Introduction to Indian Accounting Standards
Table of Content:
A set of financial statements are a key tool of communication about the financial position, performance and changes in financial position of an entity that is useful to a wide range of stakeholders in making economic decisions. Accounting Standards is an essential building block in the financial reporting world. These Accounting Standards provide principles and rules that must be followed to ensure accuracy, consistency and comparability of financial statements. These accounting guidelines also ensure that financial statements should be understandable, relevant, reliable and comparable.
Accounting Standards are a set of documents that lay down the principles covering various aspects, such as, recognition, measurement, presentation & disclosure of accounting transaction in the financial statements. Objective of accounting standards is to standardize the diverse accounting policies & practices with a view to eliminate the non-comparability of financial statements to the extent possible and also to enhance the reliability to the financial statements. Accounting standards play a very significant role in enabling the stakeholders to get the reliable and comparable accounting data and investors to make more informed economic decisions.
The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (The ICAI), since its establishment way back in 1977, has been involved in the formulation of Accounting Standards and standard setting process of the country. ASB has been relentlessly working to ensure that the world’s fastest growing emerging economy of India is equipped with high quality Accounting Standards (AS) comparable to the best in the world. The ICAI also issued Accounting Standards which are applicable to the entities other than companies and are aligned with Accounting Standards notified by the Ministry of Corporate Affairs (MCA) with certain differences.
With the increasing flow of foreign funds, following were few of the rising complexities which were not explicitly and comprehensive dealt by AS and it was needed to have guidance around the same to witness consistent accounting treatments by entities.
a) Capital being raised in the form of complex financial instruments like optionally convertible / compulsorily convertible shares / debentures etc.
b) Various derivative instruments embedded in the foreign currency bonds / equity instruments , commodity derivatives etc.
c) Group restructuring, business acquisitions, mergers, demergers, slump sale etc.
d) Complex revenue arrangements and business models with innovating emerging digital economy
e) Diverse stock-based compensation with innovative remuneration models for C-suite
f) Complex tax provisions and impact thereof in determination of current and deferred t ax
g) Different ways to provide shareholders’ return and various modes of shareholder’s investments in kind in the event of group reorganisation.
Further, a need was felt to have comprehensive disclosures in the financial statements so as to enable the investors to have a complete overview of business background, risks involved and other important aspects. The disclosure requirements in ASs are limited and the need was felt to improve those disclosures especially about aspects like revenue, related party transactions, segment reporting, business combinations etc. so as to improve the quality of financial reporting and enable investors to take an informed decision.
In 1973, International Accounting Standards Committee (IASC) was formed through an agreement made by professional accountancy bodies from Canada, Australia, France, Germany, Japan, Mexico, the Netherlands, the UK and Ireland, and the United States of Ameri ca. The main goal of the committee was to harmonize different financial reporting practices. The standard setting board of the IASC was known as the IASC Board. The IASC Board promoted various standards, conceptual Framework, which was directly adopted by many countries and many national accounting standards setters were referring to the same to govern the standard setting process in their countries.
As early as 1989 the International Organisation of Securities Commissions (IOSCO), the world’s primary forum for co–operation among securities regulators, prepared a paper noting that cross border security offerings would be facilitated by the development of internationally accepted standards. For preparers, greater comparability in financial reporting with their global peers had obvious attractions. In May 2000 IOSCO announced that it had completed its assessment of 30 accounting standards of the International Accounting Standards Committee (IASC 2000 standards). As a result, the IOSCO Presidents’ Committee recommended that its members permit incoming multinational issuers to use the 30 IASC 2000 standards to prepare their financial statements for cross-border offerings and listings, as supplemented by reconciliation, disclosure and interpretation where necessary to address substantive outstanding issues at a national or regional level.
On 19th July 2002, a regulation was passed by the European Parliament and the European Council of Ministers requiring the adoption of IFRS. As a result of the Regulation, all EU listed companies were required to prepare their financial statements following IFRS from 2005. This has led to IFRS being considered as one of the major unified GAAP in the world. So with this, two prominent and widely adopted accounting standards have emerged:
1) Accounting Standards set up by US Financial Accounting Standards Board (FASB) (widely known as “US GAAP”) and
2) IFRS
As discussed above, accounting standards in India are formulated by the ASB of ICAI. The central government prescribes the standards of accounting, or any addendum thereto, as recommended by the ICAI, in consultation with and after examination of the recommendations made by the NFRA. The Ministry of Corporate Affairs (MCA) notifies the standards under the Companies Act by publishing them in the Gazette of India. Notified standards are authoritative under Indian law.
It may be noted that IFRS are being issued / revised by the IASB from time to time. As a part of convergence with IFRS, the Ind AS may be issued/revised corresponding to the IFRS. Accordingly, whenever IASB issues any new IFRS or update the current one, ASB of ICAI considers the convergence thereof under Ind AS. While doing so ASB provides considerations to local regulatory landscape, business practices, tax and other relevant provisions to develop exposure draft with proposed carve in or carve out from IFRS.
MCA has notified the Companies (Indian Accounting Standards) Rules, 2015 vide its G.S.R dated 16 February 2015. Accordingly, it has notified 39 Ind AS and has laid down an Ind AS transition roadmap for companies and non- banking finance companies excluding banking companies andinsurance companies. MCA has proposed phase-wise approach for mandatory transition to Ind AS.
As per the Companies (Indian Accounting Standards) Rules, 2015, following companies were covered under Phase I for accounting periods beginning on or after 1st April 2016, with the comparatives for the periods ending on 31st March 2016:
a) companies whose equity or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of rupees five hundred crore or more;
b) companies other than those covered by sub-clause (a) above and having net worth of rupees five hundred crore or more;
c) holding, subsidiary, joint venture or associate companies of companies covered by subclause (a) and sub-clause (b) as mentioned above
Following companies were covered under Phase II for accounting periods beginning on or after 1st April 2017, with the comparatives for the periods ending on 31st March 2017:
a) companies whose equity or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of less than rupee s five hundred crore;
b) companies other than those covered in sub-clause (a) above i.e. unlisted companies having net worth of rupees two hundred and fifty crore or more but less than rupees five hundred crore.
c) holding, subsidiary, joint venture or associate companies of companies covered by subclause (a) and sub-clause (b) as mentioned above.
For the purpose, NBFC is defined as a Non-Banking Financial Company as defined in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 and includes Housing Finance Companies, Merchant Banking companies, Micro Finance Companies, Mutual Benefit Companies, Venture Capital Fund Companies, Stock Broker or Sub-Broker Companies, Nidhi Companies, Chit Companies, Securitisation and Reconstruction Companies, Mortgage Guarantee Companies, Pension Fund Companies, Asset Management Companies and Core Investment Companies
Ministry of Corporate Affairs, in its circular dated 30th March 2016, amended the Companies (Indian Accounting Standards) Rules, 2015 to include its applicability to Non-Banking Finance Companies. As per the circular, NBFCs to apply Ind AS in the following two phases :
As per the Companies (Indian Accounting Standards) Rules, 2015, following NBFCs were covered under Phase I for accounting periods beginning on or after 1st April 2018, with the comparatives for the periods ending on 31st March 2018.
a. NBFCs having net worth of ` 500 Crores or more
b. Holding, subsidiary, associate or Joint Venture of NBFCs already covered under sub clause
(a) above, other than companies already covered under Ind AS roadmap for Non -Financial companies
Following NBFCs were covered under Phase II for accounting periods beginning on or after 1st April 2019, with the comparatives for the periods ending on 31st March 2019
a. NBFCs whose equity or debt securities are listed or in the process of listing on any stock exchange in India or outside India and having net worth less than rupees five hundred crore;
b. NBFCs, that are unlisted companies, having net worth of rupees two-hundred and fifty crore or more but less than rupees five hundred crore; and
c. Holding, subsidiary, associate or Joint Venture of Companies already covered under sub clause (a) and (b) above, other than companies already covered under Ind AS roadmap for Non-financial companies
NBFCs having net worth below rupees two fifty crores and not covered above shall continue to apply ASs. Further, where Ind AS is applicable to NBFCs, the same shall apply to both standalone and consolidated financial statements.
It is notable that NBFC can apply Ind AS only if they fall in any of the above criteria. Voluntary adoption of Ind AS by NBFCs are not allowed.
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