Impact of Ind AS on Financial Statements

The Indian Accounting Standards (Ind AS), as notified under section 133 of the Companies Act 2013, were first implemented voluntarily in India on April 1, 2015. They became mandatory for certain companies on April 1, 2016, and were later extended to other companies and sectors. The main objective of Indian accounting standards (Ind-AS) is to bring in more transparency of annual financial statements in company accounts. It is a simplified single accounting system common for all companies, cutting out confusion and fraud.

The standardized framework of Ind AS makes financial statements more comparable, helping investors, creditors, and other stakeholders in making decisions. The Indian standard provides a clear framework for auditors, making the auditing process more efficient and effective. Ind AS adoption enhances the credibility of financial statements, increasing investor confidence. It provides a standardized set of metrics for assessing management performance, facilitating better decision-making and accountability.

Accounting standards ensure the financial statements from multiple companies are comparable. Because all enterprises follow the same rules, accounting standards make the financial statements credible and allow for more economic decisions based on accurate and consistent information. Besides better disclosures, the revised accounting standards brought financial statements closer to economic reality. It will also ensure comparability between financial statements in line with global standards, and improve the ability of Indian companies to access funds abroad.

The adoption of Ind AS resulted in changes in the financial reporting framework and use of fair valuation as against historical cost valuation. Audit analysis indicated that values of profit after tax, total assets, and net worth of business entities were impacted by the adoption of Ind AS. The method of revenue recognition under Ind AS also impacted the revenues recognized by organisations.  

Implementing various provisions of Ind AS can impact the valuation of Profit after Tax (PAT), Revenues, Total Assets, and Net Worth. The values may increase or decrease depending on the options availed by the entities at the time of adoption of Ind AS.  Companies in sectors such as capital goods, infrastructure, retail, IT services, and auto ancillaries are more impacted than others on account of revised accounting standards. The reported profitability number compared to the report from the earlier system will be more volatile because of changes in the fair valuation of derivatives and financial instruments (including equity, debt, and foreign currency loan obligations), amortisation of goodwill, and reclassification of actuarial gains/losses.  Therefore, the reporting system under Ind-AS impacted more in sectors such as capital goods, infrastructure, retail, IT services, and auto ancillaries compared to other sectors. Further, under Ind AS 116, significant changes in financial reporting occur due to the creation of new items like ‘lease liability’ and ‘right of use of assets’. These changes can increase companies’ debt-to-equity ratio and overall balance sheet size. However, the revised accounting standards are unlikely to have a material impact on the business fundamentals and hence the underlying cash flows and economic risks of these companies remain unaffected.

To meet the Ind-As objective, financial statements provide information about an entity’s: (a) assets; (b) liabilities; (c) equity; (d) income and expenses, including gains and losses; (e) contributions by and distributions to owners in their capacity as owners; and (f) cash flows. The changes in the valuation of different items of revenue, expenditure, assets, and liabilities consequent to the adoption of Ind AS can materially affect the PAT of enterprises.

Factors contributing to increase/decrease in PAT:

The changes in the valuation of different items of revenue, expenditure, assets, and liabilities consequent to the adoption of Ind AS can materially affect the PAT of the enterprise due to the following reasons:

• Increase in profits due to changes in valuation of liabilities towards post-employment benefits (ii) Increase in profits due to recognition of deferred taxes (iii) Increase in profits due to measurement of investments at fair value through profit and loss (iv) Increase in profits due to other reasons (on account of writing off the prior expenditure, recognition of interest component on unwinding of discount on security deposits receivable, amortization of interest component recognized in deferred revenue income, decrease in depreciation on leasehold land and income recognized from deferred income, employee benefit expenses capitalized to Capital-work-in-progress and recognition of share issue expenses in other equity, etc.
•  The decrease in PAT consequent to the adoption of Ind AS was due to the following reasons; (a) Decrease in profits due to recognition of deferred taxes (b) Decrease in profits due to changes in valuation of liabilities towards post-employment benefits (c) Decrease in profits due to other reasons.
•  Impact of adoption of Ind AS on booking of revenues: The definition of ‘revenue’ under Ind AS 18 covers all economic benefits that arise in the ordinary course of activities of an entity that increases net worth, other than increases relating to contributions from net worth participants. However Revenue Recognition) under AS-9 is defined as the gross inflow of cash, receivables, or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties, and dividends.
• Impact of adoption of Ind AS on net worth: Net worth is the difference between the value of assets and the liabilities of a company. Net worth (equity) is arrived at by reducing from the aggregate value of the paid-up Net worth (equity) is arrived at by reducing from the aggregate value of the paid-up share capital, free reserves, and securities premium account, the aggregate value of accumulated losses, deferred expenditure and miscellaneous expenditure not written off. Free reserves do not include reserves created out of revaluation of assets, write-back of depreciation, and amalgamation.
• Impact of implementation of Ind AS on selected key areas  :
• Implementing various provisions of Ind AS can impact the valuation of Profit after Tax (PAT), Revenues, Total Assets, and Net Worth. The values may increase or decrease depending on the options availed of by the enterprises at the time of adoption of Ind AS.

In addition to the above, overheads Payable over the repayment period of liability and re-computation of interest on fixed deposits based on Effective Interest Rate Method, increase in amortization of deferred lease rental expense, amortization of interest component recognized in deferred revenue expenses, unwinding of discount on performance guarantee deposit and increase in depreciation expense on account of non-adjustment of capital grant from cost of capital asset etc. under new method have significant impact on computation of assets and investment at fair value.

Conclusion: Financial statements are to change the increase and decrease of PAT, due to the implementation of Ind AS, but no major rating or criteria of enterprise changes are foreseen since fundamentals remain the same.  To learn more about Ind AS read the following article: IND AS: ACCOUNTING STANDARDS IN INDIA AND ITS DEFINITION AND SCOPE

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