New accounting standards in India: What do companies need to know?

The new Indian Accounting Standards have replaced the existing standards since 1 April, which in turn affect the accounting processes of companies operating in the country. Outlined below is what companies need to do differently to keep up with play.

India is the world’s largest democracy and a significant player on the global stage. According to the World Bank’s latest Global Economic Prospects report, the nation’s economy is expected to grow at 7.6% in the fiscal year 2016/17, and will be the fastest growing economy in the world in the next three years. Part of this growth comes from streamlining business procedures, tax regimes and accommodative monetary policy with the new Indian Accounting Standards (Ind-AS) being a step in the same direction.

To improve India’s ranking on corporate governance and transparency in financial reporting, the Ministry of Corporate Affairs (MCA) is implementing changes to align Indian financial reporting with global standards, such as the International Financial Reporting Standards (IFRS). At present, 39 standards have been identified, with further changes expected to take place through a phased process. New changes will occur on a yearly basis, from 1 April 2016 onwards.

Below are the three main standards every business in India should pay attention to:

1. Revenue, recognition and measurement under accounting standard (IndAS 18)

This standard outlines when to recognise revenue from the sale of goods, rendering of services, and for interest, royalties and dividends. Essentially, revenue is determined by an agreement between the seller and buyer of the asset and is recognised on satisfaction of pre-determined conditions including transfer of control of goods.

2. Income and taxes under (IndAS 12)

It requires an entity to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves. For example, when a transaction or event is recognised as either a profit or a loss, tax replicates this.

3. Fixed assets 

It prescribes the accounting for property, plant and equipment and the changes in these investments with the objective to enable users of financial statements to discern information about their entities’ investments.  This includes details on component accounting, periodic review of depreciation methodology, residual value and treatment of repair costs.

Indian entities are required to adopt these new standards in two phases:

  • Phase 1 begins on or after 1 April 2016 for listed or non-listed companies with a net worth of INR 500 crore or more.
  • Phase 2 begins on or after 1 April 2017 for all listed companies and unlisted companies with a net worth of INR 250 crore or more.

The IndAS also applies to holding companies, subsidiaries, joint ventures and associate companies for the above phases.  Once applied, the IndAS is required to be followed for both stand-alone financials and consolidated statements.

Given the IndAS highlights "substance" over "form" as well as enhances financial governance, it is important for companies to stay abreast of the changes as they filter through in a phased approach.

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