How Does Ind AS Work? A Step-by-Step Explanation

Ind AS, or Indian Accounting Standards, are a set of accounting standards notified by the Ministry of Corporate Affairs (MCA) under the Companies (Indian Accounting Standards) Rules, 2015. They are converged with International Financial Reporting Standards (IFRS) but with certain carve-outs to suit the Indian context. The Institute of Chartered Accountants of India (ICAI) formulates these standards, and the MCA notifies them.

Ind AS applies to specific classes of companies based on their net worth, listing status, and holding-subsidiary relationships. As per the MCA roadmap, all listed companies and unlisted companies with a net worth of ₹250 crore or more must comply with Ind AS. Once a company enters the Ind AS framework, it must follow all applicable Ind AS, not selectively. The transition from previous GAAP (Generally Accepted Accounting Principles in India, i.e., Accounting Standards under the Companies Act, 1956) to Ind AS is governed by Ind AS 101, First-time Adoption of Indian Accounting Standards.

The fundamental difference lies in the approach. Old Indian GAAP was largely rule-based, with specific guidance for most transactions. Ind AS is principles-based, requiring the preparer to apply professional judgment to reflect the economic substance of transactions. For example, under old GAAP, lease classification was based on a rigid 75% of useful life or 90% of fair value test. Under Ind AS 116, Leases, almost all leases are recognised on the balance sheet as a right-of-use asset and a lease liability, with limited exceptions for short-term or low-value leases.

Another key difference is the treatment of revenue. Old GAAP had specific guidance for different industries (e.g., construction, software). Ind AS 115, Revenue from Contracts with Customers, provides a single five-step model applicable to all industries: identify the contract, identify performance obligations, determine the transaction price, allocate the price, and recognise revenue when (or as) performance obligations are satisfied. This requires significant judgment in areas like variable consideration and timing of satisfaction.

Preparing financial statements under Ind AS involves a structured process. The first step is to identify all applicable Ind AS based on the entity's operations. For a first-time adopter, the process begins with preparing an opening Ind AS balance sheet as of the transition date (the beginning of the earliest period presented in the first Ind AS financial statements). This involves:

1. Recognising all assets and liabilities required by Ind AS (e.g., recognising a right-of-use asset for an operating lease).
2. Derecognising items that are not permitted under Ind AS (e.g., certain intangible assets like brand internally generated).
3. Reclassifying items from one category to another (e.g., reclassifying certain preference shares as financial liabilities).
4. Measuring all recognised assets and liabilities in accordance with Ind AS (e.g., measuring financial assets at fair value through profit or loss or other comprehensive income).

Subsequently, for each reporting period, the entity applies the recognition and measurement principles of each Ind AS. For example, for property, plant, and equipment (Ind AS 16), the entity chooses either the cost model or the revaluation model. For financial instruments (Ind AS 109), the entity classifies assets based on the business model test and the contractual cash flow characteristics test.

Revenue recognition under Ind AS 115 follows a five-step model. Step 1: Identify the contract with a customer. Step 2: Identify the separate performance obligations in the contract. Step 3: Determine the transaction price, including variable consideration (e.g., discounts, rebates, refunds) and the time value of money if there is a significant financing component. Step 4: Allocate the transaction price to each performance obligation based on relative standalone selling prices. Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation—either at a point in time or over time.

For financial instruments, Ind AS 109 introduces a classification model based on the entity's business model for managing financial assets and the contractual cash flow characteristics. Financial assets are classified as measured at amortised cost, fair value through other comprehensive income (FVOCI), or fair value through profit or loss (FVTPL). For financial liabilities, the classification is generally at amortised cost, except for derivatives and liabilities held for trading, which are at FVTPL. Ind AS 109 also introduces an expected credit loss (ECL) model for impairment of financial assets, requiring entities to recognise expected losses even before a default occurs.

Companies often face several practical challenges. The first is the significant judgment required in areas like revenue recognition (e.g., determining variable consideration, identifying distinct performance obligations) and financial instrument classification (e.g., assessing business models). This requires robust documentation and internal controls.

Second, data availability and system readiness is a major hurdle. Ind AS requires fair value measurements for many items (e.g., financial instruments, business combinations under Ind AS 103). Companies may not have historical fair value data or systems capable of capturing the required data (e.g., for ECL calculations). Third, transition adjustments can be complex. For example, under Ind AS 101, an entity may need to retrospectively apply Ind AS to all transactions, which can be difficult for long-term contracts or complex financial instruments. Fourth, training and awareness among finance teams, auditors, and board members is essential. Without proper understanding, errors in application are common.

If your company is required to adopt Ind AS or is planning to do so voluntarily, begin by assessing your current accounting policies and data systems against the requirements of each applicable Ind AS. Given the complexity and judgment involved, consult a qualified chartered accountant or an Ind AS implementation specialist to prepare a transition plan and ensure compliance with the Companies (Indian Accounting Standards) Rules, 2015.

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This page provides preliminary information. It is not legal advice. For your matter, consult a qualified professional.