What does Implementation of IND AS mean?
The Ministry of Corporate Affairs (MCA) informed the companies regarding the 2015 Indian Accounting Standards Rules setting out the guidelines for the implementation of converged standards on 16 February 2015 i.e. Ind AS to Indian Companies excluding the banking companies, insurance companies & Non-Banking Financial Companies (NBFC).
How many phases for implementing IND AS are there?
1. Voluntary Phase:
IND AS is approved for adoption from the 2015-16 financial year (starting 1 April 2015)
2. Mandatory Phase 1:
For the following Companies, application of Ind As is mandatory from financial year 2016-17 (beginning from 1st April 2016):
a) Listed or Non Listed Companies whose net worth is of INR 500 crores or more
b) Holding, subsidiaries, joint ventures and associates of above listed or Non listed companies
3. Mandatory Phase 2:
For the following Companies, application of Ind As is compulsory from financial year 2017-18 (beginning from 1st April 2017):
a) All Listed companies not covered under the mandatory phase 1
b) Non Listed companies with net worth of INR 250 crores or more and not covered in the mandatory phase 1.
c) Holding company, Subsidiaries Company, joint ventures or the associate of above mentioned companies
- All companies eligible for Ind As are required to submit comparative data for one year as per Ind As. For example: if the organization covered under the mandatory phase 1 had to implement Ind AS from April 1, 2016 onwards. It's also necessary to present comparisons for the 2016-17 financial year and the 2015-16 financial year, which means that Ind AS will be applied from 1 April 2015 onwards..
- Both standalone and consolidated financial statements shall be eligible for Ind AS.
- Organizations not included in the above list may either willingly implement Ind or continue to apply established Accounting Standards (Accounting Standards) Rules 2006 under the new Indian GAAP.
- When the company opts to submit Ind AS, it must regularly file Ind As financial statement. Another voluntarily applied for this right is irrevocable, and such businesses will not be forced to file another financial statement in compliance with the new Indian GAAP.
- Insurance, banking and NBFC firms are excluded from submitting Ind as in the preparation of their financial statements
The implementation of the Ind AS in line with the Roadmap would put India closer to the wider world that has embraced or converged with IFRS. India has followed the integration method rather than strictly implementing IFRS as provided by the International Accounting Standard Boards (IASB)
Transformation to Ind AS is not only an accounting transition, but rather a feature outside the finance department, including IT, regulation, sales and marketing, human resources, investor relations, and senior management.
What are the key impacts of transition?
The key impacts of transition are discussed below:
1. Direct tax impact: Ind As it is specifically implemented to meet the needs of creditors and as such is not appropriate for the calculation of income tax. In order to tackle the problem, the Central Government (CG) created a committee to draft the Income Computation and Disclosure Standards (ICDS). According to the section 145 of the Income Tax Act, the Central Government has the authority to inform the Income Computation and Disclosure Standards (ICDS) to be followed by a given class of taxpayers or a given class of income.
Recently, the Government has notified 10 Income Computation and Disclosure Standards (ICDS) of compliance by all tax payers under the mercantile accounting system effective from the financial year 2015-16.
For example: Income Computation and Disclosure Standards (ICDS) 1 identifies the definition of accrual as a basic accounting rule. Nevertheless, it specifically prohibited the anticipated or business loss label to be incompatible with the principle of accrual. Therefore, the Tax Computation and Disclosure Standards (ICDS) tend to be one-sided, which is specifically designed to maximize collection of taxes rather than to be consistent with clear accounting principles.
2. Indirect Taxes Impact: Generally, the occurrence of indirect tax and its estimation are usually not dependent while making treatment in the financial report. In the past, though, the court required accounting care before settling on the taxability of a particular case. Therefore, the implementation of Ind AS may increase the likelihood of lawsuits due to the current application of Ind As leads to substantially different accounting in many situations.
3. IT Impact: Information Technology is anticipated to play an important role in the process of Ind AS conversion. It is important not to underestimate the time and money of the process and the potential risks associated. Implementing Ind As requires change in the definition, measurement and accounting of many items in the financial statement. Both applications and business processes needed to provide information in order to comply with Ind AS. Thus, IT frameworks need to be upgraded and function in conjunction with Ind AS. It is important to keep in mind that IT infrastructure improvements are not restricted to IT modules, but also include asset management systems, financial instruments and payroll processing systems.
4. Internal Control Impact: The fundamental prerequisite of the conversion process is to maintain successful internal control. Both the Companies Act 2013 and the Listing Agreement enable a company to retain the organizational efficiency of its financial reporting. In most cases, the change to Ind As requires substantial changes to the company's financial reporting system.
5. What are the main considerations for Ind AS Conversion?
The conversion to Ind AS provides potential opportunities for company to further evaluate and expand.
Many companies operate internationally, function domestically and provide financial reporting to analysts and other shareholders based under common accounting standards used by these competitors to increase the comparability of the company with its peers.
When the business continues the conversion process, it aims to consider the financial reporting actions reached by other firms after the introduction of the Ind AS. This will allow change users to share their thoughts and perspectives about potential plans with each other.
There are several threats involved with this conversion to the AS Ind that need to be addressed by administration. Examples of potential risks shall involve:
- Failing to disclose the implications and conclusions to shareholders, boards of directors, appraisal committees, investors and observers
- Maintaining documents and various reports in the Multiple Accounting System during the transformative time period.
- To ensure consistency, several Ind AS principles are followed, including the right to reassess accounting policy decisions reached by organizations that have already implemented Ind AS.
- Retention of Key Employees
- Unnecessary costs incurred as a consequence of inadequate preparation, project management
- Unreasonable amount of job incurred as a result of insufficient preparation
- Skipped Deadlines for the conversion process
To attempt to minimize this danger, the Board will pay careful attention to the management strategy for Ind AS conversion and reassure them that it encompasses all relevant areas on the basis of a solid management plan.
6. What are the main areas to be addressed during Ind AS conversion?
No two Ind AS conversion programs has ever been the same thing. Nonetheless, we also listed the few challenges that businesses will encounter during their conversion that will vary greatly as follows:
1. Plan start-up an activities related to planning:
The early decisions made during the development of the project play an important role in the progress of the project. Such actions include the development of a project management program to organize and track the operations. It also involves the reframing of the project on the basis of an analysis and the distribution of considerable resources to the project, the selection of the team and the deployment of their appropriate skills to meet their roles.
2. Accounting Policies Revision:
The re-evaluation of the Ind-AS strategy will be an important component of the whole conversion process, as decisions taken during this step will have an impact on the future market outcome. For example, accounting policy decisions may affect data gathering requirements that affect the requirements of the IT system, business processes, etc.
3. Creating the financial statement structure in line with the AS Ind:
Organizations will have to draft a new annual statement in order to conform with the disclosure requirements of Ind As.
4. Recognize and solve issues related to data capture:
The increased level and sophistication of certain financial disclosures required under the AS Ind that require extensive project capital to define and set up data collection procedures.
Therefore, the newly constructed Ind AS is fundamentally a converging IFRS type. This reveals that, except for a few things, almost all rules of IFRS are the same. It is therefore important that there are no significant amendments to the Indian GAAP.