In Indian Economy where everyone is talking about demonetization and black money, we can’t ignore the importance of Accounting and Financial Statements to make this move successful. Everyone has got affected by this move, be it either the business community or the Investors. It is time to take your business to a different height by using this demonetization as a growth opportunity instead of as a curbing. Investors are looking for new business or new ideas that could generate revenue and growth for them. And for Creation of Value and worth for the Company, financial policies adopted plays crucial role in it.

Recently Indian Government has announced IndAS for Indian Corporates, viz the big size corporates, but are we ready for it or our Investors have knowledge to understand the transactions recorded with it? I think the answer will be No. As we know, IndAS has been applicable for big size companies & their subsidiaries and it will also cover rest of the business group in phase manner. Even employees from these companies are not able to understand it completely. So we just trying to bring some basic knowledge about it.

To have better understanding about the IndAS, first we must understand the basic structure of Financial Statements.

Components of Financial Statements are: –

  • The Primary Statements
    • Balance Sheet for the period end
    • Profit or Loss for the period
    • Statement of Changes in equity
    • Statement of Cash flows for the period (Cash Flow Statement)
  • Notes, Including summary of accounting policies and other explanatory Information

However, we are already preparing above mentioned Statements except Statement of Changes in equity but there is a huge difference in Preparing financial statement using IndAS and Accounting Standards. Preparing Financial Statements using IndAS gives an edge to Indian Corporates as it helps users to compare over the periods presented and with companies outside India using IFRS.

Main Purpose of Financial Statements: –

  • to provide information about the financial position, financial performance and cash flows to wide users for making economic decisions, covering:
    • Assets
    • Liabilities
    • Equity
    • Income & expenses (including gains / losses)
    • Contribution by owners and distribution to owners
    • Cash flows
  • The above and other information in notes, assists user of financial statements in predicting the entity’s future cash flows and their timing and certainty.
  • Entity must identify each Financial Statement & distinguish them from other information published in the same document. Entity must specify the following details in their Financial Statements: –
    • Name of the Entity & Change in name, if any
    • Standalone Financial Statement or Consolidated Financial Statement
    • Reporting Period along with the reporting period end date
    • Presentation Currency
    • Level of rounding used in the Financial Statements.

Balance Sheet:

Earlier we use to prepare Balance sheet using T-Shape Format or Vertical Format. However, there is no prescribed format in IndAS for Balance Sheet but as per Revised Schedule III of Companies Act 2013, companies are using format for preparing Balance Sheet. In this format, Assets and Liabilities are classified on the basis of Current or Non-Current.

  • Current Assets are those assets that are: –
    • expected to be realised in the entity’s normal operating cycle
    • held primarily for the purpose of trading
    • expected to be realised within 12 months after the reporting period
    • cash and cash equivalents (unless restricted).
  • Current Liabilities are those labilities that are: –
    • Expected to settle the Liability in its normal operating cycle;
    • Expected to Settle the liability within 12 Months;
    • It does not have an unconditional right to defer settlement of the liability for at least 12 Months;
    • Primarily hold for the purpose of trading;
  • All other Assets/Liabilities are Non-Current Asset/Liabilities

# “The operating cycle of an entity is the time between the acquisition of assets for processing and their realisation in cash and cash equivalents”.

Profit or Loss:

Profit or loss is defined as “the total of income less expenses” or the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners”.

Income or Expense in Profit or Loss shall be presented by the nature of Income/Expense. However, we have already defined structure for this, issued by Ministry of Corporate Affairs.

Statement of Changes in Equity:

  • This Statement shows movements/ transactions during the reporting period that have affected the Shareholder’s equity.
  • There is no specific format for it. But it is generally tabular in approach with the various categories of equity across the top and transaction listed line by line respective to each equity.

Notes to the financial statements:

The notes must:

  • present information about the basis of preparation of the financial statements and the specific accounting policies used
  • disclose any information required by IFRSs that is not presented elsewhere in the financial statements and
  • provide additional information that is not presented elsewhere in the financial statements but is relevant to an understanding of any of them
  • Notes are presented in a systematic manner and cross-referenced from the face of the financial statements to the relevant note.

This article is by Mr. Rahul Singla, who is a Chartered Accountant by Profession. Feedback and queries are welcome at [email protected]

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September 2021