Understanding the Applicability of Ind AS in India!
Understanding the Applicability of Ind AS in India
The introduction of Indian Accounting Standards (Ind AS) marked a significant step toward aligning India’s accounting practices with international standards, specifically the International Financial Reporting Standards (IFRS). However, the adoption and applicability of Ind AS in India are subject to certain criteria. To become an expert of Ind AS financial statement, check out Master Blaster of Ind AS. In this blog, we will explore the key factors determining the applicability of Ind AS and how businesses are impacted by its requirements.
What is the Applicability of Ind AS?
Ind AS applies to Indian companies that meet certain criteria laid out by the Ministry of Corporate Affairs (MCA). The standards were first introduced in 2015, and their phased implementation began with large listed companies. Over time, Ind AS has been extended to cover various categories of entities, including smaller companies and non-listed companies. The application of Ind AS depends on factors such as the size of the company, its turnover, and whether it is listed on the stock exchange.
Categories of Entities for Ind AS Applicability
The Ind AS applicability is determined based on a company’s financial standing, including its size, market presence, and listing status. Let’s break this down into categories:
Listed and Unlisted Companies (Large Enterprises):
All listed companies (companies listed on any stock exchange) and their subsidiaries, joint ventures, and associates are required to adopt Ind AS.
These companies must comply with Ind AS as part of the government’s initiative to bring Indian financial reporting in line with global standards.
Non-Listed and Unlisted Companies (Large Enterprises):
Large unlisted companies, typically defined as those with a net worth exceeding ₹250 crore, are also required to adopt Ind AS.
For these companies, the transition to Ind AS is mandatory from the financial year starting on or after April 1, 2017. This means that companies meeting these criteria must switch from Indian GAAP to Ind AS in their financial statements.
Small and Medium Enterprises (SMEs):
Ind AS applicability is phased in for smaller companies. Companies with a net worth of less than ₹250 crore are generally not required to comply with Ind AS, though they can voluntarily adopt it.
However, SMEs that are part of the public interest group or have significant international exposure may still be mandated to adopt Ind AS.
Banks, Financial Institutions, and Insurance Companies:
Banks, non-banking financial companies (NBFCs), and insurance companies are generally required to apply Ind AS from the financial year 2020–21, regardless of their size.
These financial institutions face greater scrutiny from regulators due to the nature of their operations, which involves large-scale investments and financial transactions.
Foreign Companies and Multinational Enterprises:
Foreign companies operating in India and those with subsidiaries in India are also required to adhere to Ind AS, especially if their parent company follows IFRS. This ensures consistency in financial reporting across global operations.
Phased Implementation of Ind AS
The implementation of Ind AS was carried out in phases to ensure a smooth transition for businesses. The MCA devised a structured plan for the rollout:
Phase 1 (Applicable from 1st April 2016):
The first phase of Ind AS applicability was directed towards listed companies and large unlisted companies with a net worth of ₹500 crore or more.
These companies were required to implement Ind AS for accounting periods starting from April 1, 2016.
Phase 2 (Applicable from 1st April 2017):
The second phase involved all listed companies and large unlisted companies with a net worth of ₹250 crore or more.
These companies were required to adopt Ind AS for the financial year starting on or after April 1, 2017.
Phase 3 (Applicable from 1st April 2018):
The third phase involved certain classes of public and private companies that may not fall under the first two phases but still needed to adhere to Ind AS. These companies typically had smaller market caps or were part of sectors with specific requirements (such as banking and insurance).
Criteria for Ind AS Applicability
The Ministry of Corporate Affairs (MCA) outlined several criteria for determining the applicability of Ind AS:
Net Worth: The net worth of a company plays a crucial role in determining whether it is required to adopt Ind AS. Companies with a higher net worth are prioritized for Ind AS compliance.
Net Worth Criteria:
Companies with a net worth of ₹500 crore or more were required to implement Ind AS from the first phase (2016).
Companies with a net worth of ₹250 crore or more were covered under the second phase (2017).
Listed Status:
All listed companies are required to comply with Ind AS, as they are subject to regulations set by stock exchanges and other regulatory authorities.
Turnover:
Although turnover is not explicitly mentioned as a primary criteria for Ind AS adoption, companies with significant turnover are likely to meet the net worth requirements and thus be included in the mandatory adoption phases.
Parent-Subsidiary Relationship:
If the parent company is required to adopt Ind AS, then its subsidiaries, joint ventures, and associates are also mandated to follow Ind AS to ensure consistency across the group’s financial reporting.
Voluntary Adoption of Ind AS
While larger companies are required to adopt Ind AS, smaller businesses and those with a net worth below ₹250 crore can choose to voluntarily adopt these standards. This option is often exercised by companies that wish to improve their financial reporting practices or align with global accounting standards for various reasons, including attracting foreign investors or expanding their market presence.
Key Benefits of Ind AS Adoption
The adoption of Ind AS offers several benefits to Indian companies, including:
Increased Transparency: Ind AS requires companies to provide more detailed disclosures, which enhances the transparency of financial statements. This leads to better decision-making by investors, analysts, and other stakeholders.
Global Comparability: As Ind AS is closely aligned with IFRS, companies adopting these standards can be more easily compared with global competitors, which helps in improving investor confidence and attracting international investment.
Improved Corporate Governance: By adhering to a globally recognized framework, companies are expected to improve their internal controls and governance structures, thus reducing the risk of financial misreporting.
Attracting Foreign Investment: Foreign investors often prefer companies that follow IFRS or similar standards because it makes the financial statements more reliable and comparable. Ind AS adoption opens the doors for easier access to global capital markets.
Conclusion
The applicability of Ind AS has been a progressive shift towards aligning India’s accounting practices with global standards. While Ind AS is mandatory for large listed companies and certain unlisted entities, small and medium-sized businesses have the option to adopt it voluntarily. To become an expert of Ind AS financial statement, check out Master Blaster of Ind AS. As the business landscape in India continues to evolve and integrate with global financial markets, understanding and implementing Ind AS is becoming increasingly essential for companies that aim to maintain transparency, credibility, and competitiveness in the global economy.