Indian corporates are gearing up to understand and implement the new accounting framework called Indian Accounting Standards (Ind AS). The Ind AS is almost the same as the International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS) which is followed by more than 100 countries.
Ind AS will replace the current accounting standards followed by companies in India. The ministry of corporate affairs (MCA), government of India, notified these on February 16, 2015, and recommended its application in a phased manner from April 1, 2016. Companies, listed or public or private, whose net worth is equal to or exceed Rs 500 crore as at March 31, 2014, are the first lot to report. Effectively, the quarterly results for June 30, 2016, would be the first such reporting period for listed companies above the threshold.
So what’s the big deal?
This accounting change is in one sense similar to the “retrospective tax” regime. What do I mean by that? Basically, when you change from one framework to another, the underlying expectation is that the same accounting policies are adopted to all the balances as at the opening balance sheet date, which in this case is 1 April, 2015.
However, accounting standard Ind AS 101 – First time adoption, is introduced to makes this transition practical. It provides options in almost 20-plus situations and it is up to each company to make the choice. In fact, in some situations, it provides companies an opportunity to restructure their balance sheet. So, in one way, an incentive for adoption of these new standards. The standard setters recognise that use of options may not make the financial statements comparable between peers in the year of transition but over a period of time, it will enhance comparability and consistency of reporting.
So what are some of these big conceptual changes?
Many concepts are new, but some key items that have the potential to change the sheer size of the financial statements or the profit are:
1. Definition of “control”. It looks beyond shareholding and board nominations. It looks at business and the relevant activities and power over it to decide if a company is controlled or is jointly controlled. Incidentally, this definition is very similar to the one used in the Companies Act, 2013.
2. ‘Time value of money’ will now be reflected in the financial statements. So any off-market transaction with employees, suppliers, customers, subsidiaries, associates, etc would impact financial statements.
3. Definition of “debt” and “equity”. If there is any obligation on the issuer of the financial instrument to repay the money, then it becomes a debt. Thus, certain instruments like redeemable preference shares will become debt rather than equity and the dividend thereon will be interest and not an appropriation. Substance will override the legal form.
4. Revenue recognition moves to the perspective of “the customer”. So when a customer is offered inducements and all built into one selling price, the split is made asking the question, “What is the customer getting?” That then drives the accounting.
5. “Has the risk and reward in substance transferred?” This evaluation will find precedence when one evaluates asset-light structures like bill discounting, leasing arrangements, securitization, etc.
Needless to say, the impact of any fundamental change to an accounting framework has a much wider ramification on the company. Any transaction, from a routine sales transaction to corporate restructuring, needs to be told in an accounting language. So when that changes, the impact is Pervasive.
Ind AS is surely likely to figure in the agenda of board and audit committee in FY17!
Globally, companies which transitioned to IFRS realised that communication, internally and externally with stakeholders, was very crucial to clear any anxiety arising from this change. Many companies will try and share more on this ahead of the statutory reporting deadlines.
– By Sunder Iyer, Partner, Deloitte Haskins & Sells LLP