In the realm of accounting and financial reporting, IND AS (Indian Accounting Standards) plays a pivotal role. These standards, which are closely aligned with international accounting and reporting practices, have been introduced to ensure that financial statements of Indian entities are not only prepared in a standardized manner but also meet global comparability standards. This article provides insights into what IND AS means and how it applies to different entities.
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Meaning of IND AS
IND AS, or Indian Accounting Standards, are essentially a set of accounting principles and standards designed to regulate how entities, including companies and NBFCs (Non-Banking Financial Companies), prepare their financial statements. The main objective of IND AS is to ensure that the financial statements of these entities are prepared in a manner that allows for easy comparison and analysis, not only within the Indian market but also on a global scale.
Why Do We Need IND AS?
The need for IND AS arises from India’s growing exposure to the global economy. As businesses expand beyond national borders and participate in international financial markets, the need for a common accounting language becomes imperative. IND AS is a response to this necessity, as it enables Indian entities to present their financial information in a way that aligns with international standards. This harmonization allows for a better understanding of an entity’s financial position and performance by stakeholders both in India and globally.
Applicability of IND AS on Companies
The applicability of IND AS standards to companies in India occurred in three phases:
Phase 1: Applicability from 1/4/2015
In the initial phase, the adoption of IND AS was not mandatory for any company. However, companies had the voluntary option to prepare their financial statements in accordance with IND AS during this phase. This marked the introduction of IND AS in India.
Phase 2: Mandatory Applicability from 1/4/2016
During the second phase, IND AS became mandatory for specific companies:
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- Listed and unlisted companies with a net worth of Rs. 500 crores or more.
- Holding, subsidiary, associate, or joint venture companies of the above.
Phase 3: Mandatory Applicability from 1/4/2017
In the third phase, IND AS became mandatory for the following companies:
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- All listed companies, irrespective of net worth.
- Unlisted companies with a net worth between Rs. 250 crores and Rs. 500 crores.
- Holding, subsidiary, associate, or joint venture companies of the above.
It’s important to note that any company listed on the Small & Medium Exchange (SME) is not considered a listed company.
Once an entity begins preparing its financial statements in accordance with IND AS, it is not allowed to discontinue the application of these standards.
Applicability of IND AS on NBFCs
IND AS standards were introduced for NBFCs in two phases:
Phase 1: Applicability from 1/4/2018
In the first phase, IND AS became mandatory for the following NBFCs:
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- All listed and unlisted NBFCs with a net worth of Rs. 500 crores or more.
- Holding, subsidiary, associate, or joint venture companies of the above.
Phase 2: Applicability from 1/4/2019
In the second phase, IND AS became mandatory for the following NBFCs:
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- All listed NBFCs.
- Unlisted NBFCs with a net worth between Rs. 250 crores and Rs. 500 crores.
- Holding, subsidiary, associate, or joint venture companies of the above.
Unlike companies, voluntary adoption of IND AS by NBFCs is not permitted. This means that NBFCs can only prepare their financial statements in accordance with IND AS if they fall into one of the categories specified above.
The applicability of IND AS to banking and insurance companies is currently under discussion, and an official notification regarding these sectors is expected soon.
Net Worth for Determining Applicability of IND AS
To determine the applicability of IND AS, the net worth of the entity is a critical factor. The calculation for net worth is as follows:
- Paid-up share capital
- Add: Security Premium
- Add: Reserves created out of profit
- Less: Accumulated Losses
- Less: Deferred Revenue Expense
The total derived from this calculation represents the net worth of the entity.
Conclusion
IND AS, or Indian Accounting Standards, has become an integral part of the Indian financial landscape. Its adoption has not only aligned Indian accounting practices with international standards but has also made financial reporting more transparent and comparable on a global scale. Understanding the applicability of IND AS to different types of entities is essential for ensuring compliance and facilitating accurate financial reporting in India’s ever-evolving business landscape. As the global economy continues to grow, adhering to these standards becomes increasingly important for entities seeking to expand their reach and credibility.
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