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MCA Notifies Indian Accounting Standards Converged with IFRS – Statement from Sai Venkateshwaran, Head of Accounting Advisory Services, KPMG in India

Feb 20, 2015   16:45 IST 

The Ministry of Corporate Affairs has finally notified the much awaited Indian Accounting Standards (Ind-AS), which are converged with International Financial Reporting Standards (IFRS).  The notification of these IFRS converged standards fills up significant gaps that exist in the current accounting guidance, and India can now claim to have financial reporting standards that are contemporary and virtually on par with the best global standards. This will in turn improve India’s place in global rankings on corporate governance and transparency in financial reporting.


With the transition date for adoption of these Ind-AS standards being barely 40 days away, the corporate sector has been eagerly awaiting the notification of these standards, and this now brings in greater certainty on India’s IFRS convergence journey.  India’s IFRS convergence initiatives were revived after the finance minister’s announcement in his budget speech last year. 


The corporate sector will now need to do its part to make the implementation a success, starting with an acknowledgement of the fact that this isn’t just an accounting change, but something that impacts the whole organization and the way they do business.  It’s time for the corporates to make a holistic assessment of this change, and gear up for the implementation within the fairly short timelines. 



The roadmap envisages voluntary adoption by any company from the financial year 2015-16 together with comparative information for the financial year 2014-15 and a two phase mandatory implementation thereafter.  These standards will be applicable to both the consolidated and stand alone financial reporting by these companies.  This roadmap applies to all companies other than insurance companies, banking companies and non-banking finance companies. 


As per the roadmap, all companies, listed and unlisted, with a net worth over Rs 500 crores and their holding, subsidiary, joint venture and associate companies are covered in the first phase and will have to report under these standards for financial years beginning on or after 1 April 2016, together with comparative information for the previous year.  The second phase covers all the other listed companies or those in the process of listing and all other unlisted companies with a net worth over 250 crores, together with their holding, subsidiary, joint venture and associate companies, and they will be required to report under these standards for financial years beginning on or after 1 April 2017, together with comparative information for the previous year.  However, companies that are listed or in the process of listing on SME exchanges are exempt. 


The net worth is to be calculated based on the stand alone financial statements of the company as at March 31, 2014 or the first audited financial statements for accounting period which ends after that date. 


Time is of the essence

For Indian companies, there’s very limited time for this transition, with the mandatory transition date of April 1, 2015 being just over 40 days away for companies covered under phase 1.  This date of significance as companies will need to prepare their opening balance sheet under Ind-AS standards as of this date, incorporating all changes between the old Indian standards and Ind-AS.  The notification of these standards now gives them a set of standards on which to base their transition efforts.  Companies should carry out a holistic impact assessment immediately and plan their implementation efforts over the next few months. 


Gaps in Indian GAAP

These Ind-AS standards now make Indian financial reporting contemporary, as it fills the significant gaps that exist in the currently applicable guidance.  The application of these principles based standards will significantly alter the way several transactions get accounted in India, with substance of arrangements clearly taking precedence over their legal form.  Transactions impacted would include among others, mergers and acquisitions, funding arrangements - particularly structured instruments, revenue contracts with customers, derivative contracts from plain vanilla forwards to more complex swaps, etc. 


First to adopt certain global standards

With these Ind-AS standards, India will be adopting some of the latest global standards before the rest of the world does.  While India has been working on IFRS convergence, IFRS itself, as a body of standards, continues to evolve.  Recently the IASB issued new standards on Revenue recognition and Financial Instruments, and these standards are mandatorily applicable only from 2017 and 2018 respectively. 


The notified Ind-AS standards are converged with these newer standards, including those on revenue and financial instruments, considering the timing of India’s move to IFRS.  Early adoption of these standards as compared to the global adoption timelines, would not only ensure that our standards remain current with or ahead of their IFRS equivalents, but also provide a stable platform of reporting for Indian companies for a period of time after they move to Ind-AS.  If these standards are not early adopted, Indian companies would have to adopt these newer standards a year or two after they move to Ind-AS, which would cause confusion to users of financial statements as they wouldn’t be able to compare financial information from one period to another in the years immediately following a transition of this magnitude.


IFRS Convergence, but not IFRS yet!

India’s efforts towards convergence with IFRS are commendable and make Indian standards contemporary.  However, due to the existence of certain carve-outs or deviations from IFRS, these standards wouldn’t be considered as equivalent to IFRS, even though the carve-outs are relatively minor.  While certain of these carve-outs are optional, there are certain mandatory carve-outs, which may prevent companies from being able to state full compliance with IFRS.  Ability to state full compliance with IFRS would be relevant for several Indian companies that are raising funds from global investors, including from leading global capital markets. 


The MCA and ICAI have worked towards minimizing the carve-outs as compared to those that existed in the 2011 version of the Ind-AS standards. 


Companies on their part should endeavor to minimize the use of carve-outs, so that their financial reports are as close to or the same as it would be under IFRS.


Organisation wide change

This change has an organization wide impact, and is not just an accounting change.  Companies will therefore need to plan in advance and invest the time.  Given the pervasive nature of the impact of these new standards, in addition to the financial reporting impacts, companies will also have to assess impact on other stakeholders such as investors and analysts. 


Companies would also have to determine the impact of the standard on business areas such as strategies for inorganic growth, including acquisitions, joint ventures, etc, capital raising, tax planning, compliance with loan covenants, incentive plans, etc.  This transition would also require changes to systems and processes including, sales and contracting processes, IT systems, internal controls, etc.


Companies should make an impact assessment and engage with all stakeholders, both internal and external, to deal with their respective areas of impact and ensure a smooth transition.


Tax issues

In order to make the transition to Ind-AS smooth, the related tax issues also need to be addressed.  In this regard, the Ministry of Finance had issued drafts of 12 Income Computation and Disclosure Standards in January 2015.  It is expected that these standards will get notified shortly, and will therefore provide an independent framework for computation of taxable income, which is delinked from the statutory financial reporting by companies.  However, the basis for MAT computation for companies reporting under Ind-AS still remains an issue to be addressed.  

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