What is Implementation of IND AS?
On 16th February, 2015 Ministry of Corporate Affairs (MCA) notified the Companies (Indian Accounting Standards) Rules, 2015 laying down the roadmap to apply converged standards .i.e. Ind AS to Indian Companies other than banking companies, insurance companies & Non-Banking Financial Companies (NBFC). Government has also notified Ind AS Standards (known as Indian Accounting Standards) to be applied by these companies.
Three phases for implementing IND AS
- Voluntary Phase:
- Mandatory Phase 1:
- Mandatory Phase 2:
IND AS is permitted to be adopted from the financial year 2015-16 (beginning from 1st April, 2015)
Application of Ind As is mandatory from financial year 2016-17 (beginning from 1st April 2016) for the following companies:
a) Listed or Non Listed Companies with net worth of INR 500 crores or more
b) Holding,subsidiaries, joint ventures and associates of these companies
Application of Ind As is mandatory from financial year 2017-18 (beginning from 1st April 2017) for the following companies:
a) All Listed companies not covered under the mandatory phase 1
b) Non Listed companies with net worth of INR 250 crores or more and not covered in the mandatory phase 1.
c) Holding company, subsidiaries company, joint ventures or the associate of these companies
- All companies applying Ind As are required to present comparative information as per Ind As for one year
For example: If the company covered under the mandatory phase 1need to apply Ind AS from 1st April 2016 onwards. It is also required to present comparatives for financial year 2016-17 and financial year 2015-16. This implies that the application of Ind AS will start from 1st April 2015 onwards.
- Ind As will apply to both standalone and consolidated financial statements for the companies covered under this roadmap
- Companies which are not included in the above list can either adopt Ind As voluntarily or can continue to apply existing standards (Accounting Standards) Rules 2006 herein referred to as current Indian GAAP
- Once the company opts to apply Ind AS it will have to prepare its financial statement according to Ind As on consistent basis. One applied for this voluntarily this option is irrevocable and such companies will not be required to prepare another set of financial statement as per current Indian GAAP
- Insurance companies, Banking Companies and NBFC are exempted to apply Ind As is preparation of their financial statement
The adoption of Ind AS is accordance with the roadmap will bring India closer to the world at large that has adopted or converged with IFRS. India has adopted Convergence approach rather than adopting IFRS fully as issued by International accounting Standard Boards (IASB)
Conversion to Ind AS is not just an accounting change rather than it has affected the functions outside of the finance department, including IT, legal, sales and marketing, human resources, investor’s relations and senior management.
The key impacts of transition are explained as follows:
- Direct Tax Impact: Ind As are primarily introduced to serve the need of the investors and as such it is not suitable for computing the income tax. To address the issue the Central government (CG) had constituted a Committee to draft the Income Computation and Disclosure Standards (ICDS). As per section 145 of the Income Tax Act the CG has the power to notify the ICDS which is to be followed by specified class of taxpayers or for specified class of income.
- Indirect Taxes Impact: Currently incidence of indirect tax and its computation is typically not dependent on the treatment in the financial statement. However in the past the court had considered accounting treatment while deciding the taxability in a particular case. Therefore the application of Ind AS may increase the possibility of litigation because application of Ind As results into significantly different accounting in many cases.
- IT Impact: Information Technology is likely to play a substantial role in the conversion process of Ind AS. It is advisable not to underestimate the time and the effort the conversion process will take and the inherent potential risk associated with it. The adoption of Ind As requires change in recognition, measurement and disclosure of many items on the financial statement. Both the information and business systems needed to deliver the information to comply with Ind AS. Accordingly the IT systems has to be modified so that it functions in line with Ind AS. It is important to note that the modifications to the IT system is not restricted just to IT modules but also includes asset management systems, financial instruments and payroll processing
- Internal Control Impact: The basic requirement for the conversion process is to maintain effective internal control. The Companies Act 2013 as well as per the Listing Agreement requires a company to ensure the existence of operative effectiveness of internal financial reporting. In most of the cases transition to Ind As requires significant changes in entity’s financial reporting framework
Recently government has notified 10 ICDS effective from financial year 2015-16 for compliance by all tax payers following mercantile system of accounting.
ICDS 1 lays out accrual concept as a fundamental accounting assumption. However it has specifically prohibited expected or mark to market losses to be inconsistent with the accrual concept. Thus ICDS appears to be one sided which is mainly determined to maximize tax collection rather than routed in sound accounting principles
Key considerations for Ind AS Conversion
The conversion to Ind AS provides potential opportunities that companies require to further examine and explore.
Many companies operate on global scale, being operational on such a global scale which provides financial reports to investors and other interested parties working on similar accounting standards used on those peers may increase the company’s comparability with its peers
Once the company initiates the conversion process it wants to understand the financial reporting decisions taken by other companies after adoption of the Ind AS. This will provide the converting companies to share their thoughts and perspectives on potential policies with each other.
There are various risk associated with this conversion to Ind AS which is required to be addressed by the management. The examples of potential risk includes:
- Failure to communicate the effects and the results to the stakeholders, board of directors, audit committee, investors and analysts
- Maintaining accounts and various reports under multiple accounting framework during the transition period.
- To maintain consistency is following various Ind AS principles including a potential to have to rethink accounting policy decisions taken by the subsidiaries who have already adopted Ind AS
- Retention of Key Employees
- Excessive cost incurred due to ineffective planning, project management
- Unreasonable work level incurred due to inappropriate planning
- Missed Deadlines on Conversion process
To mitigate this risk the board should pay close attention to the management’s approach for Ind AS conversion and satisfy themselves that it covers all appropriate areas on the basis of sound management plan
Key areas to be addressed during Ind AS conversion
No two Ind AS conversion projects will ever be same. Howerver we have listed out few issues that companies face during their conversion will vary widely are as follows:
- Project Launch and Planning Activities:
- Revision of Accounting Policies:
- Developing a format of financial statement in compliance with Ind AS:
- Identify and resolve Data capture issues:
The initial decisions taken during the project set up plays a crucial role for the success of the project. These decisions include creating a project management plan to co-ordinate and monitor the activity. It also includes structuring the project based on impact assessment, and assigning significant resources to the project, determine the team and apply their appropriate skill to fulfill their responsibilities
Re- Assessment of the Ind-AS policy will be the important element of the entire conversion project because decisions made during this phase will have an impact on the future business result. For example accounting policy decision may affect data collection requirement which will affect the IT system requirement, business processes etc.
Companies will have to redraft the financial; statement to meet the Ind As disclosure requirements
The increased level and complexity of certain financial disclosures expected under Ind AS may require significant project resources to identify and set up processes to collate the data
Thus newly framed Ind AS are basically converged form of IFRS. It shows that except few items almost all the provisions of IFRS are the same. So it is beneficial that Ind AS does not have any major changes in Indian GAAP