The Ministry of Corporate Affairs (MCA) is putting into effect from April 1 a new accounting standard that is set to transform the way companies in several sectors will measure, recognise and disclose revenues in their financial statements.
Billed as Ind AS 115, this revenue recognition standard provides for numerous additional disclosures, which will significantly enhance transparency of financial statements, said accountancy experts.
Dolphy D’Souza, Partner at CA firm SR Batliboi & Co, said companies should not underestimate these disclosure requirements. For example, Ind AS 115 will require companies to provide disaggregated revenue information in financial statements. Such disclosure can be on the basis of major product lines, geography, type of market or customer (government, non-government, etc.), contract duration, sales channel, etc, whichever is the most appropriate and relevant for the entity, he said.
The standard provides guidance on how this disclosure is made and suggests that existing information provided to the CEO, board, analysts, etc may be used. Hence, one need not reinvent the wheel; however, companies will need to make it suitable for disclosure in financial statements.
Sandip Khetan, National Leader and Partner, FAAS, EY India, said: “The new revenue recognition standard is going to significantly change the revenue of companies especially in sectors like EPC, technology, mining and metals, real estate, telecom and e-commerce”.
He said that ‘revenue’ is typically an entity’s most important financial performance indicator and keenly scrutinised by analysts and investors.
Jigar Parikh, Partner, FAAS, EY India, said listed companies will have to comply with the requirements of the new revenue recognition standard from the first quarter of FY19. “Considering the extensive disclosure requirements, this give listed companies a very short implementation runway and they need to hit the ground running,” Parikh said.
Former CA Institute Secretary Ashok Haldia said the standard makes a paradigm shift in recognition, measurement and disclosure of revenue from contracts and other businesses. “It requires identification of performance obligation under the contracts and then recognition of revenue at the time of performance of each of the obligation under the contract. Thus the revenue under the contract is recognised over a period of time, when and as performance obligations are satisfied. This makes accounting more prudent, but at the same time more complex. The accounting implications are to be comprehended at the time of entering into contract for implications on the financial statements over the period of contract. This in turn might impact the structuring of the contract itself. Therefore accounting now has to be an integral part of contract negotiation and finalisation, and no more a back office function,” he said.