Starting financial year 2017 all companies will be required to transition from the current reporting format for financial results that is based on Generally Accepted Accounting Principles (GAAP) to Indian Accounting Standards Rules, 2015 or IndAS Rules. The new era of Accounting and presentation for corporate entities has been set by Ministry of Corporate Affairs (MCA) by notifying 39 new Indian Accounting Standards (INDAS) vide its notification dated 16th February, 2015.
Applicability of IndAS
Difference between IndAS and GAAP
The IndAS rules are different from GAAP as they are based on the fair valuation method. In accounting, fair value is a rational estimate of the potential market price of goods, services or assets. It takes into account factors such as acquisition, production and distribution costs.
The new accounting standards based on IndAS are closer to the global standards of reporting financial results and rely on segment revenue, segment assets, segment liabilities and segment results.
As per the Sebi circular, banks and insurance companies will not need to comply with the new accounting norms, and follow the prescriptions of their respective regulators, that is the Reserve Bank of India and Insurance Regulatory and Development Authority of India. Whenever a company gets covered under the roadmap, IndAS becomes mandatory, its holding, subsidiary, associate and joint venture companies will also have to adopt IndAS (irrespective of their net worth).
Financial statements under IndAS
- Balance sheet at the end of the period
- Statement of profit and loss for the period
- Statement of changes in equity for the period
- Statement of cash flows for the period
- Notes, comprising a summary of significant accounting policies and other explanatory information
- Comparative financial information in respect of the preceding period as specified
- Balance sheet as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements having an impact on the balance sheet as at the beginning of the preceding period.
Differences between IndAS and IFRS
India has chosen a path of International Financial Reporting Standards (IFRS) convergence rather than adoption. Hence, IndAS are primarily based on the IFRS issued by the International Accounting Standards Board (IASB). There are also certain general differences between IndAS and IFRS, some of which are:
- The transitional provisions given in each of the standards under IFRS have not been given in IndAS, since all transitional provisions related to IndAS, wherever considered appropriate, have been included in IndAS 101, First-Time Adoption of Indian Accounting Standards, corresponding to IFRS 1, First-Time Adoption of International Financial Reporting Standards.
- Different terminology is used in IndAS when compared to IFRS, e.g. ‘balance sheet’ is used instead of ‘statement of financial position’ and ‘statement of profit and loss’ instead of ‘statement of comprehensive income’.
Advantages of IndAS
Implementation of IndAS will bring radical changes in corporate financial reporting practices in India. It brings new and complex concepts and higher level of transparency. It is expected that the application of IndAS will improve the quality of financial reporting. For most companies, it will lead to better accounting, better investor relations across the world and third, especially for multinational companies, it will be less costly to have one accounting language.
IndAS enables investors to obtain better information about the company, as it mandates the use of recognition and measurement criteria that better reflect the economic reality of companies and requires the management to provide a large amount of information in the notes. Improved quality of financial reporting improves corporate governance because it helps investors, analysts and other stakeholders to better understand the financial position and performance of the company. However, full benefit of IndAS is derived only when companies take a holistic approach and apply IndAS in true spirit.
Application of IndAS involves significant judgment and estimates. Therefore, it provides significant scope for managing earnings and window-dressing. The audit committee will have to be cautious in approving financial statements.