Transformation of financial reporting—An IndAS era
With the advent of Indian Accounting Standards (Ind AS), a large number of entities in India are set for sweeping changes to their financial reporting and disclosure practices. Many entities have already been subjected to these changes in the financial year ended 31 March 2017. While the transition to Ind AS entailed significant changes in the reporting framework, it also had an impact on various other aspects of the organisation, including information technology (IT) system configurations, business and contracting processes, budgetary controls and decisions of the board and management. With evolving experience and further clarifications coming our way, entities have seen substantial changes in reporting requirements due to changes in measurement principles and disclosure requirements.
The adoption of Ind AS has indeed paved the way for enhanced comparability of financial statements of Indian companies in line with global standards, thereby leading to a more transparent and relevant disclosure. Below are some key changes:
Emergence of the fair value concept: This requires fair value accounting for many assets and liabilities. Financial instruments, in particular, which meet certain conditions, would now be required to be carried at fair value. In addition, Ind AS also provides an option to companies to value their property, plant & equipment (PP&E) on a revalued basis. These measures will ensure that assets and liabilities are carried on a more realistic basis.
New definition of control: Ind AS provides a new definition of control, which essentially looks at ‘substance over form’ for the purpose of consolidation. The new definition gravitates from voting rights or participation on the board, to one who has the power and the right to direct key relevant activities of the business. This has emerged as a significant point of contention for various companies, resulting in subsidiaries being accounted as associates and joint ventures and vice versa.
Enhanced disclosures: Another significant area, which could boost stakeholders’ confidence are the enhanced disclosures required under Ind AS. For example, disclosure of the sensitivity analysis for key risks attached to all financial instruments, disclosure on concentration of customers and expected credit loss on all financial assets, which sets the tone for presentation of a larger picture to the shareholders. Further, the alignment of operating segments in line with internal management reviews ensures larger transparency with the external stakeholders. These are seen as steps in the right direction.
Business combination: Accounting for all business combinations using the acquisition method clearly reiterates the requirement of fair value accounting of all its assets and liabilities at the time of acquisition, leaving goodwill as the residual balance.
Revenue recognition: Ind AS has brought with it a more justifiable revenue allocation methodology. Accounting for revenue under multiple element arrangements meant that companies would need to identify revenue for each component separately. This has resulted in companies having to defer revenues, especially in case of bundled arrangements.
The road ahead
While the Ind AS framework has been a long-standing change that corporate India had been expecting, the impact of the transition is now seemingly becoming clearer. Corporate India, though, is dealing with implications on large and strategic transactions which include funding, acquisitions, group restructuring and complex revenue arrangements and sector-specific standards. Also, the proactive approach of Central Board of Direct Taxes (CBDT) to providing clarifications from a taxation and Minimum Alternate Tax (MAT) perspective has been well received.
In a nutshell, the transition to Ind AS intends to narrow the gap between global reporting frameworks and that of entities in India. It will now set Indian companies on a journey to harmonise their reporting and enhance comparability, and boost stakeholder confidence.
Madhu Sudan Kankani is partner–accounting advisory services, KPMG in India. The views and opinions expressed herein are those of the author and do not reflect the views and opinions of KPMG in India.