In 1991, the Government of India opened its gates to the world through globalization. Over the years globalization has enabled cross border transactions in form of FDI’s and ODI’s, and cross border listing. Although India got familiarized with the concept of global village but the Accounting and financial reporting practices were not at par with the global practices followed, which we commonly know as International Financial Reporting Standards (IFRS). From 2007 the Government has been taking initiatives to update the existing accounting and reporting standards and move towards the best practices at par with the world.
On 16th February 2015, the Ministry of Corporate Affairs notified a set of Rules called Companies (Indian Accounting Standards) Rules 2015 with effect from 1st April 2015 introducing the IND AS as a step towards convergence with IFRS. For removal of difficulties and for ease of adoptability the Government decided to introduce the IND AS in a phased manner. The rules set a road map on the applicability of the Indian Accounting Standards (popularly known as IND AS) on a Mandatory basis to certain classes of Companies based on Listing and Net Worth of the Company as defined in the Rule 4 of the said rules. The applicability was broadly done in three phases as discussed below:
Phase I: Financial Reporting Year 2015-16
In the budget speech July 2014, Finance Minister Shri Arun Jaitley announced the introduction of IND AS and also stated that any company may follow IND AS on a voluntary basis. Hence in this phase any company whether listed or unlisted irrespective of its Net Worth could opt for following the IND AS. This set the tone for the next two phases which would be mandatory compliance for certain classes of Companies.
Phase II: Financial Reporting Year 2016-17
Rule 4 of the Companies (Indian Accounting Standards) Rules 2015 makes it mandatory for the following classes of Companies to follow the IND AS:
1. Companies Listed on stock exchange in India or a similar exchange outside India with a Net worth of Rs. 500 Crores or more
2. Companies which are in process of Listing in India or outside India with a Net Worth of Rs. 500 Crores or more
3. All other Companies whose Net worth is Rs. 500 Crores or more
4. Holding, Subsidiary, Joint Venture or Associate Companies of above
Phase III: Financial Reporting Year 2017-18
The following Companies mandatorily need to comply with the IND AS:
1. All listed Companies Listed on stock exchange in India or a similar exchange outside India
2. Companies which are in process of Listing in India or outside India with a Net Worth of Rs. 250 Crores or more
3. All other Companies whose Net worth is Rs. 250 Crores or more
4. Holding, Subsidiary, Joint Venture or Associate Companies of above.
General Exemptions to certain Classes of Companies
Insurance Companies, Banking Companies and Non Banking Finance Companies (NBFC) are exempted vide notification dated 16th February 2015. However an amendment was made to the Rules on 30th March 2016 and IND AS was made mandatory to certain classes of NBFC’s in the following manner:
1. All the NBFC’s whose net worth is Rs. 500 Crores or more and Holding, Subsidiary, Joint Venture and Associate of such NBFC’s shall comply with IND AS from financial year 2018-19 and on wards.
2. For entities not covered above
a. Listed NBFC’s having net worth of less than Rs. 500 Crores
b. Unlisted NBFC having a net worth more than Rs. 250 Crores
c. Holding, Subsidiary, Joint Venture or Associate Companies of above.
Shall comply with IND AS from the financial year 2019-20
The amendment also stated that Banking companies and Insurance Companies shall comply with IND AS as notified by the RBI and IRDA respectively.
Classes of Companies not covered above shall continue to comply with standards specified in Companies (Accounting Standards) Rules, 2006 which are same as the accounting standards issued by the Institute of Chartered Accountants of India (ICAI).
Definition of Net Worth
Net worth shall have the same meaning as defined in Section 2 sub section 57 of the Companies Act, which is the aggregate value of paid up capital and all reserves created out of profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure to the extent not written off, as per audited balance sheet, but does not include reserves created out of revaluation of assets, write back of depreciation and amalgamation.
Way Forward and Advantages
Although IND AS has been introduced, it has not completely replaced the existing standards. For class of companies not covered in the notification, existing Accounting Standards will continue to apply. The intention of the Government presently is not to replace the existing standards with IND AS immediately but gradually move towards the same to cover all the companies. The recent amendments to the existing accounting standards and the proposed amendments in the pipe line are almost in line with the IND AS.
Foreign investors prefer their entities in India to follow the IND AS as it brings in better comparability with similar companies across the globe. If entities are planning for future foreign investments it may be a good idea to adopt IND AS on a voluntary basis, to enable the Investors to understand the financial statements and also improve their valuation. Otherwise also, the adoption would benefit in following the best industry practices of the globe which will set in comparability with cross border entities which will eventually assist in driving growth of the organization. It may be pertinent to note here that a sustained adoption of IND AS over a period of 2 to 3 years would make the financial statements of an entity comparable across the years and thus a decision of voluntary compliance to IND AS is part of future planning of a business entity.
[The author of this article is a practicing Chartered Accountant and can also be reached at firstname.lastname@example.org]