All you wanted to know about...IND AS

PARVATHA VARDHINI C | Updated on January 17, 2018

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SEBI recently extended the deadline for some listed companies to file their results for the quarter ended June 2016, to give them additional time to comply with new ‘Ind AS’ rules. These companies now have time until September 14, 2016, to declare results with the new accounting standard.

What is it?

Ind AS or Indian Accounting Standards govern the accounting and recording of financial transactions as well as the presentation of statements such as profit and loss account and balance sheet of a company. For long, there has been a heated debate about Indian companies moving to the globally accepted International Financial Reporting Standards (IFRS) for their accounts.

But firms have resisted this shift, stating that this will lead too many changes in the capture and reporting of their numbers. Ind AS has been evolved as a compromise formula that tries to harmonise Indian accounting rules with the IFRS.

Why is it important?

Ind AS will not just change the way companies present their numbers, but may also bump up or knock down the profits/losses of firms. Here are a few instances. Under the existing rules, incentives, discounts or rebates given to customers by a firm can be shown as part of advertising, sales promotion or marketing expenses, which figure in the costs. But under Ind AS, these will have to be deducted from sales (revenues). Excise duties which are currently netted off from revenues to show ‘net sales’, will have to be shunted under ‘expenses’ under Ind AS.

Intangible assets such as goodwill had to be amortised, or written off as expenses over a period of time until now. Ind AS treats such items as having an indefinite life and hence they need not be amortised. This can lift the profits of firms which carry sizeable goodwill on their books.

Ind AS advocates the ‘fair value’ method of accounting. For example, currently, investments by a company in government securities or mutual funds is shown at the lower of cost and fair value (market value). Under Ind AS, these will have to necessarily be captured at fair value. For firms which have legacy or under valued investments, this revaluation can expand the balance sheet size.

The new Ind AS also promises clearer disclosures to investors in certain cases. So far companies reported their segment-wise performance based on a broad product/service grouping or even geographical segments (within India, Outside India). But Ind AS requires that segments reported to investors are the same as the firm uses for the purpose of assessing performance and allocating resources.

Why should I care?

If you are an avid investor in shares, the financials of many of the companies whose stocks you hold will look very different, starting this quarter. Higher disclosure requirements contained in Ind AS can help you make more informed decisions about its investment worthiness.

More importantly, in the coming quarterly results, compliance with Ind AS rules could lead to blips in profits earned by listed firms, due to a change in the method of accounting. As it may take some time for analysts to get used to the new format, expect some confusion about the numbers. Markets could even beat down stocks whose earnings don’t meet expectations.

The bottomline

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Published on July 11, 2016

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