Did you know that each and every country has a specific method or process whereby it stipulates companies to report financial data based on a set of rules? India too has been following financial reporting guidelines for ages now. However, from FY17, India has adopted a new set of standards called the Indian Accounting Standards, or Ind-As, which enables advanced financial management and analysis.
If you are thinking why this new change, the answer is pretty simple. With the growing need to ease comparability and transparency amongst our global peers, the Indian accounting standards are now converged with the International accounting system called as IFRS.
Thus, with this new change, India Inc is set to embrace a contemporary set of standards which are more closely aligned to show the systematic review and advanced financial modelling of the business.
And now, when it comes to the applicability of the Indian accounting standards – Companies with a net worth of more than Rs.500 crore, listed companies on any stock exchange and unlisted companies having a net worth of Rs.250 crore or more are all required to comply with the Indian accounting standards.
Coming to the impact of the Ind-As, it will cause a major change of how key financials like revenue, operating profit, net profit, book value, goodwill and return on equity will be computed. For example, under the rules of the current accounting standards, excise duty will be grossed up with sales and shown as part of the cost of materials consumed. Hence, it will be part of the revenue of the company.
Now, that’s good news for all businesses who will get a chance to boost their revenue. In fact, recent statistics have shown, 36 out of the top 50 Indian companies have experienced a marginal increase in revenues. And, that’s not all, because of higher revenue, the operating margin tends to be steadier with a neutral EPS (Earnings per share).
Another significant impact of the Ind-As standards is that it will provide a fine interpretation and measure of financial assets and liabilities. For instance, the current investment of the company and the assets and liabilities of M&A companies will be recognized at its fair value rather than book value or market value. We see the significance of fair value given to computing financial statements here that in-turn provides a great medium for accurate reporting.
Instead of just complying with legal provisions, the Ind-As mandates a more fair value accounting, towards the company’s financial and valuation modelling. This will bring about a healthy change in the financial statements of all companies. In fact, 28% of the BSE 100 companies experienced more than a 10% impact on their net profit.
Overall, the Indian Accounting Standards has unleashed a new era of financial reporting that reflects deeper insight with regards to advanced financial modelling of the company and its performance.