India’s response to the globally accepted International Financial Reporting Standards (‘IFRS’), the Ind AS has been notified by the Ministry of Corporate Affairs based on the recommendation made by the Institute of Chartered Accountants of India. Moving to a common accounting and financial reporting framework gives stakeholders access to uniform financial information across geographies.
The International Accounting Standards Board (IASB) allowed countries to adopt two approaches in the context of this accounting harmonization – adopt the IFRS in its entirety from a certain date or converge their existing local accounting standards into an IFRS framework. India adopted the latter approach. In India IndAS is mandatorily applicable to companies which have a net worth above INR 250 crore. However, that does not preclude companies from voluntarily adopting IndAS even if such net worth threshold has not been achieved. The benefits of voluntary adoption of IndAS accounting and financial reporting framework for companies looking to grow and expand business, and is most evident, aids in the process of gaining access to capital markets outside of India.
Financial statements offer crucial insights into the operations and performance of the company. Till Indian businesses tapped markets abroad, the preparer and the consumer of the information disclosed in the financial statements were within India and hence there was a uniformity in understanding and interpreting accounting frameworks. However, post globalization many foreign funds have started to invest in India and there is pressure from these foreign investors to move into globally accepting accounting and financial reporting frameworks.
In today’s context if companies are looking to expand their business/operations and are looking for investor support or international modes of finance then it becomes almost a necessity to present financial information either in IFRS or IndAS to enable readers/stakeholders understand business and its performance quickly and more importantly draw increased assurance on the underlying financial data.
Close interaction with promoters who have accessed capital markets outside India shows that there is a very strong underlying feedback that it is essential for Indian companies to report in Ind AS even if the same is not applicable statutorily mostly because of greater disclosure requirements and resultant increased transparency on the business and operations of the company.
A fair number of these disclosure requirements are qualitative in nature which the existing accounting standards may not prescribe. For instance, under Ind AS companies are mandated to disclose their risk management strategy giving a descriptive narrative on the key financial risks faced by the company thereby providing valuable insights into the company’s exposure to inherent finance related risks. Another critical additional disclosure is a company’s capital management policy and strategy along with an explanation on how the capital requirements are being managed for the relevant financial year.
Companies incorporated in India which are wholly/majority owned by multi-national companies typically use IFRS for their global or group reporting. Even for such companies adopting Ind AS is advantageous as local Indian GAAP reporting can be made in a converged IFRS framework i.e., Ind AS, thereby reducing unnecessary time and efforts in maintaining multiple books of accounts. . Ind AS does bring about increased rigour in the way books of accounts are to be maintained and also in the manner in which financial reporting is to be carried out. However, the benefits of reporting under Ind AS far exceeds the cost of maintaining the books of accounts under such framework especially for companies looking at growth or expansion opportunities.
(The author is Partner and Leader, Rik Advisory Services, Consark Advisory Services LLP. Consark is a boutique advisory services firm providing Financial, Risk & Assurance and Tax advisory services. The author can be contacted on firstname.lastname@example.org. Views expressed in this article are personal.)