Accounting Standards of India: Important Terms and Phases of Adoption

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Topics to be Covered Are

  • Important Terms
  • What is IND AS
  • Why there was a need to issue IND AS?
  • Who has issued IND AS?
  • What is meant by Carve outs/ins in IND AS?
  • Phases of adoption
  • Net Worth Calculation

Important Terms

  • Accounting Standard: An accounting standard is a common set of principles, standards and procedures that define the basis of financial accounting policies and practices. These Accounting Standards are recommended by Institute of Chartered Accountant of India (ICAI) and becomes applicable to entities only when Central Government notifies it.
  • IND AS: Indian Accounting Standard (abbreviated as Ind-AS) is the Accounting standard adopted by companies in India and issued under the supervision of Accounting Standards Board (ASB) which was constituted as a body in the year 1977. The Ind AS are named and numbered in the same way as the International Financial Reporting Standards (IFRS) . National Financial Reporting Authority (NFRA) recommend these standards to the Ministry of Corporate Affairs (MCA) . MCA must spell out the accounting standards applicable for companies in India. As on date MCA has notified 41 Ind AS. This shall be applied to the companies of financial year 2015 - 16 voluntarily and from 2016 - 17 on a mandatory basis.
  • Generally Accepted Accounting Principles: GAAP is a framework of accounting standards, rules, and procedures that companies follow when they put together their financial statements. This body is rule based. The purpose of GAAP is to ensure that the financial statements of the organization maintain a minimum level of consistency and are transparent so that it makes it easier for investors to evaluate and extract applicable information. The rules and procedures of GAAP are what govern corporate accounts when the details of their company՚s financial statements are displayed.
  • International Financial Reporting Standards: IFRS is a global framework for the general guidance for the preparation of financial statements. This is a form of an international standard, and it is extremely important for large companies that have subsidiaries in different countries. This body is principle based. IFRS is issued by the International Accounting Standards Board (IASB) , and they decide exactly how accountants must report and look after their accounts. IFRS is used primarily by companies anywhere in the world except the USA. IFRA covers topics like employee benefits, revenue recognition, investment in associates, business combinations, foreign exchange rates, fixed assets, intangible assets etc.
  • Ministry of Corporate Affairs: Ministry of Corporate Affairs (MCA) makes Ind AS applicable on the companies in India. National Financial Reporting Authority (NFRA) recommend these standards to the Ministry of Corporate Affairs (MCA) . MCA must spell out the accounting standards applicable for companies in India.
  • Accounting Standard Board: ASB is a committee under Institute of Chartered Accountants of India (ICAI) which consists of representatives from government department, academicians, other professional bodies viz. ICAI, representatives from ASSOCHAM, CII, FICCI, etc. This was constituted as a body in the year 1977. Main function of ASB is to formulate accounting standards. While formulation of standards ASB must consider applicable laws, customs, social and business environment.
  • National Financial Reporting Authority (NFRA) : The National Financial Reporting Authority (NFRA) was constituted on 1st October 2018 by the Government of India under section 132 (1) of the Companies Act, 2013. In the wake of accounting scams, a need was felt to establish an independent regulator for enforcement of auditing standards and ensuring the quality of audits to enhance investor and public confidence in financial disclosures of companies. The Companies Act requires the NFRA to have a chairperson who will be appointed by the Central Government and a maximum of 15 members.

What is IND As?

  • IND AS stands for Indian Accounting standards and are converged standards for International Financial Reporting standards (IFRS) . In simple terms, Indian accounting standards came into existence to meet the requirements of IFRS.
  • The Government of India in consultation with ICAI decided to converge and not to adopt IFRS issued by the International Accounting standards Board (IASB) .
  • The Ministry of Corporate Affairs (MCA) in 2015, had notified the Companies Indian Accounting Standards (IND AS) Rules 2015 for adoption and implementation of IND AS in a phased manner beginning from Accounting year 2016 - 17.
  • Later MCA has issued three Amendment Rules, one in each year 2016,2017 and 2018 to amend the 2015 rules.

Why There Was a Need to Issue IND As?

  • The ICAI recognizes the need for a global standard in these global times. Thus, the Government of India along with ICAI decided not to adopt the IFRS the way they are. Instead, it introduced the Indian AS, popularly known as Ind AS.
  • Ind AS facilitate the cross-border flow of money, global listing, and global comparability of the financial statements. This, in turn, facilitates global investment and benefit to capital market stakeholders. It enhances the investor՚s ability to compare the investments on a global basis. This, in turn, reduces the risk of misjudgments. It also eliminates the costly requirements of reinstatement of financial statements.

Ind AS have many benefits, some of which are discussed below:

  • Wider acceptability
  • Comparability of Financials
  • Wider acceptability
  • Comparability of Financials
  • Changes in standards as per economic situations
  • Attracts Foreign Investment
  • Saves financial statement preparation cost

Who Has Issued IND As?

  • Indian Accounting Standards (IND AS) were issued by Central Government of India under the supervision and control of Accounting Standards Board (ASB) of ICAI and in consultation with National Advisory Committee on Accounting Standards (NACAS) .
  • National Advisory Committee on Accounting Standards (NACAS) recommends these standards to the Ministry of Corporate Affairs (MCA) . Then MCA must spell out the accounting standards applicable for companies in India.
  • Note: NACAS is no more in action after the applicability of section 132 of the companies act 2013, which deals with NFRA.

What is Meant by Carve Outs/Ins in IND As?

  • As IND AS are converged standards for IFRS i.e.. IFRS are not adopted as it is. Certain changes have been made in IFRS considering the economic environment of the country. These differences are due to differences in application of accounting principles and practices and economic conditions prevailing in India. These differences which are in deviation to the accounting principles stated in IFRS are commonly known as ‘Carve- Outs.’
  • A carve out means that certain requirements of an accounting standard under IFRS are not be adopted
  • There are certain additional note or guidance given in IND AS which is over and above to what is given in IFRS. This is termed as ‘Carve-in.’

Phases of Adoption

MCA had notified a phase-wise convergence to IND AS from Accounting Standards. IND AS was adopted by specific classes of companies based on their Net worth and listing status. let՚s see the each of the phases in detail below:

Phase I (FY 16 - 17 Onwards)

  • Companies (listed or unlisted) having net worth of ₹ 500 ⚹ crore or more; and
  • Holding, subsidiary, joint venture or associate companies of companies covered in above point.
  • as on 31st March 2014 or the first audited financial statements for accounting period which ends after that date (i.e.. March 31,2014)

Phase II (FY 17 - 18 Onwards)

  • 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.
  • Unlisted companies having net worth of ₹ 250 crore ⚹ or more; and
  • Holding, subsidiary, joint venture, or associate companies of companies covered in point (1) and (2) above.
  • as on 31st March 2014 or the first audited financial statements for accounting period which ends after that date (i.e.. March 31,2014)

Phase III (FY 18 - 19 Onwards)

  • NBFCs having net worth of ₹ 500 crore ⚹ or more.
  • Holding, subsidiary, joint venture, or associate companies of companies covered under point (1) above.

Phase IV (FY 19 - 20 Onwards)

  • NBFCs whose equity or debt securities are listed or are in the process of listing on any stock exchange in India or outside India and having net worth less than ₹ 500 crore.
  • NBFCs, that are unlisted companies, having net worth of ₹ 250 crore or more but less than ₹ 500 crore and
  • Holding, subsidiary, joint venture, or associate companies of companies covered under point (1) and (2) above.

Net Worth Calculation

  • Net worth will be determined based on the stand-alone accounts of the company as on 31st March 2014, or the first audited period ending after that date.
  • Net Worth = Paid-up share Capital + all reserves ⚹ out of profit & securities premium account – accumulated losses - deferred expenditure - miscellaneous expenditure not written off)
  • Only capital Reserve arising out of Promoters Contribution and Government Grants received can be included. Reserves created out of revaluation of assets and written back depreciation cannot be included.

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