A financial reporting system
supported by strong governance, high quality standards and a sound regulatory
framework is the key to economic development. Indeed, high quality standards of
financial reporting, auditing and ethics form the foundations of the trust that
investors place on financial information and therefore play an integral role in
contributing to a country’s economic growth and financial stability. As the
forces of globalisation prompt more and more countries to open their doors to
foreign investment and as businesses expand across borders, both the public and
private sectors are increasingly recognising the benefits of having a commonly
understood financial reporting framework, supported by strong globally accepted
standards. The benefits of a global financial reporting framework are numerous
and include:
- Greater comparability of financial information for investors;
- Greater willingness on the part of investors to invest across borders;
- Lower cost of capital;
- More efficient allocation of resources; and
- Higher economic growth.
Convergence is possible in two ways, i.e. either by adopting or adapting a standard. INDAS in India are being adapted while keeping in view the legal and other conditions prevailing in India. A phased implementation of INDAS has been notified as under:
- 1st phase - In the first phase, companies (listed and unlisted) having net worth of Rs 500 crore or more and their holding, subsidiary, joint venture or associate companies will apply IndAS effective from the financial year commencing on or after April 1, 2016 for the preparation and presentation of financial statements. They will provide IndAS-based comparative figures for the previous year.
- 2nd phase - In the second phase, all listed companies and unlisted companies having net worth of Rs 250 crore or more and holding, subsidiary, joint venture or associate companies of those companies will apply IndAS effective from the financial year commencing on or after April 1, 2017. Those companies will provide IndAS-based comparative figures for the previous year.
- Voluntarily - Any company, which is not mandated to apply IndAS, may choose to apply the same voluntarily effective from the financial year commencing on or after April 1, 2015 with comparative figures for the previous year. The choice is irrevocable.
INDAS Implementation has wide
ranging impact for an organisation. Impact is felt on business, technology and
stake holders. Considerable preparation is required internally in terms of gap
analysis, guidelines, controls, training etc. Depending on the size, maturity
and complexity of IT ecology, changes to transaction and analytical system
could be significant. Finally, INDAS will have an impact (negatively or
positively) on the way financial performance is reported.
Impact
of Transition Date
INDAS
requires the figures for the comparative year to be INDAS compliant. For
transition to INDAS an entity has to follow the following steps,
- Adopt INDAS compliant accounting policies,
- Recognise, derecognise, revalue, and reclassify assets and liabilities to achieve INDAS compliance of the existing accounting system.
All the
convergence journal entries are to be applied on the earliest date of the
earliest presented year i.e. the transition date.
Structure
of Financial Reports
The INDAS
requires a new statement called Statement of Changes in Equity to be prepared.
All items of Balance Sheet will be classified between current and non current.
It also requires the present Profit and Loss account to be modified to include
two section – one the profit and loss accounts and the other the Other Comprehensive Income. While the
Profit and Loss account will continue to be comprising of all the items
included in the current form of Profit and Loss account, the Other
Comprehensive Income section will comprise of the following items:
- Revaluation surplus
- Actuarial gains and losses in defined benefit plans
- Gains and losses from investments in equity instruments designated as FVTOCI
- Gains and losses from financial assets designated as FVTOCI
- Gains and losses due to changes in liabilities credit risk of financial liabilities designated as FVTOCI
- Gains and losses arising from translating financial statements of foreign operation
- Gains and losses on cash flow hedge instruments
- Changes in the value of the time value of options designated as the hedging instrument.
- Changes in the value of the forward elements of forward contracts
Changes
in Valuation Process
INDAS
requires assets and liabilities to be presented at Fair Value. A fair value shall be determined by management after
considering the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. This valuation shall be carried out at least once every
three year for all assets and liabilities except for goodwill and intangibles
with an active market where it shall be carried out annually.
Identification
of Valuation Unit
One of
the important changes that have been bought in by INDAS is breaking down plant,
property, and equipments to component level for the purpose of accounting. Thus
if an equipment is comprised of units that are independently identifiable with
a useful life different from other components of the equipment, these will be
identified and reported separately. Differential depreciation rate will also
apply on them.
Recognition
of Unrealised Gains
Unlike
the current practice of not recognising unrealised gains, except for asset
revaluation, INDAS allows recognition of unrealised gains in numerous instances
for e.g.
- Upward movement of mark to market investments in equity.
- Upward move of financial assets fair valued through the profit and loss account.
- Recognition of certain revenues under the INDAS for revenue from contracts with customers.
Focus
on Risk Management
Recognising
importance of risk management for better corporate management, INDAS have laid
out detailed methodology for accounting and disclosure on existence and usage
of financial instruments. These instruments have been identified as excellent
tools for financial risk management which may often double up to be a major
source of financial risk. Entities will now have to measure and report
potential impact of various sources of risk on their financial health. Sources
of risk include, among others, credit, liquidity, and market risk. This will
enable the users of the financial report to assess the exposure of the
reporting entity to these risks.
Readiness
Requirement
One of
the major exercises that Entities need to undertake to be INDAS compliant is to
review the chart of accounts with the various accounting and disclosure
requirements. A review of the chart of account will reveal the gaps that the
entity will face in acquiring information that are to be disclosed. The
existing accounting system may be required to be altered along with the
software to bridge these gaps.
Current
Incompatibility
Current
legal framework and requirement of INDAS poses areas of current incompatibilities
those are to be addressed by the accounting and legal authorities. Such areas
include, among others, treatment of preference share capital as debt instead of
share capital, exclusion of proposed dividend from accounts, etc.
Another
skill set that the converging entities will need to focus on is usage of XBRL –
the new language for communication of financial data. XBRL stands for
Extensible Business Reporting Language and is derived out of XML which is
evolving as the standard style for communication of business data, particularly
over the internet. It is being developed by a global consortium of large number
of companies, organisations, and Government institutions and is being developed
as an open standard usable by anyone without any licence fees.
The
response to the implementation of INDAS in India depends on the extent of
readiness of the implementing companies. Development of skills, planning for
transition, and devising a strategy for managing the transition will mark the
extent of readiness. Induction of INDAS will not only be a challenge to the
accounting and auditing community but will also provide great opportunities for
professional development.
