Accounting Standards

IND AS
 Accounting Standard
An accounting standard is a set of rules, standards, and principles based on which financial
transactions are recorded in books of accounts. The accounting standard determines the basis
of financial reporting for most companies. They dictate how each transaction and accounting
entry should be identified, measured, recorded, and published in financial reports and
statements.
The accounting standards in India are issued by the Accounting Standards Board (ASB). The
ASB was established by the Institute of Chartered Accountants in India (ICAI) in 1977.

• Accounting standards are a set of rules which help companies record and report their
financial statements.
• Companies in India are required to follow accounting standards as prescribed.
• Accounting Standards mainly deal with four major issues of accounting, namely
❑ Recognition of financial events
❑ Measurement of financial transactions
❑ Presentation of financial statements in a fair manner
❑ Disclosure requirement of companies to ensure stakeholders are not misinformed
Recognition Criteria / It answers the question:
Rules “When should an item be recorded in the accounts?”
Rule / Criterion Explanation Example
The item must meet the definition of one of the elements of financial Machinery purchased qualifies as an
1. Definition
statements — asset, liability, equity, income, or expense. asset.
2. Probability of
It must be probable that future economic benefits (inflow or outflow) will Revenue is recognized when it’s
Future Economic
result from the item. probable that payment will be received.
Benefits
A lawsuit’s potential loss cannot be
3. Reliable
The item’s cost or value can be measured reliably. recognized if the amount cannot be
Measurement
estimated reliably.
4. Occurrence /
Sale invoice or delivery note acts as
Evidence of There must be evidence that a transaction or event has occurred.
evidence of sale.
Transaction

Transaction Recognition Timing / Rule Applied

Recognized when goods or services are delivered, and it is probable that benefits will flow to the company and
Revenue
can be measured reliably (AS 9 / Ind AS 115).
Expenses Recognized when the benefit from an asset is consumed or an obligation is incurred (matching concept).
Assets Recognized when future economic benefits are probable and cost can be measured reliably (AS 10 / Ind AS 16).
Recognized when a present obligation arises that is likely to result in an outflow of resources (AS 29 / Ind AS
Liabilities
37).
 Indian Accounting Standards (IND AS)
• Indian Accounting Standards (Ind AS) are IFRS-converged standards issued by the Central
Government of India under the supervision and control of the Accounting Standards Board
(ASB) of the Institute of Chartered Accountants of India (ICAI) and in consultation with
the National Financial Reporting Authority (NFRA).
Accounting
Notation They bring in the accounting practices:
Standards
❑ Uniformity
OLD AS ❑ Transparency
❑ Consistency
Converged Ind AS
❑ Convention of Materiality
IFRS IAS

• India used the Indian Generally Acceptable Accounting Principles (IGAAP) as its accounting standards before the
adoption of the Ind-AS.
• Indian GAAP refers to generally accepted accounting principles that apply in India, as established (1) by the
Indian Institute of Chartered Accountants and (2) under the Companies Act, 1956.
• Indian GAAP is primarily comprised of 18 accounting standards issued by the Institute of Chartered Accountants
of India (ICAI).
 Indian Accounting Standards (IND ASs)
Framework for the Preparation and Presentation of Financial Statements in accordance with Indian Accounting Standards
Ind AS 101 First-time Adoption of Indian Accounting Standards Ind AS 18 Revenue
Ind AS 102 Share based Payment Ind AS 19 Employee Benefits
Ind AS 103 Business Combinations Ind AS 20 Accounting for Government Grants and Disclosure of
Government Assistance
Ind AS 104 Insurance Contracts Ind AS 21 The Effects of Changes in Foreign Exchange Rates
Ind AS 105 Non current Assets Held for Sale and Discontinued Ind AS 23 Borrowing Costs
Operations Ind AS 24 Related Party Disclosures
Ind AS 106 Exploration for and Evaluation of Mineral Resources Ind AS 27 Consolidated and Separate Financial Statements
Ind AS 28 Investments in Associates
Ind AS 107 Financial Instruments: Disclosures
Ind AS 29 Financial Reporting in Hyperinflationary Economies
Ind AS 108 Operating Segments Ind AS 31 Interests in Joint Ventures
Ind AS 1 Presentation of Financial Statements Ind AS 32 Financial Instruments: Presentation
Ind AS 33 Earnings per Share
Ind AS 2 Inventories
Ind AS 34 Interim Financial Reporting
Ind AS 7 Statement of Cash Flows Ind AS 36 Impairment of Assets
Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets
Errors Ind AS 38 Intangible Assets
Ind AS 10 Events after the Reporting Period Ind AS 39 Financial Instruments: Recognition and Measurement
Ind AS 40 Investment Property
Ind AS 11 Construction Contracts
Ind AS 41 Agriculture
Ind AS 12 Income Taxes
Ind AS 16 Property, Plant and Equipment
Ind AS 17 Leases
AS 1 Disclosure of Accounting Policies Ind AS 1 Presentation of Financial Statements
AS 2 Valuation of Inventories Ind AS 2 Inventories
AS 3 Cash Flow Statements Ind AS 7 Statement of Cash Flows
AS 4 Contingencies and Events Occurring Ind AS 8 Accounting Policies, Changes in
After the Balance Sheet Date Accounting Estimates and Errors
AS 5 Net Profit or Loss for the Period, Prior Ind AS 10 Events after the Reporting Period
Period Items and Changes in Accounting Ind AS 11 Construction Contracts
Policies Ind AS 12 Income Taxes
AS 7 Construction Contracts Ind AS 16 Property, Plant and Equipment
AS 9 Revenue Recognition Ind AS 17 Leases
AS 10 Property, Plant and Equipment Ind AS 18 Revenue Ind AS 115 Revenue from
AS 11 The Effects of Changes in Foreign Contracts with Customers
Exchange Rates Ind AS 19 Employee Benefits
AS 12 Accounting for Government Grants Ind AS 20 Accounting for Government Grants
AS 13 Accounting for Investments and Disclosure of Government Assistance
AS 14 Accounting for Amalgamations Ind AS 21 The Effects of Changes in Foreign
AS 15 Employee Benefits Exchange Rates
Ind AS 23 Borrowing Costs
Ind AS 115, Revenue from Contracts with Customers, has replaced Ind AS 18, Revenue.

The core difference is the shift in the principle for revenue recognition:

• Ind AS 18 used a "risk and rewards" model (Revenue was recognized when the significant
risks and rewards of ownership of goods or the right to receive payment for services were
transferred to the buyer),

• while Ind AS 115 uses a "control approach“ (Revenue is recognized when (or as) an entity
satisfies a performance obligation by transferring control of a promised good or service to
a customer. Control refers to the ability to direct the use of and obtain substantially all of
the remaining benefits from the asset).
AS 18 Related Party Disclosures Ind AS 24 Related Party Disclosures
AS 19 Leases Ind AS 27 Consolidated and Separate Financial
AS 20 Earnings Per Share Statements
AS 21 Consolidated Financial Statements Ind AS 28 Investments in Associates
AS 22 Accounting for Taxes on Income Ind AS 29 Financial Reporting in Hyperinflationary
AS 23 Accounting for Investments in Associates in Economies
Consolidated Financial Statements Ind AS 31 Interests in Joint Ventures
AS 24 Discontinuing Operations Ind AS 32 Financial Instruments: Presentation
AS 25 Interim Financial Reporting Ind AS 33 Earnings per Share
AS 26 Intangible Assets Ind AS 34 Interim Financial Reporting
AS 27 Financial Reporting of Interests in Joint Ind AS 36 Impairment of Assets
Ventures Ind AS 37 Provisions, Contingent Liabilities and
AS 28 Impairment of Assets Contingent Assets
AS 29 Provisions, Contingent Liabilities and Ind AS 38 Intangible Assets
Contingent Assets Ind AS 39 Financial Instruments: Recognition and
Measurement
Ind AS 40 Investment Property
Ind AS 41 Agriculture
 Accounting Standards Board of India
• The Accounting Standards Board (ASB) was established in 1977 by the Council
of the Institute of Chartered Accountants of India (ICAI) in response to the
need for Accounting Standards in India.
• It recommends to the Government of India Accounting Standards, Indian
Accounting Standards (Ind AS) and Accounting Standards (AS) for notification
under relevant provisions of various statutes, such as
❑ The Companies Act 2013, and
❑ Limited Liability Partnership Act, 2008.
• The Accounting Standards Board of India (ASB) also issues Accounting
Standards for noncorporate Entities in India.
 Need for IND AS adoption
• Ind AS facilitates cross-border money flow.
• Ind AS facilitates global listing.
• Ind AS also facilitates global comparability of financial statements.
• Ind AS improves the investor’s ability to compare investments globally.
• Thus, global investment becomes easier, and capital market stakeholders
benefit.
 Objectives of Accounting Standards
• To adopt a uniform set of accounting principles for financial reporting.
• To create a single recognised framework of the accounting system.
• To ensure transparency in the financial statements of companies.
• To improve the reliability of financial statements.
• To make accounting principles used in India at par with internationally
recognised standards.
• To make international companies understand Indian accounting practices.
• To expand the scope of doing business globally.
 Advantages of Accounting Standards
• Attains Uniformity in Accounting: Accounting Standards provides rules for standard treatment and
recording of transactions.
• Improves Reliability of Financial Statements: The Accounting Standards (AS) ensure that the
statements are reliable and trustworthy.
• Prevents Frauds and Accounting Manipulations: Following these standards is not optional, it is
compulsory. So these standards make it difficult for the management to misrepresent any financial
information. It even makes it harder for them to commit any frauds.
• Assists Auditors: Now the accounting standards lay down all the accounting policies, rules,
regulations, etc. in a written format. These policies have to be followed. So if an auditor checks that
the policies have been correctly followed he can be assured that the financial statements are true
and fair.
• Comparability: The users of the financial statements can analyze and compare the financial
performances of various companies before taking any decisions. Also, two statements of the same
company from different years can be compared. This will show the growth curve of the company to
the users.
• Determining Managerial Accountability: Management also must wisely choose their accounting
policies. Constant changes in the accounting policies lead to confusion for the user of these financial
statements. Also, the principle of consistency and comparability are lost.
How many accounting standards are there in India?
• There are two main types of accounting standards in India. One is AS, and the
other is Ind AS. Ind AS is different from AS. Ind AS is applicable to all listed and
unlisted companies that have a net worth of Rs. 500 cr. and above. Moreover,
in the case of unlisted companies, if the net worth is Rs. 250 cr. or more but
less than Rs. 500 cr., Ind AS would apply. For all other companies, AS is
applicable.

Voluntary applicability
• A company has the option to adopt Ind AS even if it doesn’t meet the
mandatory requirement under the law (for financial years beginning on or after
April 01, 2015). However, once a company chooses to use Ind AS for reporting
financial statements, it must continue to do so for all subsequent financial
statements.
 Phase-wise mandatory adoption of Ind AS
On February 16, 2015, the Ministry of Corporate Affairs (MCA), notified the converged form
of IFRS as the Companies (Indian Accounting Standards) Rules, 2015 to maintain the
uniformity and harmonization in Financial Statements and Reports.
The MCA has made it mandatory for the companies to follow the list of Ind AS in a phase-wise manner as follows:
Phase - 1: Mandatory applicability of Ind AS to all the companies with effect from 2016-2017 if:
• It is an unlisted or listed company having a net worth of more than or equal to Rs. 500 cr.
• Holding company, subsidiary, a joint venture or associate companies of companies fulfilling the above
condition.
*Net worth shall be checked for the previous three Financial Years (2013-14, 2014-15, and 2015-16).

Phase - 2: Made effective from the financial year 2017-2018 by

• Companies which are listed or in the process of getting listed its equity or debt in any stock exchanges in or
outside India (as on 31.03.2016).
• Companies not listed under any stock exchange but having a net worth of at least Rs. 250 cr (for any of the below
mentioned periods).
• Holding company, subsidiary, a joint venture or associate companies of companies fulfilling the above
condition.
Net worth shall be checked for the previous four Financial Years (2014-14, 2014-15, 2015-16, and 2016-17)
 Phase-wise mandatory adoption of Ind AS
Phase – 3: To be implemented with effect from the financial year 2018-2019 by
• Bank, insurance companies, and Non-Banking Financial Corporations (NBFCs) have a net worth equal to or
more than Rs. 500 cr with effect from 1st April 2018.
• Holding company, subsidiary, a joint venture or associate companies of companies fulfilling the above
condition.
Net Worth shall be checked for the past 3 financial years (2015-16, 2016-17, and 2017-18)
Note: The regulatory authorities for Banks and Insurance Companies postponed the implementation date. RBI
had deferred the implementation of Ind AS for Banks by one year, starting from 1st April 2019. Insurance
Companies were given a two-year deferment commencing from 1st April 2020.

Phase – 4 : The adoption of phase 4 needs to be made with effect from the financial year 2019-2020
by the following:
• All NBFCs with Net worth more than or equal to Rs. 250 crore with effect from 1st April 2019.
• Holding company, subsidiary, a joint venture or associate companies of companies fulfilling the
above condition.
 Important points to be considered
• Companies need to prepare the financial statements in the immediate next accounting year in which
they first cross the threshold limit as specified by MCA.
• Calculation of Net worth: Net worth should be calculated as provided under section 2(57) of
Companies Act, 2013 which states:

Net Worth is based on the standalone financial statements that should be audited. Net
worth is nothing but only the sum total of paid-up share capital and all the reserves which
are made out of the profit and securities premium account and then subtract the value of
deferred expenditure, accumulated losses and miscellaneous expenditures that are not
written off.
Mathematically we can this as,
Net Worth = Total paid-up share capital + all reserves (made out of profit and including
securities premium account) – deferred expenditure – miscellaneous expenditure (should
not be written off) – accumulates losses.
 Accounting Policies
• Accounting policies are the methods, procedures and practices used in
preparing the financial statements.
• GAAP lays down the general considerations for good accounting. Accounting
standards specify the acceptable methods from the alternatives allowed by
GAAP and identify the issues that require to be examined. Accounting policies
state how a firm has selected and applied the accounting methods allowed by
the accounting standards.
 Accounting Policies
• Accounting principles are quite broad; accounting standards give them shape;
and accounting policies describe the management’s judgment, assumptions
and estimates in applying the standards.
• Managers of different firms may, and often do, differ in their views. This results
in different numbers in the financial statements. Regulators are often tempted
to lay down uniform rules for all firms.
• A one-size-fits-all approach should be avoided in order to let the managers
produce informative financial statements. Instead, regulators should require
documented evidence that the managers have considered the relevant factors
and have made reasonable judgments.
• Investors should know an enterprise’s accounting policies. Therefore, managers
should disclose their accounting policies.
Example 1: Technology Companies and Intangible Assets
Scenario: A tech startup invests heavily in R&D to develop a new software product. The current accounting
standard mandates capitalization of R&D costs, but the project's success is highly uncertain.
Issue with Uniform Rules: If the project fails, the capitalized costs inflate the company's assets, potentially
misleading investors about its financial health.
Flexible Approach: Allow managers to decide whether to expense or capitalize R&D costs based on the
project's stage and likelihood of success, provided they document their rationale and supporting evidence.

As per IAS 38 / Ind AS 38 (Intangible Assets)

• Research phase costs are always expensed.
• Development phase costs can be capitalized if:
✓ Technical feasibility and intention to complete the software product exist.
✓ The entity has the ability to use or sell the product.
✓ The asset will generate probable future economic benefits.
✓ Costs can be reliably measured.
• Capitalized development costs are amortized over the product's useful life starting from commercial
production.
Hence, it is not mandatory to capitalize all R&D costs; only development costs meeting criteria must be
capitalized, while research costs are expensed immediately.
Example 2: Retail Industry in High Inflation Economies
Scenario: A retail chain operates in a country with high inflation. Uniform inventory valuation methods like FIFO
(First-In, First-Out) or Weighted Average Cost (WAC) may not accurately reflect the cost of goods sold.
Issue with Uniform Rules: Using standard methods could result in significant variations in reported profits,
affecting the company's financial stability and decision-making.
Flexible Approach: Allow the use of alternative valuation methods that better align with local economic
conditions, provided managers document their choice and justification.

As per Ind AS 2 (Inventories)

The permitted inventory valuation methods include:
• First-In, First-Out (FIFO)
• Weighted Average Cost (WAC)
❑ The use of Last-In, First-Out (LIFO) method is not permitted under IND AS 2.
❑ Inventories are required to be measured at the lower of cost and net realizable value.
❑ The choice of inventory cost formula must be applied consistently across similar types of inventories and
disclosed in the financial statements.
❑ If economic conditions severely distort inventory cost reflection, management would typically address this
through financial statement disclosures to provide stakeholders transparency rather than changing valuation
methods.
Example 3: Energy Sector and Exploration Costs
Scenario: An oil company incurs significant costs in exploring new drilling sites. Uniform accounting rules may
require immediate expensing of exploration costs.
Issue with Uniform Rules: Immediate expensing can lead to significant short-term losses, affecting the company's
financial statements and investor perceptions.
Flexible Approach: Allow the company to capitalize exploration costs until the feasibility of extraction is
confirmed, provided they document the criteria and evidence supporting this decision.

Ind AS 106 (Exploration for and Evaluation of Mineral Resources)

For an oil company incurring exploration costs:
• These costs can be capitalized as exploration and evaluation assets under IND AS 106 if technical feasibility and
commercial viability are not yet proven but there is reasonable expectation.
• Immediate expensing is not mandatory unless costs do not meet capitalization criteria.
• After feasibility is confirmed, costs shift to development and production accounting.
• Regular impairment assessments ensure the carrying amounts stay relevant.
This flexible approach balances accurate financial reporting with practical realities of the exploration process in
the energy sector while aligning with IND AS requirements.
Example 4: Multinational Corporations and Currency Fluctuations
Scenario: A multinational corporation operates in multiple countries with varying currencies. Uniform rules may
not address the complexities of currency translation and consolidation.
Issue with Uniform Rules: Uniform currency conversion rates could distort the financial performance and position
of the company.
Flexible Approach: Permit the use of tailored currency conversion methods that reflect economic reality, with
managers providing documented evidence of their judgments and assumptions.

Ind AS 21 (The Effects of Changes in Foreign Exchange Rates)

For a multinational corporation operating with varying currencies:
• IND AS 21 mandates generally uniform principles for currency translation.
✓ Multinational corporations must translate foreign currency transactions and foreign operations into their
functional currency using the spot exchange rate at the transaction date.
✓ Financial statements of foreign operations are translated into the parent’s presentation currency using
rates at the reporting date for assets and liabilities, and average rates for income and expenses.
✓ Uniform currency conversion rates are required to maintain comparability and consistency.
• Flexibility is allowed only when currencies are not exchangeable, enabling estimated rates reflecting economic
realities.
• Documentation and disclosure are mandatory to justify rates and assumptions.
• This helps address distortions caused by uniform rules while preserving comparability and transparency.
This approach balances the need for reliable, consistent financial reporting with practical challenges in currency
translation across diverse economic environments.