Differences in major accounting and reporting areas under Ind AS as compared to present Indian Standards is as under:
Ind AS 115, Revenue from Contracts with Customers applies to all types of contracts with customers, including sale of goods, sale of services, construction arrangements, royalty arrangements, licensing arrangements, etc. whereas, separate standard applies to each of these types of contracts under the present Indian Standards. Ind AS 115 determines when and how much revenue is to be recognised based on the principle that revenue is recognised when the entity satisfies its performance obligations and transfers control of the goods or services to its customers, as compared to the present standard which focus on transfer of risks and rewards. Other differences include recognition of Multiple deliverable arrangements (fair value of each component) and also considering of Time value of money
Property, plant and equipment/intangible assets
Ind AS 16, Property, Plant and Equipment and Ind AS 38, Intangible Assets discusses eligible borrowing costs (debt vs. Equity), Capitalisation of administrative and general overheads, Asset retirement obligation (to consider time value of money), Accounting for leases embedded in sale or service contracts, Consideration of time value of money and Indefinite useful lives for certain intangibles in addition to the requirements under the present Indian standard.
Consolidated Financial Statements
Under present Indian Standard, control is assessed based on ownership of more than one-half of the voting power or control of the composition of the Board of Directors. Whereas, Ind AS 110, Consolidated Financial Statements, defines control differently, as per which an investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee, and has the ability to affect those returns through its power over the investee. There being fundamental difference in the definition of control, the entities that get consolidated will be different.
Mergers and acquisitions
Under present Indian Standard, the accounting is driven by the form of the transaction, i.e. legal merger, share acquisition, business division acquisition, etc. which results in varied results based on the form of acquisition. Under Ind AS 103, Business Combinations, all business combinations are accounted for using the purchase method that considers the acquisition date fair values of all assets, liabilities and contingent liabilities acquired, except in case of acquisitions between entities under common control.
Equity and liability instruments
Under present Indian Accounting, equity and liability instruments are largely based on the legal form of these instruments and also governed by legal and regulatory treatments permitted, such as utilisation of securities premium for redeeming instruments at a premium, etc. Whereas Ind AS 32, Financial Instruments: Presentation, requires that a financial instrument should be classified in accordance with the substance of the contractual agreement, rather than its legal form (substance over form). Redeemable preference shares classified as liability and related ‘dividend’ recognised as interest expense, Convertible bonds are split into their liability and derivative components
Other financial instruments
Under present Indian scenario, there is no mandatory applicable provisions on accounting of Financial instruments. Under Ind AS 109, classification of financial assets is based on an entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial asset. Further as per Ind AS 109, an entity should recognise all derivative instruments at fair value on the balance sheet. Investments to be categorised – fair value through profit or loss (FVTPL), fair value through other comprehensive income (FVOCI) and amortised cost. Initial recognition of all financial assets and financial liabilities at fair value (security deposits, employee loans, sales tax deferral, etc.). All investments (including unquoted equity shares) generally measured at fair value at each reporting period. Loans and advances to be measured at amortised cost using effective interest rate
Recognition of adjustments from present Accounting Standards to Ind AS
The accounting policies that an entity uses in its opening Ind AS balance sheet may differ from those that it used for the same date using present Accounting Standards. The resulting adjustments arise from events and transactions before the date of transition to Ind AS. Therefore, an entity shall recognise those adjustments directly in retained earnings (or, if appropriate, another category of equity) at the date of transition to Ind AS.
First-time Adoption of Indian Accounting Standards:
Ind AS 101, First-time Adoption of Indian Accounting Standards provide starting point for accounting in accordance with Ind AS and set out the procedures that an entity would follow when it adopts Ind AS for the first time as the basis for preparing its financial statements. Ind AS 101 has certain differences as compared to the corresponding International Financial Reporting Standard (IFRS) 1, including certain inclusion/modification of existing exemptions.
The adoption of Ind AS would entail a significant change in the financial reporting framework used by Indian companies to report their financial results. As a consequence, the reported earnings (net income) and financial position (net worth) reported by all such companies would undergo a change. Impact of this change would vary from sector to sector and company to company, with some sectors/companies being significantly impacted.