Indian Accounting Standards - Introduction
There is a growing need for global accounting standards and this need has been recognised by the ICAI (Indian Chartered Accountants Institute) in these global times. In collaboration with the Government of India, the ICAI has decided to not accept and adopt the IFRS the way they are. This led to the development of Indian Accounting Standards or Indian AS. Let us understand in detail the development of international and Indian Accounting Standards.
Table of Contents
Indian Accounting Standards - Introduction
Formulation of the Indian Accounting Standards
Significance of Indian Accounting Standards
Applicability of Indian Accounting Standards
Phases of Adoption of Indian Accounting Standards
Key learnings
Frequently asked questions
Inception of Indian Accounting Standards
Accounting Standards were formulated by The Institute of the Chartered Accountants of India (ICAI). The process of migrating towards the International Financial Reporting Standards (IFRS) was initiated by ICAI. The IFRS are issued by the International Accounting Standards Board (IASB). The purpose of this shift was to increase the transparency and acceptability of the financial statements of the Indian corporates on an international level.
For the development of the Indian Accounting Standard, ICAI and the government analysed in detail the requirements of IFRS before deciding to converge the two. The Ind AS were formulated in line with the IFRS by the Accounting Standards Board (ASB).
Formulation of the Indian Accounting Standards
The Indian Accounting Standards were issued by the Central Government of India in consultation with the National Advisory Committee on Accounting Standards (NACAS). This was done under the supervision and control of the Accounting Standards Board (ASB) of ICAI. The Indian AS was recommended by NACAS to the Ministry of Corporate Affairs who is entitled to make Ind AS applicable to the companies in India. The Ind AS are named and numbered in the same way as their corresponding IFRS. Till date, 40 Indian AS have been issued.
Significance of Indian Accounting Standards
The Indian AS helps in the flow of money across borders, facilitate global listing and allow comparability of the financial statement on the international level. This facilitates global investments, thus benefiting the capital market stakeholders. The Indian AS helps the investor in doing a comparison of the investments on a global level. With the Indian AS in place, there is no need for the reinstatement of financial statements of Indian Corporates.
Applicability of Indian Accounting Standards
The Initial implementation year of Indian AS was 2011 but it was postponed due to certain issues by the Ministry of Corporate Affairs. The Companies (Indian Accounting Standards) Rules were issued in February 2015 by the Ministry of Corporate Affairs. This revised roadmap of implementation excluded the Banking companies, Insurance companies, and NBFCs from it.
Ind AS were implemented on a voluntary basis from 1st April 2015, and were made mandatory from 1st April 2016 as per the notification. The later notification issued included the NBFCs, Banking companies, and Insurance companies for the purpose of implementation. A Company may choose to follow Ind AS either voluntarily or mandatorily. But, once it starts following the Ind AS, it cannot revert back to its old method of accounting.
Phases of Adoption of Indian Accounting Standards
The phase-wise adoption of Ind AS as notified by the Ministry of Corporate Affairs is as follows:
(This notification incorporates the specific classes of companies based on their Net worth and listing status)
Phase I
From 1st April 2016, Indian AS mandatorily applicable to every company provided::
It is a listed or unlisted company
The Net worth of the company is ≥ ₹ 500 crores
Net worth to be calculated using figures for the previous three Financial Years (31.03.2014, 31.03.2015 and 31.03.2016).
Phase II
From 1st April 2017, Indian AS mandatorily applicable to every company provided:
It is a listed company or is in the process of being listed
Its Net worth is ≥ ₹ 250 crores but ≤ ₹ 500 crores (on any of the above-mentioned dates).
Net worth to be calculated using figures for the previous four Financial Years (31.03.2014, 31.03.2015, 31.03.2016 and 31.03.2017).
Phase III
From 1st April 2018, Indian AS mandatorily applicable to all Banks, NBFCs and Insurance companies provided;
Net worth is ≥ ₹ 500 crores w.e.f 1st April 2018.
A separate set of Ind AS for Banking and Insurance Companies as notified by the IRDA, with effect from 1st April 2018. Core investment companies, stockbrokers, venture capitalists, etc. included in NBFCS.
Net worth to be calculated using figures for the previous three Financial Years (31.03.2016, 31.03.2017 and 31.03.2018)
Phase IV
From 1st April 2019, Indian AS are mandatorily applicable to all NBFCs provided:
Net worth is ≥ ₹ 250 crores but ≤ ₹ 500 crores
When the Ind AS becomes applicable to a company, it shall by default apply to:
All its subsidiaries
Holding companies
Associated companies and
Joint ventures (irrespective of individual qualification of such companies)
Key Learning from The Article
IFRS is the global accounting standard on the basis of which an Indian standard GAAP has been formulated.
ICAI is the authority to regulate, control and monitor the accounting standards in India.
The Indian Accounting Board formulated the standards on the basis of IFRS.
The AS is incorporated under the Companies Act of 1956 and further modifications are done under the Companies Act 2013.
The Ministry of corporate affairs is the responsible ministry.
The accounting standards were adopted in four different phases.
FAQs on Indian Accounting Standards: Development and Benefits
1. What are Indian Accounting Standards (Ind AS) and why were they introduced?
Indian Accounting Standards, commonly known as Ind AS, are a set of accounting standards that have been converged with the International Financial Reporting Standards (IFRS). They were introduced by the Ministry of Corporate Affairs (MCA) to ensure that the financial statements of Indian companies are transparent, high-quality, and comparable on a global level. The primary goal is to align Indian accounting practices with international norms, thereby making it easier for domestic companies to attract foreign investment and for investors to assess performance accurately.
2. What are the key benefits of a company adopting Ind AS?
Adopting Ind AS offers several significant benefits for a company, including:
- Improved Comparability: Financial statements become easily comparable with those of global peers, which helps in performance benchmarking.
- Enhanced Credibility: Compliance with internationally accepted standards increases the trust and confidence of investors, lenders, and other stakeholders.
- Easier Access to Capital: Companies find it easier to raise funds from foreign markets as investors are familiar with IFRS-converged standards.
- Greater Transparency: Ind AS requires more detailed disclosures and promotes fair value accounting, providing a more realistic view of a company's financial position.
3. How is Ind AS different from the older Accounting Standards (AS)?
The main differences between Ind AS and the previous Accounting Standards (AS) are:
- Basis: Ind AS are principle-based, allowing for more judgment in application, whereas AS were largely rule-based, providing specific rules for transactions.
- Valuation: Ind AS places a greater emphasis on fair value accounting, which reflects the current market value of assets and liabilities. In contrast, AS primarily used the historical cost model.
- Global Alignment: Ind AS are converged with IFRS, making them globally aligned. AS were specific to the Indian context and not directly comparable to international standards.
4. Why did India choose to 'converge' with IFRS instead of directly 'adopting' them?
India opted for convergence with IFRS rather than direct adoption to create a set of standards that are aligned with global practices but also tailored to the country's specific economic and legal environment. This approach allowed Indian regulators to make necessary modifications, known as 'carve-outs' and 'carve-ins'. These changes address unique Indian circumstances, such as specific legal requirements under the Companies Act, which would have been difficult to accommodate with a direct adoption of IFRS. This ensures a more stable and practical transition for Indian companies.
5. Which body is responsible for the development of accounting standards in India?
The process of developing accounting standards in India involves multiple bodies. The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI) is responsible for formulating the standards. These formulated standards are then recommended to the National Financial Reporting Authority (NFRA). Finally, the Ministry of Corporate Affairs (MCA), Government of India, notifies these standards for implementation by companies in the country.
6. How does Ind AS improve financial reporting for an investor?
For an investor, Ind AS significantly improves the quality of financial reporting by promoting transparency and reliability. The emphasis on fair value measurement provides a more current and realistic assessment of a company's assets and liabilities than the traditional historical cost method. Furthermore, extensive disclosure requirements under Ind AS mean that companies must provide more detailed information about their financial performance and risks. This allows investors to make better-informed decisions by gaining a deeper and more accurate insight into the company's financial health.
7. What are some examples of important Indian Accounting Standards?
While there are many Ind AS, some of the most significant ones that have impacted financial reporting include:
- Ind AS 115: Revenue from Contracts with Customers - Establishes a comprehensive framework for recognising revenue.
- Ind AS 116: Leases - Requires companies to bring most leases onto their balance sheets, providing a more complete picture of liabilities.
- Ind AS 109: Financial Instruments - Deals with the classification, measurement, and impairment of financial assets and liabilities.
- Ind AS 36: Impairment of Assets - Ensures that a company's assets are not carried at more than their recoverable amount.
8. What major challenges do companies face when transitioning to Ind AS for the first time?
The transition from previous accounting standards to Ind AS can be challenging for companies. Key challenges include:
- Complexity and Training: The principle-based nature of Ind AS requires significant training for finance teams to apply professional judgment correctly.
- System Changes: Companies often need to upgrade their IT and ERP systems to handle new data requirements and complex calculations, such as those for fair value.
- First-Time Adoption: Preparing the opening Ind AS balance sheet involves restating previous figures, which can be a complex and time-consuming process.
- Cost of Implementation: The transition involves costs related to training, system upgrades, and hiring expert consultants.
