Key Takeaways:
- Understand the transition from AS to Ind-AS and its significance for Indian companies.
- Grasp the framework and major standards under Ind-AS, including presentation, inventory, property, revenue, and financial instruments.
- Recognize key differences between AS and Ind-AS, supported by practical examples.
Source: Pixabay
Transition from AS to Ind-AS
a. Why Shift from AS to Ind-AS?
Historically, Indian companies followed Accounting Standards (AS) based on the Indian Generally Accepted Accounting Principles (IGAAP). However, AS lacked consistency with global norms and did not emphasize fair value measurement. To address these gaps and facilitate global business, the Ministry of Corporate Affairs initiated a phased transition to Ind-AS, which converges with IFRS. This move has brought India's financial reporting in line with International Standards, enhancing investor confidence and cross-border comparability.
b. Applicability and Phased Adoption
Ind-AS adoption was rolled out in phases based on company size and type. The main criteria are net worth and listing status. Once a company adopts Ind-AS, all its subsidiaries, associates, and joint ventures must follow suit.
| Phase | Criterion | Applicability Date |
|---|---|---|
| Phase I | Listed/unlisted companies with net worth ≥ ₹500 crore | April 1, 2016 |
| Phase II | Listed/unlisted companies with net worth ₹250–500 crore | April 1, 2017 |
| Phase III | Banks, NBFCs, Insurers (net worth ≥ ₹500 crore) | April 1, 2018 |
| Phase IV | NBFCs (net worth ₹250–500 crore) | April 1, 2019 |
Conceptual Framework under Ind-AS
Conceptual Basis
The framework for financial reporting under Ind-AS is rooted in the principles of IFRS. It guides the preparation and presentation of financial statements, emphasizing relevance, faithful representation, comparability, and understandability. The framework is regularly updated to reflect changes in the global accounting environment, ensuring that Indian companies remain aligned with international best practices.
Key Ind-AS Standards
a. Ind-AS 1: Presentation of Financial Statements
This standard sets out requirements for how financial statements should be structured and presented. It requires entities to provide a true and fair view and mandates disclosures about accounting policies, judgments, and uncertainties. Ind-AS 1 ensures comparability by defining the minimum content and the order of presentation.
b. Ind-AS 2: Inventories
Ind-AS 2 prescribes how inventories should be measured, recognized, and disclosed. It requires inventories to be valued at the lower of cost and net realizable value. This standard enhances transparency in the reporting of assets that are fundamental to manufacturing and retail businesses.
c. Ind-AS 16: Property, Plant, and Equipment (PPE)
Ind-AS 16 governs the recognition, measurement, and depreciation of tangible assets. It introduces the option of using fair value for subsequent measurement, allowing companies to reflect the current market value of their assets. This is particularly significant for sectors with substantial investments in infrastructure or machinery.
d. Ind-AS 18/115: Revenue Recognition
Ind-AS 115 (which supersedes Ind-AS 18) provides a single, principles-based approach for recognizing revenue from contracts with customers. Revenue is recognized when control of goods or services is transferred, and measurement is based on the expected consideration. This standard enhances comparability and reduces ambiguity in revenue reporting.
e. Ind-AS 109: Financial Instruments
Ind-AS 109 deals with the classification, recognition, and measurement of financial assets and liabilities. It introduces fair value measurement, impairment models, and hedge accounting. This standard is vital for banking, financial services, and any entity dealing with complex financial instruments.
Differences between AS & Ind-AS
| Aspect | AS (IGAAP) | Ind-AS (IFRS converged) |
|---|---|---|
| Approach | Rule-based | Principle-based |
| Fair Value | Limited use | Extensive (PPE, Financial Instruments, etc.) |
| Revenue Recognition | Based on transfer of risks and rewards | Based on transfer of control (Ind-AS 115) |
| Consolidation | Focuses on ownership | Focuses on control (Ind-AS 110) |
| Financial Instruments | Very basic | Detailed, includes derivatives, expected credit loss model |
| Disclosure | Minimum requirements | Extensive, detailed disclosures |
Examples
a. Fair Value Measurement under Ind-AS 16
Consider a manufacturing company holding a machine purchased for ₹10 lakh five years ago. Under the cost model (AS), it would be reported at cost less depreciation. Under Ind-AS 16, the company could opt for fair value measurement. Suppose the fair value today is ₹12 lakh, and accumulated depreciation is ₹2 lakh. The carrying amount under Ind-AS becomes ₹12 lakh, reflecting the asset's current worth and providing better information to stakeholders.
b. Revenue Recognition under Ind-AS 115
Suppose an IT firm enters into a contract to deliver software and provide maintenance for two years. Under old AS, revenue might be recognized when the software is delivered. Ind-AS 115 requires the firm to identify performance obligations and recognize revenue as each is fulfilled software delivery and ongoing maintenance, ensuring accurate matching of income with services rendered.
c. Financial Instruments under Ind-AS 109
A company invests in listed equity shares. Under AS, these may be carried at cost or lower of cost and market value. Ind-AS 109 requires such investments to be measured at fair value through profit or loss, leading to timely recognition of gains or losses in the income statement.
By applying Ind-AS, companies can comply with regulatory requirements and also provide more meaningful and globally comparable financial information. It encourages critical thinking about the financial health and value of an enterprise.