Conversion is much more than a technical accounting issue. Ind AS (the converged IFRS standards) in India may significantly affect a company’s day-to-day operations and may even impact the reported profitability of the business itself. Conversion brings a one-time opportunity to comprehensively reassess financial reporting.
On 2 January 2015, the Press Information Bureau, Government of India, Ministry of Corporate Affairs (MCA) issued a note outlining the various phases in which Indian Accounting Standards converged with IFRS (Ind AS) is proposed to be implemented in India, for Companies other than Banking Companies, Insurance Companies and NBFCs.
The application of Ind AS is based on the listing status and net worth of a company. Ind AS will first apply to companies with a net worth equal to or exceeding 500 crore INR beginning 1 April 2016. Listed companies as well as others having a net worth equal to or exceeding 250 crore INR will follow 1 April 2017 onwards. From April 2015 companies impacted in the first phase will have to take a closer look at the details of the 39 new Ind AS currently notified. Ind AS will also apply to subsidiaries, joint ventures, associates as well as holding companies of the entities covered by the roadmap. For the detailed roadmap and clarifications, click here.
While announcing the Ind AS implementation in his 2014 Budget speech, Finance Minister Arun Jaitley also said that the standards for the computation of tax would be notified separately.
The CBDT has notified 10 ICDS covering various areas such as accounting policies, construction contracts, revenue recognition, treatment of provision items requiring future outflow, treatment of foreign exchange fluctuation, etc. Two ICDSs still remain in the draft stage. These ICDS are effective from 1 April 2015 and will apply to current financial year 2015-16 (assessment year 2016-17) and subsequent years.
The ICDS provides certain deviations with respect to the computation of taxable income vis-a-vis the practice followed under the current Indian GAAP (‘I-GAAP’). Based on the ICDS notified by the CBDT, the impact of the deviations recommended may be far reaching, including depending on whether the entity is following I-GAAP or is required to transition to Ind AS.
Both Implementing Ind-AS and ICDS are likely to impact key performance metrics requiring thoughtful communication with the board of directors, shareholders and other stakeholders. Internally, their implementation can have a wide-ranging impact on a company’s processes, IT systems, internal financial controls, income taxes payout, remuneration policies and also contractual arrangements.