Ind AS is here – but are we ready?

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Indian corporates are gearing up to understand and implement the new accounting framework called Indian Accounting Standards (Ind AS). The Ind AS is almost the same as the International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS), which is followed by more than 100 countries.

Ind AS will replace the current accounting standards followed by companies in India. The ministry of corporate affairs (MCA), government of India, notified these on February 16, 2015, and recommended its application in a phased manner from April 1, 2016. Companies, listed or public or private, whose net worth is equal to or exceeds Rs 500 crore as on March 31, 2014, are the first lot to report. Effectively, the quarterly results for June 30, 2016, would be the first such reporting period for listed companies above the threshold.

Needless to say, the impact of any fundamental change to an accounting framework has a much wider ramification on the company. Any transaction, from a routine sales transaction to corporate restructuring, needs to be told in an accounting language. So when that changes, the impact is pervasive.

So what are some of the implication for stakeholders at large?

While reporting timelines are fast approaching and all companies are busy implementing Ind AS, are all the stakeholders ready to deal with the change? The financial statements are going to undergo a significant modification in terms of accounting measurements, classification, and reporting and disclosure requirements and for most users of this financial statement, it is going to be a first time.

A banker who has been used to assessing the credit worthiness of its customer based on the size of its fixed assets may have a big surprise if the asset block is removed and replaced by an intangible asset or a financial asset. This is a very likely scenario for all private public partnership arrangements such as toll road operating companies as this may represent only a right to use or a right to collect contractual cash. The loan covenants and other financial parameters might undergo a change that may lead to a violation of the lending agreement prima facie requiring drastic measures. This is also important from the company perspective to start discussions with banks for the upcoming changes in their covenants.

Directors and investors who are used to raising the right voices at meetings and making financial decisions based on the reading of the financial statements might be overwhelmed with the additional information required to be provided under Ind AS. Using the expected credit loss model for making provision for trade receivables from an incurred loss model may pose a major challenge with the investors in terms of initial acceptance. While this information, in the long run, will prove to be good tools in the hands of the reader, their utility without the right investor education and training may prove futile and cumbersome in the beginning.

Analysts and the Street who are rating companies and industries based on their performance and ratio analysis will be able to see a major shift in the ratios when debt and the capital (equity) are stated as per their substance and not form. For example, a preference share which is compulsorily redeemable will now have to be classified as a debt rather than equity as it represents an obligation on the issuer of the financial instrument to repay the money.

With revenue recognition moving to the perspective of “the customer”, there are going to be radical changes in the revenue reported as against the existing Indian GAAP. This is going to affect employee emoluments and they may see a sudden dip /raise in their bonuses and a panic to understand what has changed and why.

Also read: Are we ready for the new language in the Board room and audit committee?
- By Sunder Iyer, Partner with Deloitte Haskins & Sells LLP.

The thoughts and opinions shared here are of the author.