3 excludes common control transactions from its scope and offers no specific guidance, leaving such transactions outside the framework.
5. First-time Adoption:
Ind AS: Ind AS 101 provides guidelines for first-time adoption, with specific exemptions and exceptions relevant to India, such as treatment for property, plant, and equipment.
IFRS: IFRS 1 provides similar guidance but with broader exemptions, including areas like business combinations and share-based payments, since it applies globally.
6. Disclosures:
Ind AS: Ind AS requires detailed disclosures, particularly for related party transactions, fair value measurements, and segment reporting.
IFRS: IFRS also requires comprehensive disclosures, but the level of detail may differ in areas like segment reporting and related party transactions.
6. Brief Dive in Key Ind AS
These are the key Ind AS you should know:
- Ind AS 101 – Presentation of Financial Statements: Ind AS 101 defines how financial statements should be structured and presented to ensure clarity and consistency in financial reporting.
- Ind AS 2 – Inventories: Inventories: Ind AS 2 establishes the framework for the measurement and presentation of inventories, mandating that they be recorded at the lower of cost or net realizable value.
- Ind AS 16 – Property, Plant and Equipment: Ind AS 16 covers the accounting treatment for property, plant, and equipment, including how depreciation should be calculated and applied.
- Ind AS 109 – Financial Instruments: Ind AS 109 outlines how financial assets and liabilities should be recognized, measured, and impaired according to their characteristics and purpose.
- Ind AS 115 – Revenue from Contracts with Customers: Ind AS 115 establishes principles for recognizing revenue when control of goods or services is transferred from the seller to the customer.
- Ind AS 36 – Impairment of Assets: Ind AS 36 guides how to recognize and measure impairment when an asset’s carrying value exceeds its recoverable amount.
- Ind AS 37 – Provisions, Contingent Liabilities, and Contingent Assets: Ind AS 37 ensures transparency by requiring the disclosure of potential future obligations (provisions) and potential future benefits (contingent assets).
- Ind AS 12 – Income Taxes: Ind AS 12 focuses on the accounting treatment of both current and deferred taxes, ensuring proper recognition of tax expenses.
- Ind AS 28 – Investments in Associates and Joint Ventures: describes how to account for investments using the equity method.
- Ind AS 24 – Related Party Disclosures: Ind AS 24 requires the disclosure of related party transactions to promote transparency in financial reporting.
- Ind AS 116 – Leases: Ind AS 116 requires lessees to recognize most leases on the balance sheet as a right-of-use asset along with a corresponding lease liability.
7. Real-World Example: Zomato’s IPO and Ind AS Adoption
Zomato, one of India’s top food delivery platforms, adopted Ind AS ahead of its 2021 IPO. In its Draft Red Herring Prospectus (DRHP), Zomato clearly outlines its transition to Ind AS, which required significant changes in its financial statements, particularly in areas like Revenue Recognition (Ind AS 115) and Financial Instruments (Ind AS 109). The company’s adoption of Ind AS allowed it to reflect its true market value and future potential, gaining investor trust.
8. The Future trend of Ind AS
1. Alignment with Global Standards
As more Indian companies go global, the demand for greater alignment with international standards will only grow. The future of Ind AS will see further convergence with IFRS to ensure companies maintain global credibility.
2. Role of Digitalization
The adoption of automated accounting systems and artificial intelligence (AI) will streamline Ind AS implementation, making it more efficient. Advancements in data analytics will help businesses maintain accurate and timely financial reports with fewer errors.
3. Simplification for SMEs
There will be an ongoing focus on simplifying compliance for small and medium enterprises (SMEs), which may face challenges in adopting complex accounting standards. At the same time, large corporations will be required to maintain robust transparency in their financial statements.
4. Integration of Sustainability Reporting (ESG)
India will increasingly focus on mandatory Environmental, Social, and Governance (ESG) disclosures, including sustainability risks and carbon footprints, aligning with global frameworks like GRI and SASB. This integration into Ind AS will standardize and enhance non-financial reporting, reflecting broader environmental and social governance metrics.
5. The new Ind AS 17 Adoption in India
India has adopted Ind AS 117 (equivalent of IFRS 17), effective from April 1, 2024 for insurance contracts. However, it has been suspended as per the notification dated 28TH September, 2024 for an insurer or insurance company which may use the prevalent Ind AS 104 till further notice.
Ending Note
To sum up, Ind AS are shaping the future of financial reporting. With their increasing mandatory application, it’s important for businesses to understand these standards and assess whether they need to adopt them beforehand. Whether you’re planning to list your company, attract foreign investors, or simply improve your financial reporting, Ind AS will ensure you stay competitive and transparent in the global marketplace.
Is your business ready to embrace Ind AS for global success? Reach out to us today for expert Ind AS advisory to guide you through your Ind AS journey!
FAQs
Q 1. How does Ind AS benefit small and medium-sized businesses (SMEs)?
Ind AS adoption enhances financial transparency for SMEs, aligning them with global accounting standards and boosting investor confidence. While not mandatory for SMEs with a net worth below Rs. 250 crore, voluntary adoption can improve credibility and competitiveness in the global market.
Q 2. When should my company begin adopting Ind AS if we are planning to list on the stock exchange?
Start adopting Ind AS as soon as possible, ideally well before your IPO. This will help streamline the listing process and ensure your financials are in top shape.
Q 3. Will adopting Ind AS impact my company’s tax filings?
Yes, Ind AS changes the way taxes are recognized, particularly around deferred taxes and fair value accounting. You’ll need to work closely with tax advisors to adjust your tax filings according to the new reporting requirements under Ind AS.
Q 4. What are the penalties for non-compliance with Ind AS?
Non-compliance with Ind AS can result in penalties like fines under Section 134 upto 25 lakhs, legal actions, and reputational damage. Companies may also be required to restate their financial statements, which can be costly and time-consuming.
Q 5. Can Ind AS adoption improve a company’s valuation?
Yes, adopting Ind AS can improve a company’s valuation by enhancing financial transparency as it’s main motto, aligning with global accounting standards, and making it more attractive to investors, both locally and internationally.
Review Courtesy: CA Kartik Jindal
Team Master Brains
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